The recent wave of junior miners acquiring lithium projects, changing company names to lithium related names using words such as "Pegmatite" "Spodumene" "Patriot" "Battery" in them, and claiming to have projects "on trend with Patriot Battery Metals' Corvette Deposit" has reached stratospheric levels.
It's officially silly season in lithium.
When I was in Vancouver last week I had a conversation with my friend Trevor Hall of Mining Stock Daily about the lithium bull run. Trevor mentioned how he had sold some of his lithium winners and was beginning to feel like this was it, the top. He even wrote a new Substack article sharing some of his thoughts.
I didn't argue with him, but I also know that bubbles can become bubblier, and bubblier....before finally bursting.
It's important to understand that every bubble is predicated on a foundation of strong fundamentals and a long term growth trend. The EV revolution and the strong global growth in lithium demand certainly qualify as strong fundamentals. However, human beings have a strong tendency to take things to excess, and as my Father once told me "all good things must come to an end".
We also know that in commodities the cure for high prices is always high prices. A more than 15x rise in lithium carbonate prices between 2020 and 2022 probably qualifies as "high prices".
I could show you a multitude of charts to explain the lithium bull case, but perhaps none is simpler than global EV demand growth:
The questionable North American lithium supply response:
And the amount of capex investment required to supply the metals that society will need over the next 30 years:
The biggest problem from the bulls' perspective is that all of this data is very well known, and it is being repeated everywhere I look. Simply stated, it's consensus that we are facing a shortage of critical minerals supply over the coming decades.
That doesn't mean the shortage won't occur, it just means that the market has gone a long way towards pricing it in and that there could be some supply responses on the way that aren't being discussed much (substitution of certain metals? new technology for mining existing lower grade bulk tonnage deposits?....I don't have the answers I just ask the questions).
From a technical analysis standpoint, I observe the Albermarle (NYSE:ALB) chart (#1 lithium producer) and notice that it has largely gone sideways for the last 15 months:
Moreover, the recent rebound rally (timed with the TSLA reversal) in ALB appears to have run out of gas (no pun intended) at major resistance - one could even begin to make out the beginnings of a large H&S topping pattern on the weekly chart.
There will undoubtedly be big winners in this lithium bull market. Already, companies such as Lithium Americas (NYSE:LAC) and Sigma Lithium (Nasdaq:SGML) stand to reap large windfalls if the consensus forecasts for lithium supply/demand are anywhere close to being correct:
However, even the charts of LAC and SGML have been carving out a series of lower highs in recent months. This despite the fact that LAC recently received a US$650 million equity investment from General Motors, and SGML is apparently priced at a modest 6.1x forward earnings.
While the above charts aren't bearish per se, they also don't scream bubble mania. Could we be seeing a mania in lithium juniors at a time when the seniors are cooling off and beginning to price in a market that could return to balance over the next few years?
We know from many past market cycles that the juniors tend to join the party in the final hours of a bull market frenzy. This is the stage of the cycle in which moose pasture becomes highly valued....
Has anyone seen moose pasture being dressed up with lipstick and being touted as "on trend with Patriot Battery Metals' Corvette Deposit"?
It's worth noting that staking claims or optioning a project doesn't generate any actual new value until that ground gets explored, a drill put in it, and a new discovery is made - in fact, it costs money to acquire an option, stake claims, and conduct exploration work on the ground. When investors begin to madly rush around in herd like fashion chasing anything with the words "lithium" "Patriot" or "pegmatite" in the name you can safely assume we have reached the mania phase of the cycle.
Before you send the hate mail (send it to Trevor instead), there are going to be plenty of big winners in the new 'white gold rush'. However, there will also be a lot of money lost chasing bad projects that make little economic sense. It's more important than ever to be discerning in your investing choices.
'What the wise do in the beginning, fools do in the end.' ~ Warren Buffett
DISCLAIMER: The work included in this article is based on current events, technical charts, company news releases, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.