SQM Proves the Lithium Bears Wrong

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Yesterday, we left you with an instruction: Keep an eye on the third-quarter earnings release from major lithium player SQM.

SQM is the second largest lithium producer in the world.

If you’re invested in lithium stocks, the news was pleasing. Nothing the bears said would happen appeared in these numbers.

In fact, it was the complete opposite.

Lithium stocks finished the day up yesterday. That’s no mean feat in this market. The ASX is not really a fun place to be right now.

One way to distance yourself from Mr Market’s mood swings – and he can be a grumpy old goat at times – is to invest in a secular trend.

This was one of the secrets behind the Quantum Fund that Jim Rogers and George Soros ran in the 1970s.

That returned 4,200% over ten years. We can learn something from these guys…

What exactly am I talking about? Most financial commentary you read refers to the business cycle.

Companies that are hostage to this do well when the economy is going ok and fall back when it’s not. Their stock will gyrate up and down with their quarterly numbers.

Jim Rogers and George Soros weren’t interested in that game. They looked for trends and shifts that were so powerful they could override the general economy.

For them, two of those were commodities and defence spending back then.

A more recent example would be US tech. Since 2009, it has stormed higher even though American GDP growth was relatively modest.

It didn’t matter a damn to Facebook what level interest rates hit, or US employment or any other metric you care to name.

The rise of social media was a secular trend.

The Great Mining Collision

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The switch to electric vehicles and renewable energy is another one. It’s not going to stop. It will be a wave to ride for the next decade.

So even though lithium stocks have been weak in the last few quarters, you can hold them in confidence when a short-term factor comes into play.

Recently, that was the fear of an oversupplied market.

SQM’s results just put a bullet into the head of the lithium bear case…

Lithium prices elevated, demand strong 

You don’t have to believe me. It’s right there in the latest numbers – and against the expectations of SQM’s management.

In August, SQM forecast lithium pricing to fall 10% in the second half of the year. It attributed this to the rise of Australian mine supply.

Now that we have their latest results to hand, what do we see?

Lithium demand from electric cars has kept the price elevated and SQM expects it to stay that way for the remainder of the year.

Part of that is because SQM has produced less lithium as of now than the equivalent time period last year. Several other projects have not yet come to fruition yet either.

There are a lot of lithium projects out there in the world. But you can never assume all these will become working mines.

There are a lot of hurdles for a mining project to come into life. Think of the approvals, financing and qualified staff every single one has to find.

I’ve made the case since last year that the lithium stocks to own at the moment are the producing projects that can cash in on strong prices now.

SQM’s latest results suggest that’s on track. Now, it’s up to the stocks in question to hit their production targets and keep their costs under control.

But think through the further implications…

Other stocks in play here, too 

It also puts other metals associated with the battery trend back into the investment spotlight.

SQM’s management said it was ‘positively’ surprised by the demand growth in lithium coming from electric cars.

That same dynamic is at play for cobalt and nickel sulphate.

We can see all this playing out in the news right now, too.

The Wall Street Journal reports that FedEx is going to add 1,000 electric vans to its fleet in California.

The company is responding to regulatory pressure to cut down on emissions.

The most amazing thing about this is some of this pressure is coming from the Trump administration – not exactly known for is environmental credentials.

The Environmental Protection Agency is going after the trucking industry because it’s so polluting. Not much has changed in twenty years in terms of the rules around them.

It’s just another sign that the risk to lithium is on the supply side, not the demand one.

Regards,
Callum Newman Signature
Callum Newman,
Editor, Profit Watch

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