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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.

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.

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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Commodities

WTI Falls Below $59 a Barrel for the First Time in Eight Months; U.S. Set to Dominate Energy Market By 2025, Says EIA

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The oil-price collapse became a record fallout on Tuesday, as U.S. crude futures headed for their longest losing streak ever. In the process, the futures contract dipped below $59.00 a barrel for the first time since February and is now trading at its lowest level since last year.

Oil Prices Sink Further into Bear Territory

U.S. West Texas Intermediate (WTI) futures fell by as much as 2.8% on Tuesday, extending their losing streak to a record 12 days. At the time of writing, WTI was trading down $1.38, or 2.3%, at $58.55 a barrel on the New York Mercantile Exchange. Brent’s decline was equally perilous, with the global benchmark falling $1.60, or 2.3%, to $68.52 a barrel.

Oil prices have lost a swift 23% since Oct 3, when markets were pushing toward multi-year highs. The rout intensified this week after U.S. President Donald Trump criticized Saudi Arabia’s plan to lower production amid the selloff.

The Saudis announced Monday they would scale back output by 500,000 to bring supply back in line with demand. Saudi energy minister Khalid Al-Falih said output cuts of 1 million barrels per day are needed to re-balance the market. This suggests fellow OPEC members are likely to join efforts to reduce output in support of higher prices.

U.S. Set to Dominate Energy Market

America’s reliance on Saudi oil is quickly fading as domestic shale production achieves new economies of scale. According to a new report by the International Energy Agency (IEA), the United States will produce half the world’s oil and gas supply by 2025.

In its annual World Energy Outlook report, the agency said the U.S. will account for roughly 75% of global gas growth over the next six years. It will also account for 40% of the growth in natural gas. At the same time, U.S. shale production is forecast to more than double to 9.2 million barrels per day.

“The shale revolution continues to shake up oil and gas supply, enabling the U.S. to pull away from the rest of the field as the world’s largest oil and gas producer,” the IEA said in its report. “By 2025, nearly every fifth barrel of oil and every fourth cubic meter of gas in the world come from the United States.”

The upsurge in U.S. shale production has eroded OPEC’s dominance of the international energy market. This was most evidently on display in 2014 when a systemic price collapse forced the Saudi-led cartel to adopt new production policies. While the cartel has succeeded in bringing prices above the break-even rate for Middle East producers, it has failed to deter lean shale producers that are capable of generating profits even with the latest drop in prices. This new reality is expected to play out further over the next six years.

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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4.6 stars on average, based on 670 rated postsSam Bourgi is Chief Editor to Hacked.com, where he leads content development for one of the world's foremost cryptocurrency resources. Over the past eight years Sam has authored more than 10,000 articles and over 40 whitepapers in the fields of labor market economics, emerging technologies, cryptocurrency and traditional finance. Sam's work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Contact: sam@hacked.com Twitter: @hsbourgi




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Commodities

Oil Prices Erase Recent Gain as Trump Blasts Saudi Production Policy

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Crude oil suffered a fresh setback early Tuesday, as markets reacted to further fraying of U.S.-Saudi relations after President Donald Trump slammed the kingdom’s energy policy. Hours earlier, Saudi Arabia had announced it would cut crude production by 500,000 barrels per day in December in response to the recent plunge in prices.

Oil Prices Erase Gains

U.S. West Texas Intermediate (WTI) futures plunged to yearly lows on Tuesday, more than offsetting yesterday’s climb. The U.S. futures benchmark bottomed at $58.85 a barrel. It was last seen trading at $59.00 a barrel, down 93 cents, or 1.6%, from the previous close.

The WTI contract officially entered into bear-market territory earlier this month with losses exceeding 20% over the past six weeks. At the beginning of October, crude was tracking four-year highs. Now, prices are struggling to stave off further declines.

Declining crude prices follow a fresh surge in the U.S. dollar, which is currently tracking 16-month highs against a basket of its peers. The DXY dollar basket spiked 0.7% on Monday to 97.54. As a dollar-denominated asset, crude is highly sensitive to changes in the greenback’s value.

Trump Blasts Saudi Oil Policy

Saudi Arabia’s decision to scale back crude production has been met with heavy criticism by U.S. President Donald Trump. In a Monday afternoon tweet, Trump said the following:

“Hopefully, Saudi Arabia and OPEC will not be cutting oil production. Oil prices should be much lower based on supply!”

The president’s comments came after the Saudis announced plans to lower crude supply by half a million barrels per day beginning next month. The decision was announced by Saudi energy minister Khalid Al Falih in Abu Dhabi following a meeting of OPEC members.

“The consensus among all members is that we need to do whatever it takes to balance the market,” Al Falih said, as quoted by CNN. “If that means trimming supply by a million [barrels per day], we will do it.”

President Trump is under pressure to keep the economy running strong following sizable losses in the House of Representatives during last week’s midterm election. Although the GOP under Trump performed much better than previous administrations, the loss of a House majority threatens to undermine the administration’s goals.

Washington was relying on Saudi Arabia to keep the global market well supplied, and oil prices down, in the wake of renewed sanctions on Iran. U.S.-Saudi relations have also deteriorated over the killing of journalist Jamal Khashoggi at the Saudi consulate in Turkey last month.

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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4.6 stars on average, based on 670 rated postsSam Bourgi is Chief Editor to Hacked.com, where he leads content development for one of the world's foremost cryptocurrency resources. Over the past eight years Sam has authored more than 10,000 articles and over 40 whitepapers in the fields of labor market economics, emerging technologies, cryptocurrency and traditional finance. Sam's work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Contact: sam@hacked.com Twitter: @hsbourgi




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Commodities

Oil Prices Officially Enter Bear Market

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Crude oil extended its slide on Thursday, with the U.S. futures benchmark encroaching into bear-market territory following weeks of relentless declines.

WTI Succumbs to the Bears

Crude futures were down across the board in the latter half of the week, as concerns over rising stockpiles and higher production continued to grip the market. The West Texas Intermediate (WTI) contract for U.S. crude reached a low of $60.67 a barrel on the New York Mercantile Exchange. It was last down 24 cents, or 0.4%, a $61.43 a barrel. Brent crude declined 28 cents, or 0.4%, to $71.80 a barrel on London’s ICE futures exchange.

WTI has officially entered bear market territory, which is defined as a fall of 20% or more from a recent high. The 20% threshold was met on Thursday as prices resumed their relentless drop from four-year highs set on Oct. 3. Market sentiment has shifted dramatically over that stretch, with investors now fearful that Saudi Arabia and Russia will more than offset a loss of Iranian exports following the resumption of U.S. sanctions against Tehran.

Higher Production on the Horizon

Russia and the Saudis aren’t the only players expected to ramp up production in the near future. The U.S. Energy Information Administration (EIA) recently upped its outlook on domestic crude production, calling for 12.1 million barrels per day in 2019 compared with a previous estimate of 10.9 million barrels per day.
EIA data on Wednesday showed a sharp rise in weekly crude inventories, placing further pressure on oil prices. Commercial stockpiles surged by 5.8 million barrels in the week ended Nov. 2, bringing the total inventory to 432 million barrels. That’s the highest since early June.

Meanwhile, members of the Organization of the Petroleum Exporting Countries (OPEC) are expected to meet this weekend to go over market fundamentals and determine whether additional supply cuts are warranted. Analysts at Commerzbank believe the cartel may have no choice but to scale back output to re-balance the market. The Saudi-led production group will meet in Abu Dhabi on Sunday.

In other news, October was another record-setting month for Chinese crude imports as the world’s second-largest economy stocked up on Iranian barrels before U.S. sanctions took effect. China imported an average of 9.6 million barrels per day last month, government data showed on Thursday.

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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4.6 stars on average, based on 670 rated postsSam Bourgi is Chief Editor to Hacked.com, where he leads content development for one of the world's foremost cryptocurrency resources. Over the past eight years Sam has authored more than 10,000 articles and over 40 whitepapers in the fields of labor market economics, emerging technologies, cryptocurrency and traditional finance. Sam's work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Contact: sam@hacked.com Twitter: @hsbourgi




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