Three ways to play the hot lithium sector

There have been a few times in my career when things seem so easy that it is almost impossible to not make really good money. Be under no illusions, this is one of those times. Previous easy money rounds have included the Dot Com boom and the mining boom of 2005-2008. It really was like shooting fish in a barrel. Currently we have a lithium and battery material boom - green fish in an ecofriendly barrel.

The most recent catalyst for the current exuberance has been two-fold. The first is President Joe Biden taking ‘Cold War’ measures to guarantee supply and security of energy resources, something that even Morrison’s government has embraced. Pre-election generosity has leached from car parks to lithium projects and rare earth refiners. This is a bigger kick than convenient car parking for the economy.

The other catalyst has been the recent pricing update from Allkem (AKE), the company previously known as Galaxy and Orocobre. Even CNBC, which is solely focused on US centric stocks, has started talking Australian miners. Okay, it was BHP but if you are an international investor and you want resource exposure, either as an inflation hedge, or just because, where else are you going to go? Canada maybe – but that’s more oil and gas. G’day my little Aussie mates – it’s your time to shine. And so, we are the place to invest. We are the ‘Lucky Country’ after all - one of the world’s top lithium producers. Actually, the top producer.

Source: nabtrade

Given China has issues, and Chile has a new man in the Palacio de La Moneda, who was elected on a green platform, no wonder the world is looking down under. The current oil issues have also been a catalyst obviously. Much like the 70s oil shock killed the gas guzzler much like an asteroid killed the dinosaurs. Or video, the radio star.

In the Marcus Today newsletter, it seems that I have only to mention a stock and it skyrockets such is the demand for recommendations. Last week I recommended a South American wannabe Latin Resources (LRS) as a buy at 9.5c and blow me down, but they are now trading at 19c. Anyone would think I am a genius. Sorry to break it to you but I am far from a genius. It is just that it has gotten too easy. Anything with lithium exposure is in vogue. And it is not just in lithium - it has spilled over into rare earths (not that rare really), and battery materials more broadly. It really is shooting fish in a barrel. There are some seriously good returns currently. As there were in the Dot Com boom and the John Howard resource boom that effectively paid off the country’s debt. We won’t get into the now $1 trillion national debt in a rising interest rate environment, we can contemplate that another day. 

For the time being it is white powder fever. It doesn’t matter whether it is spodumeme or brine. Doesn’t even matter if they are years away from production and prices will be very different to what they are now. It just doesn’t matter. If it has a US or Canadian focus even better. If it is near production, better still. If it is in production, make hay. 

So, the question is when is enough? When does the run finish? When does the free money end? When will reality bite? 

Bad news I am afraid, I have no idea. But what I do know is, it will end. Something will happen and the green push will get overextended and companies with silly market valuations will come undone. In the meantime, hang on and enjoy the ride. Some traders will use stop losses. That may work, some will take money off the table and sell into strength as stuff rises. That is my own strategy. Every boom has a bust. Every bubble bursts. This one still has legs. One problem has been in taking profits, the stocks just keep on charging.

So, if you are feeling that you have missed out, do not despair, FOMO is rife I know but there are ways to get involved still. Of course, you could just throw money at some of the runners and riders - LTR, CXO, SYA, PLS, AGY, LRS spring to mind. There is money to be made here. Anything that has a good name is also in demand. Much like my betting history in the Melbourne Cup. ‘Australian Lithium Something’. Must be a sign. Sometimes you get lucky, sometimes not. 

So here are three lithium/battery tech stocks that you should consider.

The Producer - Pilbara Minerals (PLS) & Mineral Resources (MIN)

To enjoy the current bull run in prices you need to be producing. Pilbara Minerals (PLS) is the obvious choice, but Mineral Resources (MIN) is soon back in the game with its Wodgina lithium project - plus you have the iron ore kicker too. The last set of numbers hit the share price hard, but it has recovered well. Cost pressures and price discounting have been factored in iron ore prices. The great thing about MIN is its ambition to be more than spodumeme miner and process the material downstream. The company has announced it has taken control of its 51% share of the Mt Marion spodumene offtake which will be converted into lithium hydroxide by Ganfeng in China, for an initial 7- month period with options to extend. First lithium hydroxide is expected in May. The company is cashed up with around $800m, good management and is targeting over 100ktpa of lithium hydroxide within 5 years. It is moving to 50/50 with Albemarle on Wodgina and will be the managers. The company has long life assets with good partners and is a quality lithium producer in the making. On Tuesday 5th April, it also announced it was ramping up production to take advantage of the current high in lithium prices.

Pilbara Minerals (PLS)

1 year chart of Pilbara Minerals (PLS).

Source: nabtrade

The Constructor - Core Lithium (CXO)

Core Lithium (CXO) is the next cab off the Australian rank with production at year’s end. Argosy Minerals (AGY) is building a 2,000tpa Li2CO3 operation in Argentina. It is the Rincon lithium project in Salta province. But let us not forget Ioneer (INR) in South Nevada with its Rhyolite Ridge project. The company is one of the few live lithium projects in the US with excellent production and cost profile. Much has been made of the Tiem’s Buckwheat issue, but the company is working with the environmental authorities to work through this with construction hopefully starting by year end.

Core Lithium (CXO)

1 year chart of Core Lithium (CXO).

Source: nabtrade

The Explorer - Arizona Lithium (AZL)

Arizona Lithium (AZL) The company has two lithium projects in Big Sandy and Lordsburg in New Mexico. It has recently just completed a $32m capital raising to fast track the Big Sandy project. It had strong support and has also signed an MOU with Nikola Corporation, listed on Nasdaq, to purchase Nikola Tre battery-electric vehicles (BEVs). The Tre BEVs will be utilised to support two stages of development for the Big Sandy Lithium Project in Arizona — the research facility phase and the processing facility phase. The company is clearly now putting all its efforts behind Big Sandy and new shareholders have come on board at 12.5c with an attaching option to sweeten the deal. Once again it is important being US based given the strategic nature of the assets and the lack of current production. Like all of the lithium stocks it has run hard, and momentum has taken it possibly too high in the short term. Buying this one closer to the recent issue price will be rewarded over time. The current pullback and profit taking from the less sticky hands should see it pull back to under 16c and would be good buying there.

Arizona Lithium (AZL)

1 year chart of Arizona Lithium (AZL).

Source: nabtrade

The lithium sector has been the hot sector in the last month or so. It looks like some of the heat is coming out of the market. At Marcus Today, we have been recommending lithium exposure for a long time but have recently taken profits after such a heady run. That is not to say we do not like the sector. We do. Still do. But froth and bubbles lift even the boats with holes under the waterline. That does not last forever and going forward maybe investors need to get more picky. The stocks above should be on your watch list and this pullback may give you the chance to build positions in the cold light of day. Stick with quality if investing in this sector. If you are trading, momentum and sentiment will be your friend, just don’t be stubborn in the smaller runners and riders. Easy to get carried away.

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Analysis as at 05 March 2022. This information has been provided by Marcus Today (AFSL is 473383), for WealthHub Securities Ltd ABN 83 089 718 249 AFSL No. 230704 (WealthHub Securities, we), a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 (NAB). Whilst all reasonable care has been taken by WealthHub Securities in reviewing this material, this content does not represent the view or opinions of WealthHub Securities. Any statements as to past performance do not represent future performance. Any advice contained in the Information has been prepared by WealthHub Securities without taking into account your objectives, financial situation or needs. Before acting on any such advice, we recommend that you consider whether it is appropriate for your circumstances.