The next big investment bubble – obscure metals

It’s a lovely feeling when you own a stock and the chart goes vertical.

It’s not a common occurrence and it’s one that seems to be reserved for small caps, particularly those in the technology and mineral exploration sectors, which explains the draw they have for speculators.

But I notice in recent weeks that one entire sector has gone ballistic – lithium. Just about every company that is exploring for this reactive silvery-white metal has seen its stock price double. Why?

Lithium stocks are taking off

Lithium stocks have been taking off recently. There’s Western Lithium (CA:WLC), which has some exciting lithium properties in Nevada and a great management team. Look at the chart – from just over 50c to C$1.25 in a year. What a good stock this was to own.

here’s New World Resources (CA:NW), run by a team of dynamic exploration geologists, which is operating further south in Bolivia. The markets don’t seem to care about the associated political risk. It’s been a five-bagger, as you can see below.

for rare earth metals (more on these in a moment) the story has been even more exciting. This is Quest Uranium (CA:QUC), who have some exciting rare earth metals properties in Canada. The price has shot up from 4c to C$1.50 in four months!

Why the sudden interest in lithium?

So why the sudden interest in lithium? The metal has a wide variety of uses, one of the most famous being as a treatment for depression (psychological not economic). But lithium’s most exciting use is in rapidly advancing battery technology, be it in computers, mobile phones or electric cars (as covered recently in MoneyWeek: Electric cars: on the road to a cleaner, greener future. If you’re not already a subscriber, claim your first three issues free here).

I subscribe to the Peak Oil theory (Are we about to hit Peak Oil?) that the world’s oil reserves are running out. I think that alternative energy represents one of the great investment opportunities of the coming years. Author John Rubino, who foresaw both the boom in gold and the collapse in real estate as early as anyone, agrees. In his latest book, Clean Money: Picking Winners in the Green Tech Boom, he declares that green tech will be the next great bull market. It’s also a subject we’re covered in depth in MoneyWeek. See: How green energy could power your profit growth 

But the problem with alternative technology is that, despite extensive research, it’s all too easy to pick a company whose technology is flawed in some way – perhaps they get overtaken by a rival, for example. So even although you get the sector right, you still lose money.

But virtually every company involved in the rapidly-developing market of advancing battery technology will be using lithium. So buying lithium miners becomes a great ‘picks-and-shovels’ play on the clean tech boom (in the great Alaskan gold rush it is said that those who sold picks and shovels to the prospectors made more than the gold prospectors themselves).

The same ‘picks-and-shovels’ argument applies to rare earth metals (there are 17 rare earth metals in total, with names such as neodymium, dysprosium and ytterbium). These are also finding more and more uses in modern technology, such as superconductors, magnets, hybrid car components and refining catalysts. But some 97% of rare earth production is controlled by the Chinese, which puts a huge premium on anything that has potential beyond their grasp (in fact, my colleague Eoin Gleeson tipped a rare earth metals stock, Lynas Corp, in MoneyWeek back in April, shortly before a Chinese metal firm took a big stake in the group – it’s up 140% or so since, so well done if you managed to buy into that one).

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Most of the world’s lithium, however, comes from South America. It is recovered from pools of brine. Chile is the biggest producer, and has about a quarter of the world’s reserves. But just next door, Bolivia – currently with pretty much zero production – has about half. Yes, half of the world’s reserves of an increasingly important strategic metal lie in one country.

French and Japanese firms are currently negotiating with the Bolivian authorities to begin extraction. Specifically, it is located in Bolivia’s Uyuni desert, which, has to be one of the most stunning places on earth. I passed through during my backpacking days and, when you stood on the salt plains, it felt as though you were on another planet.

Bolivia’s Uyuni salt flats © Alicia Nijdam via Flikr

Obscure metals is a sector to watch closely

I would not be a buyer of lithium or rare earth stocks here, given the recent run they have had. In fact, I have been gently offloading some that I do own. But it’s a sector I am watching closely. The veteran US newsletter writer Jim Dines – one of the few letter writers with the influence to genuinely move stocks – was one of uranium’s great champions. At various stages early in their moves he declared himself ‘the original silver bug’, ‘the original gold bug’ and ‘the original uranium bug’. It’s worth noting that in early summer he declared himself ‘the original rare earth bug’. Dines has a habit of getting in early on these big moves, so he warrants following.

What’s more, as technical analyst Ross Clark of Institutional Advisers notes, there are numerous similarities in the technical patterns being made by these junior lithium companies to those of uranium stocks in the 2003-05 period. By 2006 the world and his wife were jumping on board the uranium story and the highly publicised flood at Cameco’s Cigar Lake mine sparked a mania that topped in spring 2007.

Just as uranium had a great story to sell it – nuclear energy being the only viable alternative to fossil fuels, China’s rampant building of nuclear reactors, reclaimed uranium from weaponry running out, world oil reserves running out, the vast amounts of time it takes to get a uranium mine into production – so do lithium and rare earth metals. From the advances of battery technology to Peak Oil to increased use of electronic items in developing countries to dwindling and limited supply, the story behind these metals is very convincing. And a convincing story is exactly what you need to get a bubble going.

It all points to a healthy few years for lithium and rare earth metals, and it’s worth being ready to buy on pullbacks. If we’re looking at one of the next great investment bubbles, it would be nice to be on board as it inflates, and long gone when it pops.

The three main lithium producers are Rockwood, SQM (US:SQM) and FMC Lithium. The explorers, which have moved a lot more, include Avalon Ventures (CA:AVL); Western Lithium (CA:WLC); First Lithium (CA: MCI); Rodinia Minerals (CA:RM) and Canada Lithium (CA:CLQ). I’ll be keeping an eye on them and letting you know when I think the time is right to buy in again.

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