Lithium Is Cheap — But Is It A Buy?

For months I watched the prices slowly tick higher.

$100… $115… $130… $145…

$30… $40… $50… $60…

And then I gave up… “Forget it. I missed this one.”

These were the prices over the last year of Albemarle (ALB) and Sociedad Química y Minera (SQM), respectively — two of the largest lithium producers in the world during a period when the price of lithium doubled.

Up until this week, I had all but given up on investing in the energy source of future tech as prices had simply run too far too fast. But that all changed over the last few weeks as oversupply concerns dropped lithium stocks down to a level not seen since September…

Last month, Morgan Stanley published a report predicting lithium prices will fall 45% by 2025, as increased supply could outweigh demand. This was just weeks after the Chilean government opened the doors to new competition in the country (Chile is the world’s second-largest lithium producer, behind Australia), which coupled together sent the big players spiraling…

  • Albemarle down 30% from highs
  • SQM down 24% from highs
  • FMC Corp. down 20% from highs.

If the report is accurate, this sort of fall is rightfully deserved. After all, these companies’ stock prices have gone virtually straight up on lower supply and higher demand expectations.

However, as expected, lithium producer executives are not lying down without a fight, which leads me to believe that prices now could have fallen too far too fast.

Here’s what Ken Brinsden, CEO of Australian miner Pilbara Minerals, said at a mining conference in Florida last week:

I am firmly of the view that everyone, including Morgan Stanley, is grossly underestimating how quickly the market is moving on the demand side.

And here’s Luke Kissam, CEO of Albemarle, during their Q4 conference call (days after the Morgan Stanley report) speaking about demand:

So back during the Investor Day, our models were looking at incremental [lithium] growth over the next five years at about 35,000 metric tons per year. And our new demand models suggest about 70,000 metric tons per year over the next five years on average.

That’s right. The second-largest lithium producer in the world just doubled its demand forecast. And they didn’t stop there.

Here’s Luke’s response later in the call to a supply question from Vincent Andrews, the Morgan Stanley analyst who wrote the negative report:

We believe that the market is going to remain tight… If you’ve read the articles in the press about the automobile-makers and the OEMs trying to go directly to grab lithium, that tells you the automakers believe that the market is going to be tight… So what the supply chain is telling us, what the customers are telling us and what we believe is that this market is going to remain tight for the foreseeable future.

Altogether, it now seems very possible the market fell too far too fast on this seemingly overblown supply-side news — which for us presents a buying opportunity.

Now, keep in mind, when an industry is out of favor, it can stay that way for a long time. And right now the lithium industry is definitely out of favor.

So right now I’d be a buyer of the big lithium producers as long-term investments.

Don’t expect the sentiment to turn overnight. But know that lithium will play a major role in our future, and this “blip” could be your last chance to cash in before you’re like me, saying, “Forget it. I missed this one.”

Here’s to keeping your edge,

Davis Ruzicka

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