We’ve gotten a lot of questions about the latest spiel from Marin Katusa, so I’m going to take a few minutes to dig into that today. I’ll warn you up front that I probably can’t be definitive about answers, because it looks like the ad doesn’t go into much detail on this “best lithium stock in the market” … but I can at least provide some educated guesses this time around, and get you started on your research.
The ad itself is mostly about the big picture demand for lithium, which relies heavily on increasing demand for electric cars. The logic of the argument is very compelling, as it has been for the past five years or so — projections for electric car demand rising, and the assumption that lithium will continue to be a major component of the most popular batteries for electric cars (graphite is the other, but graphite is cheaper and more plentiful), provide us with a pretty clear ramp-up in expected demand. That’s mostly because this shakes up the market pretty dramatically — a Tesla essentially uses 7,000 laptop batteries, so if they sell 100,000 cars a year (which is the pace they’re working toward right now, though they hope that number balloons when the lower-cost Model 3 is released) that’s the equivalent of about 700 million “laptop” batteries.
That’s obviously a big impact — by comparison, there are about 200 million laptops shipped each year now, though the battery world is not as simple as it was a decade ago when most laptops used similar, commoditized batteries, particularly because mobile phones and tablets, with smaller but more complex batteries, are also sucking up a lot of the world’s battery components, including lithium. (That mass-production of laptops a decade ago was a big part of the reason that the Tesla used, and still uses, thousands of small-cell batteries instead of a more customized large-cell array — the small cells were already standardized, commodity products and were fairly cheap to produce.)
Elon Musk has said that when they reach their goal of building 500,000 cars a year in several years (I’d say “if,” but that’s why I’m a lowly blatherer and not a visionary entrepreneur), they’ll essentially need to consume all of the world’s current lithium production. Which is obviously a huge demand driver for lithium, and the reason that lithium prices have been rising for a couple years as everyone tries to position themselves for this future supply/demand imbalance that will probably result in even higher prices, which will fuel additional production. And if fully electric vehicles really take off, which is still widely predicted but not, of course, guaranteed, then it’s worth remembering that Tesla may well remain a very small part of that market — most automakers are developing or selling electric cars with lithium-ion batteries (some bought from Tesla), and there are at least dozens of other major battery factories being planned or built that should increase the demand for lithium (and graphite).
So the big picture demand story for lithium makes more sense to me now than it did five years ago, mostly because it’s less theoretical and trend-based — some of the uncertainty has been reduced as the electric car business has gradually increased production… even though there’s probably more uncertainty in electric vehicle sales actually hitting the optimistic end of the forecasts from Elon Musk and others if oil prices stay low (many people buy electric cars for environmental or performance reasons, but a huge part of the demand is also likely to be based on comparative cost of operation — if gas is cheap, that equation can change).
I don’t know anything about battery chemistry, or whether competing battery designs will become more important in the years to come, but lithium demand is certainly rising right now and for the foreseeable future — that doesn’t mean it will go to the moon, or that someone won’t find a way to use half as much lithium per kilowatt hour or something like that… but over the past couple yeaers, lithium is the only non-precious metal that’s been at all thrilling for investors.
Let’s move on to what Marin Katusa’s saying in his ad:
“A Once-in-a-Lifetime Shift is About to Hit the Energy Market
“Here’s How You Can Make a Fortune From It….
“This ‘shift’ will completely transform the way we work and live. It will go down as one of the pivotal events in human history….
“Creating this shift will not be cheap. Project Tiger’s price tag is an estimated $5 billion, which makes it one of the most expensive building projects in history.
“You might know Project Tiger by its other name…
“It’s the massively hyped “Gigafactory” that is set to play a key role in the future of Tesla Motors and its genius founder, Elon Musk.”
Musk didn’t found Tesla, of course, he came along a few months after the company was born… but that’s mostly semantics — he surely is the biggest name behind the Tesla, Inc. that we know today, was one of the first major backers of the company and was actively involved in overseeing designs for its first car (the Roadster).
More on the big picture demand for lithium:
“With massive growth in electric car sales just ahead, there’s a lot of money to be made here.
“One of the biggest investment opportunities in this trend is lithium, a metal that is the key component of electric car batteries.
“Just like conventional cars can’t function without gasoline, today’s electric cars can’t function without lithium.
“This is why many people are saying lithium is the ‘New Oil.’ It’s the key natural resource that will power the electric car revolution.
“As electric car sales boom, lithium demand booms along with it…. We expect demand to increase 700% over the next 10 years.”
OK… so what’s the actual stock Katusa likes here?
Well, those of us who’ve been around for a few natural resources speculative bubbles (uranium, rare earth metals, geothermal energy, graphite — to name a few from just the past decade) are hopefully all quite aware that these kinds of increases in demand or shortages in supply for important resources (real or perceived) create waves of stupid in the stock market.
Stock promoters and Vancouver charlatans create a company with “graphite” in the name, buy a deposit for $500,000 that no one ever cared about before, and drive the company up to a $500 million valuation based on nothing but hope and hype… buttressed by some “real” news that backs up the speculation that graphene (which can be made by throwing money at mined graphite) will be the next supermaterial and make us rich if we happen to own a graphite mine. And yes, there are now at least 100 tiny little companies with “lithium” in their names, and probably at least 90% of them will be gone or renamed in five years.
That doesn’t mean we have to ignore these kinds of stocks, but it does mean we should be even more cynical than we are when reading up on other sectors — there are real companies who are genuinely investing in building up lithium production or creating new lithium projects, and some of them will probably be successful, but it’s important to distinguish between those who just have a “staked” area near some other lithium production or a permit to explore from those who are actually booking reserves, designing “mines” and preparing to finance an actual project.
(I say “mines” because most lithium isn’t mined — the vast majority is extracted by pumping lithium-rich brine out of the earth and dehydrating it before processing that “ore” to extract lithium carbonate… there are some “hard rock” and clay lithium projects as well, either producing or planned, but it’s generally far more expensive to produce lithium by actual mining).
Katusa, wisely, makes similar points in his ad:
“Any time there is a catchy line like the ‘New Oil’ associated with an investment trend, there is sure to be danger as well as opportunities.
“Despite the huge opportunities in electric cars, batteries, and lithium, I expect that 99% of the people who invest in lithium will actually lose money over the next three years.”
Of course, his solution is to read his stuff and follow his ideas to avoid being on that losing side of the ledger during the anticipated continuation of the lithium stock boom… but you can also educate yourself and learn from other sources, I imagine. And his newsletter costs $2,500, so it certainly isn’t for everyone (according to the order form he offers an extremely limited 7-day cancellation window, during which you’ll pay $500 as a cancellation fee if you want the other $2,000 back).
And Katusa also brings up a point that’s not frequently made, so I should credit him for that as well:
“Because we have an abundance of supply, I do not believe lithium prices will continue to soar.
“However, I do believe the price will remain relatively strong. We have a lot of supply in the ground, but it will take years to build mines and put them into production.
“We still have time to make great money in lithium. But don’t let anyone tell you we’re facing a long-term supply crunch.”
Lithium, like graphite, is not at all in short supply in the earth’s crust — unlike platinum or some rare earth metals, we’re probably never going to run out, or even run out of places to look for it. There has been plenty of low-cost lithium to meet demands most of the time over the past 20 years, and ramping up production requires some investment but shouldn’t require lots of exploration or discovery to find vast new stores of lithium — we know where a lot of it is.
Katusa has always, going back to his days with Casey, emphasized the importance of people — “betting” on the leadership and operating teams as much as on the deposit or the location — so it’s no surprise that he’s doing that today as well:
“… hundreds of lithium companies have been created in the last five years. Less than a dozen of them have teams with the unique expertise required to make a lithium project a success.
“If you want to make tremendous gains in lithium, you MUST stick with these knowledgeable, experienced teams.”
And then we get the relatively limited clues:
“We Just Placed a Buy Rating on the Best Lithium Stock in the Market
“Investing with proven winners is such an important idea right now because just recently, one of the world’s best lithium teams just ‘went public’ with their company. And I’ve named this stock a strong buy.
“The team behind this company is absolutely world-class.
“I don’t think there is another person in the world who knows the lithium market as well as the CEO of this company knows it.
“And one of the biggest financial backers of this company is one of the smartest resource financiers in the world.
“Just as importantly, he has experience in taking a lithium company into production. He is the polar opposite of the many “posers” out there touting lithium stocks. I expect this company will be his next big win.
“This company owns what I believe is the best undeveloped lithium project in the world owned by a public company.”
And that’s it… that’s what we get in the way of clues.
So what’s the stock?
Well, I can’t tell you for certain — but the best match I’m aware of is a company you probably already know if you’ve looked at lithium at all: Lithium X (LIX on the Canadian Venture exchange, LIXXF OTC in the US).
Why a match? Well, they do have a large potential lithium project in Argentina, right in the heart of where much of the world’s lithium comes from (the “lithium triangle” in the Andes, which includes the huge projects in Chile that have dominated lithium for decades as well as the untapped resources of Bolivia). That’s the Sal de Los Angeles project, which encompasses most of the Salar de Diablillos property — not too far from FMC’s Salar de Hombre Muerto lithium project. (They also have property in Clayton Valley, Nevada, next to the operating Silver Peak lithium project owned by Albemarle — but that’s exploratory, they are just starting drilling there this Fall, Sal do Los Angeles is much further along and is really a “pre-development” stage project.)
But the closer match is really to the people — and part of this is reading between the lines, because I know Katusa is friendly with Frank Giustra, who is one of the people behind Lithium X.
The CEO of this company, Brian Paes-Braga, probably does not really know the lithium market as well as anyone — or at least, it would be surprising if he did. Paes-Braga is a young entrepreneur/investment banker who talked Frank Giustra into investing in lithium with him and put the initial company together.
But the Executive Chairman would fit that clue — that’s Paul Matysek, who was CEO of Lithium One when it merged with the Australian firm Galaxy Resources to build a larger lithium company back in 2012. And Lithium One was also focused on Argentina (back when investors still hated Argentina), their Sal de Vida project is not too far away from Lithium X’s Sal de Los Angeles (and the two projects are likely to be pretty similar in size, it appears to me). Matysek led three previous companies to buyouts — Lithium One, Potash One, and Energy Metals — so perhaps that’s where Lithium X will be heading.
And Giustra would be that “one of the smartest resource financiers in the world” guy. Though I don’t think he’s ever been involved with a lithium company before, at least not in a high profile capacity.
The “taking a lithium company into production” bit does not really apply to Giustra, Paes-Braga or Matysek — but it does apply to another important member of the management team, COO Eduardo Morales (who just joined the company a few months ago, after the Argentina deal). Here’s how the company describes his experience:
“Mr. Morales is a chemical engineer with 36 years of experience who formerly built and operated one of the world’s largest lithium brine operations. As President of Rockwood Lithium Latin America, he successfully led the development, commissioning and operation of Rockwood’s Salar de Atacama project. His tenure with Rockwood Lithium ended with the company’s sale to Albemarle Corporation for US$6.2 billion in 2014.”
So that provides some indication that Lithium X is actually serious about bringing Sal de Los Angeles into production, certainly most of the little lithium juniors aren’t likely to have anyone that experienced running the show. They also have a joint venture in place to build the first pilot plant, something that they announced almost immediately after the deal — that JV is with the company that would physically build and operate the plant for the first phase, the partner gets 50% of the pilot project (planned to produce 2,500 tonnes/year of lithium carbonate) in exchange for investing $6 million to build it. That means Lithium X is not putting a huge amount of capital into the project just yet, despite the fact that they did just recently do a private placement for $10 million — when or whether the project grows from here to reach the anticipated production of 15-25,000 tonnes/year, I don’t think anyone knows yet.
So I’ll guess that Katusa is probably recommending Lithium X, but it’s far from the level of certainty I like to have before “revealing” one of these teaser stocks — which means that we’ll have to leave it there, and let you think for yourself on the matter.
Lithium X has grown quickly in its short life — they just acquired their share of 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 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), so perhaps it’s a little worrisome that you’re effectively paying US$88 million (C$115) 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 over the past few months 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. (All those numbers are in Canadian dollars, by the way.)
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, 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 we can be a bit superficial and look at Orocobre as a comparison, since that’s the first big new lithium producer to come online.
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$728 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$115 million. So that’s $115 million for a potential resource (their share) of 2.25 million tonnes of lithium carbonate, or C$50/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. So when they were at a similar stage (a bit more advanced, since they 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 crazy” to Lithium X, particularly because lithium carbonate prices are roughly twice as high right now as they were back in 2012 when Orocobre was valued at $35/tonne of their “in the brine” resources — 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.
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? 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.