Energy Metals Quarterly: The Peter Epstein Special Edition

Peter Epstein |

Sentiment in the lithium sector has improved markedly in the past few months. Improving sentiment and higher stock prices among lithium juniors, despite continued devastation in other natural resource sectors, is certainly noteworthy. Lithium is hot and attracting a lot of attention. That's largely without even considering underlying lithium carbonate and hydroxide prices marching higher this year and expected to be higher again next year. Renewed M&A, most notably the Western Lithium / Lithium Americas merger, could be a sign of things to come. Projections of lithium demand continue to increase. Looking back 10 years, annual lithium consumption grew at roughly 6%-8%. Estimates of annual growth looking forward in the 8%-12% range, could prove woefully low
 
Tesla Motors launched the first globally accepted EV just 3 years ago. This year BMW announced that ALL of its cars will become electric, multiple giga-factories are under construction, Apple and Google are poaching talent from Tesla, Tesla's success continues to spark car manufactures to improve product offerings or leap into the fray and battery costs are falling rapidly. Nothing short of a paradigm shift might be at hand in the EV space. Growth could clock in closer to 20% to 30% annually, (30% would be a doubling every 3 years), not so crazy with global EV adoption below 2%. Nearly half of the 258 million vehicle fleet in the U.S. alone is at least 11 years old, and global car sales are in the hundred(s) of millions. Just 5% EV penetration in coming years would blow away all lithium projections. The "green movement" not only supports EVs, but increasing is demanding it. 
 
On the supply side, lithium sources are already stretched. Even if one believes that supply can increase by 20% or more, there's no question that it's far from secure and is highly uncertain. Of the four non-Chinese producers of lithium, Chemical & Mining Co. of Chile Inc, "SQM," FMC Corp, Albemarle and Orocobre Ltd. strong and steady growth is only expected from Orocobre and that's off of a tiny base. Severe weather events, technical issues and political challenges in the "Lithium Triangle," (Bolivia, Argentina & Chile) are plaguing the majors. Juniors will need to step up. Of the relatively few juniors of merit, the ability to raise capital is improving, M&A, farm-outs, joint ventures and off-take agreements with a larger universe of partners, (including battery makers) is on the horizon. 
 
The stocks of the majors and Tesla have failed miserably to keep up with the performance of many lithium juniors and there's no reason to fear that out-performance will end. Tesla's market cap of $32 billion is difficult to budge, even on good news. The majors also have multi-billion dollar market caps, and in most cases are not pure-plays for investors looking for exposure to the lithium space. Even after a doubling or tripling of some juniors, the vast majority have market caps well below $50 million, with most below $25 million. A mere drop in the bucket for potential suitors and partners to be concerned about.

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SQM

Like other lithium producing miners outside of China, FMC, ALB​, ​ORE​ and ​SQM continue​ ​to trail the stock performance of the top 5-10 lithium juniors. SQM is plagued with well known weather issues, (severe rains, the worst in 80 years), but other issues​ as well. It​s​ Directors were fined for stock-price manipulation and SQM was charged in a tax-evasion case that led to the ouster of its billionaire Chairman Julio Ponce​. Ponce was fined $70 million last year.​ The company is in an arbitration case, threatening its lease​s​  in Chile, where SQM's lithium and iodine operations account for almost 40% of sales. ​The company’s leases are in the Atacama Salt flat​ in Chile​, containing 29% of the world’s known lithium reserves. The cheapest ​way to produce ​the metal is ​via ​brine ​harvesting in giant evaporation ponds.


Technical Commentary: 3 year Chart with a 40 day moving average with a 14period RSI. Stock appear to have undergone a reversal and appears to be overbought and forming a bottom.

 

FMC

Due ​to heavy rains​ and ​the failure ​of the Argentina​n peso to depreciate at the same rate as local cost inflation​,​ ​FMC​'s lithium supply ​has remained flat for years​. Developers in Argentina are likely to face more disruptive meteorological conditions than rival projects in neighboring Chile. Lithium supply from Argentina is considerably more vulnerable to weather-related disruption than that sourced from projects on the other side of the Andes in Chile. FMC continues to have technical problems expanding its production in Argentina. Readers ​should​ note, FMC is a conglomerate with 10% or less of ​​revenues coming from its lithium segment. 

Technical Commentary: 3 year Chart with a 40 day moving average with a 14period RSI. Has been in a long term decline and is, to some extend, still oversold but improving.

ALBEMARLE

Albemarle has experienced delays in its expansion goals in Chile as well. ALB​ has suffered from production issues ​in Argentina over the past four years. When one considers production, the one producer that has expanded capacity is the joint venture between Sichuan Tianqi Lithium Industries and Albemarle. The Greenbushes mine in Australia, the largest lithium mining complex in the world, has been supplying the additional demand over the past three years. Additionally, the lithium coming out of the Greenbushes has had annual price increases over that same time.
 
Technical Commentary: 3 year chart with a 40 day moving average with a 14 period RSI. Still oversold.

OROCOBRE

Orocobre's Flagship Olaroz lithium facility commenced production in 2015 and is producing product suitable for technical and battery markets. Production ramp up has been slower than expected due to equipment limitations and early operational issues. These conditions continue, meaning that the company's 2015 production guidance will not be achieved. The question is 2016, Orocobre's guidance is considered aggressive given this year's growing pains. Still, Olaroz is essentially the first new lithium mine in 20 years

Technical Commentary: 3 year Chart with a 40 day moving average with a 14 period RSI. Still oversold and yet to form a bottom.

DAJIN RESOURCES CORP.

Dajin's stock price has moved up considerably, on heavy trading volume. The company continues to execute on time and on ​budget in Nevada ​regrading permits, approvals, applications to applicable parties etc. Dajin Resources not only controls roughly 7,000 prospective acres in Nevada, it has about 285,000 acres in the Jujuy province of Argentina covering regions known to and/or believed to contain brines rich in lithium, potassium and boron. The Salinas Grandes/Guayatayoc salt lakes basin was chosen as Dajin’s principal focus for lithium exploration on the basis of data published in various scientific publications, indicating both permissive brine chemistries accompanied by lithium concentrations in surface and near surface waters that are within the range of lithium concentrations being produced elsewhere. The excitement regarding Orocobre's newly open brine operations is spreading to other companies with property in Argentina, including Dajin Resources.

Technical Commentary: 3 year Chart with a 40 day moving average with a 14 period RSI. Recently broke out of the $0.10 resistance range.

PURE ENERGY MINERALS

As can be seen by the chart above, Pure Energy's stock spiked even before Tesla's comments about 

​sourcing raw materials in ​

Nevada. In speaking about the non-Chinese producers so far, all the commentary has been on Chile, Argentina and Australia. Pure Energy, Dajin Resources and Western Lithium are important emerging players with major projects in Nevada. Pure Energy's stock price took another leg 

​up ​

after Tesla's Elon Musk was forced to reiterate his commitment of sourcing lithium from Nevada. Pure Energy is a pure-play Nevada lithium play. Coincidentally, both Pure Energy and Dajin Resources have 30 day average trading volume of about 525,000 shares. 

Technical Commentary: 3 year Chart with a 40 day moving average with a 14 period RSI. Appears overbought but also appears to be in the beginning of an uptrend.

WESTERN LITHIUM/ LITHIUM AMERICAS (merger completed as of September 2015)

Consolidation is a good thing for the industry. I believe the Western Lithium / Lithium Americas deal was better for Western Lithium, who is further away from production, does not have a great deal of funding and has a technically challenging project in Nevada involving a seldom if ever been done separation of certain clays from the lithium. To be fair, Western Lithium received a vote of confidence from Lithium Americas by it agreeing to the merger, which was a lot closer to a merger of equals. 
 

Technical Commentary: 3 year Chart with a 40 day moving average with a 14 period RSI. After the merger, Western Lithium looks very oversold.

CRITICAL ELEMENTS

Critical Elements announce​d​ the signature of a strategic collaboration agreement with a Leading Chemical Company ​t​hat includes take or pay off-take for all products produced from the Rose Lithium-Tantalum project. The feasibility study will be completed in collaboration with the Strategic technical and commercial Partner. Finally, should the feasibility study support the technical and economic viability of the project​,​ the Strategic Partner will also have the option of participating in the project by providing equity in the project financing for an interest of up to 25%.


Technical Commentary: 3 year Chart with a 40 day moving average with a 14 period RSI. Has recently broken out of its $0.25 trading range.

NEMASKA LITHIUM

Nemaska announced the signing of an agreement in principle with the City of Shawinigan for the acquisition of ​the land and existing manufacturing facilities in Shawinigan, Quebec. Nemaska will have the right to occupy and use the buildings required for the Phase 1 plant, as of October 1, 2015. The facility will house Nemaska Lithium's Phase 1 plant and the future commercial Hydromet plant that will convert into high purity lithium hydroxide and carbonate the spodumene concentrate produced. Nemaska Lithium now has both Federal and Provincial support to go ahead with the construction of the Whabouchi mine and concentrator.


Technical Commentary: 3 year Chart with a 40 day moving average with a 14 period RSI. Was recently overbought but looks to be forming a longer uptrend.

BACANORA MINERALS

Bacanora Minerals announced that 
​it has ​signed a lithium supply deal with Tesla Motors. On the condition that Bacanora’s and Rare Earth Elements' ​Sonora lithium project in Northern Mexico reaches certain performance milestones during the next two years, Tesla Motors will buy lithium hydroxide to feed the manufacturing of batteries ​to ​
its giga-factory in Nevada.

One of the conditions attached to the deal will be that the Sonora project has to be able to produce lithium hydroxide in accordance with the parameters determined by Tesla.


Technical Commentary: 3 year Chart with a 40 day moving average with a 14 period RSI. Stock appears neutral but looks like it could pull back slightly.

TESLA MOTORS

Tesla Motors sparked strong demand for lithium juniors last year with the announcement of its giga-factory and headlines continue to move markets. By the time its Model X is released in 2017, dozens of global, lower priced alternatives, many with 200+ mile ranges, will be in showrooms. Just as third world countries went directly from very low penetration of cell phones (or any phones at all) to high penetrations by skipping land line networks, EVs could grab penetration much faster than many expect. Over time, range anxiety will fall by the wayside as multiple vehicles with ranges of 200-300 miles or more become the norm and EV prices plummet.​

Technical Commentary: 3 year Chart with a 40 day moving average with a 14 period RSI. Appears to be neutral, needs to break out over $250.

GLOBAL X LITHIUM ETF

​The Global X Lithium ETF (ticker: LIT) is down 23% over the past 3 months. This seems counter-intuitive, but the reason is not hard to find. The top 10 holdings account for 78% of the ETF. Each is a global, multi-billion dollar company including SQM, FMC and ALB, but also companies like Panasonic, Tesla and Johnson Controls. Even though a number of lithium juniors have soared, LIT is a market-cap weighted investment vehicle. Therefore, the top 10 holdings dominate, obscuring the relative performance of many of the juniors. 

Technical Commentary: 3 year Chart with a 40 day moving average with a 14 period RSI. LIT has been very oversold but it looks at points  A, B, and C a reversal in price could be imminent.

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This edition is guest written by Peter Epstein, CFA, MBA of Epstein Research.

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Disclosure: Several of the companies mentioned herein have small market caps, including Dajin Resources, Pure Energy, Western Lithium, Lithium Americas, Critical Elements, Galaxy Resources, Nemaska Lithium, Bacanora Minerals and Rare Earth Elements. Small market cap stocks are highly speculative, not suitable for all investors. I, Peter Epstein, own shares of DJIFF and PE.V. Mr. Epstein, CFA, MBA is not a licensed financial advisor. Readers should take that fact into careful consideration before buying or selling any stock mentioned. Readers are encouraged to consult with their own investment advisors before buying or selling any stock, especially speculative ones. At the time that this article was posted, Dajin Resources and Pure Energy were sponsors of: http://EpsteinResearch.com. Please consider visiting:  http://EpsteinResearch.com for free updates on Dajin Resources, Pure Energy and others across a wide range of sectors. While at http://EpsteinResearch.com, please enter an email for instant delivery of my work.  Thank you for supporting my articles & interviews.

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