Monday, 6 March 2023 — Albert Park

By Callum Newman Editor, The Daily Reckoning Australia

[5 min read]

Dear Reader,

Today’s Daily Reckoning Australia will check how things are going with the lithium boom.

Is there still money to be made?

Let’s find out…

Our first port of call will be the flagship stock on the ASX for this space: Pilbara Minerals [ASX:PLS].

PLS released its earnings on 24 February. Goodness me! It declared a $1.2 billion profit for the first half. The company also declared its first dividend.

You’d think that kind of result would get a mark up from the market.

Not so! PLS is down 6% or so from the day before it released its accounts.

What gives? Is this ‘as good as it gets’?

Hmm. I’m not so sure.

One confounding factor, at least as price action goes, is that one of its major shareholders just decided to sell out.

The company, CATL, sold a staggering $856 million worth of stock for a gigantic profit from its earlier investments.

The stock went ex-dividend last week too.

But what of the future?

The stock only trades on a P/E of about six if it can hit its forecast profit of more than $2 billion for this financial year and the next.

That, as ever, is the big ‘if’.

You and I know that depends on where the lithium spodumene price goes.

This has skyrocketed since 2020. But nothing lasts forever.

The Financial Times reported last month that pricing for lithium carbonate was weakening in China as concerns about demand rolled around.

We see this type of spook in commodity markets, like iron ore, all the time.

Lithium prices in China, as I understand it, have always been prone to big swings.

It’s also hard to see the long term as anything but bullish, either.

It’s not as if the switch to electric vehicles and renewable technology is going away any time soon.

Tesla recently held its investor day. Musk wants to make Tesla the world’s largest (by volume) carmaker, eclipsing Toyota.

Tesla, according to the report, has spent US$28 billion to get this far.

It will need to spend nearly US$150 billion more to sell 20 million vehicles a year.

Tesla’s chief financial officer is quoted as saying:

‘We may choose to vertically integrate into more things. We may find efficiencies elsewhere.’

That sounds a lot to me like the company could be interested in buying mining projects directly.

Could this be the cause of the unexplained jump in Liontown Resources [ASX:LTR] recently?

It’s possible, I suppose, though I have no idea how likely.

Tesla is still active in engaging with Aussie stocks too, by the way.

It was only the other week that speculative junior Magnis Energy Technology [ASX:MNS] announced a conditional offtake agreement with the electric car company.

(Admittedly, the market seems sceptical of the deal. The stock is down since. Hardly a ringing endorsement of the announcement).

I thought I’d check with any recent comments from ‘Mr Lithium’, US Advisor Joe Lowry.

He said recently, in part:

‘By the fourth quarter I believe it will be obvious that investors who worried about lithium demand in 2023 and focused on negative predictions for China without understanding the historic seasonality of the China market or had misguided concerns over Beijing’s management of subsidy policy or focused on the potential impact of a global recession and let those concerns overshadow the long term growth trend simply came to the wrong conclusion.’

Probably could have used a full stop in there somewhere…but thanks, Joe!

Senor Lowry also refers us to an acquaintance, Matt Fernley, who analysed the potential demand for raw materials as EVs take market share.

Senor Fernley tells us that:

‘Assuming that all of the 240,000GWh of cells were lithium-ion (which they won’t be, but just to illustrate the magnitude), that would mean a total requirement of c.160Mt of lithium carbonate equivalent (LCE). Given that current production is of the order of 0.7-0.8Mtpa of LCE, you can understand the magnitude of the bottleneck.

‘Let’s be realistic — there are other techs out there, particularly in the ESS space where there are flow batteries, sodium-ion, etc, but the magnitude of the likely demand increase for lithium-ion in general and lithium, graphite, phosphate, nickel and manganese in particular still looks off the scale.’

Are you picking over ideas here? I think you should be. Personally, I picked up some stock in PLS last week. We’ll see how that goes.

But the high-octane stuff is at the junior end of the resource market (as PLS once was!).

I have pegged the junior most likely to have a crack at repeating PLS’s success. I called it my ‘Tesla Jackpot’ play.

You can check out the idea, and more, by clicking here.

Best wishes,

Callum Newman,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

A few years ago, we developed what we called Bad Guy Theory (BGT).

The idea was that there are good guys and bad guys. The bad guys change, of course. Germany was bad in 1940. Now it’s good. Ditto with Japan. Today, Russia and China are bad.

The bad guys come and go. But the good guy — the US, the ‘one, indispensable nation’ — never changes.

And since good guys do only good things, bad things miraculously become good things when they do them, such as invading Iraq. Or blowing up other peoples’ pipelines. Or assassinating their leaders. Without noticing, the good guy becomes a bad guy.

The panic pivot

We’ll come back to that as we puzzle out how China became a bad guy…what the US is becoming…and why you should brace yourself as the US rehearses the unhappy comeuppance of empires throughout the ages. But today, let us check in on how the financial reckoning is going.

Our hypothesis: the inflation Indians are off the reservation. The Fed will continue to raise rates, trying to get them under control, until the economy reaches a crisis point. Then, it will panic and ‘pivot’ towards more money-printing.

Here’s one little item from Yahoo! Finance: ‘Car Debt Is Piling Up as More Americans Owe Thousands More Than Vehicles Are Worth’:

‘The build-up in negative equity — or the amount that debt exceeds a vehicle’s value — is rattling consumers and raising alarms within the industry. Though it’s not unusual for drivers to carry negative equity, some dealers say more people are arriving at their lots up to $10,000 underwater, or “upside down,” on their trade-ins. They’re buying at still-sky-high prices and rolling debt from one car to another and even onto a third. Loans are commonly stretching to seven years.

‘“As trade-in values begin to cool, each month more and more consumers will find themselves falling from positive to negative equity,” said Ivan Drury, director of insights at auto-market researcher Edmunds. “Unless American car shoppers break their habit of buying again too soon, we’ll see the negative equity tide continue to rise.”’

Disruptors disrupted

As cars decline in value, so does the car-selling industry. Carvana — the ‘disruptor’ that was once worth US$31 billion has lost 96% of its value. It’s lost money every year since it was created in 2014. A US$100 million loss one year, US$150 million the next. But last year, it lost US$1.5 billion, for a total loss of US$2.107 billion during its career.

Meanwhile, another ‘disruptor’, WeWork, has wiped out US$15.5 billion of capital since it began in 2016.

These are not just the ‘paper’ losses of stock market speculators. This is real wealth — time and resources — squandered on bad ideas, a total of more than US$17 billion by these two companies alone. That’s about what the total national debt was during the Dust Bowl drought of 1931 (not adjusted for inflation). Back then, the debt-to-GDP ratio was a mere 22%.

While speculators lose money, so does the middle class; their houses are going down as well as its cars.

Mortgage applications are at their lowest level since 1995, while mortgage payments rose 26% last year…and the average sale price fell 16% since last July. Home sales fell for the last 12 months straight…and are now 37% below their level a year ago…the biggest decline on record.

The real massacre

And here’s Breitbart, adding it up:

‘Homeowners in the United States have lost $2.3 trillion in total value since its peak in June, according to an analysis from Redfin.

‘“The total value of U.S. homes was $45.3 trillion at the end of 2022, down 4.9% ($2.3 trillion) from a record high of $47.7 trillion in June,” an analysis of the Redfin Housing Value Index claimed. The research indicated that the drop in total valuation across the United States is the “largest” drop in total percentage terms from June to December since 2008.’

What can desperate consumers do? Borrow! Credit card balances just took their biggest jump since the 2001 recession.

Total debt for millennials is up 27% since 2019, the most for any age group. Millennials also had the highest delinquency rate.

In other words, so far, so good. Both the rich (investors) and the not-so-rich (the middle class) are getting scalped.

Sooner or later, we think, the real massacre will begin…

…and the Fed cavalry will, alas, come to the rescue…like Custer to the Little Big Horn.

Stay tuned.

Regards,

Bill Bonner,
For The Daily Reckoning Australia