Goldman Sachs Got It Totally Wrong, Providing Buying Opportunity On Lithium Americas – Seeking Alpha

Overview

Goldman Sachs (GS) (aka the Vampire Squid) put out a rather colorful report concerning lithium prices. Their basic premise is that prices will implode. In this article we will explore this theory and what it means for our lithium stocks; if it indeed pans out or if this is just some unfounded game on the part of Goldman to rattle the lithium tree and thus pick up cheap shares.

My Lithium Bed Is Too Cold, Too Hot, Or Just Right?

It should be noted that the industry needs moderate lithium prices. If lithium prices are too low, capital investments for new mines could dry up which would impact future lithium supply. Projects simply might be delayed, not come online, or they could be capital starved. Thus, the car makers might slow down EV investments and adoption due to lack of supply fears.

On the flip side, if lithium were to continue its rise to infinity, carmakers might slow down EV investments and push EV adoption further out while leaning on ICE engines and hoping for cheaper lithium prices in the future.

Hence, we need our lithium bed to be just right. Not too hot with stupidly high prices or too cold with ultra-low prices.

We need prices where the capital markets are happy to invest in lithium projects because they can see a logical risk to reward for that investment. Meanwhile, miners need prices where they can take a project to production and make worthwhile returns. EV producers need the lowest price they can get, obviously, in order to maintain a good profit margin and (hopefully) not have to pass along costs to consumers. In summary, we need the ecosystem to work for all the players. It has to make sense for capital markets, miners, battery makers, and the EV producers. That is the simplistic viewpoint.

Goldman Sachs’ Strange Outlook

Moving on to what Goldman wrote:

“The U.S. bank’s analysts expect a sharp correction in prices, with lithium falling from $53,982 a metric ton in 2022 to $16,372 a ton in 2023.” “Between 2022 and 2025, the bank expects a 33% on-year increase in lithium supply.” “Set against annual demand growth rates of 27%.” “Much of the extra lithium supply is expected to come from increases in Chinese and Australian hard rock projects, as well as rises in spodumene supply.”

It is my understanding that you have various prices for lithium from spot market (aka “I need it now and I’m willing to pay whatever it takes”) to long term contracts (aka “Hey SQM / ALB lets sign a multiyear contract at a reasonable amount”). Spot pricing is what we see on the high side of things. Contract pricing is what we see for long term stability. Yet, we see Goldman saying spot is going to implode. Does this make sense? Let’s see what the industry says. Granted we might not get a ton of opinions from some of the big boys (lest they annoy GS) but some are brave enough to speak up.

Industry Reaction

My initial reaction to seeing Goldman Sachs put out such a bold assessment (Lithium imploding from $78,000 current market price to $16,372 by 2023) was that Goldman was up to its old fun & games. Far be it for Goldman to engage in such activity. The link above is chock full of example of the vampire squid (aka Goldman) engaging in questionable activity. Another good example is Goldman playing the aluminum market.

Does This Make Sense?

I had a boss once that would end many sentences with “Does this make sense?” It got to the point it became a saying in our department for anything and everything; much to the amusement of everyone. The same applies here. Do the numbers make sense? Lacking the complete GS report, this is the best I have to work with. I do find it odd that Goldman is using data from 2020, as we can see 2021E is an estimation. As others have noted, it is also strange that lithium demand mysteriously drops off come 2023E. Note: Yellow highlights are per the author.

Starting at the top right, (we see in yellow) demand mysteriously drops off for batteries from explosive growth estimated in 2021E and 2022E to just plunging in 2023E onwards. The word “fishy” comes to mind.

Math

Looking at the brine column under supply, we can see that either Goldman or I are incapable of even basic 2nd-grade math. Looking at the 2021E column, we see GS saying that 209+241+30 = 481. My trusty calculator yields a grand total of 480.

If we are incapable of doing basic arithmetic, then it does make me question how the other numbers stack up in the report. The 2023E column also suffers from incorrect numbers if you add them up. These are minor mistakes, but if I can spot two minor mistakes that easily for only one slide of a report … what other mistakes are lurking?

Industry Insiders Comment on Goldman

What do industry insiders think of the GS report?

Per Benchmark Mineral Intelligence Simon Moores seemed to be rather unimpressed:

Dale Henderson of Pilbara (OTCPK:PILBF) via Afr.com:

Dale Henderson, who Pilbara late on Wednesday revealed would replace Ken Brinsden as CEO on July 30, said he was surprised by the share moves given the lack of changes in spot lithium prices, but it seemed the broker notes had “startled the horses”. “It’s a fairly bold call to say the peak has occurred, and the downhill trend will start within this calendar year,” he told The Australian Financial Review. Mr. Henderson said the near-term outlook remained “very positive”, noting the company last week secured a record price for a cargo of spodumene sold via its auction platform. “That was only a week ago and there were groups clamoring for that product, so we see that strong demand. And I note in Goldman’s report that they support strong demand [too], but what they’re suggesting is there’s strong supply coming on foot,” he said.

Per Galan Lithium (GLN:ASX) from the above link:

Daniel Jimenez, a director of Galan Lithium who is also a partner of lithium consultancy iLiMarkets, agreed equity investors had been unnerved by the broker notes and other headlines, but were underestimating demand and overestimating supply. “I think Goldman Sachs has it totally wrong,” he said. Mr. Jimenez said wait times for EVs in Europe had blown out to up to 24 months, showing “real” demand was “significantly higher” today than car sales suggest, and more lithium, rather than less, would be needed than expected. He expects global lithium carbonate equivalent demand to rise from 500,000 tonnes last year to 1.4 million in 2025, above Goldman’s forecast. As for supply, Mr. Jimenez said it was unlikely new projects not known today would come online, and it was hard for people “who have not been in the industry” to assess how challenging it is to expand lithium projects or build new ones.

and

Macquarie’s analysts this week slightly reduced their 2022 EV sales forecasts, but still expect 43% growth on last year to 9.5 million vehicles, and said any lithium and cobalt price pullbacks could be “temporary once China bounces back”.

That is a fine point concerning China. With lockdowns easing up China might start ramping production of EV cars once again.

Moving on to Canaccord mining analyst Reg Spencer:

The Goldman Sachs report, released earlier this week, claimed although the long-term prospects for the battery metals remains strong due to the rapid uptake of electric vehicles (EVs), investor enthusiasm has led to an oversupply. This is not the case, according to Canaccord mining analyst Reg Spencer. “That oversupply in the market that Goldman Sachs is referring to is in lithium production from China lepidolite sources which is lower grade, difficult to process and more expensive to process in comparison to spodumene,” he said. “I’ve been covering this sector for seven years and I can tell you supply always disappoints, especially from unconventional sources such as lepidolite that Goldman Sachs is referring to in their research report. “Lithium projects are always behind schedule, always, and to say that the world’s supply issues are going to be resolved in three years from unconventional resources, which means higher costs to produce and extract … I think is wrong.”

Here we see China and lithium supply comments from news.metal.com:

If we rely on the lithium mine production projects currently under construction, the world will face a nearly 50% supply gap by 2030. China’s proven lithium resources rank sixth in the world. In order to ensure supply security of lithium resources, China has been accelerating the mining and exploration of lithium ore in recent years.

Lastly we have this gem from Dec 2021 via Goldman as lithium prices continued to rise.

Goldman Is Bullish On Lithium?

If you pull up the buying history of GS, one sees Goldman’s lithium holdings fluctuate wildly. This could be for a variety of reasons such as hedging, shorting, speculation, etc., but it is interesting to note that recently Goldman has been increasing its lithium position. Granted, some of these positions are nowhere near how much they have owned in the past, yet, they are increasing lithium positions once again.

Why would Goldman increase its position if it were bearish on lithium? Maybe it is some sort of options trade? Who knows, but you can be the judge of the below graphic. Consider it just one part of a large puzzle. Note the “shares changed” percentages in LAC, Livent (LTHM), SQM (SQM), Albemarle (ALB).

(Hold Ctrl & Shift while hitting the + or – key to expand-reduce the above chart)

Supply & Demand

Without a doubt, the supply of lithium is going to increase in 2023. Lithium Americas (NYSE:LAC) South American Cauchari-Olaroz project will be coming online in late 2022 and ramping production 2023. Concerning demand though, I do not think Goldman has a clear picture (nor does anyone for that matter). The amount of demand coming down the hopper is simply mind blowing.

Stocks to Play the Goldman Dip

At this point, it should be apparent that either prices continue to rise, or they retreat some, but will prices implode to $16,000 a tonne? It appears unlikely. Hence we should view this as an opportunity to pick up good stocks at depressed prices. Here’s is what is currently on a blue light special sale:

Lithium Americas – With the South American project ramping up in late 2022 (along with Thacker Pass wrapping up the legal case) — factor in various other projects and partial ownership in Arena Minerals (OTCPK:AMRZF) combined with a strong balance sheet; what’s not to like? Granted, the Thacker Pass legal case carries risk, but given the support of the Trump and Biden administrations for the project and state (along with federal approval), I think the odds are LAC will prevail.

Standard Lithium (SLI) – Koch injected $100 million into the Arkansas project and the German powerhouse Lanxess sealed a deal recently. I find the company to be a steal of a deal with the share price at $5 and some change. Granted, infamous short seller group Hindenberg (currently under FBI investigation) did pen a hit piece on the company and the company has yet to fully recover from share price wise. We wrote two counter pieces to explain why the report was a fabrication.

Cypress Development (OTCQB:CYDVF) – A successful pilot plant in operation, favorable lithium results, a strong treasury, water rights, along with a recent acquisition that will expand the NPV, make Cypress my number one holding by weight. Those investors that have patience could be well rewarded IF they can afford to sit and wait. A new study is in the works. After that, I expect to see some partnership and then (longer term) an uplisting. The mine is projected to be in production by 2026.

Conclusion

Games within games are being played. You can sit and balk at the games or you can embrace the long term view. Realize that these short term fluctuations create opportunity. Granted, inflation woes will continue to plague the market for some time. Yet with time even these will iron out. Could lithium go down? Absolutely. Will it go down to $16,000 a tonne? I would not place that bet. However, some pull back in prices might be a good thing. Remember that lithium bed does not need to be too hot or too cold. It needs to be just right for all the players involved price wise. Moving on to LAC.

Right now, we are acquiring quality lithium stocks. I liked LAC at $35, I’m absolutely enthralled at $23-$24 range given the long term prospects and the absolutely immense side of Thacker Pass and the associated property that nears the Oregon border.

“Luck favours the daring” – Thucydides.

Source: seekingalpha.com