What happened to the Weebit Nano share price and lithium stocks? Investor Webinar 29 March 2023

 

In this Investor Webinar:

 

– The lithium price has taken a big hit recently, but M&A activity in the sector is heating up. Here are 5 stocks you need to focus on.

– What happened to the Weebit Nano share price (ASX:WBT) and what’s next now that it’s very well funded?

 

See full transcription below.

Disclosure: Stocks Down Under / Pitt Street Research directors own WBT shares.

 

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Transcription

 

Marc: Hello, and welcome to our “Stocks Down Under” weekly webinar. We’ve been away for a couple of weeks because Stu’s been overseas and I’ve been away last week. But we’re back, 29th of March, and a lot has happened in the last couple of weeks, including with one of our favorite stocks Weebit Nano. But we’ll start off with lithium because lithium price has taken a big hit recently, but there’s all sorts of activities in the lithium space. Stuart, talk us through what’s happening in the lithium market right now.

Stuart: Yeah. So, if you take a look at the price of lithium when we get our chart up, that’s the landed price in China, traded in Renminbi. What it shows is that 2022 was a significant year of outsized growth in the lithium price. That’s now correcting. And the expectation is that it will stabilize into 2024 and then move forward again. Now, if we were to take that chart back a little further on the left what you’d see is, we’ve been here before. The general trend on the price of lithium is up, but it goes through swings of about two or three years where supply tends to race ahead of demand. And we seem to be going through that in 2023. The big picture is about a decade from now, the world will need five times more lithium. Now, there are no shortage of candidates to be able to step up and supply that, but the winners right now are the ones that have got projects that can deliver into the next upcycle. And it’s interesting to me that Albermarle, Albermarle is an established lithium producer. It’s been around since forever and pretty much has been the pioneer of the modern lithium market. They’ve just bid for Liontown, ASX:LTR, which owns the Kathleen Valley project that is now in the process of being built and then commissioning. They’re offering $2.50 a share and the company said no. Rumor has it they’re asking for $3 a share. So, whether or not Liontown ends up being part of the Albermarle empire, what it’s telling you is that people are laying down their chips now for valuable multi-year assets, of which Liontown with Kathleen Valley was one of them. And no surprises as to why. Once the capital’s been spent, the free cash flow flows in a serious way for this commodity and that’s coming. So, lithium stocks haven’t been doing so well this year, but this has put a been a real shot in the arm the entire sector to see that there are valuable M&A opportunities in the space and we think there are implications for other stuff.

Marc: Quick question, Stu, if we take it back to the previous slide, what’s caused the decline in the share price? Because demand should be pretty robust, right, with everything that’s happening?

Stuart: So, every now and then the market gets ahead of itself. A couple of new mines come on at the spot level, and a lot of this stuff is not necessarily sold at spot, but at the spot level, suddenly there’s a little bit too much. We saw that in 2019, for example. And then the market tightened up considerably with the next spurt of demand. That’s what’s happening again here. So, that’s what’s happened with Liontown. So, as I was sharing from you, the big picture is five times more lithium, but the price isn’t gonna go up in a straight line. It’s going to oscillate around a general uptrend, is what I’m saying. But for this current cycle, you wanna wait till the price stabilizes a bit. It’s fair to say you couldn’t go anywhere in this market for the last couple of years without people wanting to talk about Lithium. The time to get in again is when everyone has had enough of lithium and doesn’t wanna talk about it anymore. And there’ll be a few names that you’ll wanna know about at that stage. One is mineral resources known mainly as an iron ore play, but now diversifying into lithium, Pilbara Minerals with the Pilgangoora mine. And there’s a new, core lithium, just commissioned the Finniss mine up in the Northern Territory. And that’s interesting because the location is perfect. You’re only 50 kilometers from the port of Darwin to get the material out to customers in China and elsewhere. So, these are stocks that can benefit quite well from the next upswing of lithium when that happens after the whole thing stabilizes.

A few others to keep an eye on that I like to tell people about, one is Allkem that was the Orocobre, owns lithium mines in Canada and in Argentina. Sayona developing some seriously valuable projects in the Canadian province of Quebec. Leo Lithium, a little more risky, but they’ve got a pretty rich hard rock lithium asset in the west African nation of Mali. But there are many others. A lot of companies have been diversifying into lithium projects in recent days. Some of those companies won’t stick around, others will persist on building them up in a serious way. And the winners amongst that crop of developers will be those that stay the course, build out some decent-size resources and are ready to position themselves for the next upswing in the price.

Marc: Right. So, is there a reason specifically why you had Sayona’s logo up here? Is that your favorite of these?

Stuart: That’s one that I’ve been paying close attention to because of the location and the size of the asset. So, Sayona, its foundation asset was Authier, which is a hard rock lithium project, but they also got to bid on some established lithium resources in a bankrupt company called North American Lithium. So, they’ve got a number of projects in Canada. Canada’s a great place to do, and in particular, Quebec’s a great place to do lithium because they get a lot of their power from hydro. So, you get very inexpensive electricity to act better on the plants. And then you’ve got proximity to the giga factories that are popping up through North America as well. So, you’re relatively close to the action in terms of getting your product out there. So, that’s why I think investors should look at that one.

Marc: All right. Good stuff. So, you’re definitely keep an eye on lithium, because at some point we’ve seen this as far back as 2016, I remember, all of a sudden lithium came crashing down.

Stuart: Marc, you remember I was talking about it like a madman back in 2020, well 2019 and ’20 when no one wanted to know this, right?

Marc: Yeah. That’s usually the best time to get in, right?

Stuart: Right.

Marc: I remember you talked about uranium, it’s probably 18 or 24 months ago, when no one wanted to talk about it.

Stuart: You wanna find those commodities that everyone hates and then look for reasons to like. At the moment, we’re not going through the hatred phase for lithium yet. That’s probably still coming,

Marc: Right. All righty. Well, stock that’s gone through the hatred phase actually last week is Weebit Nano. As everyone that watches this regularly will know, we’ve been following the stock very closely. And of course, just as you go away for a couple of days, I was in Tasmania hitting the mountain bike trails in Derby. Just on day one, stock gets sold down 20%. So yeah, a lot of panic in Weebit Nano land. So, let’s have a look at and see what happened. But also, they did a capital raise. Let’s have a look at and see what’s next for Weebit, because they’re now very well-funded. And I dare say they have never been in a better position than they are today, despite, you know, the short-term issues with the share price that no one likes except the shorters. But let’s have a look.

So, just in the last sort of two weeks or so, share price peaks on the 9th of March at $8.75 on the close, and it’s come down to five, sorry, $4.59 on the 27th. A couple of things happened there. One was the cap raise that was done at $5, but before that, actually the day before, short sellers came in basically facilitated by the fact that Weebit is not part of bigger indexes. So, INSO has had to buy this stock and have put it up for lending to shorters who pay them a fee, who pay these funds a fee to borrow these stocks and then sell it short on the market. You know, there’s good sides and bad sides to being part of a bigger index. And this is definitely one of the bad things that can happen.

Anyway, where we are now below $5, the heat’s come outta the stock, obviously. And look, if you look at the chart, there’s a good chance it could actually sort of, you know, bottom at $4. It could potentially retrace to that level, purely looking at the chart. But there’s a lot of stuff that we need to look at as well on the bright side. So, first of all, if you look at the capital raised, $45 million, take out the costs and also look at the cash burn for the first quarter, the sort of estimated cash burn, and assume that the share purchase plan will not happen because that is at $5, and we’re now below that. So, no one in the right mind would buy the stock when the share purchase plan at $5, obviously. Taking all that into account, Weebit is now sitting roughly on $86 million which is for a small cap tech company on ASX is quite a large amount of money. And the dilution, given that the share price had a very decent run over the last couple of months, dilution of this raise is only 5%, right, 5.2%. So, that’s actually very acceptable. And now, and this is the important bit, now the company is funded properly to build out their tech and sales teams and to accelerate the design and qualification with a bunch of foundries that they’re already talking to. So it’s not just SkyWater, it’s global foundries as well, but there’s probably about five or six others that they’re talking to at the moment that could potentially result in a deal in 2023.

And we’ll look at the milestones for Weebit, but the first one they expect by the middle of this year, actually, so in the next three months, essentially. But basically what this cap price has facilitated, it brings forward the commercialization and that’s really important because Weebit was basically stretched a bit in terms of staff. There’s so much happening at the company and they just needed more people, which they can now bring on board. And also, I think this is important to note as well that the proof of balance sheet with more than $80 million in the bank will also convince prospects and partners that this is now…it already was in my view, but this is now much more financially stable as well. So, if you do business with Weebit for the next couple of years, there’s no risk of the company running outta money, and all of a sudden all your work that you’ve done with them is useless, right? Because now they’re properly funded. So, the flip side, of course, there’s now people that can short this stock. The short interest is more than 4% at the moment, and this is based on delayed asset data and based on the original amount of shares, so before the 9 million new shares that were issued earlier this week. So, we’ll have a look at the numbers in the next couple of days, see what the new short interest is, but that’s what’s happening. Share price momentum’s gone, obviously. There’s nothing that will take the heat out of a nice rally better than the cap rise. And so, I think, like I said, this can potentially retrace to $4. And there was some dodgy trading apparently going on the day before the cap rise, so we want to see, hopefully we can figure out what happened there, who the shorters are.

But, yeah, it would be good to have a look at and see what happened there. But, and this is important to mention, these are all very short-term issues. Keep that in mind. Short-term issues, because like I said earlier, Weebit has never been in a better position than it is today. It’s properly funded to execute its commercialization strategy, the roadmap, and there’s a lot to do there. It’s working with tier one foundries already, and you know, hopefully, there’s a few more coming very soon because there’s plenty of leads on the boil. So, this is foundries, the IDMs, which is the integrated device manufacturers. So, these are the chip companies that do the design, the manufacturing, and the sales all themselves. Best example would be, say, Intel or SD Micro or Infinian. And then there’s the product companies, electronics companies that work with IP providers such as Weebit, but then have their products manufactured by the foundries, like TMC [SP], for instance.

So, this is triangle in this business model that Weebit has got going on. But they’re talking to all of these of prospects. And if you look at the chart, they’re already…the schematic there. You can see there’s a lot of stuff waiting to be announced, basically. So, final qualification at SkyWater, which is the last step to actually commercialize it, to start selling it. They talked about that a few weeks ago. They hope to sign a tier one fab before the half year is out, so before the end of June. Close initial agreements with customers, and these could be, you know…and product companies like electronics companies. And the next one is a really big one, qualified technology for automotive conditions because it’s very high demanding to be included in automotive chips. But once you’re in, this is a massive market, and it will be slow to ramp up because automotive companies are very slow to integrate new technology. But once you’re in, you’re in, and this is a long-term, you know, not just multi-year, but multi-decade exercise, right? Once you’re in, you’re in. R&D will continue, obviously. And the final one, scaling to 22 nanometers. I’ve talked about that already. I suspect that we’ll get an announcement sometime this year that they’ve gone below 20 nanometers, which would be really groundbreaking for Weebit. So, there’s plenty of stuff that is happening and plenty of things that can be announced in the very near-term actually.

I’ve got a few charts here. I wanted to zoom out a little bit to sort of the tech sentiment in general. And I think if you look at the NASDAQ, the tech market in general has been very resilient, given all that’s happened with Silicon Valley Bank. We talked about the bottom in the Nasdaq back in October, and I circled it there in the chart, you can see that. The week or two after that, Stu and I, I’m not sure if you remember, we talked about the bottom in the NASDAQ that we saw at that point. That bottom has been tested twice now. And in the meantime, NASDAQ has also broken out of the down trend. That breakout was also tested mid-March. And I think the rest of the year should be quite beneficial for tech, in general. And probably even more so for semiconductor stocks.

So, the Philadelphia Semiconductor Index is the big one for chip stocks in the U.S. to follow. The former resistance around 2,860 is now support that’s at lower horizontal line. The stocks has broken out of the down trend as well, and there’s now some resistance around 3,480 and 3,685. So, right now, it’s sort of consolidating. But with everything that’s going on in the interest rates, I think actually tech could have a really good second half of 2023, because almost overnight the interest rate outlook has changed for the entire market. But especially for stocks like technology life sciences, interest rate changes are very important because there’s a big part of the valuation determined by these interest rates. So, I think it could be a blessing in disguise for tech stocks, including the ones listed on the ASX. So, we wrote an article about that on the stocks on our website. So, go to Insights and then Articles and look up the article for the 15th of March. We spoke about this, that this could be a blessing in disguise for tech stocks.

And I think later on in the year, stocks like Weebit, Blue Glass, Brain Chip, Revasum, they have all taken a hit in 2022. I think these stocks can bounce really hard when the pivot comes, sometime later this year. But as you know with high tech stocks, they tend to look out six to nine months further out than the general market. So, we could actually see something happen in the first half of the year already. So, I’m actually quite bullish on this entire space, including Weebit Nano, and yes, you know, it hurts to see the share price come down so much, but again, it’s short-term issues and the company’s never been in better shape, in my humble opinion, Stu.

Stuart: So, your call is with this recent panic in the banking market, no more interest rate increases for the time being?

Marc: In general, yeah. And so, you see this morning’s Australian inflation numbers were better than expected, lower than the market was expecting. And immediately you see the markets rally, right? You see the Aussie dollar weaken because people are starting to think, well, maybe we won’t get a rate hike next time. It will be flat. And look, if you look at the U.S. bond market, the futures, the pricing in 100 basis point decline, right, in interest rates by the end of the year. So, it’s definitely changed. And yeah, like you said, this sort of translates to life sciences, to technology stocks quite quickly, I think.

Stuart: Right, right. Risk on. That’s good.

Marc: Absolutely. All right, I think that’s it for now. Keep sending us your questions about certain sector stocks that we can talk about in this webinar at [email protected]. Always happy to talk about whatever you wanna talk about in terms of your questions about the market. And we’ll see everyone next week.

Stuart: Cheers then.