We’re going to need more, so we need to find more…

Wednesday, 29 March 2023 — Melbourne

[5 min read]

Dear Reader,

Lithium stocks are showing signs of life.

Yesterday, shares for Core Lithium [ASX:CXO] closed 15% higher, Pilbara Minerals [ASX:PLS] was up 12%, and Allkem [ASX:AKE] increased close to 14%.

The star of the day though — and the reason for the wake-up call — was Liontown Resources [ASX:LTR], who shot up a whopping 70%.

Shares moved after Liontown’s board rejected a $5.5 billion takeover cash bid from lithium giant Albemarle. Albemarle offered to pay $2.50 a share for the company, or an around 64% premium over Monday’s close price.

Liontown’s board response was thanks, but no thanks.

Not only did the board feel that the offer ‘substantially’ undervalued the company, but they even remarked on the ‘opportunistic timing’ of the proposal.

Liontown’s Kathleen Valley Lithium Project, which the company expects will be one of the largest lithium mines in the world, is expected to start production mid-2024.

And then, of course, lithium stocks haven’t been doing that well lately. In fact, there’s been plenty of shorting on lithium stocks like Liontown, that is, punters betting the stock price will fall. That’s certainly backfiring now.

But this isn’t the first time that Albemarle has tried to buy Liontown, who has supply deals with Ford and Tesla. Albemarle made offers back in October at $2.20 a share and at the beginning of March at $2.35.

Liontown’s share price sped past the offer price, closing at $2.57 a share yesterday.

But the entire ordeal shows that while lithium stocks have fallen out of favour recently, companies are still finding it hard to source lithium.

We’re going to need more lithium…

Lithium stocks have been bogged down all year after lithium prices cratered. As you can see below, the price for lithium carbonate in China has dropped dramatically since the end of 2022:

While lithium prices have been tanking, the big picture shows that producers are still selling lithium at higher prices than in 2020 and 2021.

And with carmakers pledging to make more EVs, battery costs having fallen, and a push to create battery supply chains outside of China, demand for lithium will likely continue to be a trend.

We’re going to need to build more lithium-mining capacity, but also refining capacity.

While lithium is mined mostly in Australia and Chile, most of the refining of lithium (about 60%) still happens in China.

And there are plans to build a refining capacity out of China to diversify the supply chain, but to also decrease bottle necks.

Ford, for example, is planning to make two million batteries a year by 2026 for its EVs.

As Ford’s CEO, Jim Farley, told Yahoo! Finance:

‘First of all, batteries are the constraint here. Both lithium and nickel are really the key constraining commodities. We normally get those from all over the world — South America, Africa, Indonesia. We want to localize that in North America, not just the mining but the processing of the materials.’

It’s something we heard from Tesla too, during their recent investor day. Tesla unveiled plans to build a lithium refinery in Texas.

It’s something that Liontown is also exploring. The company is looking at setting up a refinery in the Kathleen Valley Project to upgrade their product into lithium hydroxide monohydrate. If that happens, the company says it could be one of the largest refineries outside of China.

But the point is, we’re going to see a lot of money flow into the mining and refining of minerals to build battery supply chains.

Don’t miss out on the underlying story

While there’s plenty of concern about the global economy heading into a recession, central banks continuing to raise interest rates, and the strength of the banks, I see plenty of opportunity in commodities.

Not only in lithium but also copper, nickel, iron ore, and gold, to name a few.

There’s a lot of money flowing into building supply chains outside of China.

Not to mention that when there’s so much doom and gloom around, commodities are real assets.

When it comes to investing in mined commodities, there are plenty of choices. You can invest in established players — companies that are coming close to production, or even look at the tiny explorers.

In fact, geologist and colleague James Cooper is looking closely at this sector. Tiny explorers that can be extremely risky, but if their first drill hits it big, they could really pay off.

And tomorrow, he will be holding a presentation on his method on finding these small explorers with potential. What’s more, he will even name a stock he’s been watching.

So, if you want to learn more about this sector, make sure you check out James’s free presentation tomorrow. You can secure your spot here.

All the best,

Selva Freigedo,
Editor, The Daily Reckoning Australia

Dear Reader,

‘How did this happen?’

Jerome Powell

To make a very long story very short, a single investment rule would have served you very well from 1982–2022. Wall Street pros expressed it crudely: BTFD. (Buy the F…ing Dip.)

What simple rule works today? STFB (Sell the F…ing Bounce)?

On Friday, the financial press was worried about the latest wobbly bank. Bloomberg: ‘Deutsche Bank Shares Plunge in Renewed Bout of Stress’:

‘Deutsche Bank AG became the latest focus of the banking turmoil in Europe as ongoing concern about the industry sent its shares slumping the most in three years and the cost of insuring against default rising.

‘The bank, which has staged a recovery in recent years after a series of crises, said Friday it will redeem a tier 2 subordinated bond early. Such moves are usually intended to give investors confidence in the strength of the balance sheet, though the share price reaction suggests the message isn’t getting through.’

Bulging balances

The message? ‘Don’t worry. We’ve got your backs.’

Investors seemed to believe it. Stocks bounced, with the Dow up for the second week in a row.

But let us answer Jerome Powell’s question: what happened?

For decades, stocks rose as interest rates fell. Then, beginning in the late ‘80s, the Fed made low interest rates a matter of policy. Stocks continued to rise. Investors learned to BTFD. By 2009, the Fed was lending money below the rate of consumer price inflation. By this stage, stock analysis no longer mattered. Crazy investments, with no hope of ever actually earning money, soared.

‘Don’t worry about it’, said the pros. ‘Just BTFD.’

Meanwhile, since 1974, the federal government ran in the red (with the exception of a few years during the Clinton Administration). In 2020 it went Full Stupid and handed out trillions of dollars in stimmy/PPP cheques. In 2021, Joe Biden added another US$1.7 trillion in his Inflation Reduction Act. The Fed’s balance sheet — roughly measuring the amount of money and credit at large — rose 10 times from 2000 to 2022.

Inflate or die

The result was higher consumer prices…which the Fed began to ‘fight’ with small increases to its key lending rate. But after more than 12 months of increases, the Fed Funds Rate is still trailing consumer price increases by 100 basis points (1%).

Ultra-low interest rates, for an ultra-long time, led to today’s US$90 trillion debt and today’s wobbly banks. Now, as interest rates rise, that debt burden — like a conscience haunted by an old sin — becomes intolerable. Households can’t pay their mortgages. Businesses can’t refinance their bonds. And banks find that their long-term assets (including Treasury bonds) are worth less than their short-term obligations to depositors.

And there you have the stark choice. It’s ‘inflate or die’. Either the government inflates away the excess debt…or the bubble epoch dies (deflation).

Our old friends, James Dale Davidson and Lord William Rees-Mogg developed the idea that there were political dynamics bigger…and deeper…than the bickering between Republicans and Democrats we see on TV. ‘Megapolitics’ they called it. Those are the forces behind our forecast: that the deciders have too much at stake to allow deflation. The only alternative — the time-honoured resort (along with war) of scoundrels and megalomaniacs — is inflation.

STFB

What does that mean for the stock market? In the near term, it’s hard to say. Stocks often go up as investors look for alternatives to fixed-income bonds. Sometimes they go down, as consumers’ real incomes fall, along with business profits.

But over time, bad money weakens trust in public institutions…in banks…in the currency…in the future — and the whole economy suffers. Almost everyone gets poorer. Some businesses — those that offer real goods and services at good prices, with decent profit margins — continue to offer decent earnings. Others fail.

What can you do?

STFB.

Regards,

Bill Bonner,
For The Daily Reckoning Australia