In March I attended the premiere mining conference, PDAC, in Toronto. Trips like this are a great way to gauge sentiment in the natural resources space.
Strolling through the conference halls, every other booth was for a new lithium miner.
Each had the same chart showing skyrocketing growth for the electric vehicle (EV) market. All those batteries were going to need a lot of lithium, and I was told there would be a shortage.
At lunch my colleague Matt Badiali said: “Mark your calendar: This is the top of the lithium market.”
When everyone is rushing into the same space, the shortages end up well-supplied. Investors lured in by the promise of high prices end up disappointed.
Rick Rule, president of Sprott U.S., has a saying about the natural resource space: “If you’re not a contrarian, you’re a victim.”
That’s exactly what happened to lithium investors who rushed in with piles of cash.
Lithium’s Bear Market
Lithium prices in China are tanking. Prices are down nearly 50% since the first quarter.
That is echoing through world markets.
Lithium is actually a salt that forms in former sea basins. The favorite metal of EV bulls is strip mined and pumped out as a slurry.
It’s not hard to find. There’s no shortage of supply. There was just a lack of effort.
The shortage that drove prices higher in 2016 and 2017 was a carry-over from low demand.
Now that the major miners have stepped in, they are drowning out small miners with a flood of supplies.
The big miners have scale on their side. They can ramp up production and process the ore quickly.
Producers like Sociedad Química y Minera de Chile (NYSE: SQM) and Albemarle Corp. (NYSE: ALB) turned their sights toward lithium when prices more than doubled into 2017.
Now the lithium market is looking well-supplied.
Battery makers aren’t married to lithium either. Higher prices can see producers substitute the metal with copper, nickel or cobalt.
Slower growth in the EV market along with that boost in supply is hurting prices.
The hardest hit in this sector are the junior miners. Desert Lion Energy Inc. (TSX-V: DLI) is the first victim in what is sure to be a growing list of miners.
It announced this week that it would halt production to re-evaluate its strategy. Share prices were at all-time highs at the mining conference in March, at C$1.89.
This week DLI is trading around C$0.10 per share. That’s a 95% loss!
In Real Wealth Strategist, we steered clear of lithium miners. The bear market in lithium is likely only getting started. There will be more victims from the junior mining space to come.
Good investing,
Anthony Planas
Internal Analyst, Banyan Hill Publishing
