Musk’s Revenge to Fire ASX Battery Plays


US stocks are still under pressure this week. They took a hit Tuesday.

The market was closed Wednesday. And they were mixed again overnight (our time).

Aussie stocks will reflect this.

It’s easy to get spooked in times like these. But let’s turn the current volatility to our advantage.

How? Why, keep an eye on stocks that hold up under the pressure!

In fact, one notably managed to rise in the last session. And that’s going to come as a surprise to many…

I’m referring to automaker Tesla [NASDAQ: TSLA]. In fact, TLSA has bucked the weakness across the wider market for the last two months. It’s up 45% since October 8.

It was only a few months back that the Tesla bears had the ear of the media.

The argument went like this: it’s burning too much cash, has too much debt and couldn’t even produce that many cars.

Those voices aren’t so loud now. Even the company’s notorious short-sellers are easing off their bets since November 1.

Perhaps that’s because Tesla appears to be hitting its production target of 1,000 Model 3’s a day.

That’s not all…the further Tesla’s share price goes up, the less cash flow pressure it faces on its outstanding debt.

Tesla has US$920 million of convertible bonds due in March 2019. The equity conversion price is US$359.88 per share.

If the stock price is under this figure, then Tesla has to pay out the full amount in cash.

However, if the stock price is over US$360, the Tesla can issue shares to redeem the debt, or a mixture of cash and equity.

Bloomberg suggests that if Tesla elects to use significant levels of cash here, it would signal a show of confidence from Musk and his management that the company isn’t worried about cash flow over 2019.

With more cash coming in, Tesla can expand even further, such as its recent move to produce in China. Already, this plan appears to be accelerating.

Further rise in Telsa’s stock would pressure the short-sellers betting against it. We could get a surge if that happens.

It would be sweet revenge for Musk, whose distaste for short-sellers is well known.

Regardless, it’s this big growth market for electric cars that the market is pricing in against the prevailing market sentiment, not to mention Tesla’s market leadership, cult following and treasure trove of data.

The stock is also a clear candidate to replace the fading FAANG constituents in the eyes of fund managers hunting for the next big growth story…

You can ride this theme for years

After all, Volkswagen’s strategy chief came out this week and said the company’s last generation of combustion engine vehicles will be in 2026. The new battle line is drawn. Carmakers know they must compete here.

This does not change, however, the strategic weakness all companies face along the supply change when it comes to the battery metals required.

The Democratic Republic of Congo’s government has now come and said it’s going to triple the royalty rate on cobalt to 10%.

There may be a social case for such a move. But it could put off further investment in the country.

60% of the world’s cobalt comes from here. It’s already a problematic issue because the DRC is both unstable and violent. Small-time miners work in horrific conditions.

Bloomberg also reports that the big player in DRC cobalt mining is Anglo-Swiss company Glencore. Its currently wrestling with issues surrounding the country that involve the US Department of Justice. It’s a shaky dynamic right now.

Certainly, the market is likely to continue to place a premium on sources of cobalt in more stable jurisdictions.

Keep an eye on any stock that fits this bill. The catch is cobalt is almost always found in conjunction with other metals.

And don’t forget the lithium plays…

Pricing for the years ahead on the table now

One of the big fears this year was too much supply crashing the market. It made a certain amount of sense in theory – except the reality played out completely differently.

Look no further than major player Albermale. It pays US$100 million in royalties to the Chilean government every year and still is having its requests to increase lithium production in the country turned down. Chile has a quota system in place.

That’s one reason behind Albemarle’s potential billion-dollar deal with ASX Mineral Resources for a joint venture in Western Australia.

I expect to see more deals and fundraising shift to Australia in this space. A lot of lithium plays sold forward their production over 2018 and 2019 to fund their initial expansion.

Pricing for future production for the years 2020 and beyond are now on the negotiating table. The miners have the bargaining power here.


Callum Newman Signature

Callum Newman,
Editor, Profit Watch