Investors in the lithium sector have watched as their shares have blossomed in 2016 on the back of a 'lithium boom', while plenty of others have likely been tempted at one time or another to get some of their own skin in the game.
Indeed, when you watch shares of businesses like Galaxy Resources Limited (ASX: GXY) soar as high as 58 cents – up from just 11.5 cents at the beginning of the year – it's hard to not be tempted. Same goes for Orocobre Limited (ASX: ORE) and Altura Mining Ltd (ASX: AJM), which are currently sporting returns of 58% and 158% since the beginning of the year, respectively.
Demand is certainly rising for lithium-ion, which is used in technology such as smartphones and batteries that are used to power modern cars (think Tesla) and even homes.
As a result, prices are also rising rapidly, attracting more and more businesses into the market. Some will make it, but others won't. After all, mining is an extremely capital intensive business. The more companies that start producing lithium, the more pressure there will be on prices which will likely squeeze many of the smaller players from the market.
As an example, in May this year Kingston Resources Ltd (ASX: KSN) was one company that decided its future was in lithium when it announced "a major lithium portfolio acquisition". Perhaps unsurprisingly, the shares lifted as much as 68% on the day.
At the time, we said:
"While those gains might seem tantalising, Kingston's venture into the lithium market highlights one of the key risks facing investors.
As prices rise, more and more explorers will venture into the sector in search of lucrative returns, which will increase the market's supply. When that happens, prices will likely begin to decrease which will wreak havoc for those companies who have either overpaid for acquisitions or maintain higher costs than their competitors."
It also mightn't come as much of a surprise that the shares have since retreated to just 1.2 cents. That's a tough pill to swallow for the people who bought in at the top thinking the business was onto a good thing. Who knows, it still might be, but the odds certainly aren't in its favour.
But Kingston Resources shareholders are not alone. A number of the high-flying lithium miners have retreated in price somewhat since their peaks. Here's an example of how some of them have fared over the last three months:
- Orocobre is down 27%
- Altura Mining is down 27%
- Galaxy Resources is down 36%
- Lithium Australia NL (ASX: LIT) is down 22%; and
- Dakota Minerals Ltd (ASX: DKO) is down 38%.
Many investors are confident that demand will continue to rise for lithium, and that's a good thing for people in the sector. But supply is a different issue altogether: too much of it could collapse prices and take some of the smaller, higher-cost players along for the ride.
This sector is by no means for the faint-of-heart, and already there are clear warning signs this could be a bubble.
"It's a boom" says The Australian Financial Review. Whether it becomes a bust is still a hotly discussed topic, but I certainly don't want to be exposed if, or when, that happens.
