Oh my, start watching lithium stocks, please. They’re hot out of the gate this morning, and there’s no guessing as to why.
Major lithium player Albemarle [NYSE: ALB] announced it’s prepared to pay US$1.15 billion for a 50% stake in Mineral Resources’ [ASX: MIN] Wodgina Lithium Project.
This could be the spark to revive interest in the whole sector.
There are a few documents to sign to make this deal all official. But there’s no reason to think this won’t go ahead.
However, it does help skewer the notion that the lithium market is on the cusp of major oversupply.
The reality is the opposite. The industry will be scrambling to keep up with the explosion in demand from electric vehicles and renewable energy storage.
Albemarle’s move proves this point.
There’s a major opportunity here…
You see, after running hot over 2016 and 2017, a wave of fear swept over the market. The perception was too many projects were in the works relative to the niche demand from electric vehicles.
Lithium stocks got dumped. The market ‘narrative’ changed. Except events in the real world did not. Outside of China, lithium prices have remained relatively strong all year.
And demand for electric vehicles keeps surprising everyone to the upside. Tesla smashed expectations in the third quarter.
That means the valuations for lithium stocks are way down while the outlook remains bright. That’s a recipe for takeovers and mergers.
There are other signs of strength here. The board of Pilbara Minerals [ASX: PLS] has approved the company’s Stage 2 expansion. Now they just need to lock in the regulatory approvals and financing to get going.
It will be most interesting to see where that money comes from. The banks have not played a role in Australia’s lithium boom in recent years.
The mines that did get financed got their money from shareholders or their offtake partners. Clients paid to lock in their own supply.
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One outcome of this is that a lot of the supply due to come out over this year and next is already locked in under contract.
It’s the years 2020 and beyond that make for interesting pricing discussions.
Aussie lithium miners could have the upper hand here…
Big players to lock up available supply now
Part of the reason for this is what’s going on in South America. Argentina and Chile could produce a lot more lithium than they do now.
This is another reason the market became preoccupied with the idea that too much product would hit the market.
Except it’s not happening as of now. In fact, South America may produce less in 2018 than it did in 2017.
That puts the burden on the Australian companies to hit their targets. It also means the big Chinese, Japanese and Korean battery players could come in and invest in the mines directly.
Don’t forget that the European motor industry can see the writing on the wall for the internal combustion engine. They’re behind in battery manufacturing capability and they know it.
China is on track to produce 70% of electric vehicle batteries by 2021. That’s a strategic weakness for the Europeans. They are now scrambling to build up their own industry.
They might just have gotten a bit of help from the French President. France has been rocked by protests recently. That’s because Emmanuel Macron upped taxes on diesel.
This is designed to push car buyers away from fossil fuels. However, most of the French car fleet runs on diesel, and the middle class aren’t too happy about another cost to their weekly bills.
But Macron is not budging for now. It’s highly likely that the French government will subsidise the uptake of electric vehicles to ease the transition.
Perhaps the biggest question mark right now is over conversion capacity. The concentrate shipped from Australia doesn’t get plonked straight into a battery somewhere. It’s quite a complicated process.
We’ll keep monitoring this as we go. But I’d expect to see a lot more deals happening around the lithium sector next year. That means going over the best projects now that have the most appeal to a bigger player.
Mineral Resources, for example, is up over 20% today as I write, based off its announcement today. That’s the kind of boost you can get when a deal is struck.
The other key from here will be to watch what kind of pricing the existing lithium producers announce over each quarter.
Keep an eye on SQM, the big Chilean producer. It’s due to announce its third-quarter earnings tonight.
2019 is shaping up to be very interesting for the lithium sector.