Today we have the attention-getting “Say NO to Lithium Stocks” headline from Dr. Kent Moors in an ad for his Energy Advantage newsletter… and, as you will probably have already guessed, it’s really more of a “Say No to Lithium Stocks (except for this awesome little one I want to sell you one)” ad.
So, naturally, the curious mind of your friendly neighborhood Gumshoe wants an answer — who’s he talking about?
To begin with, he gives a spiel that’s quite similar to most of the ones we’ve seen over the past year — you could really call it a “this pit is full of vipers, but I’ve already sorted through and found the teddy bear for you” pitch. Here’s a taste:
“Yes, demand for lithium is rising…
“And the price has more than doubled in the past year.
“So unless people stop using smartphones and cars, the price will continue to soar.
“But I hate to break it to you…
“98% of lithium stocks are complete garbage.”
And he runs through a list of half a dozen or so of the worst lithium stocks from previous speculative bull markets, including a few that were just pump-and-dump junk from day one as well as a fraud or two. If you’ve been investing in natural resources over the past ten years, you’ve seen that same pattern emerge for any “hot” niche sector, whether it’s rare earth minerals or uranium or graphite or even, when all else fails, junior gold explorers (though it’s harder to make a junk stock stand out with gold, since that junior market is so much larger). Nothing new to see there — we know that most junior exploration stocks are junk, and that risk is high.
Then we get into the “buy something” part of the ad:
“That’s why what I’m about to say will come as a complete shock.
“There is ONE lithium stock that I’m recommending every investor who follows my work buy before November 30 2016….
“Although the majority of lithium companies fail because they’re run by inexperienced and greedy management teams…
“I’ve found the one exception.
“First off, it’s led by one of the most successful teams I’ve ever come across…
“The executive chairman is an entrepreneur, geochemist, and geologist with over 30 years in the mining industry.
“He built his first company from the ground up and sold it two years later for near 1,500% gains.
“He then founded an energy metals miner that two years later sold for a 2,000% gain.
“He did the same thing with a third mining operation, but this time sold it for a 4,000% gain in just two years.”
So that’s what we want, right? The name of his “one lithium stock” that we should buy? And of course, we won’t take his word for the rest of the spiel or get too excited… we remember, after all, that plenty of Dr. Moors’ heavily teased “this one will change the world and make you filthy stinking’ rich” ideas have failed to deliver in recent years. But we do want to know who he’s talking about.
Was that enough of a clue for you? There aren’t all that many lithium companies that are at all legitimate, so many of you probably already have your guess in hand… but let’s check a few more clues, starting with some hints about another person behind this company:
“… he’s teamed up with one of the world’s most successful commodities billionaires…
“Another energy mogul with an incredible track record…
“This billionaire funded and developed a uranium miner that made early investors 6,950% gains.
“He was one of the architects of a gold mining firm that gained 2,161% for investors.
“He also got involved with a diamond miner when it was trading for $.10 a share.
“A couple years later, it was trading for $200 per share… a 199,900% gain.”
That helps narrow it down still further, as you’ve no doubt imagined — partly because billionaires are a fairly rare breed. By most counts there are fewer than 2,000 billionaires on earth, perhaps a third of them in North America (not that we’re sure this is a North American story just yet)… and even though a decent share of them are connected to natural resources industries, most micro-cap companies certainly don’t have billionaires on their boards or otherwise intimately involved in operations.
And it is, indeed, a tiny company… here’s a bit more from the ad to get our final clues on board:
“… this tiny $88 million company just pulled off something of a miracle…
“It has secured mining claims on massive properties in the two largest lithium-rich areas on earth.
“The first piece of land lies within the only major lithium-producing area of the U.S.
“It’s a 15,000 acre property that sits right on top of five known lithium-filled aquifers.
“And it’s located within a three-and-a-half hour drive of TWO of the world’s 13 estimated lithium-ion battery factories that are being built right now…
“Tesla’s “Gigafactory” and Faraday Future’s Apex Industrial Park.
“The other property covers over 20,000 acres (about the size of 15 football fields) in the northwest corner of Argentina.
“According to a recent survey, it holds over 2.8 million metric tons of lithium.
“At an estimated price of $13,000 a metric ton, that equates to $36 billion worth of the most ‘in-demand’ form of energy in the world.”
Lithium is not, of course, a “form of energy” — it’s a metal that is one major ingredient in the highly efficient lithium-ion batteries that currently lead the market (there are lots of different battery designs and chemistries, including other lithium-based designs, but so far lithium-ion is still in the lead thanks to low cost, high production, and relatively strong safety and efficiency performance), but lithium, unlike a fuel, doesn’t have any real potential energy buried inside it when you dig it up (or pump it up, in most cases)… that energy, whether created by solar power or burning coal, has to be added to the battery after it’s built.
But yes, lithium is in high demand because of the growing market for more and larger lithium-ion batteries, particularly for electric cars (since each car demands vastly more lithium than each new smartphone battery). And this company that Kent Moors is pitching is indeed a lithium startup that boasts a pretty star-studded letterhead of early investors, board members, and executives: Lithium X (LIX.V in Canada, LIXXF OTC in the US).
If you’re curious about those hinted-at leaders, the executive chairman with 30 years of experience is Paul Matysek, who oversaw the building of a couple “hot” natural resources juniors that were sold over the past decade (Lithium One and Potash One)… and the “commodities billionaire” is Frank Giustra, who is one of Canada’s better-known billionaires and is not on the masthead for Lithium X but was the founding investor, sold on the investment by CEO and founder Brian Paes-Braga (who wisely brought in a few experienced names, since he’s a young investment banker with no mining or lithium experience).
So what’s the story with Lithium X? Well, I’ve written about it several times over the past year or so, but here’s a distillation of those thoughts that I’ve shared (some of it will sound familiar to some of you):
Lithium X has grown quickly in its short life — they just acquired their share of that Argentinean project, Sal de Los Angeles, a few months ago (they bought 50% of the project in exchange for 8 million shares and a development agreement, and can up their share to 80% by spending more and giving their partner an additional $5 million in shares). Lithium X shares are trading right about where they were when they made this deal in April, so effectively they paid about $13 million for half of the project and would pay another $5 million to get to 80% (though none of that is in cash).
I’d say that Sal de Los Angeles is by far the more important of the two lithium projects they own, since the Clayton Valley stuff in Nevada, which is the other asset teased, seems much more speculative to me and is arguably in a less mining-friendly jurisdiction (at least in terms of costs — there must be some reasons why Albemarle has not invested to increase production there).
On that front, perhaps it’s a little worrisome that you’re effectively paying US$95 million today (C$135 million) for a company whose major asset cost them C$18 million just a few months ago… that would be my largest qualm, that it’s possible that you’re overpaying because of the strong Lithium X promotional push this year and the “brand name” connection to Frank Giustra. That’s not that unusual for a mining stock — adding a “known” person to the shareholder group can often make a huge difference — but it means that if lithium takes a few steps backward the shares might end up being a little lofty here.
That doesn’t seem terribly likely right now, but I don’t know how the lithium market will fluctuate.
Lithium X did just release an update on Sal de Los Angeles project at the end of August, which you can see here. It’s still a resource estimate, they don’t yet have a feasibility study or “reserves.”
What will all this mean? Well, it’s really hard to guess at what cash flow might be like for a company that won’t be producing for a few years, and that seems likely to start with a pilot plant before getting a larger scale operation going… particularly when lithium carbonate pricing moves from $6,000 to $14,000 seemingly in the blink of an eye.
But when looking at ballpark numbers I like to be a bit superficial and think of Orocobre as a comparison, since that’s the first big new lithium producer to come online, and is, unlike the big lithium producers, a fairly simple “pure play” company (Albemarle (ALB), SQM (SQM) and FMC (FMC) are the big producers, along with Albemarle partner Tianqi/Talison, but are much more diversified companies and get a small part of revenue and earnings from lithium… Albemarle is the most levered to lithium prices at about 25% of their business, though lithium is the growth driver for all of them right now as their other agriculture and chemical-driven segments are far less “hot”).
Orocobre owns 66% of the Salar de Olaroz project, which has a measured and indicated resource of 6.4 Mt Lithium Carbonate and is capable of sustaining current continuous production for 40-plus years (that’s from Orocobre’s website). Orocobre owns some exploratory assets as well, and a Borax project, but I think it’s fair to say it’s being valued almost exclusively based on Salar de Olaroz, which started production last year and hasn’t quite hit their 17,500 “nameplate” production capacity. Orocobre is valued at C$800 million.
Lithium X owns 80% (we’ll assume they spend another $5 million to get to 80%) of the Sal de Los Angeles project, which has a historical “inferred brine resource of 2.8 million tonnes of lithium carbonate equivalent” and is targeted to produce 15-25,000 tonnes per year at some point but will likely produce a tenth of that amount over the next few years (that’s the pilot project). And Lithium X is valued at about C$135 million. So, assuming no value for the Nevada project, that’s $135 million for a potential resource (their share) of 2.25 million tonnes of lithium carbonate, or C$60/tonne.
Orocobre, when they were a few years from initial production back in 2012, was valued at about C$150 million — so about 50% more than Lithium X is valued at today. Orocobre’s feasibility study came out in 2011 and used that same 6.4 million tonne number, so 66% of that is 4.2 million tonnes. At C$150 million back then that would have been $35/tonne. Lithium itself has more than doubled in price since 2012… so on that most basic measure, when they were at a similar stage (more advanced, to be fair, since Orocobre had a feasibility study already and Lithium X does not), the valuations were pretty similar.
So that gives some level of “OK, this valuation isn’t completely crazy” to Lithium X — though we are, of course, working with survivorship bias here because we know that Orocobre turned out to be very successful and they’ve been producing lithium for a year or so (even if they aren’t up to that 17,500 tonnes/year level yet), and now have a market cap of well above C$750 million… and we’re not looking at the other explorers who might have been= touted back in 2012 who didn’t survive or thrive or build a business in those intervening years like Orocobre did.
That’s not necessarily the best way to assess a lithium company, I just wanted to take a similar-sized project, in the same part of the world, and see if it was similarly valued a few years before any production had taken place. So on that front, Lithium X’s valuation isn’t as wacky as I might have expected given the Giustra affiliation, the strong management team, and the crazy price spike we’ve seen for lithium this year.
That’s no guarantee of future success, to be sure, and Lithium X has at least a few years to go before they might become a meaningful lithium producer but it’s a bit reassuring. We have seen Lithium X pitched before, it was the target of Nick Hodge’s teaser pitches in July that we covered here, and if you’re looking for more lithium coverage we wrote about a “Metal Oil” pitch from another publisher here back in March, another Nevada name here in June, and about some of the larger companies here when JR Crooks pitched them as purveyors of “salt fuel.”
With that, I’ll leave you to chew on things and discuss it amongst yourselves — do you like Lithium X, either because or in spite of Kent Moors’ endorsement? Have other favorite lithium stocks, either big or small? Think this will be a rehash of the last lithium stock bubble a few years back? I don’t currently own any of these guys, but I do see the appeal of lithium as a solid future market. Let us know what you think with a comment below.
P.S. I forgot to poke at the actual meat of the newsletter offer for you this time, but there is a bit of what sounds like a “cry for help” in there — they are selling this information in a “trial subscription” to Energy Advantage for $2 that will last for two months. After that, assuming you haven’t remembered to proactively cancel, they use your credit card to renew you for $99 for another year of the newsletter. That seems like a bargain in some ways, since you get full access to a newsletter for two bucks… but remember, the most valuable asset these newsletter publishers own is a list of people who are willing to pay for research, and they’re always looking for ways to get you on that list. The hurdle is not in getting you to pay for a $5,000 subscription, necessarily (though they’ll pitch that to you within weeks of signing up for the $99 subscription), the hurdle is in convincing someone reading an email to go from “I’ll read the free stuff” to “I’ll pay.” Once you pay, they know you’ve got a strong likelihood of sticking around… and you’ve flagged yourself as a valuable customer for them and for all of the partners with whom they cross-sell, so I’m sure they’d be delighted to have you pay $99 (or $49, which is what they were selling the same newsletter for last fall when Moors disastrously promised great things for SunEdison) … but they’re probably almost as delighted to get you to pay $2.