A Random Walk Down Lithium Street

I selected the title, a clear reference to the famous finance book, mostly because of the “castle in the air” aka “greater fool” theory. What’s my point? The classic book suggests that most investors behave illogically and the actions of many lithium investors validates this theme. After attending the recent lithium conference, reading drivel like Morgan Stanley’s lithium analysis and taking a close look at today’s offering on #lithium via Twitter, it seems those interested in lithium currently could be a test case for the key points in Burton G Malkiel’s book.

The number of people that have actually worked in the industry or even been interested in lithium for more than a few years is very limited. I rarely look at #lithium on twitter simply because it is frustrating to see the amount of nonsense about projects that appear as "expert posts" or in the “pay for play” fake news that unless you read the fine print at the bottom (which few people do) have the look and feel of news articles. I could cite the specific articles but I don’t want to encourage anyone to read the hype.

I will refer directly to Morgan Stanley whose most recent report is replete with a “rear view mirror” view of the lithium world by espousing the thesis that SQM will behave in the future the way they did in the past and including a “financial model” that enables the would be investor to feel more confident about “garbage in garbage out” analysis of the lithium market. Newsflash: SQM no longer considers lithium a by-product and they are unlikely to unleash their “iodine strategy” again - at least not in lithium.

Ok – I have cited the problem: lithium investors face a tsunami of bad information to wade through on a steady basis. So what is the solution? There is no doubt some quality info available on the internet and some credible “big bank” analysis. There are analysts I respect at several firms – Nomura and DB among them. Unfortunately, you need to know who the best analysts are before you trust the report – no matter what company name is on the masthead.

The lithium world is getting crowded with newly minted experts. Be careful who you trust. In my opinion, Benchmark is a credible voice that is improving over time. They are constantly speaking with industry players, adding dedicated, staff, etc. To be clear, I have no financial relationship with Benchmark and have a much different focus in my business at Global Lithium.

Some of the other names that have published “lithium material” for years, generally speaking are divisions of large information service companies using generalists with few deep industry connections or are very regionally focused in an increasingly global business. I consider some of the most often cited larger players publishing lithium related material to be the weakest simply because they tend to rest on undeserved reputations developed when there were only two or three sources of lithium information. So, when you pick a lithium info source, do your due diligence regarding the background of the people who are researching and writing the material.

I have done many custom studies for large lithium buyers. I recently did a project for a multi-national and presented my finding to their senior management team. They didn’t like my conclusions so they hired McKinsey for an expensive “do over”. I am sure they will ultimately get someone to give them the answer they want. The major issue with the management team was that they believed the same ill-founded nonsense many others believe mumbling mantras: "we read the XXX report and know oversupply is coming but you say it isn’t”, “lithium is just like iron ore so xxxx will happen", etc, etc.

For now, it is hard to compare lithium with certain commodities largely because lithium for batteries is not yet a commodity – it is a specialty chemical and likely to remain so. “Battery grade lithium” is a misnomer because individual cathode producers/battery makers have different quality requirements. Standardization has not happened in the industry. It is not “99.5%” purity that is the most important criteria, it is what is in the remaining “0.5%” and how low and stable the levels of various impurities are. Having worked through the qualification process over 20 years at the major cathode producers in Japan, Korea and China I have a pretty good concept of what is required for “battery quality” which is not the same as “battery grade”.

To repeat: the reality is that lithium is still a niche business that has few competent information sources. Understanding the market based on decades of actually participating in it and knowing the key players personally is a big help.

Unless you are a professional investor able to pay for access to the few real experts, my top six recommendations for parsing and staying current with the lithium market are:

1)    Read publicly available info from the “Big 4” lithium companies and next tier of juniors. You will see all you need to know to assess demand and the supply plans in the required disclosures and corporate presentations. Of course, the info is often slanted as much as corporate legal teams will allow but it is still great to form a foundation of industry knowledge and free.

2)    For now, don’t obsess over the price in China. Unless you are investing in Ganfeng or Tianqi, focus on the price outside China (aka ROW price) and utilize the price performance of SQM quarter over quarter to get a rough sense of the ROW trend. SQM is the largest single seller of LCEs (mostly carbonate) to the ROW market and doesn’t have an organics business like ALB and FMC which make it difficult to assess their upstream pricing. Also use publicly available info to track spodumene exports from Oz and the price especially if you are investing in a junior producing only concentrate.

3)    Understand the industry cost curve: Easier said than done because there are so many inaccurate cost curves in reports. The fact of the matter is, over the long term, price will ultimately settle slightly above the high end of the cost curve and you want to be invested in companies at the low end of the cost curve. Of course this is obvious – it is also often forgotten in a frenzy to capture profits from momentum driven stock.

4)    Don’t react to every stray tweet, or Linked In/Seeking Alpha/Hot Copper post. I don’t even use Seeking Alpha or Hot Copper. My past experience is that the chaff is much more voluminous than the wheat on those two sites – yes, even worse than Twitter.

5)    Trust few sources and DYOR – in addition to the previously mentioned company names I trust commentary from people like: Chris Berry, Simon Moores, Mac Whale, Jingwen Sun, Henry Sanderson, or any rare post or comment by Vijay Mehta or Gerrit Fuelling.

If someone isn’t mentioned it is not necessarily a negative it just means you should DYOR to vet your own trusted sources. Of course I also have a long list of employees at lithium, cathode and battery companies that I have access to – it is not appropriate to name those individuals.

6)    Finally - listen to the Global Lithium Podcast (www.lithiumpodcast.com) Of course, you knew I would say that. Emily Hersh and I have tried to bring some of the most insightful people in the industry to you via the podcast which is on iTunes (subscribe, please), Spotify and even YouTube. We do not put it on YouTube but a friend of the podcast does. Our recent “Beers with the Lithium Podcast” event during the Lithium Conference in Las Vegas brought out a “who’s who” in the lithium world. Several of our past and future guests can be seen in the picture if you have discerning eyes.

Following me isn’t going to give you insight to the majority of juniors. People constantly message me about their favorite tiny company with a few drill holes. Sorry to disappoint but I focus on the majors and those juniors I believe have a reasonable chance to bring meaningful quantities of lithium chemicals to market within five years. I also follow major suppliers of concentrate. 

The "random walk" concepts are clearly at work in the lithium world; hopefully you will be one of the few that rise above.