The cheapest lithium stock in the market.

I know, I know. Bullish thought pieces on lithium are as dime a dozen today as Warren Buffett quotes in a fund manager investor letter. However, we think there is a standout sleeping giant in lithium that is incredibly cheap right now and worth discussing.

The precipitous fall in the iron ore price since August has wiped more than 35% off the value of Mineral Resources (ASX:MIN), which now has a market cap of roughly $7.3 billion. We are astounded at the valuations the market is willing to ascribe to 'pure-play' lithium companies and consider Mineral Resources the cheapest lithium stock in the market. Let's compare it to one such pure-play peer, Pilbara Minerals (ASX:PLS), which has an asset right next door to Mineral Resources' Wodgina mine. Pilbara Minerals has a market cap of roughly $7 billion, so basically the pair are neck and neck in valuation.

Comparing Mineral Resources with Pilbara Minerals

Pilbara Minerals' assets add up to 536 kt p.a. of spodumene capacity, consisting of two mines:

1. Pilgan Plant: Currently in production. Operating at nameplate capacity of 330 kt p.a.
2. Ngungaju Plant: In care and maintenance. Restart to commence at the end CY21, targeting 180 to 200 kt p.a. by mid-CY22.

This is equal to Mineral Resources' current spodumene operations, which equal 535 kt p.a. capacity:

1. Mt Marion: 475 kt production; Mineral Resources owns 50% so the equivalent of 235 kt p.a.
2. Wodgina Plant: In care and maintenance. Restart commencing, targeting 250 kt p.a. by 3Q22, ramping up to 750 kt p.a. when market conditions allow (i.e. when Albemarle have secured enough downstream hydroxide capacity). We estimate Wodgina will be fully operational by FY24. Mineral Resources owns 40% so this is the equivalent of 300 kt p.a.

What about future expansion plans?

Pilbara Minerals is aiming to expand production to 1 million tonnes p.a. of spodumene (so roughly double what it produces today). The company has given no firm dates on these expansion plans so we consider them longer-dated (five-plus years).

The company also recently finalised a South Korean joint venture with POSCO to construct and operate a 43 kt p.a. lithium hydroxide facility. Pilbara Minerals will own an initial 18% of this venture, with a call option to go to 30%. Assuming it takes up this option, its share would be 13 kt of lithium hydroxide within three years.

Mineral Resources owns 40% of a lithium hydroxide plant under construction at Kemerton which will eventually produce 50 kt of lithium hydroxide, so its share is 20 kt p.a. The company intends to acquire or construct lithium hydroxide plants in China via its venture with Albemarle, adding another 50 to 60 kt p.a. hydroxide capacity, of which Mineral Resources' share would be 20 to 25 kt p.a. Hence, we assume Mineral Resources will have 40 to 45 kt p.a. lithium hydroxide production within three years.

Pulling it all together, within three years Mineral Resources and Pilbara Minerals will have similar spodumene production and Mineral Resources will be producing three times more lithium hydroxide. 
Assuming prices well below spot for spodumene (US$1,250 long-term forecast versus spot US$1,700/t) and hydroxide (US$17,000 forecast versus spot US$28,000/t), we believe Mineral Resources will be generating about $1 billion in EBITDA from its lithium assets. This compares with FY24 EBITDA consensus for Pilbara Minerals of $569 million. Although our above analysis ignores differences in grades and other mine-level nuances, we believe the overarching conclusion is that Mineral Resources will likely make more money out of lithium than Pilbara Minerals in 3 years' time.

What is $1 billion in lithium earnings worth?

Lithium producers are trading on elevated multiples. If we look at FY23F EV/EBITDA for major lithium producers globally, multiples range from 11 times to a whopping 31 times for Ganfeng, with a median EV/EBITDA of 15.5 times.

Source: Factset

If we ascribed all of Mineral Resources' current enterprise value to its future lithium EBITDA potential of $1 billion, it equates to 7 times. Valuing the lithium assets in line with the low end of peer multiples, at 11x EBITDA, gives $58 per share value versus the current share price of $38.
However, lithium isn't the whole business. You also get a mining services business that generated about $420 million EBITDA last year, with guidance for 20% to 25% growth in FY22 (i.e., more than $500 million from mining services EBITDA). And yes, you get a high cost, low-grade iron ore producer at a time when iron ore prices are falling. However, given the iron ore assets generated EBITDA of $1.5 billion last year, and have generated cumulative EBITDA of $2.6 billion in the past seven years, clearly the value of this business is not zero.

In short, the fear around a falling iron ore price has created a unique opportunity to buy the cheapest lithium stock in the world, Mineral Resources. A quick Google Translate from English into Buffett yields: "be greedy when others are fearful".  

Written By Emma Fisher, Airlie Portfolio Manager

Happy New Year to all! There's plenty of chart action in January covering inflation and interest rates. The implied probability of a Federal Reserve rate hike in March 2022 of at least 25 basis points has surged, as @charliebilello highlighted on Jan 6 (and had to update for a further surge a day later). Barclays set out the break-even rates (break-even inflation is the difference between the nominal yield on a fixed-rate investment and the real yield on a similar inflation-linked investment). On equities we see "crowded trades" and retail sentiment take a dive, courtesy of Morgan Stanley and @lizannsonders. Indeed Hiring Lab provides us a little insight into why unemployed Americans aren't hunting for work with urgency. Meanwhile, the number of Australians thinking this year will be better than last has slumped according to a Roy Morgan poll.

Federal Reserve Rate Hike Probabilities (Jan 6, 2021)

Source: @charliebilello

Federal Reserve Rate Hike Probabilities (Jan 6, 2021)

Source: @charliebilello

Break-evens on inflation-indexed bonds

Source: Barclays via Bloomberg

Collapse in "Crowded Stocks"

Source: Morgan Stanley via The Daily Shot

Goldman Sachs Retail Sentiment Index

Source: Ann Sonders

Why unemployed aren't showing urgency to find a job

Source: Indeed Hiring Lab

Only 37% of Australians expect 2022 will be 'better' than 2021 - down 22% points on a year ago

Source: Roy Morgan

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The S&P 500 was down 0.8% in November but this disguised higher volatility in many sectors and stocks as investors digested the end of QE and ZIRP. As we approach year end, investors are forced to deal with increasing uncertainties across the investment landscape: equity valuations, inflation, real world shortages, and the new Omicron strain.

Bank of America strategists calculate the real earnings yield on US equities at -2.9%, a level last seen when Harry Truman was President. US insider selling is at record highs: 48 top executives have each sold more than $200 ml of shares. More Chinese developers are defaulting on their debt including Kaisa Group and China Aoyuan.

Inflation continues to surprise Central Bankers: November CPI was up 6.8% y-o-y. Gasoline is up 55% in 2021, oil up 48%, and wheat up 23%. Lithium is up 300% as are electricity prices in Europe, which is bracing for rolling blackouts this winter if the weather is colder than average.

The Omicron variant has caused many governments to reverse the re-opening measures which will have negative effects on the economy, possibly exacerbate shortages, and potentially add to social unrest.

Faced with this wall of uncertainties, investors are placing more and more value on the genuine non-correlation and stable return profile available from the asset class of Life Settlements.

SPECIAL REPORT - Potential Effect of Omicron Variant.

Omicron is the name of the latest SARS-Covid variant and the 5th to be officially labelled a variant of concern. It spread quickly through S. Africa, is already the dominant strain in Europe, and has found its way to 60 countries including the USA. It is a development that could potentially impact the Life Settlement industry so needs some analysis, despite "Covid fatigue" and the fact that all current data is preliminary with many unknowns.

There is strong evidence that Omicron spreads more quickly: some countries report a doubling of Omicron cases every 2- 3 days. It manages to get past most vaccines (although booster shots probably offer some protection) but produces a much higher percentage of cases that are mild. Death and hospitalisation rates appear lower than earlier variants.

The USA is still battling the earlier Delta variant. When Omicron cases spike, as they will in all countries, the reaction of individuals and Governments is unknown. But the range of scenarios suggests a positive impact on the investment strategy: lock downs and travel bans (as in Europe) will reduce economic output and may force more to sell their policies. There will be some deaths and the overall effect on mortality will probably be modest, but is unlikely to decline. If the surge of cases or fear causes sick people to cancel their hospital visits and treatments, this could have an impact.

The effect on Life Settlements across the scenarios ranges from no change to significantly positive. It will have the opposite effect on most other asset classes, demonstrating once again that Life Settlements has the ability to deliver positive returns when others can't.

FundMonitor.com's Fund Selector also allows you to filter your search by individual criteria. You can filter by strategy, fund structure, fund size, and a range of other metrics.

We observe many investors with poor performance despite strong markets in the last few years.  Here are some ideas to help you address this in 2022.

1. Acknowledge the reality of your performance to date
Are you measuring your performance? If so, are you doing it holistically - taking account of all the wins and losses across your entire portfolio?  Then you're in a position to assess how well you're doing compared with how well you could be doing.  Once you do this, you'll often discover your performance is much worse than you thought (as many focus on and talk about the one or two good trades but overlook their losers).

Acknowledging the reality of this means accepting you're not using the best investment approach out there and there are better investment options than you struggling to be your own portfolio manager - or relying on those who don't deliver and untrustworthy people or institutions that often charge fees for delivering ordinary returns.  It means recognising that genuine expertise is worth finding and paying for and that it can add much more value and manage risk better than you have been doing.

2. Get rid of your under-performing broker or adviser
Many people we have spoken to over the years are seemingly trapped in a relationship with a broker that has not delivered for years.  Some of these brokers are snake oil salesmen, great talkers but hopeless investors with little or no alignment with their clients.  Australia is loaded with them.  The clients' capital is often being used as a large source of non-aligned revenue generation for the broker and their firm; the capital is used to fund the latest corporate deal the firm needs to fund for hefty corporate fees - and always seems to deliver little to no return to the client (with a million excuses why not or promises that things are just about to improve).  In effect the brokers' main clients are their investment banking arms as they are the main source of revenue generation for the firm, and the client is just a sucker that is sold sweet nothings.

There is a big advantage to being invested in a fund where the fund is the only source of revenue for the firm.  Firstly, the performance is clear, known, real and routinely calculated and produced by a third party, and secondly, the firm should only be remunerated by you the client and not have its main source of business being something that is using your money for some other benefit.  Ideally there is a clear alignment with the firm's principals invested in the fund themselves and paid mainly on performance, and not for asset gathering through having large amounts of assets or large base management fees.  That way, you actually have a much better chance of performing and can easily track your performance.

Some advisers are competent but many are not, and many trap their clients into convenient but perennially under-performing investment approaches.  Few are out there looking how to do a better job for their clients by having them invested with the best boutique investment managers globally.  Some invest their wholesale clients in the same assets as their retail clients for their own ease of business, when they should be invested differently to take advantage of all the benefits that wholesale investors have.

3. Think outside the square
Many want you to think that the only thing you can do is buy stocks and property and hope for the best.  This is far from the truth.  There is a world of alternative investment approaches which are better aligned with absolute return investors (which is most of us) and will better manage the risk over a full investment cycle than a long only investor can possibly do.  A simple example are investment managers which buy insurance to protect a portfolio against downside risks - reducing the chances of a disastrous portfolio outcome which sets you back for years.  Are you using managers that do this?  Or are you stuck in the traditional framework that's only suited to a bull market environment and will likely suffer greatly when markets fall?

4. Acknowledge the investment cycle
It has been a Goldilocks period for investment markets and a prolonged bull market.  Some completely naïve investors and investment approaches such as passive investing have done reasonably well from loading up on risk and not having seen that risk come to fruition (yet).  But this is changing and the investment environment is becoming significantly more hostile and much less likely to reward long only buy, hold and hope strategies.  Why?  Central banks are now moving to a significantly less "accommodative" stance as they threaten to reign in inflationary pressures in response to the massive societal inequities and inflationary pressures created by their policies and money printing favouring the wealthy ahead of workers.  Valuations of most assets are also very high and impute low forward returns with very high probabilities.  Recognise that the last few years have in effect been highly abnormal and simply unsustainable (What can't be sustained won't be.).

This means single digit returns from here are much more likely than double digit returns (at best).  And that risk management is now much more important to reduce the increased risk of large losses if valuations revert to longer term averages or inflationary pressures persist forcing a tightening in central bank policies.  Hence, it makes more sense to move to investment approaches with good prospective returns, better inflation protection, and much better protection from large losses than simply being long only and loaded with equity and property risk.  In fact, locking in high returns by reducing equity and property investments in favour of alternative strategies means that the abnormal gains of the last few years become permanent capital gains, protecting your wealth against the risk of large losses from market falls.

In summary
2022 is the year for radical change in the way you are investing.  There is huge potential to improve your results and better protect your wealth for a changing investment environment including:   

Step 1: Measure your performance across your entire portfolio in 2021 and be honest with yourself. If you are in a position where some of your investments have delivered little then avoid hope as a strategy or being frozen or convinced into doing nothing.  Cutting your losers is a good strategy. 

Step 2: Assess the value that has been added by your current broker or adviser relationships and stop using under-performers as these relationships are meant to add value to your bottom line, otherwise you are paying them for nothing or for treating you as a fool. Many of us are mistakenly loyal to long held relationships with sweet talkers that simply aren't in our interests. 

Step 3: Investigate alternative investment offers as there are many out there that are available to wholesale investors which better align with common investor objectives than traditional investment approaches.  

Step 4: Consider the investment cycle and ask yourself is this an environment where you think you can realistically continue using the same approach to achieve your desired returns.  If not then consider alternative approaches better suited to today's investment prospects and risks.  

There are many simple things you can do to protect your hard-earned capital and still make money, even in a more adverse investment environment.  Acknowledging the realities above is a crucial step in getting there.

Author Dr Jerome Lander, Founder and CIO

Just as the global economy started hitting its reopening stride, Omicron has seen uncertainty return.

First identified in Botswana, Omicron spread to South Africa where the alarm was raised on the 24th November. Since then, the variant has been confirmed in almost 40 other countries.

With around 60% of the global population fully vaccinated - the question is, how big a threat is this?

There are many unknowns when it comes to this new variant. These, along with the key facts we do know, plus the important signposts investor should track are discussed with Antipodes' healthcare portfolio manager, Dr Nick Cameron, in the latest episode of the Good Value podcast. 

Here are some of the key takeaways.

Transmissibility and severity

The Omicron variant has around 30 mutations in the spike protein - many more mutations or changes in the virus than we have seen in previous variants (of which many are new/novel). The spike protein is the key protein responsible for - and necessary for - the virus to enter or infect cells and cause symptoms.

Omicron has quickly become the dominant strain in the Gauteng province in South Africa. The infection growth rate profile appears higher than prior waves but importantly hospital admissions data looks more consistent.

Given borders between South Africa and many other countries were open to travellers for some time prior to the knowledge of the variant, it's no surprise Omicron has spread around the world.

Omicron appears highly transmissible but even if it's more transmissible, this doesn't necessarily mean its virulence (capacity to cause more severe disease) is also increased. Early signs suggest disease severity may not be any worse than Delta. For example, most hospitalised patients in South Africa had mild symptoms and few required high-level care.

While there are a number of mutations in the critical areas of the spike protein, there are many parts of the Omicron spike that remain unchanged. The immune system, including both T cells and neutralising antibodies in vaccinated people and in those that have recovered from prior infection (and have "natural immunity") should "remember" the unchanged parts of the virus, and provide some protection against severe disease and death.

Based on this, countries with high vaccination rates and high rates of community infection in prior waves will likely be the best protected.

Vaccine effectiveness

Given Omicron has so many mutations it is no surprise to see a marked reduction in the efficacy of current vaccines.

The most recent lab data shows the current two-dose regime of existing vaccines aren't as efficacious against the Omicron variant, but it's still too early to say how this lab data translates into real world protection against severe illness and deaths.

Boosting with current vaccines appears to lift protection, but this is likely to be short-lived. It increasingly appears an Omicron specific booster will be required, particularly for the more vulnerable populations like the elderly and those with higher-risk profiles for severe disease.

mRNA vaccine makers Pfizer and Moderna have already started developing new boosters which are specific to the Omicron variant - Pfizer's candidate could be available in March 2022.

More will be known on vaccine effectiveness in the coming weeks as more lab data results become available.

The key metric for investors

For investors, monitoring hospitalisations over the coming weeks will be key in assessing the extent of the risk posed by Omicron and the risk of further lockdowns.

So far, early indications suggest hospitalisation rates for Omicron appear low and vaccinations rates also appear to be lifting following the Omicron news. If vaccinated people, and particularly those that have also recovered from prior infection, are shown to only develop mild flu or cold like symptoms, this would be a positive sign in the fight against COVID-19. And positive in terms of the reopening continuing.

But it will take some time to collect enough data to confidently determine whether the Omicron variant is a threat to overloading health systems.

Two attractively priced healthcare opportunities amid the Omicron threat

Sanofi (EPA: SAN)

Sanofi is more than just a drug developer. A material portion of its earnings (~35%) comes from its vaccines and consumer health businesses both of which are more defensive, long-duration businesses compared to traditional drug development.

Sanofi is a leading manufacturer of vaccines, globally - it's one of only three scale flu vaccine manufacturers, and has a broad portfolio including polio and meningitis as examples, and a full pipeline of vaccines under development including two COVID-19 candidates.

Vaccines are attractive businesses. They require large scale manufacturing, are highly regulated and have high barriers to entry.

Sanofi's consumer health business is also one of the largest globally. Sanofi has a collection of well-known, over-the-counter medications and supplements and these businesses are very stable, generate high free cash flow and operate in markets which have more room to consolidate. When separately listed they can demand multiples of around 25x.

Finally, its drug business is one of the least exposed to patent cliffs over the next decade, has limited US drug pricing relative to peers, and a solid balance sheet with ample firepower to transform its pipeline.

The company's earnings are growing faster than peers, around the mid-teens level, and Sanofi is valued at just 11x earnings.

Walgreens (NASDAQ: WBA)

Walgreens has around 9,000 pharmacies in the US. In fact, ~80% of the American population lives within 5 miles of a Walgreens so the scale of their physical presence is a key competitive advantage.

But what really excites us is that Walgreens is leveraging its extensive retail footprint to provide healthcare services. Walgreens is transforming its physical locations into health hubs which will provide a range of healthcare services such as primary care, chronic disease management, vaccinations and specialty pharmacy services. All while the traditional prescription and retail offering continues.

Not only is Walgreens becoming a one-stop shop for healthcare needs, the margin profile of health services is much higher than the pharmacy business alone. Over time this could become a material driver of earnings growth and margin upside if the company is able to execute on its plans.

Once the healthcare services offerings are fully ramped up, the company's long-term earnings growth profile could reach 12-13% p.a. including buybacks, and it's valued at just 10x earnings.

The market is not pricing any value for the potential in health services and we see this a great pragmatic value opportunity.

Alison Savas, Client Portfolio Manager