Posted on - 01 May 2023
As we forecast in our 3rd April piece, lithium prices in China now appear to be recovering after widespread production cuts and into the face of sequentially-improving Chinese EV sales.
But which stocks should investors buy for most leverage into a lithium price recovery?
Every month in the Asset Allocation and Equities section of Battery Materials Review we discuss how different sectors and segments within those sectors perform. In the Lithium sector one of the ways we split stocks up is between Producers, Developers and Explorers (also by Hard Rock, Brine and Integrated, and regionally).
The chart below illustrates how the three segments have performed over the past three years. You can see that the Producers and Developers led off the recovery in Lithium equities, with the Explorers coming up strong and outperforming the more-established stocks over the past 8-10 months.
As prices recover, most investors will gravitate towards Producers, which mostly offer the best risk/reward balance. They’ve lost 20-30% of their value over the past three-four months.
Developers have lost more due to their strong operational leverage and could be expected to outperform producers during any price recovery. They are higher risk by the nature of what they do. I’ll note that I regard early-stage producers (less than six months in production) as Developers in this context. Experience has taught that they are still high risk until they reach steady-state production.
During the last upcycle (2020-21) Developers materially outperformed producers.
When equity markets go into a correction, most analysts warn investors to stay well away from small caps and focus on large caps for defensiveness, yet in Battery Materials Review we were suggesting our readers focused on Explorers and, indeed, our Explorer basket has strongly outperformed Producers and Developers in the latter stages of the upcycle and throughout the downcycle. Why?
It’s easy. Explorers are adding value via the drill bit. If you can find an Explorer that’s drilling and has a high quality project it will almost always outperform a Developer or a Producer through the later stages of a cycle and into a downcycle. Of course, when an Explorer isn’t drilling, all bets are off. Expect it to perform like a Developer – ie high risk/high reward (downside in a falling market).
Of course, you have to buy the right Explorer to get the outperformance.
There are lots and lots of explorers out there, and some perform well and some not so well throughout the cycle. How should an investor identify a good explorer from the myriad of also-rans out there?
It’s a question I get often from investors. So often in fact that I decided to put all my answers down on paper. It’s called How to Invest in Hard Rock Lithium and it’s available on our website at a very fair (I think!) cost of £20.
If you want to know how to spot a “good’un” and differentiate it from a “bad’un” using drilling results, what to look for from feasibility studies, what to look for in a management team and how to know when to buy and when to sell, then this report is for you.
I’ve been a mining analyst and investor for over 20 years. I don’t claim to have all the answers, but I certainly have as good an idea as anybody in terms of what makes a good company and, more importantly, what makes a good company perform on the stock market. I’ve put a lot of my experience and some important tips for investing in this report.
Hopefully it’ll help you to make lots of money investing in hard rock lithium…
Matt Fernley is Head of Research for Westbeck Capital’s Volta Energy Transition Fund and Managing Director of Battery Materials Review.