I already have a basket of Lithium shares Livent (NYSE:LTHM), Albermarle (NYSE:ALB) and Bacanora (LSE:BCN). I did initially buy 4 holdings for the basket but one of them did so badly that I sold it. I have had better luck with the others and the more I have looked at the Lithium market the more it seems that we are in a situation of limited short to mid term supply, coupled with rising demand.
However as a market with many false dawns we have a situation where nobody is investing to meet the future demand. Equally many of the people who will need lithium, battery makers / car manufacturers are not in general committing to long term contracts as they can buy cheaply on the spot market as currently there is an oversupply from previous false dawns.
The future imbalance is further exacerbated by US policy. The US has quite a lot of lithium in the ground but mining it is dirty, as is refining. US greens want the EV’s that need lithium, but do not want the dirty bit of mining in the US. Current US policy under Biden is largely to not mine in the US but seek supply elsewhere.
At the same time as everyone waits for someone else to jump first, and the US acts to reduce available supply in the short term (politicians and policies change) the one party that has been out and about with a reasonably open cheque book is China. I think that we will in the not too distant future see China use its relative dominance in the lithium supply world to its own benefit. EV’s will be available, but what if only Chinese manufacturers could get the batteries needed? Or only countries that were pro-China and anti US, hello VW.
The only other country with companies that seems to have made a concerted effort to secure if not control some supply is Japan.
I think there is quite an interesting dynamic to be considered that if the US starts squeezing non US supply does it enable US companies to get ahead of the european ones that currently think they have first dibs.
The dominance of China has led to my need to add to my basket. BCN is under offer from a Chinese company and in my opinion not in a position, given mine funding and other agreements, in much of a position to refuse. The UK authorities could act, but on what grounds, particularly as the main asset of BCN is in Latin America.
IF BCN goes, and personally I am happy to take the offer, then I have only two companies left in a market that has a strong potential to see some explosive growth and to be fair ALB is not a pure lithium play.
As such I have been looking for a new addition to the basket and Pilbara Minerals (ASX:PLS) is the one that I have decided to add.
Pilbara is a hard-rock lithium miner based in Australia and has been close to financial collapse a number of times in the not so recent past. It was situated very near the Altura Lithium operations and for many years the expectation is that one or other company would go bust. This has turned out to be Altura and Pilbara has taken the opportunity to buy the Altura mine.
The thesis for Pilbara is as follows;
1-The Lithium market is beginning to float all boats and currently demand looks to soon be outweighing supply and in a couple of years and the gap should widen for a number of years after.
2-In January 2021 the company did a significant cash raise. In part to fund the Altura purchase but also to improve the balance sheet. It is therefore not going bust tomorrow.
3-Control of Altura not only gave the company greater scale and more resources it also allowed Pilbara to take on a number of staff that it needed. Key staff are hard to hire for most Lithium miners and Pilbara was no exception. Taking on Altura at a step allowed the company to have the staff and structure it needed and had struggled to hire towards.
4-Since January the senior management seem much more prepared to admit how pre 2021 it was a fight for survival but with the moves in lithium pricing they have become significantly closer to cash positive.
5-The company had funded itself through a fairly expensive “Nordic” bond. The new situation of the company has allowed this to be repaid and refinanced at a much lower rate.
6-Whilst all of the current Stage 1 production is sold under contract, management admit that with current lithium pricing they are looking to sell any available excess at spot rather than get into long term contracts as their expectation is that spot prices are going up and contract prices will follow.
7-Much of the Stage 2 production is "conditionally" allocated but the details (such as price) are not disclosed.
8-Management have said that should they have excess to sell at spot they may hold this back waiting for the higher spot prices they expect to become available. To my mind this reinforces that they don’t have immediate cashflow issues.
9-Pilbara/Altura is within the table of potential mines in the world with an ability to increase production significantly in the shorter term.
10-There are only a limited amount of contracts around at the moment. Tesla and to a limited extent VW being amongst the few contracting for future supply. But as spot rises and we near the inflation point of excess demand companies will need to come to the table to ensure supply.
11-The company has a number of opportunities to increase supply in the (compared to other participants) short term. They are looking to do these in sequence rather than parallel to ensure that the capital expenditure does not run ahead of the market demand. There have been too many false starts in the industry and this suggests to me that Pilbara at least has learnt the need for sensible capital allocation.
This is not a widows and orphans investment. EV’s and lithium are the flavours of the day and as such huge demand increases are predicted but as people do more and more investigating a number of EV benefits are open to challenge and politicians who are driving this may change to find votes.
Also it has to be recognised that lithium is the technology of today. An awful lot of what if forecast to be available from “green” technologies is from technology that the UN and most governments describe as “yet to be developed”. Should something be developed it might well supplant lithium.
At the end of the day it must be remembered that much of my rationale is based on a market assessment and management’s comments to that. Whilst I have been impressed in my limited observation by the people at Pilbara it is a mine, and Mark Twain once described gold mines as “a hole in the ground with a liar standing at the top of the hole”.
The reality is Pilbara today is not Pilbara this time last year so looking at the numbers is do-able but with nothing like the certainty of a normal business.
My knowledge of Pilbara is limited as it was never worth much time when its standing story was it might go bust next month.
Given all of the above my holding in Pilbara is small. Average in AUD2.205.
It should be noted that all my Lithium holdings are individually small as none of them are deep value investments but to be seen as a basket, which over time I am trying to better understand the components of.