We all know that the world is using much more lithium – all those Teslas, Rivians and other EV s are just packed with it. Demand is soaring so those producing now are coining cash – like Sigma Lithium (CVE: SGML) soon will be. The only really world class deposit that’s about to come on stream. OK, great, coming online with supply when the price is high and possibly still rising is great.
We can also think of those who might do that in the not so near future. Atlantic Lithium (LON: ALL) is certainly making all the right noises. Perhaps fully valued for the moment until we get more information about actual production dates but maybe. Of course there’s also SQM (NYSE: SQM) in Chile, or Albemarle (NYSE: ALB) who are the other two big volume producers already pumping the stuff out. For many of us that’s not going to be racy enough of course.
But there’s more to it than just not wanting to be boring and in the industry majors. We need to understand something about how these minor metals markets work. There’s no shortage of lithium out there – there’s a shortage of people currently producing lithium. That second is a problem that can be solved really – more people go produce more of that lithium out there. But then this creates a problem for all suppliers. The market shortage goes away as more people supply, the price comes back on again and at least some will start to lose money.
This is not just some horror story to wake us at night – we had a boom in lithium mining back in 2013 and at least one of those new companies was already bust by 2018. Perfectly sensible company too, got the mine up and running but just ran out of money when prices slumped.
So, we’ve got to be aware, awake to, the way these markets work. Yes, shortages, yes, high prices, lots more exploration – but then, as like as not, a price slump off the back of the new production.
Which leads us into have a look at some of the tiddlers here. Vulcan (ASX: VUL) for example is exploring the idea of lithium extraction from geothermal waters flowing through power stations. This should actually work too. Some of my own work elsewhere tells me that it does – the idea that is, not this specific company. Or, closer to home, Marechale (LON: MAC) owns a chunk of Wearside Lithium, looking to do much the same. Or there are the clay deposits, or desalination plants (seawater contains Li, so if someone is already processing it then maybe) and on and on.
The point being that as the price of lithium is indeed up 10 this past couple of years therefore the entire mining world is looking for new ways to get lithium. New deposits of spodumene will be exploited (I know of at least four just off the top of my head) and new brines will be processed like SQM does and new sources and processes for getting lithium will be worked out and…..well, you get the point. The undersupply and thus the high prices are not guaranteed to last. In fact, it’s a very fair bet that they will crash.
Our difficulty is in knowing when lithium prices will decline. Not whether, but when. We’d also like to know who will remain standing and producing when they do. Well, yes, we’d also like to know the winner of the 4.30 at Kempton Park but ahead of time that’s a bit difficult.
This point about lithium miners though. It’s also something that holds for any other minor metal – rare earths being the other big current example. Yes, there’s a boom as a result of increased demand. But it is usually true – almost always in fact – that boom turns to bust. Simply because those high prices call forth more potential suppliers than the higher demand can support. It’s not a 100% rule, but it’s close to that, that a mining boom does lead to a mining bust.
This means that sure, it’s a glorious thing to trade. But it’s not one for long term investing. We need to be on top of the market, in and out of positions. We cannot – or should not perhaps – think we can just pick the winners and be collecting our dividends in a decade’s time. Any and every position in something as volatile as lithium – or any other minor metal – must be managed and on a regular basis.
