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Have Core Lithium and BrainChip reached the bottom yet?

September 27, 2023

Brainchip, BRN, Core Lithium, CXO, Lithium

Core Lithium and BrainChip

In today’s webinar we talk about Core Lithium (ASX:CXO) and BrainChip (ASX:BRN). Both stocks are taking big hits at the moment for various reasons.

If and when should investors jump on?

Also check our previous webinar on BrainChip here and our article on Core Lithium here!

See full transcription below.


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Marc: Good morning on September 27, 2023. Good morning, Stuart.

Stuart: Good morning.

Marc: This is our weekly investor webinar, we’re talking about lithium today and about BrainChip. There’s a lot happening with the Core Lithium, and there’s a lot happening with BrainChip, so a lot to talk about. So, Stuart, let’s just jump straight in with Core Lithium.

Stuart: So Core Lithium is a bit of religion amongst certain stocks…amongst certain investors, I should say. There are people who bought the stock at about 20 cents a share. And they made out quite well, the stock raised well above $1 as it was bringing the Finniss Lithium Mine in the Northern Territory into production. The stocks now reversed course…Go back for a second, Marc. The stocks now reversed course and we’re hearing a lot of chatter about people worried about Core Lithium. So let’s talk about what the stock…what’s to like and what’s not to like.

All right, who’s Core Lithium? Up close to Darwin, there’s a large block of ground that’s very prospective for hard rock lithium, and over a period of about five years, Core Lithium was able to discover and then develop a new lithium mine called Finniss. They shipped the first spodumene concentrate from that mine in April of this year. And nine months before that, they changed CEOs. So put in charge Gareth Manderson, formerly of Rio, who knows how to run mines, as the new CEO. Stock’s had a bad 2023 and they’ve compounded things by just announcing a $100 million placement at 40 cents a share. And we’ll look at the chart in a moment. The chart is actually absolutely terrible. As you can see there, it’s almost a perfect reverse U. There’s that 20 cents a share level over there in about middle of 2021. In fact, it base built there for quite a while before it shot off into the stratosphere is in 2022. Now it’s almost reversed all that ground. So it’s interesting to me from that perspective because at some stage everyone is gonna start hating Core Lithium, which could make it an outstanding buy.

Marc: It looks like it’s happened already, Stuart, everyone seems to hate it.

Stuart: As in there’s hatred, and then and then there’s murderous hatred. I think we’ve got to the hatred point, we’re about to get to the murderous hatred shortly to the point where if you bring up Core Lithium in polite company, they might throw you out of the barbecue.

Marc: Right. I know you’re going through this in the next slides, but what always surprises me with these sorts of movements in share prices is if you look at where the company was, say two years ago, we’re back at that same share price level, right? The company, realistically, should be a lot further ahead in its journey. And also with the cap rates right now, it should be in a better position than it was. So it’s always amazing to see how Mr. Market at some point just dislikes companies just because of the sentiment or just dislikes markets.

Stuart: Right. So we’ll look at what Mr. Market’s got right and what’s not right at the moment. But Marc, what would be your conclusion? Without knowing anything, go back to that chart, tell me what you would think without me telling you anything.

Marc: Oh, look, I know, there were some issues a little while ago with Core Lithium and we actually wrote about Core Lithium on the Stocks Down Underr website around that time when that first dip…this was early ’23 you see the share price dipping to 75 cents and bounced back up. Around that time, we wrote about Core Lithium and we said, “Look, with stuff that’s going on at the moment, don’t be surprised if this stock will go a lot lower because this sort of stuff never comes alone,” right? If there’s a setback, there’s always more at some stage. So in that sense, it doesn’t surprise me, but going all the way back to 34 cents, you know, given through on the back of a very deeply discounted cap raise. But it’s still a bit of a surprise because the company should have made some progress in the last few years, right?

Stuart: Right. I’ll quote Shakespeare at this point, “When troubles come they come not single spies but in battalions.”

Marc: Exactly. Well, that’s what’s happening here. And it’s what happens on the stock market quite a lot actually when stocks get into trouble.

Stuart: Right. So let’s talk about where we’re sitting with Core Lithium and why investors should be paying attention to the moment. Okay, so this mine just got up and running. In FY24 it will produce about 80,000 or 90,000 tons of the products. This mine is exquisitely located just 90 kilometers up the road to the port in Darwin along a sealed road, and at the other end up in China is Ganfeng and one of its competitors Yahua, who are taking the material on offtake grades. Meanwhile, back into the Northern Territory, this great grade is high. As a rule of thumb greater than 1% lithium is always attractive in lithium resources. And look at that reserve, 10.6 million tons of the stuff, 30 million at resource, and that’s growing all the time.

The operation has just one little open pit at the moment, just a starter operation. The deposit they’ve identified as their cornerstone, BP33, they’re evaluating that at the moment. They won’t come up with a final investment decision on that part of the project until early next year. So, in other words, just like the Carpenters sang back in the ’70s, “It’s only just begun,” in terms of the potential upside you can get. And when you get a good hard rock lithium plate, it can be a multigenerational asset if they play their cards right.

Marc: You know what happened to Karen Carpenter, right?

Stuart: Exactly, yeah. So you could start before the good times start, basically.

Marc: Basically.

Stuart: So there’s 500 square kilometers of exploration ground sitting around where Finniss sits. And the company’s actually set aside some money from its budget to go drill a heck of a lot of RC and diamond looking for what can add to this resource. So it’s big now…well, it’s medium-sized now, it’s gonna be big if Gareth Mendes and his colleagues have their way. Now, we’ll talk about the raise in a second, but this company has no debt based on this mine and it has got…it’ll have over $200 million in cash. So we’ll fund it to do whatever it needs to do before investor sentiment comes back to this one. So that’s what’s to like about this operation right now.

So what went wrong? First of all, it was a market darling. I kept on seeing chatter about Core Lithium CXO, this rocket emoji, rocket emoji, you know, the dumb stuff that retail investors like to talk about. That was 2021 and the peak was about November 2022. 2023, people have worried about the price of lithium. Marc, think about the discussions you and I had when we were contemplating a certain lithium play for Stocks Down Under earlier this year. And we got it right. But in the meantime, the traded price of lithium, we’ll show a chart a little later on, was going sideways, briefly stabilized, and then lithium stocks were away. Now it’s turned the other way.

The important thing is this. New mines always have teething issues. You can do all your planning, but until you’re actually digging the stuff out of the ground and processing it through the plant, you haven’t done all your learning. So, and that’s not just true of new mines, it’s true of new factories. There’s a famous book from the 1950s, I encourage investors to read all the time, “Common Stocks and Uncommon Profits” is the title of the book. And in the key thing, there is always a wait for the teething issues to show up because all the chickens will flee the stock and at the point where the last of the teething issues are out of the way, you suddenly get a bargain basement opportunity for a new factory or a new mine.

Marc: Was that book written with resources stocks in mind, Stuart?

Stuart: It wasn’t and…but the same principles apply to anything that’s new basically, but the mining industry is notorious for this. The reason I’d be encouraging any young person to seek a career in mining engineering is because those skills are always gonna be in demand. You want fresh minds to come in and sort out potential problems in mines that are always gonna show up.

Now, this company’s issues are its recoveries are lower than expected, or at least lower than the analysts were expecting. So the $100 million raise is to de-bottleneck the operation, and they’re expecting lower production in FY25 before they get that done. But it was July 2023, the guidance related to this de-bottlenecking they needed to do that took them down. Meanwhile, the shorters got it and did their worst and the company is now about 8.8% shorted. So the usual suspects, Pilbara Minerals, Genesis Minerals, and [inaudible 00:08:51.605] are all more heavily shorted, but this is still a pretty heavily shorted stock itself.

There’s the price of lithium, but not just any price. Lithium is one of those unusual commodities where you can never quite tell what the spot price is. This is the trading price as it lands in Chinese ports as priced in Renminbi. Relatively little lithium actually changes hands at this price. This is the loose material that’s lying around that changes hands allowing the Chinese traders to monkey around with the price. So as you can see, at the same time, Core Lithium was rewriting the price of lithium according to that measure, which is really valid. You can go look at it every day, it was racing hard. Lithium’s come down, bounced, and then down again.

So the fruits of that is that you’ve got this situation where lithium has been dropping heavily as far as people can see. Now, if you look through that, the long-term demand for lithium is such that the world just doesn’t have enough of this stuff. So the immediate spot price is probably not a realistic explanation of what’s going on in the real world but it’s the one that everyone looks at. So you want that this particular chart to turn around before lithium is in good shape.

Marc: Right. So does that spot, the share price there where we…? Where is that? When was it? May, I think. So that initial dip that you see there, that’s when we picked that one particular…actually, we can then the name, it’s Leah-Lithium, and we did really well on that one. And we got out before the initial trade, the first trading hall. But we’re getting…we’re at the same level there. But what we’ve been doing is really watched the pivot here and the price, and I think you should do it now as well, not just for in this case for CSL, but for any lithium play. Although, like, you said, there’s not a lot traded at this price. It’s one of the things that we actually as outsiders can actually monitor, right, in terms of pricing. So it’s turned out to be a good indicator previously. So definitely watch this price development.

Stuart: Right. So let me summarize where we’re at. Watch this stock like a hawk, and the reason is Core Lithium is a very well-placed mine. It’s rare to actually get this kind of location in a rich lithium field, a field full of granites that are rich in the sort of stuff that you would find in Core Lithium. And I’ve talked about the advantages this company has. But yeah, watch the price of lithium carefully, watch for any hiccups in the quarterly numbers. Importantly, listen carefully to what other people are saying. If everyone hates the stock with a passion, like with a murderous hatred, that’s when you actually start looking carefully because it’s probably reached the bottom of that point. Ruler line across the bottom there, 20 to 23 cents, probably the resistance of the support level for this stock breaks through, then it’s anyone’s guess what happens.

I think the management are probably not too worried about what the current share price is. They’re concerned about setting this company up for a really long-term growth. I remind you, Gareth Manderson, joined this company from Rio Tinto, and he was a 20-year veteran for Rio Tinto. Rio Tinto cooperatives don’t care about the Rio Tinto price, what they care about is setting up the assets they’re working on for long-term, low-cost production. And that’s what Gareth’s working on now. So not so good in the near term for Core Lithium shareholders, probably good in the long term [crosstalk 00:12:35.869] still talking about this.

Marc: Stuart, you watch out for director buying quite closely. Have directors been buying in this stock recently?

Stuart: Yeah, they have been taking their fair share of the share purchase plan related to the placement. Now, keep in mind that the stock is underwater on that one. So it’s not working out so well. And that’s a near-term problem as well is the share purchase plan happened at a time when markets are not in great shape. Without knowing the details of when the window opens or closes on an opportunity like this, I’d also watch for that. When Gareth himself and some of his colleagues are prepared to put their hard-earneds into this opportunity, that’s probably the time.

Marc: All right. Good stuff. So let’s keep a close eye on that one. Another one to pay a lot of attention to if you own it, definitely, but also, if you’re looking to get into it at some point is a BrainChip. That one has been falling like a rock. And the question really is have we reached the bottom yet? Because the other day we reached 18 cents and this is…

Stuart: You might say, Marc, it’s a no-brainer, right?

Marc: Well, I like the idea of a joke on this one but I’m not sure if it’s a no-brainer because, as you flagged with the CXO, if certain support levels break, then there’s more downside to it, right? So yeah, maybe we need some artificial intelligence to figure this one out. But a little while ago, in July, we looked at the chart, at BrainChip, and we concluded…you can see it on the right, that slide that we used back then. We concluded that support of around 30 cents needed to hold for BrainChip not to go down further. And, of course, now we’re 10 weeks later, we’ve seen that support around 30 cents, we’ve seen that break. And so we went down to 20 cents, and actually, we fell through that level as well. We’ve seen 18 cents just on Friday and Monday, I think. So it’s definitely fallen through those support levels.

And, by the way, Stuart, I’d say, unfortunately, is this stage where you and I still own some BrainChip shares and we rode part of the way down on this one, luckily not all the way from the top, previously, having been very successful with BrainChip. But that’s, you see how, sort of, tides can turn with certain stocks. But now what is really the question for investors either when you own it or if you look to get in because, yeah, at that support level of 20 cents, that broke, and so what’s next, right?

So on the right there, you see the chart, this is up until the close of yesterday. And you can clearly see that support level that the lowest horizontal line there, that is the 20 cent mark, and the low was actually 17.5 cents yesterday. And clearly visible is that the stock broke through that declining, sort of, trading range, broke through that, the bottom of that one, the trading range, and then subsequently broke through the 20 cents support level. So really, what’s next for BrainChip?

If you look at this chart, all the way on the left, you can see some circles there. And those were the gaps that were formed back in…when was this? 2020 and 2021 by the looks of it. Yeah, late 2020. And so these gaps start when a stock jumps from one day to the next. So it’s called a gap where the stock just jumps higher in this case, and it sort of leaves a gap. Basically, that’s where the word comes from, obviously, but it leaves a gap in the chart. And historically, a lot of gaps get filled at some point down the line, right? So, meaning that if you have an upward gap at some point in the future, the share price will come down to basically fill that gap in the trading area. So the price levels that haven’t been…where the gap is from earlier.

So what we see now is that with the decline that we’ve seen so far, all these gaps have now been filled, which in itself is good. But obviously, shareholders would have liked the share price to have gone higher rather than fill these gaps. And now the question is, is the breakthrough 20 cents support level, is that an actual break or is it a false move? And basically we’ll know in the next couple of days because, typically, the standard time period to verify a break is about three trading days, sometimes it’s a bit longer than that. So we’ll figure it…we’ll find out really soon if this is a permanent break through the 20-cent level. If it’s a false move, we see the upside is around 20 cents, which is the lower end of that trading range. So it’s circled under right there at the top, that’s around 20 cents, and that…sorry, 26 cents, and that will be a 30% return in the very near term. So if you’re a trader with a lot of risk appetite, you can play this one. But keep in mind, you have a tight stop loss because if it goes down, and I mean, if this downward break is confirmed, probably 12.5 cents is where we could be going. And that’s a 34% downside, right? So there’s a lot of downsides.

And then finally, for the fundamental investors if you look at this one, so in the very near term, you’ve got 30% upside and 34% downside, depending on which scenario plays out, which means that the risk-reward ratio doesn’t look favorable at all. So you need to be very careful with this one. And actually, what you wanna see is a turnaround in the stock where it’s actually confirmed by moving averages but that could be a while, right? So I suspect if you’re a fundamental investor, you want more solid news coming out of the company in terms of, you know, announcements, revenues, all that sort of stuff. Hopefully, at some point moving towards profitability and cash flow breakeven, that is some time away, I think.

So purely fundamentally, with that, we would say be careful with this one. Yeah, and again, depending on your risk appetite, if you’re a trader, yeah, you could play this one. But yeah, keep it very tight stop loss because you can get hurt with this one really quickly if you’re not careful because volumes are big. I think the other day, we had more than 25 million shares traded. So yeah, be careful with this one. And again, fundamentally, wait until we see that turnaround in fundamentals come through in terms of news flow. Potentially, we might do an interview with management if they fly over to Australia in November. We’re not sure about that yet. But hopefully, we can catch up with Matt to see what’s going on. In the meantime, yeah, just be really cautious. And Stuart, for you and me to conclude on this, we rode this thing all the way down from where we got in, and hopefully…

Stuart: You and I are supposed to be investment professionals, Marc.

Marc: Yeah, that’s true. But you know, even professionals make mistakes, right? In fact, a lot of professionals make mistakes, and it’s a good thing that the position wasn’t too big. So it was sort of a punt. But luckily, we made some money on other stuff as well, right?

Stuart: Right.

Marc: All right. I think that’s about it. Stuart, any last words from you? I mean, not in life, but for this particular webinar.

Stuart: So obviously, the market is a worrisome place at the moment. You saw iron ore drop 5% yesterday. I’ve been telling people watch iron ore carefully because if the Chinese economy is cracking up the way I fear it is, suddenly their demand for iron ore will freeze up. And I think yesterday’s move possibly suggests that we’re in for two or three months of really stormy weather in the markets if what I fear in China actually happens. And iron ore is the canary in the mine on that one, so watch that one carefully.

Marc: All right, good stuff. Yeah, overnight obviously, the bond sell-off didn’t help the markets either. So I suspect in the very near-term will be a rocky ride for investors. So we’ll wrap it up here and we’ll see you next week.

Stuart: See you next week.