Investor guru Benjamin Graham created the allegory of Mr. Market to depict emotion-driven weekend warriors tendency to dump stock at the sniff of bad news, of both the fake and real variety.
There’s been plenty of panic selling of lithium stocks by Mr. Market this year, following Morgan Stanley’s February report suggesting new lithium projects may depress prices. The intuition is that new supply will arrive faster than the auto industry’s mass transition from internal combustion engines to electric vehicles.The Global X Lithium & Battery Tech ETF, which holds a suite of stocks with lithium exposure, has slumped 16% this year, after a thumping $900 million of net inflows since its inception in early 2016, according to Bloomberg.
The Morgan Stanley oversupply scenario is very unlikely to happen, given that the new supply wave is contingent on almost perfect project execution. That’s an unlikely outcome given the struggle of getting the chemical composition of lithium carbonate from a new operation just right, or the constant struggle of companies obtaining finance just when they need it.It may also be based on a conservative estimate of electric vehicle (EV) adoption. Most industry experts including McKinsey & Co. and mining consultancy CRU simulate this transition through models. The only real indication that more optimistic demand scenarios will occur is through the actions of carmakers, and BMW’s announcement in March of a fast-track introduction of EVs certainly indicate a more positive scenario for lithium producers.
Wealth Minerals Ltd. provides investors with outstanding credentials to create wealth. The company has 75,500 hectares (186,561 acres) of salt lake brine exploration concessions in Chile, including the key northern portion of the Atacama Salt Lake where Chile’s SQM and Albemarle Corp. tap two of the world’s three largest deposits. The company has a joint venture agreement with state mining company Enami to facilitate a permit to extract lithium in the South American country, and is represented by Marcelo Awad, the former CEO of FTSE100 mining company Antofagasta PLC.
“The reason why Wealth was such a high flier in 2017 was because people wanted the optionality [of having additional lithium supplies in the market],” Wealth Minerals President Tim McCutcheon told InvestorIntel. “The irony is that we are going to show that optionality now, when we are trading below a dollar.”Mr. Market has given Wealth Minerals a fair beating so far this year. The stock traded near C$2 on the TSX Venture Exchange back in March, reflecting the commencement of a 24-month period to establish the optimum legal structure for a joint venture between Enami and Wealth Minerals. Ltihium carbonate prices have dipped below $20,000 a metric ton this year, but have dropped far less than lithium-related company values, suggesting the equity reaction is overdone.
Partnering with a state company is the only realistic way of entering the Chilean lithium market. A competitor recently failed in its attempt to secure an extraction license independently from a state enterprise, suggesting that the only viable way of getting production to market is by doing what Wealth Minerals did – that is, team up with a state company.
The company has already published some promising lab results with industry expert Tenova, with recovery processes removing most of the calcium and magnesium (a major obstacle in obtaining battery-grade purity), and suggesting that the brine is of the same quality that SQM and Albemarle extract further south. Initial process and scoping studies, and follow up drilling will be completed later this year.You don’t need to be Warren Buffett to take an counter-cyclical stance and buy shares in a very well-positioned lithium player such as Wealth Minerals, before Mr. Market has decided that the wind has started blowing the other way.