A price projection—or any model—can only be as good as its assumptions are accurate. It doesn’t matter how thick the report is, nor how impressive the equations are, nor how expensive the presenter’s suit is, nor how famous the firm making the call is. If the assumptions are off, the result will be garbage.
In the immortal words of Monty Python, it’s only a model.
I bring this up because many investors and speculators who should know better often forget. For example, what happens when a well-known name like Morgan Stanley (MS) comes out with a model projecting much lower lithium prices by 2021? One might think that this opinion would affect primarily emerging producers hoping to go into production around 2021. But no, large numbers of investors dumped their shares in profitable lithium producers like Albemarle (ALB) that were making good money before the recent increases in lithium prices.
This is particularly silly, because the impetus for the MS report was the new permits for expanded production that the Chilean government issued to the world’s largest lithium producers. That includes Albemarle and rival SQM. But permits aren’t the same as production. It takes years for the one to become the other. That’s if everything goes right—which it never does.
This isn’t just an assumption that’s questionable; it could turn out to be dead wrong.
And what about the model’s demand assumptions?
The press coverage doesn’t include those details, but according to MS’s model, electric cars would have to account for 31% of all car sales by 2025 to soak up the (assumed) extra production. Given the single-digit numbers today, it may seem reasonable to be skeptical that this will happen. What this doesn’t tell us includes:
- Was adoption of electric busses and trucks, which use much bigger batteries, included?
- What about industrial- and utility-scale batteries, like the big one Tesla installed in Australia?
- Does the model take into account carmakers like Volvo going all electric by next year?
- Does the model take into account the proliferation of new laws banning gas and diesel engines, as well as those providing tax incentives for buying electric cars?
- Does the model assume that other proposed new sources of supply will actually come online?
Maybe someday I’ll have a talk with the guys at MS and they’ll tell me.
Note that I’m not saying that lithium has to go higher. It may or may not. All I’m saying is that one bank’s report should not be taken as divine revelation. And even if the report turns out to be roughly right, it won’t stop today’s profitable producers from making money hand over fist until prices actually do decline substantially.
What about junior lithium explorers? I’ve stayed away from them for some time. Well before the MS report, I was warning readers that lithium is not rare, and major producers are able to greatly increase output if prices remain elevated long enough to incent them to do so.
Fortunately for resource investors, there are other minerals essential to the new energy paradigm that are in short supply. These make much more compelling cases for speculation. I’m particularly bullish on nickel, copper, cobalt, and silver (which goes in the solar panels, not the batteries). I’m researching good speculations in this space now.
And I’ll be on the lookout for killer assumptions other analysts make, perhaps in order to grab headlines… They could create great buying opportunities.
