Warning: don’t touch lithium with a ten-foot bargepole

Lithium batteries © Getty Images
If you’re in lithium, have an exit plan

Today’s article comes with a stark wealth warning: avoid lithium. It could seriously damage your wealth.

Lithium stocks have gone crazy

This story starts, like many a splendid afternoon, with a good lunch. I’d been invited to hear a lithium company present.

When I say “lithium company”, I mean a company that is developing lithium assets with a view to eventually producing lithium. (Most of the world’s lithium is extracted from brine through evaporation and electrolysis, while some is produced by crushing, roasting and leaching rock – spodumene rock, to be precise).

The company is looking to raise some money. I took a look at the chart.

In early 2016 it was 6c. By September it had hit $2.50.

OMG.

I then had a potter through the charts of some other lithium explorers and developers. Pennies have become dimes. Dimes have become dollars. There are five and ten-baggers all over the shop.

The price of lithium carbonate and lithium hydroxide (you can’t sell pure lithium as it has a tendency to explode) has, meanwhile, more or less tripled.

Goodness me, I’ve missed out here. Quick! Jump in?

Not so fast.

I get the lithium story. It’s the fuel of the cleantech revolution.

Fifteen years ago its main uses were in ceramics and glass, lubricants, and aluminium and rubber production. Battery technology accounted for just 5% of the 70,000 tonnes of annual demand. Now battery technology accounts for 40% and annual demand is 163,000 tonnes.

According to Deutsche Bank, the market is set to triple by 2025 to 534,000 tonnes. Lithium demand for electric cars, e-bikes, and energy storage is going to rise rapidly. Energy storage and electric vehicles are the big drivers. One electric car alone requires 63kg of lithium. Where’s all the supply going to come from?

Cue a massive rush into lithium exploration and development stocks.

One microcap gold explorer I follow had been going nowhere for years. Suddenly it doubled. And it kept on going on up. How come? Then I found out it’s now a lithium play. And it’s not stopped going up.

I’m getting a sense of deja vu

We’ve been here before, folks.

Every few years a commodity comes along which is going to save the world in some way. Demand is going to balloon and there’s no supply, because people have been ignoring it for so long.

I’ve seen it happen in uranium, in silver, in palladium, in rhodium, in rare earth metals, in potash, in graphite. It even happened in lithium a few years back (so much so that I totally underestimated how high this particular rocket could go).

There is a mad rush to acquire exploration assets in that particular commodity. Last year’s rare earth metals company rebrands itself as this year’s graphite company.

Strategic Total Focus Uranium (STFU) is suddenly Outreach Max Graphite (OMG). The suspiciously white-toothed CEO regurgitates a load of spiel about this new critical commodity, investors pile in blindly and the CEO then goes prospecting on his yacht off the coast of Guadeloupe.

And the thing is, if you get in early – and you get out – you can make a shedload of money. But if you don’t get out, you get crucified. It’s greater fool theory on steroids.

Who remembers uranium?

That was probably the biggest bubble of the lot.

For years – decades – uranium did nothing and went nowhere. Then in the early 2000s the oil price started rising and rising. It was getting rather expensive. Alternatives were going to be required. Then there was the rise of China. It was investing heavily in nuclear power stations.

The uranium price started moving up. Then the Peak Oil narrative took over. The world is running out of oil. “Nuclear power is the only thing that is going to save us!”

Prominent newsletter writers as well as the media all jumped onto the story. And everyone believed it. They always do with bubbles. They believe it because there’s a lot of truth to it – just as there’s a lot of truth to everything you read about lithium now.

In June 2007 uranium peaked. The price of uranium itself had gone from about $6 per pound to more than $150. There were hundreds – I mean hundreds – of uranium exploration companies. No more than a dozen had assets with a reasonable chance of becoming producing mines.

One company I followed – Laramide Resources (LAM.TO) – was (and remains) a legit uranium exploration and development play – with two or three genuine properties. Its stock went from one cent – yes, C$0.01 in 2002 – to C$16.70 by spring 2007. It went up by even more than bitcoin.

Then it came down again.

In 2016, with the assets now further developed than they were in 2007, it touched C$0.14.

The same thing is going to happen to lithium.

If you’re in lithium, have an exit plan. If not, look for the next big thing

I don’t know if we’ve already seen the peak, or if there is going to be another surge up. Nobody knows. But I can tell you with utter surety that the bottom is going to fall out of the lithium market.

It’s a bubble – same as uranium, rare earth, rhodium and graphite all were. Like all bubbles, there is an utterly compelling story at the heart of it.

If you’re in, lucky you, clever, you, well done you. I wish I was, and I’m cross with myself for missing out. A bubble is a bull market in which you don’t have a position, I often say. I’ve missed it. More fool me.

But at least I can see this for what it is.

You should now have your exit strategy clearly mapped out – and you should certainly have taken your original stake and some profit off the table.

If you’re not in, you should stay away.

You want to make megabucks? Work out what the next go-to commodity is going to be, the next commodity to save the world. Cobalt, maybe? Phosphate? Titanium?

Any ideas, please post them in the comments section below. I’d be glad to hear them.

  • Martin George

    Here’s one for you Dominic – Tantalum. Slightly different twist. Arrowhead Resources, an ASX listed junior resources company then known as Gippsland Limited, was going along reasonably nicely – got to initial production – with its Abu Dabbab Tantalum-Tin-Feldspar project in Egypt. Then the Egyptian government stepped in and appropriated the whole project and its assets on what appeared to be a technicality. Bust! Mind you, the hype action and its effect on share prices, had mostly occurred a few years before, when all the talk was of blood tantalum, how it was finding its way into consumer electronics (tantalum is used in miniaturised high-value capacitors), and how would it ever be replaced by legitimate sources as we grow more reliant on our billions of smartphones!

  • Funny, I was thinking about lithium only this morning. Thanks. Saved me the trouble of doing the research!

    Second-guessing the minerals market takes some skill. Who would have thought that diamonds would have been such a rubbish investment over the last couple of decades?

    Let’s be retro and go for tin. Could be good for Cornwall.

  • Paul Ferguson

    Hear, hear. We at Great Lakes Graphite would deeply appreciate it if all of the pretenders would do everyone a favor and discretely exit, stage left. Attrition will fix this eventually, but that can take a long time (and destroy considerable shareholder wealth in the process). The only companies worth considering are those with cash flow or a short and clear path to it.

  • GGR Writes

    Vanadium
    As in Vanadium Redox Flow Batteries
    Wholesale energy storage without lithium’s drawbacks
    Brings into play and maximises alternative energy supplies

    • Mike

      Yes a very exciting market , have a look at company Lon:RED, Redt Energy,

      Huge potential for capturing energy from Solar & Wind Power.

      http://www.redtenergy.com/