TRADE ALERT: Getting back into lithium – buy Livent Corp
21st February 2020 |
There is no one catalyst I can point to that signalled the beginning of the current green rush. Perhaps it is the confluence of cataclysmic images from infernos all over the world, floods, plagues of locusts and people wearing t-shirts in the Antarctic combined with a teenager lecturing world leaders that has woken the world up to the potential for green solutions to provide at least a partial solution to the guilt many people feel at the state of the environment.
I originally recommended buying Orocobre in April 2016 and sold it in August 2018. At the time there was a great deal of investment pouring into the lithium mining sector ahead of expected demand growth from mobile devices as well as the nascent electric vehicle market. Unfortunately, the supply came to market before the demand cycle truly took off and the vast majority of lithium miners endured significant downtrends.
What is particularly interesting right now is that the lithium price is still declining but related shares are just about all showing signs of having bottomed.
The major point is that Tesla is still trading in the region of its peak and announced this speculation is rising they have as many as 500,000 orders for the cybertruck. They are breaking ground now on a factory in Berlin and there is talk of another manufacturing facility in Texas. The additional capital expenditure is likely to contribute to the next big consolidation for the share but it is very positive for lithium demand over all. Tesla is a big electric car manufacturer but it is by no means the only one. China and South Korea are the world’s largest producers of lithium batteries and they are both ramping up production.
Alliance Bernstein the brokerage house, expect electric vehicles to be cost competitive with internal combustion vehicles in between 2 and 3 years with the sector going mainstream in 2024 and the rationale for petrol cars evaporating by the end of the decade.
That forecast has been around for a while but the important thing is it has not changed in the last four years and we are a lot closer to those dates now than when I first recommended the lithium sector.
What is different now is the clear willingness among investors to give credence to the view that a complete change in how we run the global economy is necessary if we are to protect the environment. Jeff Bezos committing $10 billion to funding climate enhancing measures is just one example of how topical this subject has become.
That is the reason lithium miners are now rallying. They are pricing in the potential for a substantial uptick in demand for the metal as the world shifts to more electric vehicles. This is therefore an ideal to participate.
I am recommending you buy Livent Corp up to $16. I am not recommending Orocobre on this occasion because a number of subscribers have reached out to say they have difficulty buying Australian shares. There are no significant lithium miners listed in the UK, so we can invest in the sector through US listed companies.
Livent was spun off from FMC Corp in late 2018. It is one of the few pureplays on lithium anywhere and is the world’s largest producer. The vast majority of other companies have lithium production as a side business so by investing in Livent we are getting unfettered exposure to the lithium market. The company announced quarterly earnings last night and widened their guidance to reflect uncertainty about the coronavirus.
Albemarle also reported and the company predicted the downtrend in lithium prices will persist this year but there is evidence of supply being tightened among the wider mining sector. Meanwhile, Orocobre came out with a more enthusiastic statement and its shares rallied. Both companies are selling the same product so the truth is probably somewhere in between. The simple fact is that everything attached to the green sector is on a recovery trajectory and there is every reason to expect the uptrend to take lithium with it.
I recommend buying Livent up to $16 and I particularly think the current setback is a buying opportunity. A target of $30 over the coming 12 months is not unreasonable considering the trajectory of capital flowing into the sector. The risk is that China growth slows much more than economist believe likely and demand for batteries moderates for a time. My personal opinion is that as long as central banks are in stimulus mode, demand for speculative ventures will be on an upswing.
Action to take: buy Livent Corp
Ticker: LTHM US
Price as of 21.02.20: $11.86
Market Cap: $1.73 billion
52-week high/low: $14.16/$5.49
Buy up to: $16
Target: $30
All the best,
Eoin Treacy
Investment Director, Frontier Tech Investor
