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It’s all about ASX lithium stocks in this week’s investor webinar … and a promising stock for your watchlist

May 15, 2023

KGN, Kogan, Lithium


It’s all about ASX lithium stocks in this week’s investor webinar … and a stock for your watchlist


– Let’s talk about ASX lithium stocks … we think they have bottomed out and it’s time to jump on the lithium train again!

– A stock for your watchlist: Kogan (ASX:KGN) is turning the corner.

Full transcription below.


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Mark: Good morning on Monday, the 15th of May. Morning, Stuart.

Stuart: Good morning.

Mark: For various reasons, we couldn’t record a webinar last week. So here we are, first day of the week. Bright and early in the morning, Stuart. Hope you’re awake yet because we’ve got a lot to talk about. But let’s kick it off with lithium. So, we put a lithium stock on Concierge last week, and it was a big hit, up 16% in first 5 days. We won’t tell you which one it is. You’ll have to get a free trial to Stocks Down Under Concierge on the stocks on our website. But, Stuart, talk us through what’s happening in Lithium at the moment.

Stuart: Right. So, lithium has had an interesting 2023. The price of the commodity, as it’s traded in China and quoted in Renminbi, has been dropping like a stone for the first few months of the year. It’s just stabilized at the last little while at about $28,000 a ton for lithium carbon equivalent. So that’s caused sentiment to move away from the lithium sector. But, Mark, what we noticed was that a lot of the lithium stocks were actually holding up quite nicely. Like, they weren’t being plummeted anywhere near as bad as the commodity. And I think that’s because people could look through this price weakness and see that long-term, the prospects of lithium were brighter than ever. And we’ll talk about that in this webinar so you can see where we’re coming from. You’ve heard me say it before, and I’ll say it again. The world needs a lot of lithium.

Between now and about the early 2030s, lithium demand is expected to rise sixfold, and no surprises there. The rapid electrification of most economies in the world and the booming electric vehicles will mean a lot of lithium-ion batteries, and there’s just not enough lithium around to cope with all that. So, numerous companies are now trying to develop that future supply, which becomes quite serious, as you can see from that chart as we move into the 2030s. And so the early movers are gonna make out like bandits so long as this trend continues, and so far it’s been pretty relentless. So there’s the chart that I was talking about a second ago. Lithium has tended to be boom or bust. Mark, you’ll recall that I was talking like crazy back in 2020 at the bottom of that chart, and no surprises there.

Lithium had come off a boom that was going on until about 2018, then went through a couple of quiet years, and no one wanted to touch lithium at that stage. Suddenly, in 2021, things turned around and began to re-rate. And in 2022, they re-rated in a serious way. Now, that probably involved a little bit of heat at some point. End of 2022 into 2023, China ended subsidies on electric vehicles, and they’d had those in place since about 2010. So, Chinese producers of electric vehicles, therefore, had to run down their inventories of the commodity. That’s caused that weakness in that price. And it reflected in similar pricing across the spectrum, but it doesn’t accord with the real situation on the ground, where a lot of lithium is sold on long-term contracts way above that spot price. So, I think that that turnaround we’ll see at the bottom there is an important signal to come back and look at the long-term fundamentals for lithium developers, which are excellent right now.

And yeah, there’s some proof of what I was talking about. Why this volatility? The industry is still new, pricing is still opaque, and China. China takes about 43% of the world’s lithium, 40% or 50% of the world’s lithium. There’s a map of China showing where all the lithium mines are and where the processing plants are. They’ve gotta jump on the rest of the world in terms of this industry. But they’re now soaking a heck of a lot of lithium from outside, which tends to lead to the sort of volatility we’re seeing. For investors, people are still getting used to this volatility. So they just assume that lithium will boom forever, or bust forever. It doesn’t work like that. It’s just a commodity in the early stages of mainstreaming so that investors can understand it. And there’s some further color around what I was talking about in terms of the decline. End of subsidies, rundown of inventories.

The bottom was probably around April 25th, and we’re turning around. Now, look at the fundamentals behind that, 800,000 new passenger plug-in EVs registered in just the month of February 2023 around the world. We all know Tesla, but, Mark, I reckon you’ll be hard-pressed to know what those other names are, like, such as Gilly, for example, or Stellantis. A lot of companies are getting involved in electric vehicles, and they’re growing their sales quite strongly. And China wants to be a big player in terms of shipping electric vehicles as well. In Australia, we’ve just seen the boom in registrations of new electric vehicles. For the first time ever, there was a long wait time, for instance, to get a Tesla that’s now been overcome. Where I come from, I see Teslas all the time now. So, we’re only a small market, but if that’s indicative of what’s going on in the rest of the world, the demand’s here, and it’s here to stay for a while yet.

Mark: Yeah. What’s interesting, Stuart, is that Warren Buffet, arguably the most successful investor ever, just lowered his…

Stuart: Oh, we’re gonna rival him one of these days, Mark.

Mark: Yeah, definitely. I think Concierge is actually doing better this year than…

Stuart: Than Warren.

Mark: …than Warren. Anyway, but he just lowered his stake in BY… was it BYD?

Stuart: BYD. They’re at the top, yeah.

Mark: Yeah, because as he…the rumors are, he didn’t want to be invested in a company that’s competing with Tesla. So that’s interesting, he brought that stake down. Of course, Gilly acquired Volvo a couple of, about 10, 15 years ago, I think, by now?

Stuart: Yeah.

Mark: And, yeah, it’s making a big move in EVs as well. But I’d say, if you’re competing with Tesla and looking for best competitors against Tesla, my bet is gonna be the German manufacturers. So, Audi, you know, Volkswagen, those…

Stuart: Mercedes staying there at the bottom of that line?

Mark: Mercedes, those sorts of companies, because they have such high standards, big expertise in engineering and manufacturing that Tesla can actually learn from them in terms of how you put together a car, right? So I think that’s where you need to look at. But I thought it was interesting that Warren Buffet lowered his stake in China’s biggest player in EVs because he didn’t wanna compete with Tesla.

Stuart: Right.

Mark: Anyway.

Stuart: So, then there was the Liontown transaction. One of the biggest suppliers of lithium chemicals is a New York-listed company called Albemarle. Albemarle bid $2.50 a share for Liontown, which is developing the new Kathleen Valley lithium mine in Western Australia, which is coming on spring next year. As you can see from the chart there, they paid a big number, which capitalized Liontown at $5.2 billion, and helped to make Tim Goyder their chairman, a billionaire. The billions were a long time in coming, but well deserved for that particular champion. And Liontown said no. They felt the bid was underbidding them. So what that’s telling you is that the capitalized players are seeing this temporary weakness in the lithium price and the knock-on effect on valuations of lithium stocks, and they’re moving now to do the M&A.

You’re seeing that with Allkem getting together with Livent, which is a transaction that was announced last week, which gives Livent some serious upstream capacity as well. So the M&A boom’s on, and when that happens, everyone else who’s anyone, the signal goes out to investors that this whole sector is undervalued. And there’s the details of the Livent transaction. A $10 billion deal, all stock to merge these in makes them the world’s third largest lithium producer. Allkem was actually the pioneer of this whole lithium boom on ISX back when they were Orocobre. The Orocobre part of it developed one of the first lithium brine place in Argentina. Its counterpart that went into Allkem are called Galaxy. They developed the Mt Cattlin lithium mine in Western Australia. Put those two together and a few other projects and the beginnings of their first lithium hydroxide plant.

Hydroxide is obviously the premium lithium product, and that’s where Allkem wanted to be. And now Livent is saying, “You know, come and join us. We’ll dominate this space.” I think there’s more where that came from. So, who to watch now? I’ve listed a few names there on the left-hand side of the screen. One that I would draw to people’s attention, that I’ve been talking about for a while now, is Sayona, SYA. The attraction here is the Canadian province of Montreal. These guys took the North American lithium operation in Northern Quebec out of bankruptcy. They’re now revving that up to produce lithium, and they’ve got various other hard rock lithium projects in the province. Why do you want to be in Quebec? A lot of things to like about Quebec. Mark, you’ve been to Montreal before. It’s a nice place, right?

Mark: I’ve been to Toronto without proper winter attire. That’s not a…it’s not a good idea.

Stuart: Okay. You get Frenchy attitude if you go to Quebec. But they more than compensate for that by the price of electric power in the province. Just about everything they do is powered by hydropower, which means you’re talking about 5 to 10 cents per gigawatt hour. That’s cheap. And it means that you get really low-cost renewable energy to put into these projects. That’s advantage number one. Advantage number two is just across the border in the United States are a whole bunch of giga factories that are now going live. And so you get the ability to providence good quality and well-made lithium products at very low cost and not have to ship them very far to the end result. Sayona is leading that charge in Quebec, and they’re about to start producing. So I think the rush of free cash flow back to that company is about to roll in a serious way. So investors ought to go and take a look.

There are others. Pilbara Minerals, for instance. There’s the Pilgangoora lithium mine. That’s a producing mine there. Lithium Plus Minerals interest me. They’ve got all the territory around the Finniss lithium mine that Core has just brought into production as well. And the men behind that operation, Dr. Bin Guo, was also very successful with AVZ Minerals, which has got some hard rock lithium assets in the Democratic Republic of the Congo, struggling to get those projects moving forward. But that company did pretty well on the development of that truly monstrous asset over in Africa, and now, Bin Guo’s next play is in the Northern Territory with Lithium Plus. So, a few ideas to look at. The ASX is not short of lithium plays to look at. The key is nearness to production. That’s why I talked about Sayona. Now, two things. Lithium’s been boom or bust. Mark, you recall, I was talking a lot about it a lot during the bust, and the boom substitute came along.

But until this commodity gets better known and a bit more transparent, it’s gonna be boom or bust. Which means, do your homework and then do some more homework. And preferably, subscribe to Stocks Down Under, because we’ve got a fair bit of expertise in this space now, I think you’ll agree.

Mark: Yeah, definitely. So, thanks, Stu, for that one. So, yeah, as you saw in that chart, we think lithium pricing, at least at the very minimum, has balanced, it’s consolidating, but more likely, it’s going up from here, right, Stu?

Stuart: Yep.

Mark: So, that brings us to our next company, nothing to do with lithium, by the way, but a stock that we’ve been following as well for a while now. And we think this one should be on your watch list, and we’ll go through the reasons. So we’ve been tracking this one all the way since COVID hype. It spiked as people were starting to work from home, had to buy all sorts of stuff for at home, and Kogan was booming on the back of that. Build up its inventory because, for some reason, they thought this spike was gonna last forever. But, of course, what happened in the course of 2020, that hype started to, well, top off basically. And then, basically, it’s been downhill from there, from $25 all the way to where we are now. And if you look at that chart, you can see that downward trend line. We think it’s finally broken that trend line, and we want to see some sort of, you know, test of that breakout before we actually jump in. But let’s also have a look at…zoom in a little bit.

Stuart: No, so, Mark, I would say here, the trouble with Kogan is what I call the indigestion problem. Most companies can’t cope with the sort of growth that Kogan enjoyed during the COVID period. It’s now putting the infrastructure in place to be able to grow, and it’s a reasonable expectation they’ll go back to their usual pre-COVID growth, which regular businesses would kill for. So, this is just the return to normal play we’re talking about here.

Mark: Yeah. So, we’ll get to that. I just wanted to highlight the chart first, because what we need to see before you get into this stock is some sort of test of that breakout. So, if you look at this chart sort of about a year back, you can see the horizontal orange lines there. That’s the trading range, more or less, where the stock has been trading in. It actually popped up, bounced against the resistance level there around $4.50. It’s coming back down, in our view. But once you hit, sort of, you know, below $4, $3.80 to $4, I think, this one has got a very good shot at bouncing back strongly and actually making it out of that trading range. But yeah, Stuart, coming to the fundamentals, so what’s happened at Kogan, basically in the last, sort of, you know, 18 months, we think it’s turning the corner now because the inventory…it was plagued with massive inventories.

You can see the numbers here, almost $200 million versus $78 million now. So they brought that…sorry, brought that back quite a bit over the last year, 18 months. So there’s no more clearance discounts on that. And if you look at the quarter-by-quarter, year-over-year sales numbers, it’s still declining, but it’s coming down. It’s decelerating, and that’s a good sign, actually. Comparables are getting much easier, of course, if you compare to the last…the third quarter that we just concluded to…the third quarter last year. And the current quarter that we’re in, the fourth quarter, should be better again than the fourth quarter last year because…

Stuart: And, Mark, this company returning reports on a quarterly basis, so you get a chance every three months to see that growth picking up once we know they’ve turned.

Mark: Exactly. And so, if the sales decline itself, gets closer to zero or actually turns positive, we think Kogan is away because of what they’ve done in the last year. So, getting rid of inventories, making the business model even more lean and mean, I’d say, you’ll see a very quick recovery in EBITDA once, you know, that sales trend turns positive again. And actually, over the last quarter, EBITDA was already positive by $4.4 million, but we think that can go a lot higher. Gross margins jumps also on the back of, you know, a much more leaner organization, basically. And like you said, Stuart, we spoke to the CFO last week, just talking through, you know, numbers and what they’re looking out…what they’re looking for longer term, and they hope to get back to pre-COVID growth levels, which were quite amazing, actually. So, right now for Kogan, you need to look at that inflection point in sales.

Basically means, look at the quarterly numbers and see if they can actually get to zero decline in sales or, you know, preferably, a positive sales growth again, and that will be a major catalyst for the share price in our view. And then looking at valuation, of course, because at the end of the day, it all comes down to valuation, why would you buy this if it’s really expensive? Well, you wouldn’t. So, we need to have the valuation that looks interesting as well. For the next financial year, 2024, which starts in June, if EBITDA… Kogan is trading at an EBITDA of 10.2, for the year thereafter at 9, but consensus EBITDA growth for the coming financial year is 300%. And, of course, this comes from a very low base. But even if the year after that it’s 14.5%, which is still very healthy, I think. And so, in our view, Kogan is actually pretty attractive. Of course, there’s always risks because, you know, you can have an actual serious economic slowdown.

We don’t expect a recession in Australia, but you never know what’s gonna happen. It could be sort of black swan events that can trigger a massive recession. You can have the RBA, like they did last time, increase interest rates even more than we’re expecting right now, because we think we’re sort of very, very close to peak interest rates if we’re not there already. But yeah, you never know. If inflation pops up again, the RBA might be forced to hike rates again more aggressively than they have so far, or, yup, peak interest rates could be higher than we think at the moment. And the other thing, of course, is competition. Well, Kogan has said, “Yeah, we compete with Amazon but in different categories.” If you wanna shop for a fridge or a TV, most people wouldn’t go to Amazon. They would go to Kogan or similar companies like JB HiFi. But you never know what’s gonna happen in the space, right?

Retail is very competitive to begin with, and you never know what the competition will do. So that’s definitely a risk as well for Kogan. But keep this one on your watchlist. Keep an eye out for the next sort of quarterly results, which are probably, if you look at the reporting, maybe some early indications of that, six to eight weeks away. But again, you know, if the stock sort of bottoms out or tests the breakout around anywhere below $4, maybe $3.80 would be good. I think this one is definitely one to potentially put into your portfolio, Stuart.

Stuart: Okay. And I’ve been talking to a few people about it who are customers of Kogan. And generally, the experience is a positive one. So I think they’re executing well in terms of just the underlying business. Now that they’re through the inventory, they can start to please the investors as well as the customers.

Mark: Yeah. And look the, sort of, the body language in the call that we had with the CFO, he was very confident, right? As in, in terms of what they’re doing, that it’s going to work, it’s already working. So there was not a lot of doubt, as in, you know, “Is this actually gonna work?” So I think that’s very, very positive. They have a very clear sort of strategy, how to get to where they wanna be. So that’s something to keep in mind as well. All right, I think that’s it for us today. Thanks, everyone, for watching and your patience because we didn’t have a webinar last week. Yes, email us any of your questions you might have and we’ll try to answer them in these webinars.

Stuart: See you next week.