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Lithium Miners can be a Good bet for the Long-Term

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Long-term trends, if identified early can be a profitable investment. In such stories, the investor can buy and hold a stock till there is a clear visibility of earnings. One such sector that fits the bill is the Lithium miners. Let’s analyze in detail.

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Key observations

  1. Electric vehicles will slowly replace the fossil fuel powered vehicles
  2. As a result, demand for Lithium-ion battery will grow exponentially for the next few years
  3. There is no replacement for lithium-ion batteries
  4. Lithium supply is unlikely to keep up with the demand
  5. Lithium miners will be direct beneficiaries

What are the uses of Lithium?

After debuting 26 years ago in a Sony CCD-TR1 camcorder, lithium-ion batteries have gained widespread use in consumer products, electric vehicles and energy storage.

Last year, lithium-ion batteries equal to a storage capacity of about 45 gigawatt-hours (GWh) were used by the consumer products, according to The Economist. In comparison, the electric vehicles (EVs) only needed about half of the capacity: 25GWh.

However, with the boom in the electric vehicles, demand will increase exponentially. Lithium prices have already doubled in just over a year.

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How much demand will the electric vehicles industry generate in the future?

According to Goldman Sachs, EVs will increase their market share from 0.2% of all vehicles sold in 2016 to about 5% in 2030.

However, with advances in technology and price of EVs dropping rapidly, it is likely that the above assumption of Goldman Sachs will be reached much earlier, especially if China and India adhere to their plans.

China wants 12% of all car sales to be from battery-powered or plug-in hybrids by 2020, whereas, India wants all its vehicles to be electrically powered by 2030.

Lithium-ion battery production to skyrocket

Strong EVs sales will stoke demand for the lithium-ion batteries. The top battery manufacturers are gearing up for this challenge by increasing their capacities rapidly. Leading the way is Tesla, with their huge $5 billion gigafactory, which is expected to produce about 4GWh a year from this year. By 2018, Tesla wants to produce 35GWh, a nine-fold jump within two years.

Bloomberg New Energy Finance forecasts lithium-ion battery demand from electric vehicles to increase from 21 gigawatt-hours in 2016 to 1,300 gigawatt-hours in 2030.

Some of the other areas where lithium demand is expected to grow is shown in the table below.

Agreed that the demand for the lithium-ion batteries is going up. But, is there a shortage of Lithium?  Will the raw material prices shoot up or is there abundant supply that can push prices down?

Lithium demand and supply

Considering the huge demand for lithium, several projects have been announced that are likely to increase the supply in the near future. However, will this lead to a supply glut similar to crude oil? Let’s listen to some experts in the field.

Joe Lowry, lithium industry consultant and commentator, believes that even with all the new supply additions, “supply shortage will cause significant issues in the battery supply chain by 2023.” (“Lithium Investment at the Crossroads”, July 17, 2017).

Chile’s SQM has been a leader in lithium production for almost two decades. Its Chief Executive Patricio de Solminihac believes that the present demand for lithium is about 200,000 tonnes LCE, which is likely to grow by about 14% per year.

“We believe it is highly probable that worldwide demand will exceed 500,000 tonnes by 2025,” said Solminihac, reports Reuters.

A few analysts, however, believe that lithium supply will overtake demand as soon as next year.

Rebecca Gordon of the UK-based consultancy CRU believes that by 2018, lithium supply will meet demand if all the new projects come online. This will cause a sharp drop in prices from the current levels.

Can the demand stall due to advance in battery technology?

The popularity of electric cars is unlikely to slowdown anytime in the near future. However, is there a technology that can make the lithium-ion batteries redundant or replace them?

Recently, Bill Joy, the Silicon Valley guru and Sun Microsystems Inc. co-founder, announced a new alkaline battery that can compete with lithium-ion and better it in certain areas. Though this is a revolutionary find, it is yet years away from mass adoption. According to Joy, it may take another five years for it to gain wider acceptance.

Lithium-ion battery prices are dropping with new advances in technology. Prices fell 73% between 2010 to 2016. Therefore, any new entrant will find it difficult to displace lithium-ion from its leadership position.

Hence, lithium demand is here to stay, at least for the next decade.

Now, after having established a strong demand growth for lithium, let’s search for a stock to invest in.

What companies do we like and why?

We shall cover two companies in short. If the readers feel that the lithium story is compelling, we shall delve into greater detail in examining these stocks in the future.

Sociedad Quimica y Minera (NYSE: SQM)

Sociedad Quimica y Minera is one of the largest producer of lithium in the world. It is based in Chile, which has the largest lithium resources in the world.

Source: Statista

It is a dividend paying company, though the dividend amount keeps varying depending on the company’s profitability. However, with greater demand, SQM is likely to increase its earning and thereby its dividend.

Payment Year Amount
2016 $1.46
2015 $0.47
2014 $1.4
2013 $1.04
2012 $1.26

In terms of valuation, the stock is quoting at price/earnings of 35.3, which is way above its 5-year average of 21.7 and the industry average of 21.7.

Nevertheless, with its leadership position and a growing demand, the results are likely to surprise on the upside and the price/earnings multiple will look more reasonable after a few quarters.

What do the charts suggest? Is it time to buy?

SQM was stuck below the $32.8 level for more than three and half years. Finally, the stock broke out of the resistance in March of this year. The stock successfully retested the breakout levels twice and has since then resumed its uptrend. The stock doesn’t have any major resistance until it reaches $59 levels. However, periodically, every stock corrects.

Therefore, at the current levels, we shall only buy 25% of the allocation. Rest 50% should be purchased when the stock falls to the trendline support and the final 25% allocation should be done once the stock resumes its uptrend after a correction. We don’t want to hold the stock if it starts to trade below the $32 levels. That will signal a change in the fundamentals of SQM or the sector as a whole.

The stock can easily surpass its lifetime highs in a couple of years if the demand projections prove correct.

Orocobre Limited (OTCPK: OROCF)

The second stock that we like is an Australian based company Orocobre limited. The company holds 66.5% interest in the Olaroz lithium brine mine in Argentina, which is operated by them and is their flagship project.

They plan to ramp up production in the next 2-3 years, without issuing any new equity, according to the company’s latest presentation. If they are able to achieve their target, the stock is likely to get re-rated.

Currently, the stock is being punished as its production in June quarter was 2,536 tonnes of lithium carbonate compared to 2,784 tonnes in the March quarter. The company attributed the fall to bad weather. Nevertheless, the markets did not buy the argument and punished the stock.

This is a risky stock. We are not buying this for its past track record, but are expecting it to get its act together and reap the benefits of the lithium boom. Therefore, the allocation to this stock should be low.

When should one buy? Let’s look at the charts.

This is a volatile and trendless stock as seen in the charts. It is stuck in a range of $1 to $4.

Nevertheless, it has already fallen from its highs of $4, thereby reducing the risk. We can keep a stop below $1 and buy 25% of the allocation at the current levels. Next 50% can be bought if price falls to $2 levels. The last 25% should be invested once the stock breaks out of $4 and makes a new lifetime high.

We believe that the downside risk in the stock is limited, whereas its upward potential is attractive.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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  1. fermera_dany

    September 17, 2017 at 11:37 am

    If one is to follow this articles advises, which platform shall the one choose / use to buy some stocks?
    Living in EU (Bulgaria).

    Regards,
    Daniel

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Analysis

Silver Prices Poised for a Breakout – Overview of Key Trigger Levels

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Long-Term View

  • Since 2003, silver has exhibited spectacular volatility, increasing by more than ten-fold by the 2011 peak, before declining by more than 72% by end of 2015. Despite the volatility over this 15-year period, the commodity has found support on several occasions at a key long-term trendline (green trendline; retests – green arrows in Figure 1). More specifically, silver bounced off the support in 2008, 2015, and most recently in 2017 (green trendline currently at $15.50).
  • For 2 years (2011- early 2013), silver found support just around the $26 level, before finally breaking below and plummeting in April 2012 (blue horizontal trendline; sell signal – last blue arrow).
  • While, it can be said that silver, similar to gold, has been forming a large inverse H&S pattern since 2013 (neckline – yellow trendline), silver is further away from giving a buy signal based on this potential development. It is really the short-term view that reveals a well-defined pattern, whose completion may give a timelier signal.

Figure 1. Silver (XSLV.X) 8-Day Chart 

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Short-Term View

  • Zooming in, the daily chart reveals a strong support in the $15.50 – $15.80 area (violet line at $15.70). Notice how when the commodity broke below $15.50 for the first time, it moved sharply lower, before finding support at the long-term support discussed in the long-term view (green arrow). Within a couple of trading sessions, silver was back above $15.50.
  • A much more well-defined inverse H&S pattern is observed on the daily chart (lows – orange ellipses, neckline – orange downward sloping trendline, target – orange vertical line).

Figure 2. Silver (XSLV.X) Daily Chart  

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Implications

  • A break above the neckline of the small inverse H&S will activate an upward target of $21.75. Furthermore, such a breakout would trigger a buy on the larger inverse H&S.
  • While, a potential buy signal on the longer-term view may generate a target close to $28, the $26 level is expected to serve as a major resistance (i.e. resistance at $26 should take precedence over most other technical developments).

Outlook

  • Neutral with a bullish bias.
  • If silver breaks the orange trendline (a close above $17.80 should be used as a trigger) outlook will shift to bullish.
  • If the commodity breaks below $15.50, outlook will shift to bearish, as that would imply that both the $15.50 – $ 15.80 support area (violet trendline) and the long-term support (green trendline) have been breached.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Commodities

Is Oil About to Spike Again?

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The recent attack on Syria by U.S. and ally forces has raised the prospect of another major spike in oil prices, according to JPMorgan Chase & Co. Oil, already at more than three-year highs, could be poised for another 10% gain in the short term.

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JPMorgan’s New Outlook

The U.S. multinational investment bank recently issued a forecast calling for $80 a barrel oil, citing an expanding presence of Western forces inside Syria as well as the threat of new sanctions on Iran, a major oil-producing nation. Brent crude, the international futures contract , closed at $72.58 a barrel on Friday for a weekly gain of 8.2%. A price point of $80 a barrel would put Brent at roughly 70% of mid-2014 levels.

U.S. counterpart West Texas Intermediate (WTI) rose 8.6% during the course of the week to settle at $67.39 a barrel.

“Risks we thought might materialize this summer through Iran sanctions are emerging somewhat more quickly due to events in Syria,” JPMorgan strategists led by John Normand wrote on Friday.

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U.S., British and French missiles pounded Syrian targets early Saturday in response to an alleged chemical weapons attack carried out last weekend. U.S. President Donald Trump declared “Mission accomplished” shortly after the blitz, which included 105 missile strikes fired on three targets.

While it is unclear what the response will be once markets reopen on Monday, the Trump administration has indicated the missile strikes were not a recurring event. That said, Washington’s ambassador to the United Nations Nikki Haley said the U.S. forces are “locked and loaded” to carry future attacks if the Syrian government uses chemical weapons again.

Syria and Russia have both denied that a regime-led chemical weapons attack took place and no conclusive evidence has been brought forward on the matter.

The Case for Commodities

JPMorgan analysts aren’t the first to declare commodities a good investment at this stage of the business cycle. Strategists at Morgan Stanley have noted that energy stocks have historically been a “very consistent late-cycle outperformer,” which puts them on firm footing to beat the weakening bull market.

The energy sector has rebounded sharply from the multi-year downtrend in oil prices, but has severely underperformed the S&P 500 Index this past year. The $3.8 trillion worth of energy stocks represented on the S&P 500 have gained a mere 1.7% over the past 12 months, compared with a 13.3% return for the broader index.

Commodities like crude oil and gold are also benefiting from a weak U.S. dollar. The closely-watched dollar index (DXY), which tracks the greenback’s performance against a basket of six currencies, is down 2.5% this year. The dollar posted negative returns in 2017 and in January was off to the worst start to a year in over three decades.

In addition to energy stocks, the following oil-related portfolio recommendations were put forward by JPMorgan:

  • Long WTI call spread
  • Long Brent calendar spread
  • Overweight the S&P 500 Energy Index
  • High-yield energy credit
  • U.S. versus euro five-year inflation-linked bonds
  • Long Canadian dollar versus Japanese yen

However, gold may be the more attractive bet over the long term as geopolitical risks and rising U.S. shale production squeeze oil prices. Even the strategist at JPMorgan said the $80 a barrel price point would likely only be good for three-to-six months before U.S. producers flood the market again. As we’ve mentioned before, U.S. crude producers can make profits with prices as low as $40.

The current risk-off environment could also boost the appeal of cryptocurrencies, which are said to offer store-of-value characteristics. It has been argued that volatility and ‘FUD’ (fear, uncertainty and doubt) have masked the intrinsic value of crypto assets during the latest downtrend. Given that the underlying fundamentals have only changed for the better, a more sustained rally in crypto assets could strengthen portfolios struggling with the late-cycle blues.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 353 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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Analysis

Analysis: Gold Continues Oscillating, on the Verge of a Major Signal

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Long-Term View

  • In 2015, gold found support at its 2008 peak (resistance-turned-support in Figure 1 – white trendline; GLD chart shown).
  • In August 2017, the commodity broke above a key resistance (violet trendline), which subsequently served as support on two occasions in October and December of 2017 (violet arrows).
  • Gold has formed a large, multi-year inverse H&S pattern (lows – yellow ellipses, neckline – yellow downward sloping trendline). 2017’s failed attempt to break the neckline (yellow arrow) confirmed the importance of the trendline, even if the observed pattern does not prove to be an inverse H&S. In 2018, the commodity has oscillated sideways, going above and below the trendline several times (see Short-Term View).

Figure 1. GLD 6-Day Chart  

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Short-Term View

  • The commodity has been trading in a horizontal channel since January 2018 (blue horizontal trendlines), with an upper boundary roughly 1% away from 2016’s high.

Figure 2. GLD Daily Chart  

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Implications

  • While it could be argued that the neckline of the H&S has already been broken to the upside, given the commodity’s price action in 2018, one should wait for the short-term to align with the long-term view for a confirmation.
  • A break above the upper boundary of the channel will activate 2 targets. A conservative one (with a 4% upside) if the channel is considered to be a “trading range”. A more aggressive target (with a 9% upside) is obtained if the channel is considered to be a “flag”. A move above 2016’s high should be used as a confirmation of the breakout.

Outlook

  • Neutral with a bullish bias.
  • If the commodity breaks above its 2016 high (1,380 used as a trigger, just above the 2016’s high), outlook will shift to bullish.
  • If the commodity breaks below the lower boundary of the horizontal trading channel (using 1,300 as a trigger, just below the support of the channel), outlook will shift to bearish, at least in the very short-term

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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