One look at lithium prices, and you get the sense that an enormous bloom has come off one of the sweetest-smelling roses in the history of gardening. Back in January, the lithium stocks were absolutely on fire when we all bought the CA$0.20 placement in Volt Lithium Corp. Volt Lithium Corp. (VLT:TSV;VLTLF:US).
There were a number of benchmarks, such as the pilot test, which arrived on May 24, with the result being a CA$3,477/t cost of production from the Rainbow Lake brines.
One glance at this chart and one can see that it speaks volumes about the state of the junior lithium market and the dramatic change in sentiment it has undergone.
It is significant that Albemarle Corp. (ALB:NYSE) — the largest lithium producer in the U.S. — is down from a high of over $300 per share in November 2022 and trades at a mere $120/share.
Patriot Battery Metals Inc. (PMET:CA) topped at CA$17.74 (now CA$9.08) while Alberta "briner," E3 Lithium Ltd. (ETL:TSXV;EEMMF:US) topped at CA$5.725 in September (now CA$2.15).
There were three drivers — milestones — that were going to drive VLT higher by the end of 2023. Those drivers were:
- Government grant money offsetting CAPEX costs by late summer, thus minimizing equity
- PEA (Preliminary Economic Assessment) by the end of September
- S. deals allowing for expansion into the U.S. brine treatment arena
To date, the company has not met these very important milestones, and while there are certainly reasons for it that represent "delays" rather then "failures", the market for the juniors is merciless these days, and I fear punishing when it comes to "missed milestones."
From the Trading Economics website, here is an excerpt of the demand-supply outlook:
"EV sales pessimism in China limited lithium demand for battery manufacturers in their typical restocking season. Instead, firms took advantage of high inventories following the supply glut caused by extensive subsidies from the Chinese government throughout 2021 and 2022. These developments drove key market players to forecast the next lithium deficit to return only in 2028, an aggressive twist from speculations of persistent shortfalls that took lithium prices to CNY 600,000 in November 2022."
To be clear, even at current lithium prices, VLT can still be exceedingly profitable. If they can still solve the CAPEX issues with a fully diluted capital structure of < 200,000,000 shares issued and outstanding, then pre-tax EPS of CA$0.10 (approximately) can be achieved by mid-2025. At a 30 multiple, that assumes a CA$3.00 share price, with the caveat being that weakness in the lithium price may dampen the P/E ratio for the sector.
More important is the issue of money flow. Retail investors literally bailed out of the burning lithium aircraft in May-June as the first hint of a lithium price retracement appeared on the horizon.
I have discussed these issues with Volt CEO Alex Wiley. While he is confident that all milestones will be achieved, I am not sure that there will be a sufficient tailwind to propel the retail crowd back into the sector with anything close to the vengeance we saw in 2022 and early 2023.
They once asked Hall-of-Famer Wayne Gretzky why he had such vision of the ice surface while playing a game that he dominated from 1979 to 1990, winning the MVP for the NHL in nine out of ten years.
His answer was simple: "I always skate to where I think the puck is going, not to where I know it is."
In investing, that is the formula for buying low and selling high. Most of the big money managers these days try to build positions in companies and sectors that are largely out of favor with the retail masses. When I went with Volt in late 2022, there were zero "briners" out there but a large number of "miners", many if not most of which were explorers. I recognized that the lithium stocks were already well-bid when I first told you I was buying Allied Copper in late August 2022 at CA$0.08, but the hook was in the "briners versus miners" angle that certainly favored VLT because relative to the miners like PMET and LAC, VLT had a far closer proximity to production (and positive cash flow). While the "briners" are still a better story than the "miners," retail money flow is skating away from the lithium "puck" and moving to copper, nickel, and cobalt.
Of those three, cobalt and nickel have crashed from much higher prices in early 2023 and are now in the bottoming process. Copper, however, has yet to have anything close to a price spike, and the junior copper producers, such as those found in the COPJ:US (junior copper ETF), had a high of only $21.92 in the past 52 weeks versus a low of $15.84 and a last trade at $17.09, have yet to experience any significant inflows. In other words, there has been no retail migration into copper despite massive moves in literally all other "critical metals" like lithium, nickel, uranium, and cobalt.
If the deficit demand for lithium is not rekindled until 2028 (as forecast in the Trading Economics article), that is a long period of time before prices get back to the CA$43,000/mt level that was the cornerstone of the CA$0.20 EPS forecast I made back in May.
While VLT remains a superb fundamental story and a respectable longer-term investment, those subscribers looking for a shorter-term move might be sorely disappointed.
For those investors that participated in the Volt financing in January, break-even is at CA$0.20. The half-warrants from that deal are exercisable until February 24, 2025, at CA$0.30. In other words, we still have ample exposure to VLT, thanks in large part to the unit.
In retrospect, I wish I had known that the VLT milestones I expected in late summer were going to be delayed so that we could have secured a $0.30 price or higher. However, now the objective is "to move where the puck is going to go," and if that means that copper is going to be the "new lithium" or "new uranium" in 2024, that is where I want to be.
To repeat and to be crystal clear, VLT is not a "Sell"; it is a "Hold"
I hope everyone has a clear picture of the path moving forward.
