SGML - Friday's Selloff In Lithium

Summary

• I have been a lithium investor since my first visit to Chile and became even more immersed when I began studying the Thacker Pass lithium project in Nevada.
• Bank of America published a report last Thursday specifically targeting Livent Corporation that caused all lithium stocks to decline.
• This Wall Street analysis sent the market into what is technically termed by professional economists "a tizzy."
• Here is the logic of the Bank of America analysis team - and my riposte.

I remain quite positive about lithium and confident that short-term pricing or attempts to trade based on "possible" fluctuations in pricing by quarter are a waste of time. This is a freight train rolling down the tracks. It may slow for the occasional curve it encounters, but I believe it will continue to gather momentum month-by-month as we look at the big picture.

I first wrote about the Battery Revolution 2 years ago in these pages and have continued to do so ever since. I will cite something I wrote in one of those articles, a topic that is too seldom thought about or reported upon.

The primary impetus for the use of all lithium - and the other essential battery metals/elements I have most recently discussed on Seeking Alpha - is in electric vehicles ("EVs") and grid-level Battery Energy Storage Systems. But there is another growing source that will only add to the demand for these elements. From my article of April 2021:

Most lithium research focuses on its uses for passenger and commercial EVs. That is only part of the story. Lithium and the other primary metals are increasingly being used to save lives in combat while exponentially reducing carbon emissions."

I quoted Gen. Jim Mattis, when he commanded the 1st Marine Division on the drive to Baghdad in 2003, saying "Unleash us from the tether of fuel." In modern combined warfare, we use infantry fighting vehicles, tanks, aircraft, naval gunfire support and more. We also need to move food, water, ammunition, spare parts and more as we advance. The way to get all that there, in 2003 and still today, is by using fossil fuels to power the ships, the planes and the never-ending convoys of trucks that are susceptible to ambush IED attack. I included the following photograph, courtesy of the U.S. Army, showing a convoy inching ahead in Afghanistan:

Probably half of all convoys are comprised of tanker trucks, taking fuel to the front for tanks, fighting vehicles, Humvees, jeeps and more, Imagine just one IED striking a vehicle near the head of this line. There is virtually nowhere to turn around. These truck drivers and escorts are now stationary targets.

But "what if?" What if we did not need all those trucks and all those soldiers taken away from other more important tasks? We would still need to deliver "beans and bullets," but just not carrying heavy and dangerous fuels would slash massively the number of vehicles and people placed in harm's way.

The U.S. military thinks tanks and innovation centers are currently hard at work to use the latest battery technology for vehicles, for huge battery storage systems at forward operating bases and for myriad other uses on land, sea, air, and space, be it from the smallest drones to the biggest naval vessels.

Airlifting battery electric storage systems and replenishing as needed could save millions of gallons of diesel fuel and gasoline, reduce the number of trucks and contractors, and take that many more service members out of harm's way.

I remind myself regularly that, in addition to the current demand for lithium and the other key materials for rechargeable batteries, there are these other uses coming online as well as uses we have not even considered yet. For EVs, for battery storage systems, for less energy loss from long transmission lines (by creating local and regional battery centers,) for the current and expanding use in national defense, and for the innovations yet to come, I believe in and invest in both current energy sources as well as those of the future.

With this in mind, below is the key thought in Bank of America's downgrade of Livent Corporation ( LTHM ) that led to the one-day plunge of 10% in Albemarle Corporation ( ALB ) and other lithium suppliers.

The gist of Bank of America's report is that lithium is historically strong in Q4/Q1, but weaker in the next two quarters. Plus, they believe China's re-emergence from Covid restrictions and more Chinese brine production will create a ramping up of greater lithium supply.

Indeed, Reuters did report that the big Chinese battery maker CATL had offered discounts to "some" Chinese automakers it supplies, which sent traders, fearing a global lithium price war, to sell off all lithium companies.

A double whammy? I don't think so:

"Seasonally, 4Q/1Q is often a period of strength for lithium markets as Chinese-based brine production sees lower operating rates. At the moment, that lower production is offset by destocking and poor sentiment in China. These trends should recover as we move into spring, but it will be met with more volume. Come May-July, we should see a combination of Chinese brine-based production return to the market, brownfield expansions, as well as the first greenfield tonnage in years. This makes charting the path of the lithium price (and thus LTHM shares) through year-end particularly difficult."

My response to this report? Typical Wall Street analysis. Somewhere in my earliest days in this business, I remember a maxim that went something like this: "Never trust a Wall Street analyst who can tell you the exact number of railroad ties between Erie and Lackawanna, but has no idea of whether the stock is a buy or a sell."

There are two reasons this old maxim is a good warning for investors.

First, too many of these reports are counting railroad ties. They pore over past information like what lithium prices have done previously , look at previous profitability, previous earnings, etc., then presume what will most likely happen now.

Here is the problem with such analyses. There is no "previously" with lithium!

Lithium is no longer used primarily as a medication for depression and other pharmaceuticals. It is not just a material used to remove impurities in refining other metals, or as an initiator for polymerization, or for the production of non-rechargeable batteries.

Once lithium was discovered to be perfect for separating the anode and cathode with active migration between the two in small rechargeable batteries, the demand increased significantly for batteries for cell phones, camcorders, cameras and other electronic devices.

But even that (relatively smaller) usage has been utterly eclipsed. Lithium is in high demand, which I believe will only grow higher, for rechargeable batteries for electric vehicles and power storage. We stand on the threshold of these uses for lithium - as well as the other primary metals and materials I have discussed in my previous "CCLANG" articles ( C obalt, C opper, L ithium, A luminum, N ickel and G raphite.)

This is the new lithium . If you are a trader who likes "action," maybe the Bank of America report that lithium pricing is likely to be seasonal (with Q4/Q1 being stronger than Q2/Q3) will be of interest to you. For me, I do not day trade based upon some reporting without considering if it has any serious long-term implications for my holdings. In this case, it does not. My investing theme remains intact.

I no longer own any lithium exchange-traded funds ("ETFs"). Early on, before my in-depth analyses, I owned both Global X Lithium & Battery Tech ( LIT ) and Amplify Lithium & Battery Technology ( BATT ). However, the holdings of both have changed over time. Now, both share two flaws for me and the way I choose to invest.

First, both have Chinese companies as the largest percentage of their holdings. Our Growth and Value Portfolio at The Investor's Edge® holds many international companies and ETFs. But I do not trust the capricious and unpredictable nature of the Chinese government, which can - and has - used its power to destroy value based solely on political motive.

Second, their large-cap bias is fine as long as there is a fair percentage of the essential battery materials among their metals mined. But in some cases, the share of essential elements might be crowded out by their production of iron ore or coal or some other metal or element not needed for the Battery Revolution.

Those other primary products might do better in some quarters or years than the lithium they produce, but I am not interested in leavening my focus. I want those elements, materials and metals that fit within the scope of my electrification theme. I may also own some of those large-cap companies, but I am not buying a basket of them via ETFs. Especially if they hold mostly a large percentage of Chinese companies and a bunch of large-cap companies that might dilute what I am looking to own.

So what do I own instead?

As of today, I own Sociedad Química y Minera de Chile S.A. ( SQM ) ("SQM"), Lithium Americas ( LAC ), Sigma Lithium Corporation ( SGML ), and Bank of America's pan, Livent.

SQM is a powerhouse in lithium and a stable company in relatively stable Chile. I like the country and certainly its people. I believe the political travails of the past are behind them, though strong emotions still prevail on the right and the left. Sort of like the U.S.? Given the share of taxes SQM pays, I do not see any government losing the golden eggs from this goose via resource nationalism.

Canada's LAC has properties in both Argentina and the USA. Thacker Pass is the US property just down the road from me in northern Nevada I became familiar with long ago. What happens there has been local news for some time, long before LAC burst onto the national stage. I live just up the mountain from Reno where the judge deciding the numerous lawsuits presides. I stay very informed on LAC. FYI, as of yesterday General Motors ( GM ) became LAC's largest stockholder and largest offtake (of new lithium production) partner.

SGML holds a 100% interest in the Grota do Cirilo, Genipapo, Santa Clara, and São José properties in Brazil. These include 27 mineral rights covering an area of about 74 square miles. The company uses 100% hydroelectric power from the Irapé hydropower plant and plans to recycle 100% of the water used. SGML has already been mining the hardrock in the area on a pilot scale and expects to have production on an industrial scale this year. If successful, Sigma could be a serious contender going forward.

Finally, spun off from metals giant FMC in 2018, U.S.-based Livent Corp. has a storied history. In the 1940s, as Lithium Corporation of America, LTHM worked closely with the US government to develop applications for lithium. FMC acquired the company in 1985 but both then and after the spinoff, LTHM continued to keep the polymerization division moving forward, while also expanding into the energy storage and EV battery markets. In addition, Livent provides the only producer in the western hemisphere for high-purity lithium metal to increase the payload and efficiency of commercial and military aircraft and rockets.

Sometimes I want to own an entire sector. "Some" ETFs and mutual funds do that for me. But in many areas, like this one, I am instead selecting what I believe are the best companies - like SQM, LAC, SGML, and LTHM.

Good investing,

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