Piedmont Lithium & ResMed under pressure!

Piedmont Lithium & ResMed under pressure!

In this week’s Investor Webinar (4 October 2023) we look at Piedmont Lithium (ASX:PLL) and Resmed (ASX:RMD).

Both stocks are under pressure and we want to know if it’s time to load up!

Full transcription below.

 

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Transcription

Marc: Good morning. On the 4th of October, this is our weekly webinar. Morning, Stuart.

Stuart: Good morning.

Marc: You realize it’s World Animal Day, don’t you?

Stuart: Okay. What animal are you celebrating?

Marc: Well, I’m a cat person. But yeah, look, I’m not sure what your preferences are, Stuart.

Stuart: My favorite animal is the party animal.

Marc: You are a party animal, right? Late into the night, jacuzzis and all sorts of stuff. Let’s not go there. So, well, what are we talking about today? We’ve got a lithium stock that we think we should talk about because of what’s happening in lithium that keeps going down, and maybe, hopefully, we’ll see some sort of bottoming in that lithium price at some point. And ResMed, we’ll take a look at what happened to the share price recently. We won’t go into the fundamentals too much. We’ll have a quick look at that, but we’ll have a look at what’s driving it technically and whether or not you should jump on right now. But let’s kick it off, Stuart, with Piedmont Lithium.

Stuart: Yeah. So, basically, the only thing the punters care about right now is lithium, and the reason is because it’s going down. So, a lot of people bought lithium over the last three years, and they’re not looking so good right now. And one of those stocks that has been a favor of the market is Piedmont Lithium. Now, Marc, if you go back to 2020, Piedmont Lithium commissioned us to write some research about them.

Marc: I think we did a good job apparently, Stuart, looking at share price.

Stuart: Absolutely, absolutely. The stock took off not long after that. And it’s remained a billion-dollar company or close enough to it and no surprises there. This company has executed very successfully in terms of positioning itself into some great lithium projects, which are now beginning to bear fruit. The only thing that’s going wrong here is the lithium price, which I’ll talk about. Let’s review Lithium, Piedmont Lithium, and why you should pay attention. There’s the chart. Now, it’s interesting, the stock’s nearing the low that it reached in middle of 2022 again. So, the resistance level there in the middle of that chart is interesting. If it holds at that point, it could be interesting. But the long-term trend has been down since the middle of 2021. So, for those two reasons, I would be a little bit wary on this stock right now.

Who is Piedmont Lithium, ASX: PLL? Stock’s now 60 cents. It’s been over a buck. Lithium projects in the U.S. states of North Carolina and Tennessee, when we were writing about it back in 2020, it was just North Carolina, and this project was genius. It was an old tin belt in North Carolina that had been worked previously for that metal. Tin often occurs in parallel with lithium, hard rock lithium because of the pegmatites, they sourced it. So, some smart money went and looked at the tin belt in the Piedmont District of North Carolina, and discovered there was some ample resources there. And the beautiful part of North Carolina is twofold.

One, it’s a red state, so everything’s inexpensive in North Carolina, including power and labor. The second thing is, it ain’t too far along sealed highways to get the lithium to wherever the gigafactories are going up in North America. And this is where I learned about the idea of provenance, lithium provenance. It’s one thing sourcing lithium from a non…such a nice place, such as the Democratic Republic of the Congo. Our apologies to any citizens of the DRC who are proud of their country, but let’s face it. It’s not the nicest place in the world. Marc, would you agree on that?

Marc: I think your buddy Trump a couple of years ago had a very good, sort of, description for these types of countries.

Stuart: This is a family value show, Marc, so we won’t use the term, but [crosstalk 00:03:50].

Marc: It got something to do with the feces and holes, yeah.

Stuart: Right. So, companies want to know in this day and age where they’re getting their material from, that it’s been properly manufactured under best practice for labor standards and everything else. And that really favors, for the lithium industry, lithium that can be sourced domestically in the continental United States, U.S. and Canada. That actually plays into another Trump thing, which was onshoring of manufacturing, which has continued now with the Biden administration. So, those projects in North Carolina and Tennessee are turning out to be quite valuable. Meantime, they had 20% of the projects that say are working on up in the Canadian province of Quebec, namely OTA, and a project they took outta bankruptcy called North American Lithium. And that’s actually starting to deliver right now.

North American Lithium is restarting and it will start to yield ample quantities of spodumene concentrate in the next little while. And they’ve also got half of another project in Ghana. So, hedging their bets in terms of the offshore project where you can get [inaudible 00:05:04] at a reasonable price. For that $1.1 billion or thereabouts, you’ve got a fair bit of cash, $129 million, and they also have equity investments in, say, Atlantic. And if you add them up, depending on what the current price is, they’re sometimes worth between $150 million and $200 million. So, a lot to like about this company, which I’ll elaborate on a bit further.

Basically, the original North Carolina project, that starts to kick in a serious way in about 2027. The Sayona projects, North American Lithium is going now, OTA comes a little later, Ewoyaa in Ghana. So, by about 2025, all of these projects will be under construction and producing between…and 2027. So, this is a near-term opportunity with multiple well-located projects. Keith Phillips, CEO of this company based in New York or Chicago, I can’t remember which, has done an outstanding job of bringing this portfolio of lithium projects together.

What’s else to like? Well, I draw your attention to the fact the undervaluation stock, just the NPV on reasonable numbers for the Carolina Lithium project is worth 2 billion. So, you’re getting everything else for free. The Sayona projects are interesting because Quebec may have a lot of Frenchmen in it, but what it also has is very low-cost electricity. Everything they produce in Canada gets done with hydropower. So, it’s a renewable energy paradise up there where costs are very low. And obviously, in Quebec, you’re very close to the car factories, not only in the southern part of Canada but in North America. I’d also draw your attention to the commercial relationships. Tesla wants a piece of the action in terms of the product. So does LG Chem, the big player from South Korea. There’s gonna be a focus on downstream chemicals. So, this is not just shipping low-grade spodumene concentrate. They wanna go to all the good stuff, which is lithium hydroxide. So Marc, does this sound like an exciting opportunity to you?

Marc: Yeah. It does. It does. And looking at that support level that you mentioned around 60 cents or 55 cents, that looks very attractive, but I’m afraid you’re gonna say what’s not to like about Piedmont Lithium right now.

Stuart: Yeah. So, what’s not to like about Piedmont Lithium, and it’s one word, this, the price of lithium has been terrible in 2023. And we talked about this in our webinar last week. All year, the landed price of lithium carbonate in the Chinese market has been dropping like a stone. Jumped briefly between May and June, and that helped to rally some of the stocks, then the drops continued. So, there is inventories of lithium lying around. That was in part due to the Chinese government’s decision to end subsidies to electric vehicles earlier this year in part. But lithium’s gonna be like this for the next few years. New mine starts up, suddenly, there’s too much production lying around. And as I’ve said before, lithium’s not the most transparent of commodities.

So, you can obviously look at this price every day, but what are the other prices at which commodities are changing hands? It’s different. Now, what the authorities on this emerging commodity are arguing is that over time the spot price has just got to go up because the demand will shoot the lights out compared to the available production. But that’s a swings and roundabouts thing. At the moment, there’s too much. I suspect in a couple of years, there might be too little, but you wanna see that chart stabilize and recover a little bit before you’d even wade back in the water. Doesn’t matter how respectable the lithium stock is, everyone’s taking a battering at the moment.

Marc: All right, good stuff. So, yeah, they have it. Lithium, very popular with the punters. And we’ve been getting a lot of questions about a number of lithium stocks, including this one, so we thought we’d discuss it this morning. Then a completely different stock in the healthcare space. And this is a stock that is talked about a lot as well because of the crash that it had, or, yeah, well, it’s a mini-crash, I’d say, if you look at what happened to the share price in the last, sort of, 10 years. ResMed. So, let’s jump in here. And I’m by no means a specialist on ResMed from a fundamental point of view. That’s you, Stuart. But I wanted to look at ResMed from a technical perspective, so looking at the charts, looking at the share prices. And basically, the question is, is it time to jump back in?

Stuart: That girl, by the way, looks too young to be a ResMed patient. Ordinarily ResMed’s market is middle-aged guys who are a lot more obese than this patient is here. So, I think they’ve created that photograph purely for its aesthetics, rather for its real realism, shall we say.

Marc: Stuart, I suspect she may be a model. I’m not 100% certain.

Stuart: No.

Marc: So, ResMed share price chart since 2012, and you can see that’s a beauty, right? It’s almost a straight lineup. But what happened, if you look at the final part of that chart, you can see a massive drop from above $32 down to $21, $21.50, actually not too long ago. And so, what triggered that was weaker than expected revenues in the fourth quarter that just ended a few months ago. And also, and this is interesting, and you might have a view on this as well, Stuart, the impact of weight loss drugs on sleep apnea. So, obviously there’s a correlation between obesity and the need for sleep apnea equipment. And so, the thinking was in the market, for a little while at least, and maybe still, that the new…there’s three, I think, in the market right now, three weight loss drugs that will help with reduced obesity, at least in part, a little bit in the U.S. especially, that that may have an adverse impact on the demand for sleep apnea equipment. Now, Goldman came out…

Stuart: Ask me what I think, Marc.

Marc: Yeah, one sec. Goldman came out and said, “Well, it won’t be that bad.” So, that is why the share price bounced about 5% the other day. But Stuart, what do you think about this?

Stuart: I think all this argument about weight loss drugs has a lot of nonsense. Marc, there’s a heck of a lot of obesity out there. But sleep apnea is a multifactorial disease. A lot of people who aren’t overweight nonetheless have sleep apnea. Traditionally, it’s been one of the most underdiagnosed diseases around there. And a lot of what ResMed has done over the last decade is help to improve the rates of which people get diagnosed and, therefore, treated. So, I think the argument that weight loss drugs will kill the market for sleep apnea is one of those great after-the-fact inventions that people have come up with to justify a remarkable share price move, as I say, a once in a decade opportunity here. And notice I’m saying opportunity. We can talk about that in a moment.

Marc: Yeah. So, you can be right, Stuart. You may be right. The market, at least Mr. Market for a little while said, “Look, these weight loss drugs are having an impact.” And Goldman now just came out with the reports that basically align with what you’re saying, that’s all a heap of horse feces. Looking at the chart though, there’s a break in the trend and a long-term trend. And we’ve seen that sideways trading basically for two years already, right, since, sort of, the middle of 2021. At that point or late in that period, the interest rates started to rise, so all these, sort of, high valued stocks started to come down or trade sideways, and we’ve seen that with ResMed as well.

And then finally, it broke the uptrend. And what’s now really important, there’s two circles in this chart. If you go all the way to the left there, you can see that the green line, which is a 50-day moving average, broke the red line, which is the 200-day moving average, which is a really important sign for technical analysts. They look at that and take that as an indication that the trend has changed. And this is a weekly chart. So, on a weekly chart, these averages crossed positively back in 2012. But the reverse, it looks like it’s about to happen in reverse now. If you look at that circle all the way on the right there where the green line is coming down, and give it a couple more weeks, if this trend continues, it will break the 200-day moving average, which is a really negative sign for the share price.

So, that is about to happen. We don’t know if it will, but it will take a little bit of a miracle in terms of share price recovery for that green line not to break the red line there. So, if it happens, it can open up the way to more downside. And we’ve seen a recent bottom at $21.50, so there will be support there at that level. That’s where the Goldman report came out, and then the share price bounced. But look, it’s anyone’s guess what’s gonna happen. The likelihood of the share price coming down further, if these averages are crossing, is quite high if you look at, you know, historical, sort of, evidence for a whole bunch of stocks, which is why technical analysts are really focusing on this sort of indicator.

So, $23 seems a good level, but yeah, you need to jump on. But you need to be really aware of what’s happening. And then looking at the valuations, and Stu, I’ll ask you about some traditional, or historical valuation I should say, for ResMed in a moment. But right now, if you look at the EBITDA growth, you can argue that’s, you know, between 10% and 11%, that’s very reasonable for a stock like this. But then our preferred metric to, sort of, gauge if what you’re paying for that particular growth…So EV/EBITDA to EBITDA growth, that metric signals stock is still pretty expensive at 1.5 and 1.3 for 2025. Even for a stock, I think, that has traditionally been fairly expensive…Stuart, this is where your experience with ResMed comes in. You’ve always seen this stock. It’s more expensive than the market average, right?

Stuart: It always trades at a premium to the expected growth rate because the growth rate was expected to go for so much longer. Now, the reason the punters need to be wary of this one right now is the rude awakening that you’ve been showing in the last few charts means that this one could actually be in dangerous territory until it actually starts to price that growth more reasonably going forward. So, as you say there, once it comes down to an EV/EBITDA of about 10, then you would start to pay attention. So, it’s a once-in-a-decade opportunity, but we’re not there yet. We’ve gotta wait for the punters to take a real bruising on this one.

Marc: Yeah. And combine that with more macro developments like high interest rates and the potential for even, you know, one more high potentially this year in the U.S. and in Australia. And so, I think the sentiment around the stock isn’t great. Sentiment in the market isn’t great. So, yeah, we definitely hold off. Those averages we showed you, sometime in November, we should have a bit more clarity on that. So, until then, I’d say stay clear of this one. Keep a close eye on it just like you would keep a close eye on the lithium price to see when you can jump on there. But the market, Stuart, is pretty risk averse, especially if you look at what’s happening in the bond market, you know, the equities are not in good shape at the moment, so be careful out there, people.

Stuart: Right.

Marc: And with that, I think we should wrap it up. Anything any observation, Stuart, from you on the market?

Stuart: Yeah. The old selling may go away thing applies to the months up until about now. So, if you start to see commodities tighten a little bit, that’s a sign that the world is not coming to an end at the moment. So, this could be the turning point, this particular month. If not, we’re in for a rough ride through Christmas and in the New Year, I suspect.

Marc: All right. Well, it’s October now. I know what happened back in…was it ’87? I was a pretty young kid at the time, but it wasn’t pretty. And that happened in October, right? So, that whole thing…

Stuart: You know what Mark Twain said, “October’s always a bad time to buy stocks, so is January, February, March, April, May, June, July, August, September, November, and December.

Marc: Right. So, how the hell do you get in the market then, Stuart? That’s an enigma.

Stuart: I suspect Mark Twain made most of his money from royalties of his books rather than from speculating in the stock market.

Marc: Yeah. What did he know? All right, we’ll leave it there. And see you next week.

Stuart: All right. See you.