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Kaiser Watch December 30, 2022: Lithium Bottom-Fish Stocking Stuffers

Posted: Dec 30, 2022JK: Kaiser Watch December 30, 2022 with Jim Goddard and John Kaiser
Published: Dec 30, 2022KRO: Kaiser Watch December 30, 2022: Lithium Bottom-Fish Stocking Stuffers
Kaiser Watch is a weekly 15-30 minute audio show produced by KaiserResearch.com with Jim Goddard and John Kaiser discussing the junior resource sector. The show has three parts: the first is a general topic, the second discusses developments involving the KRO Favorites which as of January 1, 2022 are no longer exclusive to KRO members, and the third is a peek inside the members only KRO Bottom-Fish Workshop. KRO is transitioning into a Do-It-Yourself research platform that covers all Canadian and Australian resource listings and which also features a Bottom-Fish Workshop where John Kaiser highlights juniors with solvable "missing pieces". Companies that graduate from the Workshop may become part of the Annual Favorites collection whose profiles and related commentary are unrestricted for non-members. Visit the KRO Favorites Dashboard for quick access to all the unrestricted Favorites related content. KRO is not sponsored or compensated directly or indirectly by public companies. The business model is based solely on membership fees in the form of a USD $450 Annual Individual Membership that at some point will increase substantially to reflect KRO's shift to a research platform. However, when the change happens active members will be grandfathered to renew indefinitely at the current rate provided they maintain a continuous paid membership. Kaiser Watch is available at Kaiser Research YouTube and as a Podcast downloadable from KaiserResearch.com. Each episode will be made available through the publication of a Kaiser Media Watch blog report which will provide links to specific questions and include supplementary graphics. All episodes will be archived at Kaiser Watch.

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Kaiser Watch December 30, 2022: Lithium Bottom-Fish Stocking Stuffers
Jim (0:00:00): Lithium Mania 2.0 has been a frequent theme on Kaiser Watch during the second half of 2022 though you have not said much about specific companies. You have pointed out lithium bottom-fish to your Kaiser Research Online members who pay $450 per year, but now you want to introduce a few as year-end stocking stuffers for our Kaiser Watch audience. Why do you believe lithium will excite the market more than gold in 2023?

The lithium bottom-fish stocking stuffers I will introduce today are all early stage exploration juniors who could end up repeating what Patriot Battery Metals delivered this year with its Corvette project in the James Bay region. Patriot started the year in the $0.40-$0.50 range and started to break out in March when drilling got underway at Corvette. By June it was reporting long intersections of 1%-2% Li2O, confirming that the pegmatite bodies within the Corvette trend where big and rich enough to be future mine candidates. The stock has traded as high as $10.50 in early December where it had a $1.3 billion implied project value. The stock is volatile and will not have a resource estimate until the middle of 2023 when it will shift into a combination of feasibility demonstration and additional discovery exploration to reveal the scale of its future lithium supply potential. Lithium Mania 2.0 is about spending the next few years identifying the second half of the ten-fold supply expansion required to allow new EV sales to replace ICE car sales by 2035 as part of the energy transition needed to subdue the climate change consequences of global warming. The bottom-fish lithium juniors I have flagged as lithium enriched pegmatite hunters have market caps below $50 million, in some cases below $10 million. Any one of these could repeat the Patriot Battery success by the end of 2023 and deliver 10-100 fold gains. Institutional investors are not interested in exploration juniors, and retail investors don't yet understand the nature of Lithium Mania 2.0.

Most retail investors heard about lithium in 2015-2018 during which advanced lithium juniors got going. They benefited from Lithium Mania 1.0 while lithium carbonate prices were $10-$15/lb but then had to struggle through the 2018-2020 slump of lithium carbonate prices back below $3/lb after the Australian pegmatite hunters proved way to successful. But when the Australian created lithium supply-demand imbalance began to reverse in 2021, sending lithium carbonate prices up ten-fold in 2022, it carried two messages.

The simple one that we have learned to distrust (rare earths, cobalt, vanadium) is that lithium projects are now well in the money and need to be funded to production. The second more important one was that the supply-demand imbalance reversed to the benefit of lithium suppliers because the car makers had gone beyond the point of no return, and suddenly those future demand projections made in 2015-2017 linked to the idea of EV replacement of ICE car sales by 2035 were no longer wishful thinking. It is this combination which pulled institutional capital into the more advanced projects like Sigma Lithium, Critical Elements, Frontier Lithium and Cypress, both through market purchases which created the upwards revaluation, and through treasury purchases which nailed the new valuations to the wall and provided the means to execute on the development cycle.

From what I have seen so far the valuations appear to reflect fair value based on long term $10-$15/lb lithium carbonate pricing. The institutional audience is sophisticated enough to understand current prices should not be the basis for valuing a project. The way I see it, if current prices prevail in the long run the EV replacement dreams evaporate because car prices simply won't be low enough to support mass adoption. On the other hand if LCE drops below $10/lb as Goldman Sachs believes it will, there won't be enough lithium available by 2030-2035 to build the volume of affordable cars needed to displace ICE.

Although EV sales as a percentage of total sales are rising, it is still just the beginning, and as such this trend will be less vulnerable to an economic slowdown than total car sales. We might even be given the optics of EV new car sales share rising while total car sales are declining if we are forced to work our way through a recession.

The pricing upside for advanced projects such as Sigma Lithium comes from expanding the production scale either before the facility is built or adding more capacity (an analogue would be Verde Agritech which started with 600,000 tpa and initially struggled, but in 2020 felt justified to expand to 3,000,000 tpa, which it must now fulfill over the next two years, though it is already planning for an expansion to 10M tpa, premised on farmer adoption of K Forte and continuing high KCl prices).

The institutional audience at this stage is not interested in betting on discovery stage juniors like my bottom-fish stocking stuffers, but it is primed to respond rapidly to new discoveries such as what PMET delivered at Corvette because a resource estimate and PEA are possible within two years of a discovery hole.

Pegmatite plays are preferable over brine and claystone because the impurity issues of a pegmatite can be rapidly isolated through metallurgical studies making spodumene concentrate, whereas for brines and claystones customized processing technology needs to be refined. Back of the napkin calculations about the value potential of en emerging pegmatite discovery can be done very quickly compared to brine and claystone plays.

Retail audiences at this stage do not appreciate the pegmatite discovery basis of Lithium Mania 2.0, even though success can deliver 10-100 fold gains. One could speculate that retail investors are thinking they missed the boat, that winners of the past year which are advanced lithium juniors will solve the supply problem. But I think the retail audience, especially the younger generations, simply never had eyes on the junior resource sector, at least the critical metals part of it. And 2022 was a very bad year for the stories they had sunk their teeth into, so for the moment they have no fear of missing out on anything, and the basis for greed is not yet visible.

There is the eternal optimism that gold will make a comeback and inject life into the juniors. But what circumstances that could take gold to $4,000 would be helpful to gold exploration plays and currently marginal ounces in the ground? I've long thought of gold as a way to hedge large scale uncertainty, and I think it will continue to play that role, but it won't play that role in terms of real price gains that are of a sufficient multiple to create a gold exploration and development mania. The experience of gold from the 1970's onward, however, is a roadmap for understanding the lithium sector and appreciating why some people call lithium "white gold".

Consider the situation of lithium, which for decades bumbled along at $2-$4/lb lithium carbonate, with demand tracking macro-economic growth until small lithium ion batteries began to be incorporated into cell phones and laptops. That helped the price into the $10-$15/lb range around 2010 which was a substantial real gain, similar to what gold underwent during the seventies. Lithium Mania 1.0 kicked in during 2015 when the market saw Tesla leading EV growth sectors and the other car makers waking up to the EV threat to their ICE fleets. The Australian mobilization of new pegmatite sourced supply created the 2018-2020 LCE price collapse back to where it started, but with the reversal of the supply-demand imbalance in 2021 lithium is now at an all time record real price high. Even if we see a retreat back to $10-$15/lb, that is still a huge real price gain similar to what gold experiences in the 1970s.

When gold stabilized at $400 in the eighties it created a whole new exploration and development reality for juniors, ranging from heap leaching low grade oxide deposits in Nevada to chasing wider but lower grade mineralized structures than was feasible while gold remained fixed at $35/oz. By the 1990s copper-gold systems had become a development target. The comparable situation today with lithium is in the form of all those pegmatites noticed while exploring for precious and base metals in past decades but ignored because the global market size was small and dominated by a few high value brine (Chile) or pegmatite (Greenbushes) sources. The lithium market worth $200 million in 2005 became worth $18 billion in 2021, and will be a $100-$200 billion market in 2030-2040 before new technologies display the lithium ion cell.

Consider that annual gold production in 1971 was worth $2 billion. From 1980-2002 its annual value ranged $15-$25 billion. In 2010 the value of gold production leapt to $102 billion and in 2021 was worth $173 billion. It took 30 years for the value of annual gold supply to grow from $20 billion to $100 billion. From 1980-2021 the mining industry doubled the above ground gold stock to about 6.5 billion ounces. Most of this gold worth about $12 trillion today sits in vaults serving no purpose other than to hedge against uncertainty and inflation. $400 gold in 1980 inflation-adjusted to the present using US CPI is $1,434, which means gold has undergone a 25% real price gain during this period. The best hope for a bigger real price gain for gold over the next few years is a continuation of official buying by central banks eager to diversify away from US dollar reserves in light of actions the United States and democratic allies have taken against thug nations like Russia and will take if China chooses to annex Taiwan.

A higher creeping real gold price will not make currently marginal gold systems worth developing and will not ignite a speculative frenzy. It would help gold exploration juniors because the annual gold market is very deep, which means a new gold discovery does not need to worry about individually over-supplying the market as can be the case with smaller critical mineral markets. So gold focused discovery exploration juniors are still exciting to own as bottom-fish. But ounces in the ground need a substantial real price gain to become interesting. Gold blipping to $2,200 in 2023 won't be good enough.

Consider lithium in contrast. The lithium market went from $1 billion in 2015 to $9.6 billion in 2018 before crashing back to $2.8 billion in 2020. This year's nominal value will be $30-$40 billion (reality will be lower because suppliers were locked into lower contract prices, though that will not be the case going forward). Assume a ten fold demand expansion over the next decade to 1 million tonnes of lithium metal. Assume lithium carbonate ends up back in the $10-$15/lb range. That annual lithium market would be worth $120-$180 billion. This magnitude of metal value appreciation over such a short time scale is without precedent. And the demand is not being driven by grumpy old people fearful of fiat currency debasement and resentful about social safety nets. It is being driven by a combination of policy and decisions car makers have already made that can't be changed even if a fossil fuel pumper becomes president.

I have been stuffing these lithium exploration bottom-fish into stockings because the market will begin to understand the enormous scale of Lithium Mania 2.0 in 2023. In the graphic above I have tried to illustrate how three decades of growth in the annual value of gold production is being compressed into just one decade for lithium. This is an unprecedented window of opportunity for resource juniors focused on pegmatite exploration, in particular in Canada which is on almost nobody's radar. My big prediction is that in 2023 the world will awaken to the problem of Lithium Mania 2.0 and why regions such as Canada, Brazil, Scandinavia and parts of Africa are crucial to delivering the second half of the ten-fold supply expansion needed by 2030 to make EV replacement of ICE by 2035 a reality.

Patriot Battery Metals Corp (PMET-V)

Unrated Spec Value
Corvette Canada - Quebec 3-Discovery Delineation Li

Long Term Annual Average Gold Price with CPI Adjustment

Charts comparing long term lithium and gold prices

Lithium Supply Evolution Chart

Annual Gold Supply Value with Projected Lithium Supply Value Superimposed

IPV Chart for Patriot Battery Metals
Jim (0:15:28): Why do you like Brunswick Exploration?
Brunswick Exploration Inc (BRW-V)

Bottom-Fish Spec Value
Hearst Canada - Ontario 2-Target Drilling Li

IPV Chart for Brunswick Exploration
Jim (0:20:45): Why do you like Dios Exploration?
Dios Exploration Inc (DOS-V)

Bottom-Fish Spec Value
Nemiscau-North Canada - Quebec 1-Grassroots Li

IPV Chart for Dios Exploration
Jim (0:26:42): Why do you like Xplore Resources Corp?
Xplore Resources Corp (XPLR-V)

Bottom-Fish Spec Value
Surge Canada - Ontario 2-Target Drilling Li

IPV Chart for Xplore Resources Corp
Jim (0:31:45): Why do you like Lodestar Battery Metals?

IPV Chart for Lodestar Battery Metals
Jim (0:35:10): Why do you like Searchlight Resources?
Searchlight Resources Inc (SCLT-V)

Bottom-Fish Spec Value
Jan Lake Canada - Saskatchewan 1-Grassroots Li

IPV Chart for Searchlight Resources
Disclosure: JK owns shares of Brunswick, Dios, Lodestar and Xplore; Brunswick, Dios, Lodestar, Searchlight and Xplore are Bottom-Fish Spec Value rated

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