Lithium Demand is Outpacing Supply - “It’s Economics 101”

Lithium is a hot commodity, but despite its popularity many investors remain uncertain about whether now is the right time to get into the market.

At last week’s Mines and Money conference in New York, Howard Klein, founder of RK Equity and author of the Lithium-ion Bull newsletter, shared his thoughts on that topic.

“It’s early, it’s definitely not too late,” he said at the sidelines of the show. While there was “a rerating of sorts” for the industry at the end of 2017, “since the beginning of the year there’s been a big selloff.”

According to Klein, this shakeout is an opportunity. “[There’s] an opportunity for those who missed it last year to … come back,” he explained. “But you still have to be selective and understand which are … the highest-quality companies and projects and enter at the right price.”

Speaking about supply and demand, Klein laid lithium surplus concerns to rest, calling them “very overblown.” He added, “it’s economics 101 … demand is outpacing supply, therefore prices are going to remain high for quite some time — in particular for lithium carbonate and hydroxide.”

Listen to the interview above for more insight on lithium from Klein, including how he picks stocks and which companies he likes right now. You can also view the transcript below.

INN: This is our first time speaking, so I want to start by asking you about yourself. As I mentioned, you’re the founder of RK Equity and you have your own lithium newsletter. Tell me a little bit about your background in the lithium space.

HK: RK Equity has been in business for about 15 years. I started work in this industry, in the junior mining industry, with Robert Friedland and the original Ivanhoe Mines (TSX:IVN) in Mongolia, and about seven years after that, you know, about nine years ago, I represented Western Lithium, which is a Nevada asset that is now owned by Lithium Americas (TSX:LAC). So I’ve been representing junior mining companies for a long time, and heavily focused on the lithium space in particular in the last two years, but as far back as eight years ago.

INN: Your lithium newsletter has a different tone than many other publications. You have song lyrics and pop culture references and that kind of thing. What made you decide to go that route, and what’s been the response from your readers?

HK: The Lithium Bull has evolved a great deal over the course of two years. I’ve formally written it as the newsletter only for about 15 months, but it was all part of … just educating my investor base about lithium, and then I just started one by one throwing in some ideas, and … thinking of lithium narratives. I’m a big classic rock music fan, and so I started with it and then people liked it so I started using it more. The response has been actually very good in terms of the writing style, apart from the references, but just the actual writing. It’s infotainment I call it — I try to make it very informative, but at the same time easier and not dry to read as many other traditional research publications sometimes can be.

INN: We’re here at Mines and Money in New York, and you were just on a panel discussing lithium. I believe one of the questions addressed was whether it’s too late to invest. What are your thoughts on that?

HK: It’s early, it’s definitely not too late. So yes, finally at the end of last year there was a rerating of sorts for an industry that was extremely undervalued and not well understood. Since the beginning of the year there has been a big selloff, half of which was because of lithium disinformation or change of policy in Chile, and the other half has just been a general volatility in the market as interest rates have been rising and political events have made things like bitcoin or cannabis stocks … fall and lithium has fallen within that. So within that shakeout has actually given an opportunity — I wrote about it in today’s newsletter, I called it “Twice in a Lifetime” — the Talking Heads. Once in a lifetime is an opportunity for those who missed it last year to kind of come back, but you still have to be selective and understand which are … the highest-quality companies and projects and enter at the right price.

INN: Maybe you could tell me a little bit about the criteria that you use when you are looking at lithium stocks.

HK: I have KISS principles — so “keep it simple stupid,” but also KISS the rock band. And on that are … quality of asset. Hard rock is easier than brines and brines are easier than clay or some other asset. If you don’t require innovative technologies to make it economic. So that’s very important. Jurisdiction, right? America is better than Africa in most instances, or Western Australia or … and Canada. So management, track record, quality assets, you know, ability to finance are among the key criteria.

INN: Any stocks you would mention in particular that you think are doing it well?

HK: Yeah. I think, look there are — lithium is a critical mineral in the US, and there is only 2 percent of all production of lithium that comes from the US, so I like some US assets, and in particular US-listed assets. There’s a very — there is a shortage of them because they are mostly in Australia and Canada. I like Lithium Americas very much, and I like Piedmont Lithium (ASX:PLL,NASDAQ:PLLL), which just has been on the NASDAQ now for one day. So this is easily tradeable with a … relatively high stock price in North Carolina. Lithium Americas has obviously partnered with Ganfeng Lithium (SZSE:002460) and SQM (NYSE:SQM), and has a second asset … in Nevada that is going to be very interesting. So I would — I like those two stocks very much, and I’m invested in both.

INN: Taking you back to the market a little bit, you talked about how it’s early days, it’s a good time to invest. What can you tell me about the oversupply concerns that we saw coming into play earlier this year?

HK: The oversupply fears were part of this disinformation, which I said was half of the reason that the stocks have fallen. So it’s not easy to turn on supply of lithium. It takes four to five years, and most of the companies that currently produce lithium did not invest until very recently in that supply. So I think it’s very overblown. Lithium in the ground is not rare, but the skills to produce lithium are quite rare, and permitting and other issues. Demand also is rising so much faster than supply can keep up. I have never experienced in my 15 years in the resource space … any material that is forecast to grow four to five times within the next seven years. Even the iron ore boom of … which was 10 years, was only about a doubling or a two-and-a-half-times increase from a very large base. It’s very difficult when you’re growing that fast to have supply catch up. It’s economics 101. You know, demand is outpacing supply, therefore prices are going to remain high for quite some time — in particular for lithium carbonate and hydroxide.

The spodumene market, which not a lot of people talk about, is separate and distinct from the carbonate and hydroxide market. I do believe you may see some oversupply of that because the conversion of the spodumene supply is not keeping pace with the production, prospective production, of the spodumene supply. That’s a 2020, 2021 consideration for spodumene, so I’m a little bit cautious on prospective prices of spodumene, but I’m with a high degree of confidence thinking that carbonate and hydroxide prices will remain at or above current levels for the next five to seven years.

INN: In your newsletter you’re always encouraging your readers to do their own research, and we’ve talked about how there is a lot of disinformation in the market. If you’re an investor, you’re new to the space, where should you start? What should you be doing to educate yourself?

HK: What’s interesting in this market — because it’s such a small industry it’s not a very big business for most of the traditional investment banks to allocate a lot of time to. So they have written research, but it’s often of very low quality relative to what they might have written elsewhere. There’s a bit of a cottage industry of industry professionals who have been around, a lot of them are on social media.

The Lithium Bull and our newsletter is a place to start, but I also reference a lot of other good resources out there that are readily available and visible. Anyone who wants to get educated about this space I would encourage them to … go on Twitter, go on social media and LinkedIn, and you’ll very quickly find some people who are providing — for free — a lot of good information. And analyze the companies themselves — Albemarle (NYSE:ALB), SQM, Mineral Resources (ASX:MIN), Orocobre (TSX:ORL,ASX:ORL), are putting a lot of information into the market through their quarterly conference calls and transcripts, but you also need to look through their messaging because everyone has their own slant on things.

INN: Any final points or pieces of advice for lithium investors in 2018 ?

HK: Keep investing, keep looking at the market. Things are undervalued, but this a 15- to 20-year secular investment thematic so you have time. Don’t ever think that you’ve missed it or that you have seen it all before, because this is not uranium, this is not rare earths, this is not copper. Just view it on the specific fundamentals of the lithium business and what’s driving it, which is China, which is the electric vehicles and energy storage. So get smart on all of those demand drivers, and then look at the individual companies that are well placed to profitably produce and generate cashflow and are not currently expensive … for that forecasted cashflow.

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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.