Dryblower on lithium's season of regret

IN a boom everyone pays too much for everything, from residential property to lithium, and it’s the lithium which interests Dryblower because it seems that the lithium business has entered what might be called a season of regret.
Dryblower on lithium's season of regret Dryblower on lithium's season of regret Dryblower on lithium's season of regret Dryblower on lithium's season of regret Dryblower on lithium's season of regret

US-based Albemarle is a prime example of appearing to overpay for an asset in a rush to boost the size of its lithium business by last year offering to fork out $1.6 billion for a half-share in the Wodgina project in WA, while Wesfarmers is another example with its proposed $775 million purchase of Kidman Resources.

It's a guess, but it's reasonable to see both of the assets involved in those deals being worth a lot less today than their original price, and it's also interesting to note that both deals are yet to be completed.

Over time, companies which overpay can absorb the extra cost of an ill-timed acquisition but long before that happens management of the companies which overpaid can expect a grilling from shareholders concerned that their money might not have been spent wisely.

Albemarle's agreement with Mineral Resources was originally expected to be finalised before June 30, but is now scheduled for completion before Christmas, assuming a fistful of government approvals are received and Albemarle is happy with the plant being built by Mineral Resources and not concerned with a tailings dam leak reported last week.

Wesfarmers is expected to wrap up its deal to buy Kidman in the next few months though speculation continues to surface about a rival bid, perhaps from Rio Tinto - though why anyone would top an already generous price is an interesting question given the worldwide glut of lithium and a steady flow of news about big new discoveries.

Buyer's remorse is another way of describing lithium today and while overpaying for assets and a dash of irrational exuberance on the part of governments was always going to lead to a downer the question now is how long will the downer last.

The answer, unfortunately for investors exposed to lithium stocks and companies hoping to expand rapidly, is quite some time because what's happening is beyond the control of the miners and at this stage of the business largely in the hands of government tax policies.

There are other factors are work in the lithium slowdown, not least the problem of it not being a mineral in short supply, once you start looking for it. But that stage of the shake-out is further down the track and will be largely focussed on production costs (cheaper the better) and quality (purer the better).

Liontown Resources, the latest success story of the Australian lithium exploration sector has just demonstrated the abundance of lithium, rushing from nowhere at its Kathleen Valley discovery in WA to a 75 million tonne resource estimate, and $230 million stock market valuation.

Why wouldn't Rio Tinto take a bite of Liontown rather than overbid Wesfarmers for Kidman if it really wants a slice of lithium?

Too much lithium chasing what is still a small market is the root cause of the problems emerging in the Australian and Chilean lithium industry and while the glut will fade as demand rises the problem is knowing when the demand surge might arrive.

That's when governments enter the equation because they have been playing both sides of the street, encouraging the production of lithium because of its use in low-pollution electric cars, and then discouraging it by removing tax incentives on the same electric cars.

Being jerked around by changes to government policy is nothing new, but what's happening in the vehicle market is the place to start in trying to understand where lithium is heading.

In simple terms the widely forecast boom in electric cars has not arrived and while they will one day supersede petrol and diesel vehicles it's going to be a fiercely expensive and slow-moving process.

The first hurdle is the problem of government subsidies and the tolerance of the taxpayer base to aid private car buyers and while it's early days there does appear to be a direct link between the size of government hand-outs and the number of vehicles sold.

Removing (or lowering) subsidies, which has happened in China and Europe, crushes electric car demand because it takes a financial helping hand to help car buyers get over other battery car drawbacks, such as range anxiety and a shortage of repowering stations.

Cold comfort as it might be but Australian lithium miners are not alone in the world of government-induced uncertainty with Chile also meddling in the market, first by telling the world it was open for battery-business by promising cut-rate lithium and then discovering that Albemarle was far from happy with the price it was expected to accept.

The net result of the troubles in Chile is that a battery-making dream looks like going up in smoke, not only because of government interference but also because battery demand is not as strong as forecast.

In the long run lithium and electric cars will enjoy a brilliant future, though as Lord Keynes warned in the long run, we're all dead.