Tesla (NASDAQ: TSLA) has released the Master Plan 3 and within it is a significant lesson for those bullish on lithium stocks. That lesson being that there is no shortage of lithium out there. There is no shortage of lithium resources and the only constraint in converting those into batteries is the application of capital and effort. The meaning of this is that there's no long term scarcity or shortage valuation to lithium. There is, instead, a short to medium term scarcity value to current lithium mines and current lithium producers. This is impor5tant for any valuation of lithium stocks.
So, this applies to Albemarle, Ganfeng, Core Lithium and Lake Resources among many others. The point being that there is simply nothing in the lithium space which is a tuck it away and forget about it investment. Not at current elevated levels of lithium pricing there isn't. Any- and every- thing has to be viewed through this lens of there being plenty of lithium out there. The only shortage we've even possibly got is of current mines and extraction plants for lithium. And if we can't believe Tesla on such a point then who can we believe?
Two charts from the report to show the point.
Note that resources are what we know is out there and really pretty certain that we can extract. We do not have an operating mine, nor even the licences or proof as yet. But we really are pretty certain, just not perfectly - that's reserves, when we've the proof.
Then there's this. As interest in a mineral rises then more of those resources get proven up into reserves. Because people go spend money on doing the proof:
What this is telling us is that there just isn't a shortage of lithium out there. Even if we go and electrify darn near everything. This means that there's no scarcity value to lithium in the long term. More than that, it means we should expect the lithium price to decline further over time. No, we don't know exactly when. But in the long term we should expect lithium to sell for its production cost plus a decent capital margin - also known as a profit. But that will be the price for the highest cost producer required to meet market demand. So, low cost producers will make good and higher profits, the highest cost producer that stays in business will just about break even.This has large implications for the long term of lithium mining company stock prices. Currently they're boosted by the scarcity not of lithium but of people currently mining. As there is no lithium scarcity in the long term nor will there be any scarcity of lithium miners. The current price premium for lithium will disappear (it's already down 40% in the past 6 months) and therefore so will that for extant lithium miners.
This leaves us with the really important lithium mining stock question. We know that premium will disappear we just don't know when. There will be fat profits for the moment but there's a cliff edge approaching. So, be very aware, if not wary, of long term positions in lithium miners. Speculation, trading of them, by all means, sure and yes. But they're simply not long term positions for the pension fund.
