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Lithium fantasies vs. bitter realities
Joe Lowry, often revered as “Mr. Lithium” among investors, recently opined in a tweet, “Convinced ?#lithium supply won’t exceed demand in this decade.” In a sane world, such opinions voiced by a 20-year veteran of the lithium industry should have a chilling effect on the rampant investment that has caused the establishment of over 100 new lithium companies worldwide since the beginning of 2016.
But the trading activity in many of these companies shows that the enthusiasm for lithium stocks is not only unaffected by such sentiment: it seems to have a stimulating effect on punters who feel they might be missing the boat.
Rational investors who are typically better informed than mania-induced deal chasers have already profited from the lithium craze, and in the cases of the most sophisticated, have already moved on to other opportunities.
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That’s not to say that the boat has left the harbor and is now sailing away from the Great Crap Table that is the speculative junior mining business. There is, and will be, hundreds of opportunities for the risk-tolerant who dream of catching a ten-bagger.
I categorize the startup lithium space into three flavours: 1) Advanced; 2) Speculative; and 3) Dreamers.
In the case of the first category, companies are typified by having an early mover advantage (they were lithium companies before 2016), have a seasoned and well regarded management team who have a history of selling mining assets and/or putting them into production, and which are typically trading above $1 a share, having put exploration dollars into the ground, and demonstrated continued potential economic viability of their projects.
This is the realm of the serious lithium investor, who must presume that there is a potential, as per Joe Lowry’s statement at the outset of this article, that lithium prices might not go any higher, and in fact, could return to a baseline around US$6,000 to $7,000 per tonne for grades suitable for battery ingredients.
The second category is where the high-risk, high-impact opportunities still exist. In most cases, these companies became lithium companies in 2016, have projects that are either geologically untested, and/or are “closeology” plays designed to capitalize on the geological advancement of neighbours.
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These companies are typically trading well under a dollar, and have management teams that are more experienced with reactivating shell companies and are what I refer to as the “volume business” opportunists who chase the commodity flavour-of-the-day throughout their careers, picking off “scores” or “passes” along the way.
Not that you can’t make money on this second group. But you have to be agile and quick, and it also helps to have an inside line on what the gameplan of the promotional group behind it is. This is not investing; this is gambling. The only money I direct at such plays is money I can afford to kiss goodbye to without shedding a tear. Not that there is such a thing as a dollar that can afford to be wasted, but there are those among us who are attracted to the potential of an exponential win, even though the odds are not at all in our favour.
The third type of company is the skull and crossbones variety, the pie-in-the-sky, wing-and-a-prayer type of play that is the dregs of the market, that only snags uninformed investment from those who would be better off buying lottery tickets, for those odds are better for making money.
Mark Twain actually gave out some good advice in regard to such companies. He said, “If you want to double your money, take it out of your pocket, fold it in half, and put it back”.
In the case of some lithium juniors, that should be regarded as premium advice.
To find out which lithium juniors fall into which category, subscribe to the Midas Letter Premium Edition. The September edition will be published on Sunday, September 11, 2016.
James West is an investor and the author of the Midas Letter, an investing research report focused on Canadian markets. The views expressed here are his own and are presented for general informational purposes only — they should not be construed as advice to invest in any securities mentioned.
James West and/or associated funds do not own shares in any securities mentioned in this article. For the full Midas Letter disclosure policy, click here. Postmedia and Midas Letter have a revenue sharing arrangement.