January 22, 2018: Blind Faith Journey. Featuring Dire...

January22,2018:BlindFaithJourney.FeaturingDireStraits&MoodyBlues

Istarttodaywithareminderofthestronglypositiveshort(6-12months),medium(1-4years)andlong(5-10years)termlithiumthematic:

2018-“TheSongRemainstheSame”implieswegetboththegood–secularupMegaTrend;alongwiththeinevitablepullbacks,triggeredrepeatedlyandpredictablyby“oversupplyfears”.

ComingbacktoLedZeppelin’sHousesoftheHoly.Side1,Song3.TheEndoftheLithium-ionBullis…

OvertheHills&FarAway:https://www.youtube.com/watch?v=60iwmyhV8pQ

“ManyhaveIloved,andmanytimesbeenbittenManytimesI'vegazedalongtheopenroad

Manydreamscometrue,andsomehavesilverlinings

Iliveformydream,andapocketfullofgold

Mellowisthemanwhoknowswhathe'sbeenmissingMany,manymencan'tseetheopenroad”

MellowistheAgingSkepticwhoknowswhathe’sbeenmissing.It’snottoolate,it’searly.Iliveformydream,andapocketfulloflithium(cashmachines).Remember:thisisaMarathon,notaSprint.Along-termJourney:

Don’tStopBelieving:https://www.youtube.com/watch?v=VcjzHMhBtf0InSeptember,Ireferencedviaanautomobilemetaphor,SteveWinwood’sTraffic–Feelin’AlrighttodescribehowSQMmadeusallfeelaftertheirInvestorDay.Though“ICan’tFindMyWayHome,”resonatedlastweek,Isay,Chillax.HaveWinwoodBlindFaith:

https://www.youtube.com/watch?v=IN1J5sMv28Q&list=PLIjkHGKwbuLkz49fpdJ-LfEoW95arp7s-

AndThink:VujaDe,TippingPoint,MaturingonOptimism,EuphoriaComing

AndPractice:Yoga,TM

TreePose:SunRisingon2018#Lithium

TheEmpireStrikesBack?

IwassittingwiththeCEOofalithiumproducerwhenSQM/CORFOnewsfirsthitviaaRosskill-buzzTweetabout216,000tons,quotingCORFO’sEduardoBitran.Firstinstinctwasbleak:

Star(Alliance)Wars:The(Chilean)EmpireStrikesBack

EmpireStrikesBack-OriginalTrailer:https://www.youtube.com/watch?v=JNwNXF9Y6kY

Ihavesinceconnectedwith10+fundmanagersinAustralia,NewYorkandCanadadeeplyinvestedandknowledgeableaboutthelithiumspace,anequalnumberofCEOsoflithiumproducersandadvanceddevelopers,severaltechnicaladvisorswhoknowbrinesintimately,andseveralbulgebracketandboutiquesell-sideadvisors,tocorroborateviews.Apartofmewantstothankwithallmyheartallthoseresearchanalyststhatseemtobeincompetitionwitheachothertobe“TheFirst”tocalla“LithiumTop”.Youconstantlykeepcreatingdipbuyopportunities,whiledelayingfinancings,thuskeepingsupplytighterandlithiumpriceshigherforlonger.MorganStanley.“SignificantLipricedownsiderisk”

HSBC.“OpentheFloodgates”

CORFOsurelydeservesaVictoryLap.Moreonthatlater.ButIcan’thelpbutthinkthenon-political,OligopolisticportionoftheSQMbrain,wasnotunhappyforthismisperceptiontospreadasameanstoslowdownorthwartthemostadvancedprojectscurrentlyinmarketseekingfullfunding.AmongtheEmergingProducers,NemaskahasbeenhitthehardestYTD(seebelow).

AseniorexecutivefromaprominentdevelopmentprojectinArgentinaemailedme:

“…Wearenotconcernedandit'salongtermrampup.TheyhaveessentiallytwominesinAtacama,apotashmineandalithiummine.Thebrinetheyarereinjectingbackisthehighsulphatecontentonefromthepotashmine,whichisextremelyhardtoprocessforlithium.Theycan'ttripletheirvolumewithoutseverelyaffectinggrade,flowratesandwaterbalance.AlsorememberthatALBistryingtodothesamefromthesameSalar.”

CongratulationsUBSforgettingitright...

AndCormark…

BottomsUp!

Thehardworkandkeydifferentiatoratthisstageofthelithiumcycleistohaveatrue,proprietarysupplymodelandrealisticassessmentsofwhichnewprojectmaycomeonlineandinwhattimeframe.Veryfewbanksallocatecommitmenttodothisworkproperly–analysts’coverageuniverseistoolargeandtheymustspendalotoftheirtimenotdoingactualresearch.Noonemakingan“oversupply”callhasdoneacredible,rigorous,convincingbottom-upanalysis.JoeLowrycontinuestodothebestworkonsupplyandhasbeenthebestpriceforecaster:$12-15/kgthe“newnormal”forseveralmoreyears.Ihavebeenworkingwithpartnerstocreateourownsupplymodel.IexpecttraditionalinvestmentbankresearchqualitytodeterioratefurthernowthatMiFiDIIhasbeenintroducedinEuropeandislikelycomingtotheUS.Fundmanagersnowhavetopayharddollarsforvirtuallyeverythingbrokersprovide:conferences,1x1meetings,phoneaccesstoanalysts.Theywillclearlypayforlessofitandpassthe“savings”totheinvestorsintheirfunds.Activemutualfunds,alsounderpricingpressurefromtheshifttopassivemanagement,willincreasinglybenchmarkhug.Aseriesofnewdisruptionsareoccurringonaglobalbasis.ArtificialIntelligence,BigData,Robotics,ElectricVehicle,EnergyStorage,Blockchain.Eachcontainingadistinctnicheorniches.Highgrowth,butstillopaque.ThismaysoundcontrarianinthesedaysofallpassiveandETFsallthetime,butaconfluenceoffactorsarepointingtowardareturntoearlyhedgefunddays–modestsizeAUM,thematicspecialists,takingadvantageofinformationasymmetries.Superiorandsuper-normalrisk-adjustedreturnsareavailableforthosepossessingan“edge”.

#callme

AirSupply

Newnicknameforsell-sidefear-mongerswritinglithiumShortStories.AirSupplyisanyonewhohasn’tdonethebottomupworkbutmakesboldclaims.Thisoftenmanifestsitselfintextbookcommodityeconomictheorywelearnedinbusinessschool:“…commoditiesalwaysreverttomeanandmarginalcostofproduction....Lithiumpriceiswayaboveincentivepricesoentrantswillquicklycomeinandmeetdemand...Lithium,ofcourse,isnotrare…Itwillall“EndinTears”…Yeah,yeah.Eventually.In8-10years,maybe.LithiumcarbonateandhydroxideareSpecial.SpecialtyChemicals.10-20XEBITDA.Thelithiumsupplychainisglobalanddozensofnew,verylargecustomerswhohaveneverthoughtaboutlithiumaregettingtheirheadsaroundhowtogetapredictable,long-termsourceofsupply.Lithiumisn’teasyorsuperquicktoproduce.Productionisnotsuperscaleable.JamesBondRobertFriedlandlikestotalkaboutDRCcopperandCleanTeQ’scleanandgreencobalt/nickelsulphateatProjectSunriseinNewSouthWales.AtMines&MoneyLondonhecommentedabout“RevengeoftheMiners”givendemandfromEVrevolution.Hiscommentsareevenmoreapplicableforthosewithqualitylithiumassetsthatcanbeputintoproductionwithin7-10years,preferablysooner.AllsuchissuersarecurrentlyinundatedwithstrategicinterestfrommassivecompaniesfromtheUS,Europe,Korea,JapanandChina.Desperateforsupply.Lesssensitiveonprice,moreconcernedaboutsecurity.Iseethelithiumindustryevolvinginsomewayslikethecopperindustry,notsomuchironore.Economiesofscalematterlessinlithiumcomparedtoironore–$300-500Mcanbuildahighlyprofitablemedium-scalelithiumcashmachineworth$1.5-$2B+.Thetop4companiesprobablywillevolvetohold50-60%marketsharewithanotherdozenorsootherprojectsofscaleheldbyanother10-15companies.Justaguess.Newage,cleanandgreenDr.Lithium-thechemicalwiththePhD--maydisplaceoratleastbeseenascomparabletooldfogieDr.Copper,themetalwiththePhD,asaleadingindicatorofeconomicgrowth.Meantime,wheneveryouhearBigBankshouting“Oversupply,”thinkAirSupply.Noself-respectingJoeBatteryPackinvestorwhoisseriousaboutmakingmoneyinLithiumRockandBrinecantoleratelisteningtothistypeofmusic:

I’malloutofLove:https://www.youtube.com/watch?v=JWdZEumNRmIMakingLoveOutofNothingatAll:https://www.youtube.com/watch?v=ogoIxkPjRts

Mr.MarketYear-to-Date

Whilelowerquality/higherrisklithiumdeveloperswillalmostcertainlyexperienceoverthenext2-4years:DireStraits–MoneyforNothing:https://www.youtube.com/watch?v=lAD6Obi7CagIhavehighconfidencethatin2018/19highqualityassetsandcrediblemanagementteamslooksoonatRoyaltyKingCORFOnewsasanotherinalonglineof:

SultansofSwing:https://www.youtube.com/watch?v=Il8ZC3O64AU

OrPsychodelicMoodyBlues:RidemySee-saw:https://www.youtube.com/watch?v=Qggtp3Ffvwo&t=1sPerhapswewillseeincreasedprescriptions/demandfor#lithium’smedicinalattributesJ

IwillrestrictmycommentsinthisissuetoSQManditspartnersKidmanandLithiumAmericas.

TopShelfLithiumAmericasInrecognitionoftheirnewBigBoystatusontheNYSEfromthiscomingThursday,LACannouncedwhatisquitestandardforNYSE-listedcompanies:a“shelfregistration”forUSD500Mindebt,equityorothersecuritiesthattheycantapintoOVER25MONTHS.WhatotherEmergingProducerhassuchfinancialflexibilitytotapUScapitalmarkets?LACisnowfilingaccordingtogreateranddeepercorporateUSdisclosurerules,which,Iassume,wouldimplicitlyleadtoconservativenessinprovidingguidance:beextracarefultounder-promiseandover-deliver.Towit,LAC’sOperationalUpdateincludedavague“2020”start-upatCauchari,whenallpriorguidancefromSQMandLACwas2H2019.InthecontextofAirSupplymusicdrivinguscrazylastweekMr.MarketinsertedAC/DCHighwaytoHellbatteriesinsideStairwaytoHeavenLACmis-interpretingtheshelftomeansomesortofimmediate/dilutiveequityraise.MyguttellsmeLACmayusethisshelfsometimeforhighyielddebttoreplaceGanfeng/Bangchakloan.ArgentinaisabitofadarlingwithWallStreetdebtinvestorsandgivenMacri’sforeigninvestorcharmoffensiveandacceleratingGDPgrowth,IexpecttoseelotsofUSAcapitaldeployedtoArgentina.Meantime:

• Cormarkre-iteratedLACastheirTopLithiumPickandCAD13.25target• CanaccordupgradedLACfromHoldtoSpecBuy,$11target.• NationalBankFinancialalsoupgradedfromNeutraltoOutperformwitha$12.5target

KidmanResources

InJuly,Isaid,EyesWideShut

InSeptember,Isaid,Who’sNext?BargainInDecember,Isaid,LongLiveRock

Today,inthefaceofanotherKDRcollapseuponSQMnews,IaskTheWHO’smostfamousquestion.

WhoAreYou?https://www.youtube.com/watch?v=PdLIerfXuZ4

Answer:anequalpartnertowhatcouldbethelowestcost,longestlivedminerandrefineroflithiumhydroxideontheplanet.Infive-years-time,ifnotsooner,Mt.HollandmaybeconsideredSQM’s“flagshipasset”.KidmanhasfalleninsympathywithLACandintandemwithmosteveryASXEmergingProducer.Withthepolitical/CORFOdealbehindSQM,Isuspectwe’llbegintohearmorere-affirmationoftheirpedal-to-the-medalfocusonadvancingMt.Holland,foranyoneparanoidtheremightbeadelay.BlueOceanSecurities’SteuartMcIntyrejustpublishedatimelyaudioslidepresentationre-iteratingKidmanastheir“PreferredInstitutionalLithiumExposure”

http://www.blueoceanequities.com.au/kdr/

OnemorefromTheWHO.

I,Lithium-ionBull:Won’tGetFooledAgain(LivefromForestHills!):https://www.youtube.com/watch?v=9CqPMbRqVNg

Willyou?

RoyaltyKingCORFO

Ithinkit’sveryfairtoconcludethatasfaraslithiumisconcerned,ChilenowhasmoreSovereignriskthanArgentinaandAustralia.IwasabitsurprisedathowmuchSmoothOperatorSQMseemstohavehadtocapitulate,butIwonderifthisdealwillbefurtherre-negotiatedinafewyearsifPineradeliversmorebreadtoChileans.IrealizedwhowonthislatestroundofnegotiationswhenIwashonoredtobeputamongthatsmallcoterieoflithiumcommentatorstoreceiveatweetreplyfromTheTaxMan.

@EduardoBitranwasfurthergettingbusywith@globallithiumonTwitteronSaturday.Feelfreetolookitup.

GoodorBadforSQM?

I’mimplicitlybiasedtobelievetheabovetweetwrittenbeforeCORFOnewshit.Fastforwardto2018SeptemberInvestorDayand/ortheir25thNYSEAnniversaryBellRinging,IanticipateSQMwilltalkebullientlyaboutprogressatallthreeoftheirlithiumoperations,whilecontinuingtoshowhighlithiumpricesandforecasttightmarkets.ButI’mabitcautiousabouttheheavyhandofChileintheAtacama,whichwillreduceSQM’searningsimmediatelyvianewroyalty.SQMhasspokenbeforeabouthavinga“responsibilitytoitscustomers”togrowtomeettheirneeds.SQMismakinggoodonthatresponsibilitythroughaggressive,butprudentgrowth,withTierOneassetsdiversifiedbycountryandproductmix.IbelieveMr.MarkethasnotyetbeenpricinginwhatwillbethekeygrowthdriversandnewsflowforSQMoverthecomingyears:Cauchari-thenextbignewbrinebeingputintoproduction;lowestAISClithiumcarbonate.MtHolland–perhapsthelargest,lowestAISC,longestlivedlithiumhydroxideproducerglobally,locatedinasuperlowsovereignriskjurisdiction.

MineLife.MineDeath.Caucharihasa40+yearminelifeandSQMandLACequallyowntheasset.Mt.Hollandhasa50+yearminelifeandSQMandKDRequallyowntheasset.Ownershipisanimportantconcept.SQMownsnothinginAtacama.AndthenewagreementforeshadowsapossibilitythatSQMwillsellitslithiumfacilitiestoCORFO.Ithasonlya12-yearleasewithaputoptiontoselltoCORFO“thefacilitiesthatarenecessarytoincreasetheadditionalproductionandoperationcapacityrelatedtotheincreasedlithiumquota.Theexercisepriceofthisoptionisthereplacementvalueofthefacilitiesincludingdepreciation.”Ownershipisanimportantconcept.Agoodfriendcharacterizeditwell-SQMisaContractMineronbehalfofthepeopleofChile.Nowpaying3-8Xmoreintaxesthanpreviouslyfortheprivilegetoadminister“ThePeople’sLithium”.Iwouldputa30-50%probabilitytodaythattheSQM/CORFOdealwillbere-negotiateatsomestage.But,immediateterm,thedealshouldbeconsideredthe“basecasescenario”forSQM’sflagshipAtacamaassets.Whichmeans,Atacama,despitehavingtheworld’slowestcashoperatingcosts,nowisthesecondorthirdlowestcomparedtoCauchariandMt.HollandonthemuchmoreimportantAISC-all-in-sustaining-cost.2030“concession”meansAtacama–ShortLiveBrine-hasa12-yearMineDeath.

MyfriendIsuruSeneviratneofRadiantValueManagementsharedwithmehisview:

ThetermsofSQM’ssettlementareprettyrough.CORFOforcedSQMtoacknowledgethattheconcessionrunsoutin2030(irrespectiveofhowmuchlithiumisproducedbetweennowandthen),andagreeon:

• returningallassetstoCORFOatendofconcession• grantingapurchaseoptionforthewaterrightsacquiredbySQMSalar(Atacamasolar

evaporationsite)andproductionfacilities(Carmenchemicalprocessingplant).ThisincentivizesSQMtokeeppushinghardintoAustraliaandArgentina,evenastheynegotiateextendingtheconcessionwithChile’snewgovernment.Atfirstglance,SQM'sEBITDAfellfrom~$1bnto~$700min2018and~$800min2019.WearemodelingAtacamacapacityexpansionof43ktaby2021(withutilizationtofollow).SQMhastheabilitytogreatlyincreasedebtfromthecurrentlevels,soIdoubttheywillbecapitalconstrainedexecutingtheirgrowthplansacrossChile,ArgentinaandAustralia.Butthemassivedividendof2016willlikelynotberepeated.

WiththechangesinSQM’scorporategovernancestructure–andthesteppingdownofJulioPonce–perhapswewillseesomenewapproachesfromSQMintermsoftheirfinancingstrategy.Theymayleverup.Changedividendpolicy.IftheNutrien32%blockissoldtoanotherstrategic,SQM’sfinancialmanagementandpushforgeographicdiversificationwilllikelyincrease.DIVERSITYwasasubjectofoneofmyTweetsreferringtoaSimonMoores’commentontheenormousexpansionofEuropeanautomajorsworriedaboutsecuringsupply:

Don’tForgetDemand

InthewakeoftheSQMparanoia,it’seasytoforgetthatFordannounced$11BinEVinvestments,upfrom$4.5B,thatInfinitiisanothercarcompanygoingallelectricandprobablyanotherdozenrelevantDEMANDdatapointsthatarecomingsofrequentlyit’salmostimpossibletokeeptrack.Meanwhile,moreprooffromChinaontheOldNormalSynchronizedGlobalGrowth.

IsharedsomeMustSeeTVaswellfrom“Iain’ttalkingaboutrich,I’mtalkingaboutWEALTH”BlackRock.

Evy‘mynextcarwillbeelectric’HambrosoundsanawfullotlikeLithium-ionBull:

https://lnkd.in/eQmqs9mhttps://lnkd.in/e3gY_R7

On#lithium&batterymaterials:

"Fundamentallybullish...Structural(10-yr)demandthatdoesn'texistinothercommodities...

SpaceRocketjuniorlithiumandbatterymaterialsinvestmentsin2017…Oneup1800%!...MyNextCarwillbeElectric".

Broader#commoditiesthematic:BullRunin2018dueto:

1.SynchronizedGlobalGrowth;

2.Sixyearsunder-investmentinmining;3.ExplosivePriceResponse;

4.RobustMarginsandCashflow;5.LargePEdiscounttomarket

Disclaimer

Lithium-ionBull(ForestHills)isaperiodicpublication,writtenthroughmyadvisoryfirmRKEquityAdvisors,LLC.Imayact,ormayhaveactedinthepast,asafinancialadvisor,orcapitalraiserforcertainofthecompaniesmentionedhereinandmayreceive,ormayhavereceived,remunerationforservicesfromthosecompanies.I,RKEquityaswellastheirrespectivepartners,directors,shareholders,andemployeesmayholdstock,optionsorwarrantsinissuersmentionedhereinandmaymakepurchasesand/orsalesfromtimetotime,subject,ofcourse,torestrictedperiodsinwhichwemaypossessmaterial,non-publicinformation.Theinformationcontainedhereinisnotfinancialadviceandwhetherinpartorinitsentirety,neitherconstitutesanoffernormakesanyrecommendationtobuyorsellanysecurities.