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By Chris Berry (@cberry1)

The Trump-induced reflation trade has been a popular one on Wall Street with the major equity indices such as the SPX at all-time highs and up slightly YTD (+5.57), the US 10 Year Government debt market and the USD both range bound.


Source: Bloomberg

Whether or not President Trump’s planned economic de-regulation plans can sustain this remains to be seen (this is likely fodder for another note).

The mining sector has also benefited from this idea of a reflation trade, with this sense of optimism and de-leveraging from major mining companies translating into strong gains in recent months. Glencore (GLEN:LON) up 87%, Anglo American (AAL:LON) up 65%, BHP Billiton (BHP:NYSE) up 26%, and Rio Tinto (RIO:NYSE) up 37% over the past six months respectively.  

Lithium names have also benefited here and are continuing plans to increase production capacity to maintain and increase market share.

SQM (SQM:NYSE) aims to generate $1B in EBITDA by 2020 (the company reported roughly $140M in Q3 2016) and will invest $300M to achieve this target. The joint venture with Lithium Americas (LAC:TSX) will comprise the bulk of this but the company stated it plans to invest $100M in 2017 for expansion. Even in a bull market, return on invested capital (ROIC) matters and it appears that SQM’s investment in a major cash flow driver for its business is an obvious and sound strategic move.

Orocobre (ORE:ASX, ORL:TSX), despite posting reasonable financials, continues to struggle, again lowering its production guidance to 12,000 -12,500 t from 15,000 t. The company still plans to double capacity to 34,000 tpy Li2CO3 by the end of 2018, but has yet to reach their original stated capacity of 17,500 tpy.

Albemarle (ALB:NYSE) reported Q4 and fiscal year results yesterday and continued its relative dominance of the lithium space with yet another quarter of 40%+ margins. Volume and pricing growth were up 18% and 14% respectively, though there are many, including Joe Lowry, that question this conservative pricing strategy in a raging bull market for lithium. The company reported a 31% YOY increase in lithium sales to $669M and a 34% increase in adjusted EBITDA to $286M. The company’s efforts at deleveraging have left it with $1.4B in cash and a debt/EBITDA ratio of 2.2x. This is balance sheet strength and flexibility is exactly what the company needs as it embarks on its aggressive expansion plans.

ALB did forecast an additional $60 to $70M in costs on 2017 to its lithium business, but the continued strong demand acts as a buffer here. Higher pricing of 10 to 15% should also be beneficial. On the call, CEO Luke Kissam commented that the company’s stated goal is to generate a return double that of their cost of capital. Investing in their lithium business is the clear drive to achieve this goal.

More broadly, the themes of project-level investment and consolidation will continue with Nemaska Lithium (NMX:TSX) a likely next beneficiary due to its solid location and de-risked profile. Given their success in raising $70M from the institutional investor community, the composition of the investor base and structure of the financing here should be an interesting data point.

The Lithium Americas (LAC:TSX) financings were a seminal event in the current lithium cycle as it showed a belief from multiple strategic partners that the demand story is real. With LAC, NMX, Galaxy Resources (GXY:ASX), Neometals (NMT:ASX), Pilbara Minerals (PLS:ASX), and Altura Mining (AJM:ASX) among those forecast to add to lithium supply by 2020, and the need for the equivalent of one new lithium mine to come on stream every year between now and 2025, many are looking at which companies may comprise the “next wave” from 2020 onwards.

Millennial Lithium (ML:TSXV) has recently announced its intention to raise $8,700,000 CAD to advance their Pastos Grandes salar in Argentina. The early work here has been encouraging and given the fact that investors are giving Argentina renewed consideration, several catalysts are at hand for the company which should prove beneficial going forward.

On the hard rock side, WCP Resources (WCP:ASX) has focused its efforts on hard rock pegmatite exploration in North Carolina, where I recently returned from a site visit. The history of lithium mining is well known in this part of the world and though it’s at an earlier stage, the company plans on executing a drill program to better understand the pegmatite zones on its project and producing a scoping study this year.

Reflation or not, the bull case for lithium remains intact. Even ALB, who constantly tries to talk the market down, referenced the need for 20,000 tpy LCE in their demand models during the earnings call. While I still think that execution outranks exploration in terms of value creation, a reasonably positive macroeconomic environment, low interest rates, and voracious demand for next generation technologies imply that deal making in the lithium space will continue.

The argument for security of supply around lithium and associated raw materials will only grow louder as the dynamics around energy generation and storage continue to evolve. 

 


  

Chris Berry

President of House Mountain Partners LLC and Co-Editor of Disruptive Discoveries Journal


Chris Berry (@cberry1) is a well-known writer, speaker, and analyst. He focuses much of his time on Energy Metals – those metals or minerals used in the generation or storage of energy. He is a student of the theory of Convergence emanating from the Emerging World and believes it will have profound effects across the globe in the coming years. Active on the speaking circuit throughout the world and frequently quoted in the press, Chris spent 15 years working across various roles in sales and brokerage on Wall Street before shifting focus and taking control of his financial destiny.He is also a Senior Editor at Investor Intel. He holds an MBA in Finance with an international focus from Fordham University, and a BA in International Studies from The Virginia Military Institute. Please visit www.discoveryinvesting.com and www.house-mountain.com for more information and registration for free newsletter as well as his disclaimer.  

Our Thinking and What We Do

We are believers in the theory of Convergence. As the quality of life between East and West slowly merges due to advances in technology, continued urbanization, and    changing demographics, opportunities across numerous industries will arise which we can take advantage of. We aim to point out the strategic opportunities in the commodity space which arise from these themes. 

Throughout history, no society has sustained a higher quality of life without access to cheap commodities or materials. As global population increases, putting stresses on resource availability, efficiency and technology must come to the fore to continue to provide for a higher quality of life.  The looming convergence of lifestyles between the emerging world and the developed world is a fact we must all understand and accept in order to chart a sustainable path forward for humanity.

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