Pilbara Minerals: the lithium rush that doubled the investment in months

Pilbara Minerals: how lithium sent the stock soaring 150% at the height of the frenzy

In January 2016, an Australian mining company called Pilbara Minerals was trading at around 0.40 Australian dollars. Four months later, its shares were above 0.60 and a retail investor was boasting that he had sold them for a 150% profit. The trigger was neither a geological discovery nor a billion-dollar contract: it was the word lithium. The company, which operates the Pilgangoora project 120 kilometres from Port Hedland in Western Australia, became the perfect vehicle for a speculative wave that swept up a dozen junior miners of the same metal.

The thesis repeated in the analyses of the time is simple: demand for batteries for electric cars, mobile phones and renewable energy storage is growing exponentially, and lithium supply cannot keep up. Goldman Sachs and Citigroup, according to the material cited, fed the narrative with demand growth projections of 64% through 2020. The price of lithium carbonate had risen 47% year to date, according to the data available in February. With that tailwind, any miner with a lithium project seemed like an unrepeatable opportunity.

From 0.40 to 0.60 dollars: Pilbara Minerals' climb

The stock's timeline trinc in the material is a textbook case of euphoria. In late January, Pilbara rises 6.5% in a single session and is recommended as a buy through a low-cost broker. Days later, another 6%, then 4.35%. In early February, a cumulative 19%. By the end of that month, the investor trinc the stock has racked up more than 25% in gains in a few weeks. In April, Pilbara adds 9% and reaches 60 cents. In May, 16% in one night and 11% in another. The same investor who sold with a 150% gain laments: "I shouldn't have sold".

The phenomenon is not isolated. Dakota Minerals rises 18% in one session, Lithium Australia 9%, Neometals 3%, Metalicity 13%, Hannans Rewards 50% and Argonaut Resources 46%. The list of junior miners with lithium projects keeps multiplying: Galaxy Resources, Sayona Mining, Tempo, Dakota, Neometals, Lithium Australia, Metalicity, Hannans Rewards, Argonaut Resources. They all rise. Almost all correct and rise again. The pattern repeats with a regularity that starts to look suspicious.

Why did lithium soar in 2016?

The explanation offered in the material rests on three pillars. The first is demand for rechargeable batteries: mobile phones, laptops, eReaders, tablets and, above all, electric cars. The second is energy storage for renewables, which requires high-density batteries. The third is China, which concentrates the buying of lithium concentrates and cannot find enough supply. "There is not enough lithium right now to supply China, Tesla", the material states. The Tesla effect is explicitly cited as a catalyst: Elon Musk's company's electric vehicles are shaking up the automotive industry and reshaping the minerals supply chain.

The figures used in the cited articles are striking: global lithium salt sales are around 1 billion dollars a year, a small amount for the size of the market it moves, which explains why any supply strain translates into disproportionate price increases. Global lithium production would double over the next eight years, according to the projections being shared. And lithium carbonate prices had risen 47% year to date, with Citigroup projecting the trend would continue into 2017.

The technical warning nobody wanted to hear

Not everyone bought the story. One dissenting voice warned that the accumulation/distribution charts of these miners showed a worrying pattern: the indicator was falling while the price was rising. In technical terms, the smart money would be using the upward momentum to sell. "As fast as it rose, it may sink", the warning went. The response was not long in coming: "The underlying trend is so ugly that Lithium Australia, Galaxy, Neometals have surged again". The discussion turned into a clash between technical analysis and fundamental analysis. For some, the indicators foreshadowed a collapse. For others, lithium was an asset with demand and price fundamentals that invalidated any technical signal.

The technical rebuttal has substance. When asked why the accumulation/distribution indicator was falling just as the rise began in 2015, the answer was that those were other stocks, from another country. Most of the lithium miners were at annual highs. The discrepancy was left unresolved. It is the exact point where the analysis gets stuck: was it a speculative bubble or the start of a structural cycle?

The real business: Pilgangoora and tantalum

Beyond the share price, Pilbara Minerals has a tangible asset. The Pilgangoora project, 120 kilometres south of Port Hedland, contains the world's second-largest spodumene resource and one of the largest tantalite deposits. The company completed a pre-antiestéticasibility study which, according to the statement reproduced, confirmed that the project was on track to become a globally significant mining hub for lithium concentrates for decades. That is the foundation the bulls cite when asked about the numbers.

The financial situation, however, was not that of an established company. Pilbara was in a more stable position than Neometals, but was still losing money. The explanation given is that there was previously no demand and the lithium price was low, so it was normal for these companies not to make money. "Things have changed and exponential growth is projected through 2020-2025", the argument goes. The stock market, in that logic, discounts what the miners will earn in the future, not what they earn now.

The rotation: from Pilbara to Dakota, Metalicity and Sayona

As Pilbara moves away from 0.40 dollars and approaches the dollar, the focus shifts to cheaper miners that have not yet run. Dakota Minerals, at 14 cents, is presented as the new opportunity. Metalicity, with lithium and gold projects, is offered as a lower-risk alternative. Sayona Mining, which has just acquired the Authier lithium deposit in Quebec for 4 million Canadian dollars, enters the portfolio. Argonaut Resources and Hannans Rewards join the list. The strategy is clear: find the next Pilbara before it takes off.

The problem is that the list grows faster than the capacity to analyse it. "I find it very suspicious that there are so many", is the admission. Selection becomes an act of faith. The ones that have been rising for a year, like Pilbara, are considered expensive. The ones just starting their rally, like Sayona or Argonaut, are considered opportunities. Constant rotation generates gains for those who get the timing right and losses for those who arrive late.

The ending: where is the ceiling

The question hanging over the whole material is how far this can go. The optimists say Pilbara has no resistance until 0.8 euros, the 2007 level, and that lithium is "the new gasoline". The cautious point out that with cheap oil, investments in electric cars face an uphill battle, and that these stocks move more on speculation than on the companies' future. The lithium price, they admit, is hard to track in real time: there is no lithium Brent to hold on to. Meanwhile, the share price keeps its course, oblivious to the warnings. The analysis stops here, with the miners at their highs and the doubt of whether the next move will be another rally or the correction some have been announcing for months.