Lithium Is So 2017, But Argosy Could Be 2018
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Lithium stocks have been taking a battering in 2018, giving back in some cases all of their gains from 2017. This is similar to how the graphite boom of 2014 unfolded with several of those former high flyers now failing to exist. Lithium prices are falling sharply as is cobalt as shown below.
As a result of the share price performances of the lithium producers, the lithium price and cobalt too I have had very little interest in this space since 2017. Moreover, the increasing supply of lithium hitting the market as new mines come on stream combined with very low uptake rates of electric vehicles (this is another article in itself) doesn’t bode well for the sector. As I see it the only opportunity in this sector remains in the companies that are able to prove battery grade production, sign a meaningful offtake and investment/funding and move into production – provided the current valuation is right. Argosy Minerals (AGY) could be the only one in the sector with that potential.
This week’s announcement of battery grade production from their Rincon Lithium project in Argentina could be the catalyst for a period of good news and developments for the company. As the company points out in that announcement samples have been sent to potential customers and discussions of project off-takes continue. Understanding that half of the world’s lithium production comes from the region around the Rincon project in Argentina and Chile, points to the likelihood that every major battery manufacturer is comfortable with the location and will be sourcing their lithium from somewhere in the vicinity of Rincon. The risk being overlooked as a result is extremely low. In my view then the potential for an offtake (and possibly investment in the project) is very high which creates an attractive trading opportunity.
Value will be created from news of an offtake and possibly investment while a solid Preliminary Economic Assessment by independent consultants will further heighten the value of the project, allowing the company to move into large scale production.
As a trader what I first ask is what value could possibly be created? First I look at the market caps of all the current ASX-listed producers. Now these lithium producers all have differing project sizes, project economics, cash levels etc but it gives a “high level” feel for what the range of numbers are. Altura Mining (AJM) announced this week they started trucking lithium spodumene concentrate to Port Hedland in readiness for their first shipment. Market cap $536 million. Kidman Resources (KDR) even after halving in value is still $500 million market cap while we look at the bigger players Orocobre (Ore) and Galaxy Resources (GXY) have market caps north of $1 billion. With AGY having a market cap of $230 million there is considerable value to be made with an offtake and movement into stage 3 of their production where a market cap closer somewhere to $500 million is a reasonable target representing a near 100% lift. Let’s discount for time and future lithium supply affecting prices etc and even at $350-400 million market cap represents 50% gain.
Obviously the timing of any offtake deal would be difficult to determine but I struggle to see how one wouldn’t be done soon considering that these discussions have been ongoing, it is in the so called “Lithium Triangle” where half of the world’s lithium is sourced and battery grade has been achieved.
When considering the share price performance I look at what impact news flow has had on the company. That tends to reflect whether a stock is considered expensive and whether the future positive outcomes are already baked into the share price. This week when the battery grade being achieved was released AGY shares jumped 33% initially and pushed higher to be up over 50% at one point. Clearly good news is not priced into the stock and with share price not carrying on either with further gains to me tells me the market is not pricing in the news of any offtake and a move into a market cap range of $400-$500 million (or 40 to 50c per share) is an opportunity for investors in a sector that is deflating everywhere else.
Greg is the Head of Proprietary Trading at Gleneagle Securities and has over 20 years of experience as proprietary trader and high level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank. He has been involved across all asset classes including commodities, bonds, currencies and equities right across the globe.
After a 10-year career within the comforts of the large investment banks and research firms he branched out on his own to form his own proprietary trading firm successfully building the business into a multi-million dollar trading operation that turned over a billion dollars a year. This same team now runs the proprietary trading desk at Global Prime, risking their own money in line with the firm's and client's capital.
Greg has appeared on CNBC, Channel 9 - Business Sunday programme, a guest columnist for the Australian Financial Review, a regular author for Personal Investor, Wealth Creator and Shares magazine and is the former Treasurer of the Australian Technical Analysts Association.