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Lithium is making a strong comeback!
September 21, 2022
AKE, allkem, Lithium, Pantoro, PNR, Sayona, Sayona Mining, SYA
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Marc: Good morning. It’s the 24th of August, 2022, and this is our weekly Investor Webinar for Stocks Down Under subscribers. Good morning, Stuart.
Stuart: Good morning. Good to be here.
Marc: Loads to talk about. Let’s kick it off with lithium, because Peter, who you will have been speaking to, and I’m talking to our subscribers now. You will have been on the phone with Peter. He’s getting a lot of questions about lithium, what to do with lithium stocks, and which ones we like. So, Stuart, let’s jump in there.
Stuart: Yeah. So, we subscribe to “The Economist” magazine here at Stocks Down Under. And last night, I was reading this article in the latest edition, Cell Side Analysis. So, a decent coverage on future demand for various battery minerals, of which lithium is a key part. And The Economist’s takeaway is that, basically, there’s not enough production capacity to satisfy the demand for people who are going to be using lithium-ion batteries in electric vehicles and in other applications. Now, you’ve heard me say this before, I’ll say it again, and the experts of “The Economist” will back me up here. The world will need something like 5 or 6 times more lithium between now and 2030 if the ambitions of the global economy are your only guide.
The article starts out by talking about the fact that roughly 10% of new vehicle sales today are electric vehicles. It doesn’t surprise me. As I drive up and down the highway next to where I live, I’m seeing Teslas all the time now. Now, admittedly, that could just be where I live here in Sydney. But, basically, you’re seeing the mainstream electric vehicles. It’s not just for really well-off people who want a virtue signal about how they love the planet. It’s starting to get into the middle class now. And all the surveys are suggesting that by the end of the decade, about 40% of the vehicles that are moving out of showrooms could be electric.
Now, here’s the challenge. Most battery-making capacity at present is in China. The emerging player in battery minerals is South Korea. And it’s fair to say that country’s going to make out like bandits as it builds the capacity because no one wants to actually have to be reliant on China to source their batteries. As the rest of the world scrambles to build capacity, they’re also going to need a reliable supply of all sorts of battery minerals, particularly lithium. So, the short take-home message, and there’s a lot of stats to back this up from Bloomberg and other reliable sources, those battery makers are going to need all the lithium they can get.
Now, if you look at the next chart, this actually surprised me. When we started talking about lithium, everyone hated the commodity. If you can see there on that chart, 2019 moving into 2020, lithium was depressed. No one wanted to talk about it. No one wanted to know it. That’s when we started talking about that commodity and uranium in early 2020. Look what happened in 2021, there was a big rewrite up six-fold. And no wonder all of you folks out there are talking to Pete because a lot of you would have bought lithium, I suspect, or lithium stocks on the way through.
There were certain market darlings. One of them was Lake [SP], another one was Core, etc. So, those stocks have been pummeled in the bear market of 2022, but look at the commodity. That’s the price at which China is importing lithium, and it’s pretty much steady at did 500,000 Yuan per ton. That’s telling you something, is that there are supply constraints at the moment given the outsized demand for lithium going into mainly batteries, but all sorts of applications for the modern economy.
Marc: So, quick question here, Stuart. I remember in 2017, I think it was, or even earlier, 2016, everyone was falling over each other to get their hands on lithium stocks, and then you had the big collapse in this space. Why wouldn’t something like that happen, say maybe not this year, but 2023?
Stuart: Yeah. So, the difference is the electric vehicle revolution was still some way away. Basically, it’s only been in the last year and a bit that you’re seeing electric vehicles start to mainstream to the point where it’s not only made Elon Musk the richest man on the planet, but it’s actually turned Tesla into a highly profitable company. And in the meantime, just every other carmaker has followed suit, announcing that at a certain period of time their cars will be electric. You can see that in 2016, ’17, the first time that [inaudible 00:04:38.438]. So, I think this time round, we’re very different.
So, what do I think about lithium stocks? Wait until they’re less popular. A lot of people have taken a real bath in stocks like Lake and so forth. It’s about time to get back in the water, I think, but you’ve got to be selective, and I’d pick the ones that weren’t market darlings last time around. I’ll bet you on the money, Marc, that no one down at the volleyball club has been telling you to buy Allkem, for example, AKE. That’s the market leader. It owns the Olaroz lithium producing facility in Argentina that was piloted by Orocobre. It merged with Galaxy to become Allkem, an $8 billion company in the top 200, and they’re actually a reasonably successful producer, doing well in this environment because of the low cost of sourcing lithium from Olaroz.
Marc: Right. With Argentina going to wreck and ruin, with potential knock-on effects for this lithium place there, what’s the risk here for Allkem?
Stuart: So, the risk is that Argentina does something really stupid, like nationalizing the lithium mines, for example. President Fernandez has been talking that he will work with the lithium industry because he needs all the foreign exchange he can lay his hands on. So, so far, so good. There hasn’t been too much regulatory interference in what Allkem and other producers are doing. The one that you’ve got to watch out for is Chilean producers. Chile votes next month on a new constitution, and amongst other things, it actually vests…that new constitution vests the ownership of natural resources in the state. So, Chile’s had a big move to the left that could potentially hamper its historically very productive mining industry. But the best lithium players of all are the ones that are closest to the emerging giga factories. That’s why I like a company called Sayona.
Now, interesting, Sayona wasn’t exactly a market darling on the way up in 2021, but it’s got a lot going for it. Its company maker is Authier up in Northern Quebec, a province of Canada. They also bought out of bankruptcy a company called North American Lithium, which owned another lithium operation next door. They expect to get first production from that combined operation next year. Now, one of the great things about Quebec is all the hydropower. It’s got some of the lowest cost of power production in the industrialized world, and that makes the spodumene concentrate coming out of Authier and North American Lithium even cheaper. The stock’s been rallying quite nicely since July, off the back of lithium staying strong and the expectation that this will be an interim producer. Like I said, you want to be careful. Lithium is, unfortunately, still too popular, in my mind, to get a real bargain. But if you pick the ones that weren’t market darlings last year, you could make out reasonably well.
Now, we wrote about Sayona Mining awhile ago in Resources Stocks Down Under. We’ve written about most of the lithium plays, so you can do a lot of your homework in that one. But that’s the one that I would be focusing on at the moment. And there’s the stock chart to back up what I’m saying. Had a bit of an attempt to rally early this year. It’s given that up when it raised some extra capital to get this project moving. And plus, you know, we’ve been in a bear market, but it’s been a pretty solid performer coming out of that.
Marc: All right. Good stuff. So, there you have it. Everything you needed to know about lithium. That brings us to our next topic and it’s about the Top Picks. So, all of our subscribers will know the Top Picks page. The performance there hasn’t been great for a number of reasons, and we’ll talk about that, which is why we’re replacing Top Picks that we’ve had for a year and a half now with a more personal service. So, we’ll talk you through that. So, why did we start Top Picks last year? So, we have a lot of research on the website, right? We publish something…you know, we publish five articles a week, and before we switched to one company per day. We actually had 12 companies per week before that. So, there’s a lot of research on the website.
Stuart: I would argue, Marc, we are the most prolific researchers of any other company in our space.
Marc: We probably are. So, there’s something like 1,100 or 1,200 companies that we’ve written about on the stocks on the website for, including a whole lot of lithium, as Stuart just said. So, it’s a lot of reading, basically, for people that want to stay on top of the news, basically. And so, the feedback we got or that Peter got is, “Look, guys. You’ve got great research, but it’s too much for us to read through all of that. So, why don’t you just give us your best ideas and make it actionable.” So, that was the reason that we started Top Picks. By the way, we had some great runs with more than 100% on some of these stocks, but also some stocks that didn’t do so well. And the problem with that, basically, I think the reason for that is we didn’t really sort of fine tune it to the point where it was real disciplined.
So, for instance, we had no buy range or stop loss or target prices, all the things we have now with Stocks Down Under Concierge. So, get a trial to that if you haven’t done that already. And the thing is then these ideas don’t stay current enough. If there’s not enough discipline, you know, these stocks will just sort of stay on that list, and move around, and, basically, the trading idea gets diluted. I think that’s probably the best way to put it. So, to tackle that problem, we’ve set up Concierge which is much more buttoned down, and I think we’ve done great with that. Performance has been really good. But for Top Picks…
Stuart: And we’ve been working stop losses as well, Marc. That was [crosstalk 00:10:40]
Marc: Yeah, exactly. That’s what I’m saying. Yeah. So, we’ve been working with stop losses and buy ranges, buy up to, you know, X. Don’t buy above that level. So it’s much more disciplined. But for Top Picks, what we have decided, and actually, we’ve been doing it for a little while already, is to give you periodical updates over the phone and I think most of you will have either had a chance to talk to Peter, or he will have called you in any case. But Peter will be in touch on a regular basis. I’m not saying every month or every week, but on a regular basis, just to update you on stocks that are on our radar screen right now. And there’s a few of those like Cycle Farm [SP] so most of you will…if you have spoken to Pete, he will have told you about Cycle Farm, or Rate My Agents, and there’s a few more. And as he talks to you, he will have our latest thinking on some of these stocks, and you’ll be up to date on what’s happening in these stocks.
So, at the bottom there you can see a phone number. That’s Pete’s phone number. If you see a call coming from Pete, from that number, just make sure you answer because it’s Pete and he’s there to call you with our latest thinking on some of these stocks. And you might actually want to put that number in your phone already so that when it rings, you actually know it’s Pete already, right? So, that’s my advice to you at this moment. What we’ll do with Top Picks, we’ll shut that off tomorrow, and so your will no longer be seeing it on the website. But Peter will be in touch, again, on a regular basis to talk you through our most current thinking on some of the stocks that we think have good opportunities.
Marc: All right. Lastly, we want to talk to you about a gold stock because, you know, gold, Stuart, has been one of the sort of the players that we’ve been talking about for about a year so. Unfortunately, gold hasn’t really sort of spiked in the face of rampant inflation. But you wanted to talk about Pantoro as a stock with some good potential.
Stuart: Yeah. So, those of you who’ve been following us for a while will know that I’m a big gold bug. It’s my conviction that sometime in the next decade and a half, gold will go to $10,000 an ounce, U.S. And the reason is gold has historically proved to be a great inflation hedge, and this time is no different. Obviously, there are other inflation hedges out there. People thought it was going to be crypto, and particularly Bitcoin for a while, but the bear market of 2022 has pulled that apart. So, what’s gold doing? It’s interesting, it’s range trading right now. Range trading between about $1,700 and $2,000 an ounce. And it’s picked up to that $2,000 an ounce twice now, and it’s holding pretty steady at the low end of the range where it is at the present time. So, you might say the gold bugs are watching for the next big, should we say, financial dislocation event that could potentially move it higher. A few more bad quarters of inflation, you could be in there.
Now, I was talking with a man yesterday who was considering subscribing to SDU Concierge. He said, “What do you like about Pantoro?” And I shared with him my views on the stock, and I undertook that we would update the folks in the webinar today. So, what’s Pantoro? You can read about our original view, Stocks Down Under 28th of April, 2020.
This company’s original mine was called Nicolsons up near Halls Creek in the far north of Western Australia. But where the big money’s going to roll in, it owns half of the Norseman Gold Project, which it bought back in 2019. That horse you can see on the right-hand side is the town of Norseman, Western Australia. It’s the first town you come to when you cross the Nullarbor Plain coming from the east. You’ve left Port Augusta, you’ve driven over about 700 kilometers of the Nullarbor Plain, and then you get Norseman at the other end. Historically, Norseman was a very rich gold field, so the horse that’s depicted in that statue was Norseman. And Norseman, it is believed, kicked over a gold nugget, which told his owner that there was a big gold field here, about 1894.
Fast forward to the 1930’s, and it was the company maker for what became Western Mining, and it was the gift that kept on giving. Western Mining brought it into production in 1935, and the mine was still going strong up until about a decade ago. Since put on care and maintenance, and fell into the hands of Tunnel Resources for one half and Pantoro for the other half. Big resource. Close to 5 million ounces in resource, with more where that came from. And first production from the new Norseman as of this year. So, the capital’s been raised, there is 53 million cash in the till for this company at the moment, so we’re now getting ready for the first gold pour at the new Norseman.
So, as usual with the stocks over the last few months, we’ve been through turbulent times. Interestingly, the stock held fairly steady at around $0.20 pretty much through most of 2021, and it’s gone slightly below that, but not badly below it at the moment. So, it looks like the market’s lost patience. But given there’s light at the end of the tunnel in terms of a real live mine coming out of this, I suspect you’re going to start to see people start to nibble at about the current share price, so long as nothing goes wrong with the initial stages of the start up.
Marc: Right. Stuart, you know, I’m usually the devil’s advocate, right, when we talk about stocks. So I always ask the nasty questions. Wouldn’t you expect that the…well, basically the expectation of gold starting to come out of that mine is already sort of discounted in that share price, so is that really going to make a difference to move up the share price, or is it going to be gold price that is going back up to $2,000 again, if that happens?
Stuart: Yeah. So, what you’re potentially facing here, and this is why investors need to be careful, and I talk about this a couple slides down the track. Typically, a new mine or a new factory starts up, there’s going to be teething issues, you know, machinery that doesn’t work as expected. In the case of mines, grade control, for example. And grade control could be a big issue for a field that was nuggety as Norseman traditionally was. So, what you’re seeing is the market actually being a bit nervous, waiting to see, “Okay, we know first gold is coming, but is it going to come in anywhere near the numbers suggested by the feasibility study?” So, the risk you have going into the stock now is that something could go wrong in the first few quarters. Not badly wrong, but enough to annoy people and cause them to move on, and that’s what you’ve got to worry about here. So, Marc, your devil’s advocacy is on the money on this one, I think.
But here’s what’s to like in the medium term once the geniuses at Pantoro figure out how this works. First of all, you’ve got a large, very high grade resource. On top of that, you’ve got a heap of exploration ground in the neighborhood, which could potentially build this thing for another generation or so in terms of the off-feed [SP]. The mine that’s starting now is a very cut-down starter operation from just three pits, but there’s a heck of a lot more where that came from. Only a 7-year mine life, producing just over 100,000 ounces in each one of those years. But all-in sustaining cost of $1,300 an ounce, which is not bad. And a pretty good NPV at $2,600 an ounce Aussie, which is roughly where it is right now. So, the plants will be completed shortly. We’ll see the first gold. And if the ramp up kind of works as planned, this one could start to attract some attention. The fact that our man over in Western Australia, who we were talking to yesterday, has heard about it, that tells you that potentially some good things could be coming out of this one, but be a little bit careful.
Marc: Right. And that all-in sustaining cost, is that Aussie or U.S. dollars?
Stuart: That would be Aussie.
Marc: Right. And NPV as well?
Stuart: Yeah. Interestingly, Australian miners like to quote everything in Australian dollars, generally. It’s a funny situation, but it makes sense in light of the fact that it’s only rare that the currency goes to parity, and more often than not, it’s down where it is now, around 70.
So, when to time this? Wait until the stock and commodity stabilize. It feels like gold is trading at the bottom end of the range that it’s been at since 2019, 2020, but you want to know that you’re not going to have that come apart for you. Same deal with the stock. Watch out for production hiccups early in the life of this mine. And I’ve talked about the nugget effect. What’s the nugget effect? Your drilling suggests that gold will come out of the ground say at 5 grams a ton, but you’re drilling in the wrong place. But you dig in the wrong place, it comes out at 3 grams a ton. That can make for wacky changes in the cost of production, not change in the actual output from the mine. So, you want to see that the folks who run this mine have done their homework on grade control. Now, they’ve had several years to get to know the field quite well, so I’m not too worried about that. But if you’re talking to management at Pantoro, that’s the question to ask.
Marc: All right. Good stuff. So, that’s Pantoro. Well, that’s it for us. Just a heads up, I will be overseas in the next two weeks, so we won’t have a webinar in those two weeks.
Stuart: It’s just going to be me, Marc. What am I going to talk about?
Marc: Yeah. Good idea, Stu. Good question. I don’t know. I’ll leave it up to you.
Stuart: We’ll think of something.
Marc: Yeah. Look, I won’t be there, but I’ll be back in two weeks or three weeks, actually, and so we’ll catch up then.
Stuart: All right. Good job.