Our 2019 Lithium Supply Outlook

Summary:  

  • Of the Junior miners, who will most likely come online for the first time in 2019?  
  • How much cash do they have on hand?  Who has financing secured?  Without funding, Junior miners won’t be able to start construction on a mining project.  Essentially, cash is a good proxy to gauge positive progression toward production.  
  • Who amongst the Junior miners has an offtake agreement in place?  (Another positive sign for possible production.)  
  • How much new supply will come online from what we like to call “The Lithium Cartel” and the Junior Miners?  

Let’s take a look at the potential producers hoping to come online in 2019.  

Screen Shot 2017-10-26 at 9.26.13 PM.png

Current Cash Analysis

In the words of Cuba Gooding Jr from the famed movie, Jerry Maguire, “Show Me The Money!”  We think it’s important to see how much money is currently in the bank for potential future producers as this is a strong indicator towards production in the near term.  Little cash balance could mean either they won’t produce (worst case scenario) or a capital raise is coming.  

Screen Shot 2017-10-26 at 9.29.07 PM

When reviewing the last chart, we believe that it is important to keep in mind the big discrepancies between how much the Capital Expenditures (capex) are for each company and the actual amount that they have committed and in the bank.  This is crucial when looking to the future, as it shows how close a particular company may be to breaking ground on construction of their project.  

Offtake Agreements

First, what is an offtake agreement?  An offtake agreement is whereby a Lithium producer has agreed to terms with a third party (aka a Buyer) that will commit to purchasing a certain percentage of the Lithium product from the producer.  

Second, why is it beneficial?  The producing company will be guaranteed (so long as nothing goes wrong) future cash flows because their product will be purchased once it is produced.  Thus, they can produce without worrying about demand for their product.

For investors, this is exciting since future cash flows is the crux of any investment.  Furthermore, knowing that the producer has a client in the marketplace is a signal that a party who needs dependable supply has faith that the company will make it into production (nothing, of course, is ever guaranteed when it comes to mining and investing).

Finally, should producers need further investment, they’ll be more likely to raise capital successfully once they have shown they have an offtake agreement in place (especially if the offtake partner is well known and respected).  

Screen Shot 2017-10-26 at 9.31.48 PM

Lithium Production for 2019

Screen Shot 2017-10-26 at 9.32.29 PM.png

If everything works exactly to plan, ~92,300 Tonnes LCE will be added to the market in 2019.  Yet, we’re speaking of Lithium production here, an industry well known for having trouble meeting production targets.  Over promising and under delivering, especially with the new entrants that don’t have strong partners, will continue to be a major issue.  As a result, we think it’s important to think about this ~92,300  as a best case scenario.  It’s not unlikely that only about 75% of that actually gets produced (~69,225) or even 60% (~55,380).  There are a few scenarios where this could occur such as weather difficulties (historically seen), financial markets disruption (the market is at an all time high), and political upheaval to name a few.  

Predicting the exact amount of actual Lithium produced in 2019 is a lot like predicting the weather.   After all, weathermen are usually wrong and can only get it right much closer to the actual event.  With that in mind, we want to think about 2019 on a more broader picture basis, using the above numbers that we laid out as a guide.

On a global perspective, 2019 looks like the first year where supply could have the potential to outpace demand.  With that in mind, as we will continue to outline in our company specific posts, we are believers in some of the 2018 producers, especially the discounted junior miners entering the market in a year in which it seems very likely supply and demand will be more tight.  Furthermore, these miners have been setup to take advantage of some of the highest prices on record which will result in record gross margins for them.  Overall, we keep seeking to find miners that can take advantage of these record prices but are overlooked by the investing marketplace (read as value investing).  

The 2019 producers could still be in line for record prices or very high prices (often now quoted as the new normal lithium prices) for lithium.  Thus, miners in 2019 can still be considered discounted and considered potential future cash flow kings.  We’ve already covered Lithium America’s and plan to cover Nemaska shortly.  Much is still exciting about the miners expected to come online in that year and we’re excited to see how the story unfolds!  

Leave a Reply

Your email address will not be published. Required fields are marked *