Today’s Profit Watch is going for something a little different.
I mentioned last week that I was on the phone to a renewable energy analyst.
He made an offhand comment that lithium stocks were cheap.
The implication was that there could be good buying here.
Right now, I can confirm they’re certainly way down on their former highs.
Whether we should be considering accumulating them now needs some research.
The least we can do is check in on how a few lithium stocks are travelling over this week…
PLS — a long-term lithium player
When I think of the lithium sector these days, Pilbara Minerals Ltd [ASX:PLS] always springs to mind first.
I first covered it in a report titled ‘Electric Gold’ written in December 2015. That report was on the opportunity around lithium stocks (where has the time gone?).
PLS was around 25 cents then.
In December 2017, PLS hit a high of $1.15.
It’s been a rough ride since. It now trades for 27 cents.
However, unlike a lot of resource stocks, there’s at least something solid behind this one.
It has around $100 million in cash, for starters, and last quarter just under $20 million in revenue went through the accounts. There wasn’t much in the way of profit.
PLS has 100% ownership of the Pilgangoora Lithium-Tantalum Project in Western Australia.
It has plenty of runway. They expect to be in operation for over 20 more years!
PLS has also established relationships with some of the big players in the Asian battery market and has done so for a long time now.
All the ingredients are there for something good to happen again. But they have been for a while.
I point that out deliberately. Here’s why…
Hard to hit big expectations
I remember a few years ago I went to a ‘battery metals’ conference at the State Library of Victoria.
Goodness! I ran into a friend from high school — and he was a shareowner in PLS.
He was sitting on a good gain but reluctant to sell for tax reasons.
I told him my worry (then) was that the lithium trade, by then, was getting long in the tooth. This was around late 2017 if memory serves.
Lithium stocks had been running hot overall since 2015.
It’s always hard to deliver on big expectations…
And so it’s proved since.
What’s hobbling the company is the weak price of lithium spodumene.
The drivers of the lithium boom are still there for it to come again.
Cars will go electric and there are ‘gigafactories’ going up all over the world.
There’s also an explosion in batteries used elsewhere — 5G towers, for example, and also power storage.
However, remember that lithium is a chemicals game.
The raw stuff Australia ships out goes through conversion and processing before it heads into the batteries.
The market power and ‘value added’ mostly lies in Asia. A stock like PLS is a price taker unless we get a shortage of supply.
I don’t see any evidence of that yet. But there are very good odds of such a dynamic appearing again.
The downturn in the lithium market has stalled further investment decisions.
However, these supply/demand imbalances can take a long time to play out.
PLS itself has yet to move on its ‘Stage 2’ expansion, which has been on the table for a while.
I also saw another battery metal play, the stock European Cobalt Ltd [ASX:EUC] announced recently it’s acquired a gold project in Canada.
That gives you a good idea where the action is right now in resources.
PLS itself says it expects lithium to go into deficit in 2025. That’s a while away in market terms.
However, there’s also a chance that the Chinese or European firms move early to lock up projects long before 2025 nears.
My take? I’m keeping tabs on lithium stocks. They’ll have another run some day.
Is it likely to be this quarter? No.
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