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Views on Lithium, and how we sold too soon!

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Question asked 15/01/2022

Views on Lithium, and how we sold too soon!

I was hoping that you would cover CXO Core Lithium Limited For a while, it was tracking with PLS but without major announcements this year it has persisted with great returns almost daily. What would you say is driving this and how long can it continue. Also, I held onto my PLS for a bit longer after you said to trim some exposure and I'm lucky it has done ok is it time to pull back now? Thank you in advance. Hi James, Keen to understand your thoughts on PLS from here onwards. In mid Dec we followed MM and exited PLS only to see it rally significantly in recent weeks. The original rationale for exit at that stage was that that MM was seeing near term weakness in lithium. However, since then, that weakness did not emerge . What is the reasoning behind that and where to from here for 2022? These things happen of course, but keen to learn and understand for the next time this arises! Cheers A

Answer

Hi Guys,

Lithium is certainly a very hot space at the moment and at Market Matters, we certainly underestimated the trajectory it has established. Firstly, on Core Lithium (CXO), this is simply a more highly leveraged play on the sector with no earnings but a good resource and when investors turn unequivocally bullish, the smaller players tend to offer the most upside – that has certainly been the case with CXO v PLS as shown below NB: (CXO is about 1/8th the size of PLS and is pre-revenue while PLS is selling Lithium now).

In terms of our exit of PLS plus we also exited IGO in the Growth Portfolio – both regrettable calls, we did so because of concern about supply coming on stream at a time when actual (not perceived or future) demand was not as strong as the market was implying with these prices. Commodity companies tend to trade between 0.5x net asset value (NAV) in a bear market and 1.5x NAV in a bull market. As a guide, IGO have just acquired Western Areas (WSA) at 1x NAV. At current prices, PLS is trading at around 1.8x NAV which is very high.

The trend here is clearly up and while I have kicked myself a few times for selling PLS (and IGO), we won’t be revisiting these until the risk/reward looks more favourable.

For those looking for a speculative stock in this battery metals space, have a look at Blackstone Minerals (BSX) – the company is developing nickel mines in Vietnam, and leveraging the upstream resource into a downstream battery metal precursor plant in partnership with some of South Korea’s biggest battery companies.

chart

Core Lithium (CXO) v Pilbara Minerals (PLS)

LAST UPDATED 15/01/2022 05:58

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