LAC - Why Lithium Stocks Are Plunging Like Niagara

2024-01-21 08:25:11 ET

Summary

• The bottom has fallen out of the support once afforded to lithium production companies.
• The fear of fewer electric vehicle sales due to recent issues may contribute to the decline in lithium stocks.
• When does the lithium decline find a recovery point?  Most analysts see it not happening until 2025 or later.
• I'm not so sure they are correct.

Given the headlines in the US right now about EVs being stranded in cold weather (which I warned about in previous analyses,) the current fear plaguing lithium stocks is that fewer EVs will be sold. Many buyers may be put off when they see EVs being towed by dependable diesel and gasoline tow trucks through the snowy streets of Chicago and elsewhere.

This fear presumes that the same issues attack EV batteries in any weather. Not so. Yes, at this stage of innovation, intense heat and intense cold will both affect lithium-based battery life. But that is as much because we are draining the battery in the sweltering heat by using the air conditioner on high -- and we are draining the battery in frigid temperatures by running the heater full bore.

When those of us still quite satisfied with our gasoline or diesel engines have to crank up the A/C in big heat or the heater in frozen conditions we aren't so much draining the battery as we are simply burning a little more fuel.

In both cases, EV or Internal Combustion Engine ((ICE)), we are running out of our power source somewhat earlier than we otherwise would. The difference is that a full tank of gas, in most cars and trucks, will get you farther down the road than most batteries in most EVs.

This does not mean that no more EVs will be produced and sold, especially as charging stations are built and the batteries themselves achieve longer ranges.

Nor will they completely overtake ICEs in the immediate future. An EV will certainly not do the work I need it to do. I live at 7,000 feet in the High Sierra.

Right now I am surrounded by the result of a typical winter storm. The sun is shining brightly, making all this new snow look as if there are trillions of diamonds sparkling within it. It is warm enough to walk outside with a light winter jacket -- but until the full thrust of this storm passes, it will still be 5 or 10 degrees when I need to go somewhere tonight. My ever-dependable Subaru Forester will start right up and get me there and home.

But the rest of the world is not me, and maybe not you. EVs will continue to be produced and sold, BESSes (Battery Energy Storage Systems) will continue to be built. Charging stations in a country the size of the USA are way behind the curve, but are being added as we speak.

Even more important than the likelihood of increased EV sales to consumers and BESS sales to utility companies and corporations is the law of supply and demand.

As the price of lithium (especially lithium carbonate and lithium hydroxide) has plummeted, the cost of creating lithium-based batteries has also rapidly decreased. Since batteries are the most expensive part of an EV, this gives the EV automaker a chance to increase their profits on each car sold or, more likely, to drop their prices since their competitors are dropping theirs. A smaller profit on a greater volume sold often works out to be the same or better than a larger profit on fewer cars sold.

With the battery portion of an EV's cost running anywhere from 12 or 13% to 30%+, this means that cheaper lithium can mean cheaper prices for cars. Having that pricing power means, to stay competitive, at least some car companies will be dropping the price of their automobiles.

Visual Capitalist 2023

Lower prices attract more buyers. In turn, more lithium is needed. In turn, as the current glut evaporates, the price of lithium will rise again. The solution to the problem of falling prices is falling prices. At some point, those cheaper costs will mean more sales, leaving less lithium in supply, until we reach the tipping point where supply is not keeping up with demand.

The question is: when?

I think it will be this year, perhaps within months. Financing charges to buy a new car are coming down. Incentives are still in place from various governments around the world. People unlike me, who live in cities and suburbs and do not take cross-country road trips like I do, may well find the convenience of overnight home charging a convenience, not a burden.

If I am wrong and it takes another 12 months or even 24, as long as the companies I buy have the cash flow to persevere even at low prices, I don't mind slowly re-accumulating those lithium companies whose shares I sold when they penetrated my stop orders.

To that end, I will be buying -- though nibbling is a better term -- over the coming months, a little here and a little there. My favorites to keep accumulating at these levels are Albemarle ( ALB ), Arcadium ( ALTM ) -- the name of the new company formed when Livent and Allkem merged -- and Lithium Americas ( LAC ). I am also now beginning to buy a little more Lithium Americas Argentina ( LAAC ). If SQM ever comes down to the high 30s I might add a bit of it as well.

Albemarle, SQM, and Arcadium all have other lines of business and, more importantly, good balance sheets and established lines of credit to help them squeak through to the other side.

Not so with Lithium Americas. But then LAC is not affected by the price of lithium -- it doesn't produce any! It has plunged because it has no income and, if no government loan comes through and if GM decides to write off its millions in LAC support and abrogate its offtake agreement, LAC is stuck with what may be the largest lithium find in the US, but delayed by months or years from seeing income. That property is too valuable and too hard-won for me to believe it will not be developed -- and sooner, rather than later.

If I am wrong, and these companies' shares stay where they are, or move down for some time, I can live with it. The amount of "dead money" I have allocated while waiting for them to turn is currently a shade over 3% of our Investor's Edge model Growth & Value Portfolio. I plan to keep it under 6% with the other 94% allocated elsewhere.

Good investing,

Joseph L. Shaefer

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