This article was first posted on May 12, but readers keep asking about it so we have pushed it back to the top of the page for your edutainment. No, Tesla is not “betting it all” on this one little company, but there is, as always, a bit of truth behind the tease… and in case you’re curious, the price of the stock being hinted at in the ads has clawed back maybe 15-20% from the dip it took right before we wrote about it (the ads appear not to have changed at all).
Which means I feel just fine about not changing my words, either — the balance of this article is unchanged from when it first ran on May 12, 2016. We’ve left all the original reader comments in place as well. Enjoy!
We can open this up with the easy solution: “Extraterrestrial Gold” is lithium.
Kohl says as much if you sit through the first 2/3 of the lengthy presentation, but there you have it — two seconds in, and you know that today we’re talking about another lithium stock. Now you’ve got your freedom — wanna know what it is? Just stick with us for a moment and we’ll sift through the clues and get you the basics, and let you think for yourself about the merits.
Don’t care? That’s fine, we’re done for today and you can go about your business. See you tomorrow!
Still here? OK, we’re assuming that you don’t want to spend $799 a year to subscribe to Kohl’s energy-focused trading advisory… you just want to hear if there’s some underlying truth to this “Extraterrestrial Gold” pitch about a tiny little 60-cent lithium miner… right?
Well then, with no further ado…
Kohl’s pitch even ties in Area 51 and all the UFO mystery for us…
“Area 51 is full of secrets…
“Many believe the U.S. military base houses the remains of crashed alien spacecraft.
“But just a short, two-hour drive away, in the middle of the searing-hot desert, a group of scientists has discovered something even more mystifying…
“It’s hands down the most exciting (and unusual) moneymaking opportunity of my career.
“See, a small, $0.60 exploration company has made an incredible discovery right here in the good ol’ U.S. of A.
“It’s found one of the world’s largest deposits of a crystal-like metal we’re calling ‘Extraterrestrial Gold.'”
And he makes some logical leaps as well — implying that this “extraterrestrial gold” is responsible for the most advanced variations of prototypical lithium batteries…
“‘Extraterrestrial Gold’ could be manipulated to create batteries that ‘last almost forever,’ according to Great Britain’s national newspaper, The Independent.
“Imagine a cell phone battery you could recharge in just a few seconds and you never have to replace…
“Or imagine taking your home off the fossil fuel grid forever thanks to a battery capable of storing all the energy your family will ever need…
“These aren’t pipe dreams. ‘Extraterrestrial Gold’ is making all of this a reality… with orders already pouring in.”
That’s not really about lithium, it’s a materials science story about new battery chemistry, using lithium in a different way… and about using a solid instead of a liquid (and flammable) electrolyte in batteries, but we’re a long way from having any idea whether this will be the real solution for more batteries, or from knowing whether those solutions will have an impact on how much lithium the battery industry consumes (less? More? I have no idea).
He then spends much of the first half of his ad getting you excited about the mystery behind this mineral, talking about how it comes from outer space and will revolutionize energy — all of which is probably at least halfway true. From what I can tell, scientists believe that most of the lithium deposited on earth of the millennia was originally created from stellar activity, going back to the big bang and including novae and solar flares… and lithium is indeed a primary component of lithium ion batteries that are continuing to revolutionize energy storage. It might not be the final or best solution for energy storage, but it’s certainly the flavor of the decade — being relatively plentiful and light makes it a good battery ingredient for portable electronics and electric vehicles.
That “plentiful” bit might be called into question, however, if electric vehicles really take off as many folks expect. Almost all of the stories that pitch lithium stocks revolve around Tesla’s Gigafactory and the massive, massive demand for lithium that facility will create… along, of course, with all the other large (but much smaller than the Gigafactory) battery production facilities being built around the world, some in partnership with other electric carmakers. Lithium is, at least when it comes to “story stocks” and the fickle enthusiasms of individual traders, a Tesla story.
So which lithium stock is it that Keith Kohl is hinting at today? Here are a few clues from the ad:
“Tesla Motors recently signed a deal with the tiny $0.60 firm that owns this massive deposit!”
That’s probably the only clue we really need, since Tesla has only signed two such deals so far (and both are mostly PR stunts, frankly)… and in fact, the lack of contracted supply for Tesla’s lithium needs has folks worried about how much Tesla will have to spend on lithium carbonate as the Gigafactory spins up over the next few years, which is partly why lithium prices have risen pretty dramatically over the past year or so (lithium was one of the few commodities to have a great 2015, though it’s not a really clear and visible market with lots of open trading like we’re used to with iron ore, copper or gold).
Goldman Sachs has estimated that the Gigafactory itself will consume 17% of the world’s lithium supply by the time it’s really operational around 2020, and right now I believe consumer uses for lithium (like batteries for cellphones, electric cars and laptops) are still a little less than 50% of total lithium demand (it’s also used as an alloy in steel and glass, among many other industrial uses). Lithium prices have already gone up about 1,000% over the past decade, and they’re widely predicted to rise further… though it’s also true that technological advances could easily mean that less lithium is required in five or ten years than is needed for a battery today, or that other battery or material advances will have an impact on lithium prices.
Currently, lithium is obviously critical for lithium ion batteries… but it’s not a meaningful part of the cost of a Tesla — a Model S probably requires about 15kg of lithium carbonate, and that would cost Elon Musk something in the neighborhood of $100 at this point. The manufacturing of the batteries is far more expensive than the raw material…. which perhaps means worries about Tesla’s costs are overstated, since they wouldn’t sell a different quantity of cars if the raw material cost for the batteries was $300 versus $100, but a lot of this is still very much theoretical, in flux, and part of a complex global market where new supplies are also coming online every day. And, of course, high prices beget research into alternatives… and technology changes quickly.
But we don’t want to spoil the fun, so let’s see what else Kohl tells us to gin up our interest in the “secret” stock:
First, he tells us that it’s one of the “better” kinds of lithium producers — the ones who extract lithium from brine, which is far less expensive than mining hard-rock lithium…
“But here’s the deal: Not all lithium is created equal… nor is all lithium equally profitable to refine.
“To simplify, large concentrations of lithium are found in only two forms: spodumene and brine.
“Spodumene is underground ore. It has to be painstakingly extracted, then meticulously dried and processed with harsh chemicals like sulfuric acid before it can be refined into the fine powder used in batteries.
“All of this takes a lot of money.
“On the other hand, brine-based lithium is easily accessible. It forms in large pools laying 90–130 feet under the surface of gigantic salt beds. After it’s sucked to the surface, evaporation transforms it from light yellow slush into raw lithium.”
None of that will come as a surprise to most of you, I’m sure — we’ve written many times about the fact that lithium production is dominated by the big three producers, and that they get most of their production from low-cost brine evaporation projects in the Andes mountains of South America (mostly in Chile, but increasingly in Argentina as well — and the belief is that the hugest untapped reserves, trapped by political reluctance, are in Bolivia). We covered those big three (Albemarle (ALB), SQM (SQM), FMC (FMC)) about a month ago for a different teaser here, if you’re curious.
But what, then, is this “one little company” from Keith Kohl? More clues…
“… this tiny company is in the catbird seat.
“It’s sitting on over 9,000 acres of lithium in Nevada… worth billions of dollars at today’s prices.
“That’s not too shabby for a company with a ‘market cap’ of just $27 million.
“And here’s the thing that gives this company a unique advantage in securing unprecedented returns for investors…
“The lithium that it holds the rights to is brine-based.”
And one final clue from Kohl…
“Now, if you’re skeptical that this tiny company could climb 3,300%, I certainly understand.
“But I think this is an under-the-radar play that could eventually shoot up 3,300% or more, based just on the current value of its lithium reserves alone.
“Early analysis suggests that the lithium extends to much greater depths within the basin.
“That’s why we may have a conservative estimate here….
“In other words, this company already knows there’s a ton of “Extraterrestrial Gold” on its claim. Now it just needs to confirm it, before it begins pouring money into getting it out of the ground.
“We will likely see a huge jump in the company’s share price when this happens.
“… because that’s just the way the market reacts to these sorts of things. It happens all the time. A tiny penny stock either makes or confirms a new discovery and then — whoosh — the stock hits warp speed…”
So there’s some kind of catalyst expected, as of a week ago when we saw this ad running heavily.
And there you go, add that to the fact that they’ve signed a five-year supply agreement with Tesla and the Thinkolator can confirm that this is… Pure Energy Minerals (PE on the Venture exchange in Canada, HMGLF OTC in the US). Many of you had already gotten to this point, just by checking to see who Tesla had a deal with, so you did it the easier way… but yes, you were right.
Not that it’s done much good to be right on this one, at least so far — the catalyst did come out just this week (yes, that’s why I finally got around to writing about this pitch)… and it wasn’t well-received by the market, so the shares lost about a third of their value. And you can see why if you read the company’s press release, which is full of mining-speak about how the lack of lithium on the exploratory drilling they were doing really means they now understand the geology better, and will mean that they rely more on the expected higher-grade lithium in the other sections of their land so the overall average grade will be higher, which will make processing more efficient. “Less is more,” in other words.
The market doesn’t usually like those kinds of press releases, even when they happen to be perfectly true or logical when it comes to a mine’s long-term prospects (I don’t know if that’s true this time, of course, and I’m not suggesting that investors who sold are necessarily going to be wrong)…. So I suspect that anyone who was buying in to the stock because they were excited about the ongoing drill program stopped reading after “The results from wells CV-4, 5, and 6 included no significant lithium values….”
Will that turn out to be short-sighted? I don’t really know — sounds like they’re not giving up on those southern drill holes and think there’s still potential for deeper lithium brines, but they’re also focusing more on the northern areas where they’ve already found indications of lithium for their next phase of drilling. And like several other early stage prospectors in the Nevada lithium patch, they are quick to remind you that their property is close to Albemarle’s Silver Peak mine, which is the only lithium brine production facility in the US (Silver Peak is to the North of their property, so — perhaps not surprisingly — their best results have come from test drilling on the north end of the property, these results that the market seemed to find disappointing were from further away from Silver Peak).
And yes, that is “drilling.” This is far from being a producing lithium miner, though it’s possible that they could start producing in the next four or five years, and they’re also testing what they’re hoping will be a faster evaporation system. The supply contract with Tesla is at prices lower than current spot prices, and has all kinds of qualifications and did not come with any money from Tesla that I’m aware of, so it’s more of a story — Tesla can claim they’re sourcing some local lithium, and a teensy tiny junior mining stock with a market cap of only about $25 million can claim that it’s partnered with Tesla, and get lots of attention.
The new extraction system is essentially replacing the giant solar evaporation pools that are used by the other brine producers with a machine, in order to drastically reduce the time required to produce lithium from the brine — the big pools that are used in the Andes generally take 1.5 to 2 years because they wait for natural evaporation, and the technology Pure Energy is hoping to use is expected to do that same work in eight hours. They also say that it gets much higher yields and a higher purity end product, and, of course, it doesn’t require huge swaths of land for those gigantic pools. I have no idea whether it will work, or what it will do to either operating or capital costs, but it does at least differentiate the company a little bit.
And… that’s about as far as I can take you today. The consensus is that lithium prices will rise considerably over the next five years, largely because of electric vehicle demand… but I’d urge you to be very skeptical of little lithium companies in general, and to actually read their filings and look at their backers and their financials, as well as considering their capital requirements. That’s because the big “story” aspect of lithium, and the widely reported (but quite possibly negative in terms of financial impact) Tesla connection and the expected rise in lithium prices have brought all kinds of chicanery into the marketplace. Dummy companies, overly promotional management and hopeless projects thrive in a highly speculative commodity market, as you’ve no doubt seen from past booms that turned into popped bubbles in gold, rare earths, graphite and other junior mining stock sectors.
To be clear, I haven’t done that research for Pure Energy and I don’t know what their prospects are, or if there’s anything negative about them other than the fact that they’re tiny and speculative. I also don’t know what their history is prior to the work they’ve been doing in Nevada that really started in 2014. The next big piece of news from Pure Energy is likely to be the release of their Preliminary Economic Assessment (PEA), which is now expected in August per their latest investor presentation, and that should give a clearer idea of the economics of the project (no, it’s not worth anywhere near “billions of dollars” right now, since the resource isn’t very well defined and they haven’t said how much lithium they think they can produce, or how much it will cost to build the plant or extract the lithium, but perhaps it will be worth more than it’s trading for today). Maybe Keith Kohl is right and they’ll be an exceptional opportunity, I just think it’s worth doing the work yourself if you’re going to jump into such a small and risky operation… if you do that research, please come on back and let us know what you discovered with a comment below.