First Published March 8 2016
This is not a brand-new ad, and it has been discussed by Gumshoe readers a few times — but apparently I’ve never written about it or looked closely at it, so we’ll remedy that today. And, of course, we’ll name the “secret” stocks being teased for you.
Keith Kohl opens his ad by promising that his “Metal Oil” is going to be the “Oil of the 21st Century”, and what he’s talking about is lithium, which is the lightest and least dense metal… which is part of why it is in high demand in batteries (yes, lithium ion batteries include more graphite than they do lithium… but graphite is relatively cheap and abundant).
The big argument is a compelling one: Lithium battery production is climbing rapidly, and with Tesla’s Gigafactory the demand should ramp up even more quickly (and, of course, other car makers and battery companies are also investing in increasing their production capacity — it’s not just Tesla). There’s a lot of lithium in the world, but it’s not that cheap to increase production quickly — which gives some logic to the “lithium will rise in value” argument. So what are the stocks being hinted at by Keith Kohl?
Let’s start by stipulating that it pays to be careful about our assumptions — uranium, for example, has been in a “must rise” status for two years or more thanks to falling production and continuing reactor development, and a price that meant many uranium miners couldn’t operate profitably or bring in more supplies… but the price didn’t rise as expected. Why? Well, there’s no one reason… but partly because the market is not as transparent as we’d imagine, there are huge strategic and accidental stockpiles (such as when Japan shut down their reactors — they still had contracted uranium shipments coming in), most uranium is sold on long term contracts, and some customers plan ahead for decades. We also don’t know much about non-public companies, much of the time, and we all have a tendency to see market opportunity and obvious supply-demand imbalances but assume, with some accidental hubris, that the major players in the market aren’t also seeing that imbalance and acting to profit from it (having the effect, sometimes, of “rebalancing” that enthusiastic speculators maybe don’t foresee).
But that said, yes, sometimes windfalls hit and give you a chance to profit, even if the spike in interest later recedes (examples from the last decade? Rare earth minerals, graphite/graphene, you can probably name your own). Sometimes whole segments of the junior resource space all go crazy at the same time, and if enough speculators and promoters get people jazzed up about it the actual mechanics and financials of that business almost stop mattering for a brief while. Right now, it seems that gold and lithium are the two areas that have some near-term potential to go bonkers (this is not a unique insight of yours truly — if I see that, it means thousands of other people do, too, all of them better traders than I).
So let’s see what Keith Kohl is talking about. Here’s how the ad gets us started:
“Elon Musk and Tesla Motors, Toyota, BMW, GM, Nissan, utility companies, energy insiders, and the government are sending the energy business into a tailspin by phasing out fossil fuels and ushering in the futuristic Metal Oil.
“This swift transition will create a staggering amount of wealth for those who understand what’s to come….
“Imagine you owned a piece of Spindletop Hill on January 10th, 1901…
“It was the first oil gusher of the Texas oil boom, and it changed U.S. history.
“It set off an industry that made trillions off of the explosive demand for gasoline in the early 20th century.
“Early investors became the new ruling-class millionaires. Everyday oil barons retired well….
“Today, we’re on the verge of a new energy revolution using a new type of fuel that will be a staple for 90% of our energy needs.
“America is making the quiet transition from fossil fuel to Metal Oil.”
I know, I know, I hear you yelling there in the back — yes, you are correct lithium is not a fuel. And batteries are not an energy source, they’re just a way to store energy. But still, it’s that energy storage that holds back essentially every “alternative” to gasoline — few resources can pack the kind of punch as a gallon of gasoline, and do so both with the support of a global infrastructure so everyone can use that gasoline and relatively easy transportability. Better batteries hold out the promise of a more fungible energy future, where the electricity generated by a windmill is as valuable as the electricity generated by a coal or gas plant or the power generated by a gasoline engine. That’s not the case now, because the wind doesn’t always blow and doesn’t necessarily blow close to the big city where you need your air conditioners to always pop on in the Summer without fail, and because you can’t just swap out a gallon of gas for a pack of batteries at your corner service station when hydropower is cheaper than gasoline.
But anyway, that’s the idea — better energy storage is the holy grail for alternative energy, both mass energy storage that is much more efficient and portable energy storage that can perhaps someday replace fossil fuels in the automobile fleet.
Here’s a bit more from the ad about increasing demand for electric cars:
“Tesla Motors offered the proprietary technology at the heart of its Model S electric car to any company that wants to build electric cars.
“Elon Musk opened his cookbook and let everyone else follow his revolutionary electric car recipe.
“And by the time he was done, he had all major automakers on board.
“BMW and Nissan shook hands on the deal and, in return, offered to throw some of their patents into the mix to push the electric car agenda forward.
“There was once a wall of Tesla patents in the lobby of the company’s Palo Alto headquarters.
“They have since been removed in the spirit of the open source movement for the advancement of electric vehicle technology.
“What does all this mean?
“Well, you should expect to see Metal Oil electric cars flooding the market.”
And more to get you excited about the potential change in the lithium market…
“… despite this exploding demand, the suppliers of Metal Oil are still very, very scarce.
“I have been on the ground researching the whole thing and detailing my findings.
“Small American companies are now sourcing stockpiles of it from remote countries like Chile and Argentina.
“And just like oil before it, there are already cartels springing up to seize as much of the material as they can.
“You can bet the government is making headway to control whatever stockpile we have on our soil. After all, this is high priority.
“It’s been the Department of Energy’s mantra over the last eight years to phase fossil fuels out of the energy equation.
“And with Elon Musk holding the bull’s-eye, it’s sure to become a reality in the next three years.”
And a bit more…
“Tesla’s huge battery facility will eat up as much as 17% of the world’s existing lithium supply.
“With a target of 500,000 lithium batteries for 500,000 electric cars annually, the Gigafactory will need 15,000 tons of lithium per year just to start.
“And at last count, the U.S. only has 38,000 metric tons in proved reserves.
“The 500,000 lithium car batteries that Musk wants the Gigafactory to produce per year will swallow that up in a hurry.
“And remember, that’s just Tesla Motors we’re talking about.
“We’ve not yet considered the lithium battery packs that BMW, Mitsubishi, Toyota, Nissan, Honda, Tesla, GM, Ford, Kia, Fiat, Mercedes, Porsche, Volkswagen, Audi, and Hyundai will need for their cars.
“Tesla is already planning on buying 1.8 billion lithium-ion cells over the next four years from Panasonic, its main supplier for now as it awaits the Gigafactory.
“But if you do the math, that only equates to enough cells for approximately 250,000 vehicles.
“And it’s creating a frenzy, sending the lithium market into a tailspin.”
So who does Kohl think you should buy for this “tailspin?”
We get into our clues:
“Lithium Mega-Play #1
“This company is at the heart of the lithium revolution. It has surged 215% and still has some ground to cover.
“But it’s flying so low under the radar that most folks have never heard of it, except for insiders and institutional investors.
“So we’re getting in now to enjoy the ride up.
“If you look at the market cap, it’s sitting quietly at $2.4 billion.
“Yet it’s a leader in the electric battery space. And it will profit from all ends of the lithium energy revolution.
“It’s at the top of my buy rating for a couple of reasons…
“First off, it provides stored lithium battery packs for industrial electric forklift trucks and other commercial electric powered vehicles.
“It’s also a proven leader in the electric car battery sector, and its disruptive lithium battery solutions are the go-to for most auto brands.
“But that’s not all… It’s also the go-to company for the electric battery needs of high-end clients like the Air Force and the Army.”
This is one of the stocks we looked at in part of our Friday File for the Irregulars a couple weeks ago, Enersys (ENS). It’s up about 10% or so since then, along with lots of other “clean energy” stocks — they are a consumer of lithium, so they would not necessarily be helped by a big price jump… but they are also just a strong, established battery company, they sell a lot of old school lead acid batteries as well, for uninterruptible power backups (think telecom, data centers, etc.) and, yes, they sell electric forklifts and batteries. Buying EnerSys because you think lithium will soar is a little bit like buying Cummins because you think diesel prices will rise, so there’s not a nice, clean line there — but a rising battery business should, one would think, be good for established battery companies.
It’s a good business, not quite cheap but probably reasonably valued — and it’s a survivor in a business where there have been some high-profile flameouts and bankruptcies over the past five years or so. EnerSys is as much cyclical as it is a “clean energy” play, so weakness in the industrial economy would hurt them.
“Lithium Mega-Play #2
“This tiny mining exploration company controls the richest lithium reserve in Argentina. This cache is so rich that it’s the world’s first large-scale lithium-based field in 20 years.
“Just how rich are we talking here?
“Production could reach 17,500 tons of battery-grade lithium annually.
“And the great thing is we’re getting in now, because this company is expected to realize full production capacity by the end of 2015.
“This really is the ground floor.
“Lithium buyers have no choice but to reserve their orders from this tiny miner because it controls so much of the stuff.”
This one is Orocobre (ORL in Toronto, ORE in Australia, OROCF OTC in the US), whose major asset is the Salar de Olaroz lithium project in Argentina. They’ve been helped both by rising lithium demand and by the gradual recovery of Argentina’s reputation among global investors — which has helped to give some confidence that their assets won’t be held captive. They are expected to reach that 17,500 tonne/year rate by September as of their last investor presentation, and at $7,000/tonne for lithium carbonate that could get their revenues well up into the $100 million+ range.
That would mean, at their current market cap of $400 million, that they’re trading for something approximating 4X sales — I don’t know if that will end up being reasonable or not, since they do say they have abundant capacity to grow that production (and they do have a couple years of lithium lined up in the ponds already), but it’s at least in the ballpark. SQM, the big (dramatically larger than Orocobre) Chilean firm that has controlled much of global lithium production to date from similar production fields in the Salar de Atacama, also trades at about 4X revenue (they’re also a major fertilizer company, and produce iodine and other stuff — it’s not an exact comparison, though Orocobre also has a Borax project in Argentina so neither is a lithium “pure play”).
So, an interesting and pretty substantial new lithium producer coming online — but not entirely unknown, of course, and I’d argue they’re priced at probably a reasonable level now given current production ramp-up and the current price of lithium… at current prices it seems that you’re probably paying a bit of a premium price for what is expected from the company this year, and you’re anticipating that the lithium prices will rise as automakers start to plan a couple years out and place bigger orders, or that they can grow production with some expansion projects in the years to come. Or you just think they’ll start to be valued based on the potential lithium reserves that they’re sitting on, not their actual production.
And one more…
“Lithium Mega-Play #3
“There isn’t a lithium miner tinier than this little renegade company.
“But don’t let that fool you.
“This company has its lithium-based fields strategically located in targets in the Salar basins of northwestern Argentina.
“But it also owns a mine that’s strategically located in Nevada, right up the alley from Elon Musk’s Gigafactory.
“Will it be one of Musk’s suppliers?
“Only time will tell… but it’s good to be on the right side of this possibility. Because not only will Tesla Motors need lithium, but so does just about everyone these days.
“This little miner is a good ground-floor opportunity… and you can get in under $1.”
This seems to be Dajin Resources (DJI.V in Canada, DJIFF OTC in the US), which is absurdly small — market cap only $15 million or so, but does have relatively small potential projects in both Argentina and Nevada. Their Nevada properties, which are fairly close to Rockwood’s lithium assets (the only producing lithium salt brine facilities in the US — Rockwood is now owned by Albermarle (ALB), which is a much more diversified chemical company), are what gets everyone excited, partly because of Elon Musk’s stated desire to source lithium for the gigafactory from relatively nearby. Of course, Elon Musk could have personally bought Dajin Resources by now if that was all he wanted, but starting up these projects is not without cost or risk, and you need substantial scale (like Orocobre’s big project in Argentina) before it starts to make sense.
It’s hard to imagine a project actually being built and run by Dajin, but perhaps someone (Rockwood, etc.) will take them over and get production started as lithium starts this highly anticipated boom, and it is, of course, possible that they could develop something on their own if they can get the financing. Here’s a little piece on Dajin from oilprice.com, just FYI. I haven’t looked at their books (or Orocobre’s) in any great detail, so perhaps there’s something hiding in there to inspire either lust or terror.
Probably a better match is likely to be Western Lithium (WLC.TO, WLCDF), which I unaccountably failed to consider (even though it has graced our pages once or twice before) — WLC is substantially larger and more advanced than Dajin (though still small, market cap just above $100 million), and does have projects in Nevada and Argentina. [Readers are providing feedback to me that it is indeed Dajin, but either technically matches the clues given.]
If I were speculating on lithium prices I’d probably look around for a few tiny little guys like Dajin and make small bets on them, with the hope that investor enthusiasm would drive the prices higher in some kind of sharp news-inspired move, but I wouldn’t think of them as real long-term investments. SQM (SQM) is probably the easier bet on lithium for more conservative investors if prices shoot higher, given their huge market position and production capacity and substantial lithium leverage. To me, without having dug very see yet into their financials and with some trepidation about political/regulatory risk in Aegentina, Orocobre is the most interesting of these three as a “middle of the road” idea that’s small and producing and growing.
Your mileage may vary, of course… So waddya think? Like any of these as lithium plays, or have other favorites to consider? Let us know with a comment below.