PLL - Why I Would Worry About Piedmont Lithium
Summary
- I've no problem with the idea that Piedmont will bring its lithium into production.
- I'm also not worried about management, efficiency or anything else at the company. They're all fine as far as I can see.
- What worries me is the lithium price itself. I think we're about to see the standard tragedy of the minor metals market.
This is a very gloomy set of thoughts
It's also possible to describe this as entirely realistic. But I worry about lithium stocks and specifically Piedmont Lithium (PLL). The underlying economic point to grasp is that Piedmont, like most other miners, is a commodity producer. That, in the economic jargon, means that it is a price taker. Not a price setter. There is nothing about its production that means it can determine the price at which it sells.
The other way around of putting this is that the sales price is set by what every other user and producer of lithium is doing. We're in one of those markets where that supply and demand curve at the start of every economics book actually works. There is no market segmentation possible, no marketing to gain a premium price, there's just the entirely substitutable pile of lithium which is the same as and equal to everyone else's pile of lithium.
The effect of this is that a miner is simply a price taker. If the price of gold is $2,000 an ounce then that's what the mine can sell gold for, $2,000 an ounce. Doesn't - not beyond fractions of a percentage point - matter whether it's artistically crafted, organic, fair trade or plain old industrial rock crushing. The price of gold is $2,000 an ounce.
Lithium is a little more complex, yes, given the necessity of transferring the spodumene concentrate to the processor and so on. It's a two step process and there are contracts in between those two. But it is still true that no one is going to be able to charge a long-term premium price. There might be variations, percentage points here and there based upon reliability and long-term contracts but that base price of lithium is going to be the determinant of mine revenues.
Piedmont Lithium numbers
I've no reason to doubt these numbers from a Seeking Alpha colleague. So, I'll take them as being just fine, true even .
Piedmont is forecast to have very strong cash flows as it enters production soon, especially if spodumene prices stay at near US$5-6,000/t (source) - Eg: Spod at US$5,900/t equates to over US$600m of annual EBITDA for Piedmont from NAL only
Fine with those as a calculation. What I'm not fine with is the idea that those numbers are going to be maintained. This is the point I'm making though. Please note that I'm not arguing that anything is wrong with Piedmont, with their mining claims, their ability. Only and solely that they are a price taker. If the global lithium price falls then so does their income.
Minor metals markets
There is no shortage of any useful mineral out there. The only thing we can or do ever suffer is a shortage of people either currently mining it or able to mine it in the near future.
Skyrocketing metals (or minerals) prices last as long, and only as long, as it takes people to open new mines to provide the same material. Because there is no shortage - none, not even in theory - of places where we can gain that same mineral or metal.
Yes, of course, this works within certain boundaries, gold isn't about to become $1 an ounce but if the price did rise to $10,000 an ounce it's absolutely amazing how much would be found and processed.
Rare earths
One example of this is the fuss over rare earths back in 2010. China decided to limit exports, prices soared. At one point there were 420 rare earth projects looking for finance (number from Jack Lifton). Only two of them, Lynas and Molycorp, came into anything like large scale production but that was enough. By 2014 rare earth prices were below what they had been in 2010. Lynas then needed a significant recapitalisation, Molycorp went bust again a bit later (to be revived as MP Materials).
My point is not about the politics of this. It's about the non-shortage of rare earths. Not only are they not rare they're not earths either. Demand rises, prices rise and supply will rise. But the thing about such metals markets is that supply often - I would say near always actually but that's opinion, not fact - rises more, in the long term, than demand did. Therefore prices fall, eventually at least.
We've seen this before with lithium
Back in 2013 and so there was a boom in the lithium price. An early indication of the EV move really. So, a number of lithium mines got financed. One that I know of even went into production. Then went bust. I wrote about Altura here .
Nothing wrong with the mineralogy - hey they went into production! - nor anything obvious with the management or anything. Just that supposed shortage in 2013 had led to lots of investment in new lithium and so the price dropped. Mines based on the idea of always higher prices failed. Oh well, that happens.
And that's my point, that does happen. Not only does it happen my insistence is that it always happens. There's simply too much of any one mineral or metal out there for it not to. High prices will last as long as the mine development and permitting process takes and no longer. Given the frenzy that always accompanies high prices this will mean over-supply at the end of that period and so some of those new mines going bust. That's just the way the commodities cycle works.
We might say that lithium has already topped out
Now, this could be me projecting my views onto a small variation or it could be my view coming true. To be fair, even I don't think the lithium price is going to crash this year nor next .
Benchmark lithium prices hit about $90,000 a metric ton in November. Prices are now about $60,000 a metric ton, down 33%. It’s a steep drop, and Rai sees more declines ahead. She sees prices falling to $34,000 a metric ton over the next 12 months, citing slowing demand growth for EV, and more lithium production.
SHANGHAI/LONDON, Feb 27 (Reuters) - CATL (300750.SZ), the world's largest battery maker, has offered to cut costs for Chinese automakers, a move that demonstrates its market power and could also widen China's cost advantage in electric vehicles.
China's CATL has offered smaller domestic electric-vehicle makers discounted prices on batteries, according to four people with knowledge of the terms.
The discount offers included a clause that shocked the auto industry after a year of rising prices: a built-in assumption that prices of lithium carbonate, a key component in auto batteries, would more than halve, three of the people said.
Oh Aye ?
Analysts at brokerage China Securities Co. Ltd. estimated that there could be an annual lithium surplus of 18,000 tons, 185,300 tons and 179,500 tons, respectively from 2023 to 2025, while prices could fall to between 300,000 and 350,000 yuan per ton this year and drop to 200,000 yuan per ton in 2024.
Gosh .
My only insistence here is that lithium prices are only currently constrained. There's no logical shortage of lithium out there that can be mined. There's only a shortage of current production, a shortage that can and will be solved. Or, in my reading of it, over-solved.
Which brings us to this :
Fastmarkets’ price assessment for spodumene 6% Li2O min, cif China was at $2,500-2,750 per tonne on January 21, up by $100-150 from $2,400-2,600 per tonne two weeks earlier, and up by $2,050-2,290 per kg (up 476.92%) from $450-460 per kg on January 27, 2021.
It's not just that it wouldn't surprise me to see the spod concentrate price back at $450 (to be more accurate, that's the price of lithium in spod concentrate) it's that I expect it to get back to that. In fact, to below it. I don't know when, sure, but expect it I do.
An accounting point
With mining we have to distinguish between operating costs and capital costs. It costs some amount to open a mine. Lots in fact, not just some. But once you're open those costs are "sunk costs". There's nothing that can be done to get them back. So, those costs make no difference to your decision about whether to keep mining or not. That is based purely on your operating costs. So, it is entirely possible - in fact it's common - for output prices to fall below all-in mining costs. Because you only stop mining when your income is lower than your operating costs.
This is just a feature of the industry, that's how it is.
So, Piedmont
Please note, I do not think that Piedmont - or any of the other lithium miners - is a stock to avoid. The point I do want to get across is that Piedmont - or any of the other lithium miners - is a trading position, not an investment. This is not something to be locked away in the back drawer for the grandchildren. Instead it's an active position that needs to be managed.
I have little doubt that Piedmont will come to market with product and that the price will be high when it does. But that's not the point I'm making. There might even be some years of high prices - but there aren't going to be decades. That's just not how minor metals markets work.
Why I'm wrong
Well, I'm not. Over some timescale I'm right. The question is over what timescale? Hmm, I don't know either. But that is the question that needs to be answered. Those lithium producers who come to market first will do very well for some period of time. Until all the other producers also come to market and supply rises above demand.
The investor view
The point I want to get across here is not that Piedmont, or any of the other lithium miners, are a bad trade from here. That's not my point at all. The thing I am trying to emphasise is that they're trades, not investments.
To put this too strongly. Our grandkiddies might ride in Ferraris if we trade lithium stocks right but they won't if they inherit lithium stocks we buy right now. Anything done in this space is an active position that must be managed that is.
That's just how mining stocks work.
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Why I Would Worry About Piedmont Lithium