Mining companies have been roughly about 30% of listed entities on the Australian Stock Exchange, at least since we started tracking them, back in 2014. This makes Materials the most crowded sector in the exchange, translating into 674 companies… A growing number of these are focused on lithium, the chemical element that underpins the electric vehicle revolution.
We routinely talk about lithium, having worked in the space for over a decade. So let’s look into this.
Weakened pricing kept miners at stressed levels for a while in recent years, with some unfortunate mine closures. It is not the first time a “lithium bubble” has burst. Lithium had a boom in 2008-9, only to plummet shortly after and resurge in 2015-6, to then come down again in 2018, to now it is booming again. Already popular with retail investors, perhaps due to its ESG investment qualities, lithium has remained a tough niche for institutional investors to deploy capital. Pricing has been controlled by party-to-party contracts, and an easy way to hedge just doesn’t exist. This is coming to an end in June 2021, with the London Metal Exchange finally releasing its much-anticipated new cash-settled lithium futures contract, settled against Fastmarkets’ price assessment for lithium hydroxide monohydrate.
Behind the current sentiment lies the fact that lithium-ion appears poised to remain the core battery tech platform for the foreseeable future. We are contrarian investors by conviction, so downturns are times to find hidden gems, and get positions. Bubbles are trickier times to enter or average down your cost, requiring deeper analysis to identify company specific opportunities such as low valuations in comparison to peers, little to no additional value assigned to new acquisitions, and upcoming exploration results, among others.
As with most minerals and metals, we would suggest a diversified strategy:
- holding a variety of sources (hard rock & brine, and even types of deposits and chemistry),
- extraction processes (traditional vs direct extraction, and others that may come up in the future so keep an eye on technology, and of course metallurgy when appropriate) and
- finally jurisdictions, to diversify geopolitical risk and supply chain restrictions.
Additionally, include a mix of producers, developers & explorers, to equalise the need for dividends & potential upside.
So even though volatility may remain for some time, signs point to expansion, and we remain bullish.
Lithium will continue to grow. Are you in?
Stay tuned for part 2 where we will discuss some exciting ASX-listed lithium plays. In parts 3 & 4 we’ll cover TSX-V and other exchanges.
And that is it for today. We’d love to hear your thoughts. Reach out on our social media channels to chat, and also find additional resources here.
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