Note: This article first appeared on Trend Investing on December 10, therefore all information is as of that date.
What will 2018 bring? I think an expansion on what we have seen in 2017, and quite possibly a 10-20% market correction along the way.
My top themes for 2018
- Continued growth in the electric vehicles and the EV metals thematic - especially lithium and cobalt, but also rare earths, graphite and nickel. This will be boosted by Governments (China, Europe, India, etc) getting stricter on emissions, as well as by cheaper and better EVs on the market (Tesla (NASDAQ:TSLA) Model 3, Renaut (OTCPK:RNLSY) Zoe, Nissan Leaf, GM (NYSE:GM) Bolt, BYD Qin etc).
- Smart cars and increased data usage with faster global connections. Increased demand for memory.
- Blockchain and Crypto currencies gaining more acceptance, perhaps going mainstream.
- Industrial and personal robots continue to replace/support humans. Internet of Things (IoT) becoming ubiquitous.
My number 1 investment principle right now that guides me in 2018
Buy investments with LIMITED SUPPLY and STRONG DEMAND. In 2018 I see cobalt, lithium, and Bitcoin fitting these criteria. Hence my 2018 stock picks features two well valued cobalt miners, two well valued lithium miners, and the number one in demand (with limited supply) cryptocurrency Bitcoin.
My top 5 stocks for 2018
1) Cobalt Blue [ASX:COB] [GR:COH] (OTCPK:CBBHF)- Price = AUD 0.59
Cobalt Blue are optioned to 100% own the Thackaringa cobalt-pyrite sulphide project in NSW Australia.
They now have an inferred and indicated resource of 54.9 million tonnes grading 0.091% cobalt (for ~50,000 tonnes of contained cobalt), with exploration upside. The resource is a shallow deposit continuing at depth, suitable for an open cut mine. The company refers to it as "one of the world's largest undeveloped cobalt resources." Cobalt Blue is targeting a resource of 100 million tonnes at 0.084% cobalt for 84,000 tonnes of contained cobalt. That will support a 20 year operation at 4,000 tonnes pa.
Cobalt Blue will have a low cost of production due to their ore type and a new way to process it using gravity separation. In a recent Proactive Investors interview CEO Joe Kaderavek said, "Thackaringa ore is completely different to a laterite deposit. The ore is essentially 20% pyrite (sulphide) mixed with 80% quartz/feldspar. The recent breakthrough in using simple and low-cost gravity separation technique takes advantage of the difference in weight of sulphide (hosting the cobalt) versus quartz/feldspar. The heavy sulphide separates easily. We therefore only need to process 20% of mined ore (sulphide) in a refinery."
Most of the laterite deposits will need to refine the ore at 0.1-0.2%, whereas Thackaringa will be refining concentrate at 0.4-0.5% cobalt.
My preliminary model has Cobalt Blue with an unrisked NPV8% of A$1.08b (or risked at A$540m). Given the current diluted enterprise value of about A$68m, the stock is very undervalued (due to early stage). My preliminary stock price target is A$2.75 (4.8x upside) for end 2020 assuming they make it to production at 4ktpa cobalt. I have assumed a US$30/lb cobalt selling price (and US$12/lb cost of production), which right now seems bullish, but I think will be realistic given the cobalt demand surge coming. Note if my model uses a a US$25/lb cobalt selling price then my price target reduces to AU$1.91 (3.4x upside). This shows the stock is very sensitive to cobalt prices.
I like that Cobalt Blue is a cobalt pure play not dependent on nickel or copper prices. I like that they have a large and growing cobalt sulphide resource, with good grades that can be easily concentrated to a higher grade 20% concentrate for much cheaper processing costs, and a very low sovereign risk. Valuation is also very attractive due to the early stage.
I rate the stock a very strong speculative buy, and have done so since they were priced at AUD 0.23 as you can read here.
Trend Investing subscribers can read my November 2017 interview "Cobalt Blue CEO Joe Kaderavek Talks With Matt Bohlsen Of Trend Investing.
2) Ardea Resources [ASX:ARL] [GR:A91] (OTC:ARRRF) - Price = AUD 1.26, USD 0.96
Ardea Resources 100% own the Kalgoorlie Nickel (laterite) Project (KNP) in Western Australia, just 150kms from Kalgoorlie.
Ardea state that they have "the largest cobalt resource in the developed world." Ardea's total cobalt and nickel resource continues to increase and now stands at 405,000 tonnes contained cobalt (grade 0.05%), 5.46 million tonnes contained nickel (grade 0.7%).
Ardea's higher grade KNP cobalt zone now has 65.7Mt of ore at 0.13% cobalt and 0.79% nickel. That works out to be a very healthy 85,410 tonnes of contained cobalt. Added to this is their recent scandium discovery, which will help reduce production costs as a valuable by-product credit, as will their PGEs, high-purity alumina, and chromium.
Ardea Resources Kalgoorlie Nickel (laterite) Project (KNP)
Australian cobalt projects listed by resource size including grade
Note that Ardea is a laterite ore so they will have a higher capex. Opex is expected to be relative low given free-digging nature of mineralisation (soft clays with an iron rich goethite, not nontronite, ore). Also their high pressure acid leach (HPAL) process has lower opex than atmospheric leach processes.
My very preliminary conservative model (not yet to be relied upon) has Ardea Resources with an unrisked NPV8% of A$1,150m (or risked at A$575m). This model will be revised to be a lot more accurate once I get the upcoming PEA/DFS results. Given the current diluted enterprise value of about A$140m, the stock appears undervalued (due to early stage). By way of comparison a similar project 16 months ahead, Clean TeQ has a market cap of A$728m (EV of A$554m) and their PEA has a post tax NPV8% of US$891m (~A$1.15b). I am holding off giving a price target until I can confirm my model assumptions better from the PEA/DFS. Ardea is sensitive to both nickel and cobalt prices.
I like that Ardea Resources KNP project has a large contained cobalt resource (405kt), a high and consistent grade zone, has valuable metals (cobalt, nickel, scandium, PGMs), and a very low sovereign risk. They also have several other projects such as their zinc-gold Lewis Ponds project, and their Mt Zephyr gold-nickel project. Their negative is KNP has a laterite ore so a higher start up capex, but the company will mitigate this with a modular production design (1mtpa, 2mtpa, 4mtpa). Valuation is still attractive due to the early stage.
I rate the stock a strong speculative buy.
Trend Investing subscribers can read my December 2017 interview "Ardea Resources Managing Director Matt Painter Talks With Matt Bohlsen Of Trend Investing."
Note: An alternative stock for cobalt, copper, nickel exposure is Glencore [LSX:GLEN] [HK:805] (OTCPK:GLCNF) as they have about 50% of their revenues from EV metals.
3) Neo Lithium [TSXV:NLC] (OTC:NTTHF) - Price = CAD 2.03, USD 1.58
Neo Lithium 100% own the Tres Quebradas (3Q) lithium brine project with "lithium rich brines hosted in salars and reservoirs covering 160Km2." The 3Q project has one of the highest lithium grades (716 mg/l average) of any project in Argentina, and also has industry leading low impurity levels.
Neo Lithium very recently released their PEA which included:
- Post tax NPV8% of C1.45b (US$1.13b), IRR of 24.4%.
- PEA based on a production rate of 35,000 tonnes of lithium carbonate per year.
- Expected mine life of 20 years with a 3 year ramp up period starting 2021.
- Fully loaded operating cost of US$2,791 per tonne of lithium carbonate.
- Total capital expenditure of US$588.7 million.
Neo Lithium summary of strengths
Neo Lithium trades on a diluted market cap of C$255m, and an enterprise value of CAD 190m due to having a large cash pile of CAD 65m. Given the company's PEA result of a unrisked NPV8% of C$1.45b, and hence a risked (50%) NPV8% of C$725m, the current enterprise value of CAD 190m is still very attractive. My stock price target is C$8.01 (3.9x upside) by end 2021, assuming they make it to production at 35ktpa.
I like Neo Lithium as they own 100% of their salar, have good lithium grades (one of the highest lithium grades in Argentina) and excellent brine chemistry, significant resource size upside (update early Q2 2018), an impressive PEA of C$1.45b, very well funded, excellent management, and are still very well valued. Their FS is due late 2018 or early 2019.
I rate them as a strong speculative buy.
Trend Investing subscribers can read my December 2017 interview, "Neo Lithium CEO Waldo Perez Talks With Matt Bohlsen Of Trend Investing."
4) Lithium Power International [ASX:LPI] (OTC:LTHHF) - Price = AUD 0.52, USD 0.36
Lithium Power International 50% owns their tenements at the Maricunga Salar in Chile. It has the third highest lithium grades globally, third to only the Atacama Salar operated by Albemarle (ALB) and SQM (SQM), and the Zhabuye salar in China.
The Maricunga Salar location map
Lithium Power's partners are a Chilean joint venture partner (32.3%) and Bearing Lithium [TSXV:BRZ] [GR:B6K1] (OTCQB:BRGRF) who acquired Li3Energy (17.7%). Note Lithium Power has a first right of refusal to acquire the Chilean JV partners 32.3%.
Maricunga is the highest grade pre-production lithium brine resource in the world at 1,160 mg/l LCE. The resource has grown 3.7 fold since 2016, and now stands at an impressive 2.15mt LCE.
Lithium Power International has the third highest lithium grade globally
Lithium Power International trades on a market cap of A$136m.
The company is due to imminently release their PFS. My stock price preliminary target (not yet to be relied upon) is A$1.36 (2.6x upside) by end 2021, assuming they make it to production (project 25ktpa). This may improve over time if the company increases their project production target, or increase their share in the project.
I like Lithium Power for their excellent lithium grades (3rd highest globally), good brine chemistry, significant resource size upside, near term catalysts (PFS-Dec 2017, DFS-mid 2018), and that they are still very well valued.
I rate them as a good speculative buy.
Trend Investing subscribers can read my November 2017 interview, "Lithium Power International CEO Martin Holland Talks With Matt Bohlsen Of Trend Investing."
Note: An alternative to LPI for those not wanting Chile risk would be Lithium X [TSXV:LIX] (ROCEF) (OTCQB:LIXXF). Another great value lithium miner is International Lithium Corp. [TSXV:ILC] (OTCPK:ILHMF).
5) Bitcoin Tracker EUR XBT Provider-ETN (COINXBE:SS) - Price = EURO 600
Bitcoin Tracker EUR is an open-end Exchange Traded Note incorporated in Sweden. The ETN provides investors with access to the returns of the underlying asset, EUR per bitcoin, less investor fees. The average EUR exchange rate of bitcoin from the exchanges: Bitfinex, Bitstamp and OKCoin provides the underlying reference price.
The fund currently began on 10/05/2015 and has a market cap of USD 240m, and an expense ratio of 2.5%. Daily volume has varied from around 10,000 to 85,000 shares traded, showing ample liquidity.
Bitcoin has a system/program designed to reach a maximum of 21 million bitcoins, and to date around 16.7 million have already been mined. This off course means supply is very limited, and with a growing demand we have seen the price of Bitcoin rise.
Bitcoin has a limited supply - just 21 million Bitcoins of which 16.7 million have already been mined
There is no way to value Bitcoin, except perhaps to compare it to the current money supply. It has been said the current value of the worlds coins and banknotes is $7.6 trillion, meaning Bitcoin's value if it reached 100% of the current money value would be $361,000, or 26 x higher than the near $14,000 price today. This means that Bitcoin offers an asymmetric risk reward.
I like Bitcoin as it has limited supply and growing demand; however investors should remember it can go to zero, so should invest only what they can afford to lose.
In choosing my top 5 stocks for 2018, I have focused on strong underlying trends and my areas of expertise. I have chosen investments with limited supply and strong demand.
My top five stocks for 2018 are Cobalt Blue, Ardea Resources, Neo Lithium, Lithium Power International, and Bitcoin (either direct or via Bitcoin Tracker EUR XBT Provider-ETN).
The main trends my top 5 are following are the EV metals demand (cobalt and lithium), and the blockchain/cryptos trend.
I see all five of these stocks as being high growth, and in sectors that should do well in 2018 and beyond.
As usual any comments are welcome.
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Disclosure: I am/we are long COBALT BLUE (ASX:COB), ARDEA RESOURCES (ASX:ARL), NEO LITHIUM (TSXV:NLC), LITHIUM POWER INTERNATIONAL (ASX:LPI), BITCOIN TRACKER EUR XBT PROVIDER-ETN (COINXBE:SS). I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information in this article is general in nature and should not be relied upon as personal financial advice.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.