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Irrational Exuberance in Lucid Group Is a Valuable Lesson for Investors

Lucid Group’s (NASDAQ:LCID) stock price performance in 2021 can be described with only two words: “irrational exuberance.” Former Federal Reserve…

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Lucid Group’s (NASDAQ:LCID) stock price performance in 2021 can be described with only two words: “irrational exuberance.” Former Federal Reserve Board chairman Alan Greenspan used to mention the phrase often. LCID stock saw gains of more than 400% and is priced around $52 today.

Source: ggTravelDiary / Shutterstock.com

For those who are unfamiliar, Lucid is an electric vehicle (EV) company. In the past month, its stock more than doubled as per MarketWatch data. In light of these considerable returns, here is what you should know about this EV play.

LCID Stock Is Overvalued Despite Gains

I have written three articles on Lucid — two when it was still Churchill Capital Corp IV stock, and one after it made its trading debut as LCID stock in early September. All three articles share one common factor: my concern that Lucid Group is overvalued.

History has proved me wrong, though, as this EV company has rallied ever since. But value is not the same as price, and the facts still indicate LCID stock is extremely overvalued.

Last week, Lucid’s market capitalization was measured to be higher than Ford’s (NYSE: F) value of $79 billion and almost the same as General Motors’ (NYSE:GM) market cap of $93 billion. This is insane not because I say so, but because the valuation is disconnected from reality. Lucid has just started its production phase, with all excitement, risks and problems that come with it.

In my last article, I summed up my concerns about LCID stock:

“Call it FOMO, FUD, or whatever fancy acronym you want. I call it two things. A greater fool’s theory game and a return to logic and reality. It is for these reasons that I dislike “meme” stocks.

… As a result, I am still very reluctant about LCID stock. Until I see solid financial results I consider it too pricey, too risky and now too overestimated.”

What are these solid financial results that I expect? Profitability, positive free cash flow and strong margins, but also liquidity and efficiency performance. When a newcomer such as Lucid enters the market, what is its efficiency related to its capital and assets used?

The Good and Bad News From Q3 Earnings

We now have the first earnings report since the trading debut of LCID stock, and some highlights to analyze.

First of all, the Lucid Air sedan was named MotorTrend’s Car of the Year for 2022. Additionally, customer reservations increased to 13,000 with an order book of approximately $1.3 billion for the third quarter. Since then, the number of orders has increased by at least 4,000. Finally, Lucid ended Q3 with about $4.8 billion in cash on its balance sheet.

The net loss attributable to common stockholders for the nine months ended Sept. 30 was $3.7 billion. Meanwhile, Lucid’s loss from operations in the same period was more than $1 billion. As expected, the numbers were much higher and much worse than the figures for the nine months ended Sept. 30, 2020.

Why? The answer lies in another argument below about the economic lesson of Lucid Group.

Is Lucid an Example of an Unhealthy Stock Market?

Matt Maley, Miller Tabak’s chief markets strategist, has argued that the price surges of Lucid and Rivian (NASDAQ:RIVN) are “a sign of an unhealthy stock market.” Maley elaborated on his concerns:

“this market is being run by liquidity, and much less so than on economic growth or earnings growth. This liquidity is going to become less plentiful and people need to be preparing for how they will react when this market starts to come down at point. It’s inevitable, and I think will come down at some point in the next 12 months.”

I agree with him 100%. I will add that ignoring valuations, especially for newcomers such as Lucid and Rivian, is a very risky game that leads to violently burst stock market bubbles.

The market at its best is all about results — real financial results. But right now, it operates simply on hopes, dreams and estimates, along with tons of enthusiasm about EV stocks.

Considerable caution is needed, plus a return to the basics of a solid market approach. From that angle, what makes any stock valuable? It is its real financial performance, profits, earnings, growth and the “derivative” of its products.

LCID Stock Is a Valuable Economic Lesson

In any business, the average cost (AC) is the sum of the average fixed cost and the average variable cost. The AC curve is U-shaped. It reaches a minimum point that represents the optimal capacity for a given output.

If a business is expanding its output, it operates above capacity and the AC curve starts rising. This is what Lucid is doing now. It expanded its plant capacity and wants to build 20,000 cars in 2022. Its costs can only go higher.

What does this mean for its profitability? As its costs will rise, profit margins should remain under pressure. Businesses need to find the optimal capacity of production to reach profitability.

Simply pursuing higher production numbers puts companies at risk of being unprofitable for several years while burning cash to support expansion. I reckon Lucid will need plenty of time to reach profitability if we assume it follows the example of Tesla (NASDAQ:TSLA).

Can investors continue to ignore Lucid losing money for several quarters, or even years? I believe they cannot, so be wary of LCID stock’s lofty valuation.

On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn

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Resources Top 5: Hopeful uranium stocks, an important graphite deal, and lots of imminent news flow

Aspiring graphite miner Black Rock invited to finalise agreement with Tanzanian government Cauldron Energy dusts off Yanrey uranium project, despite ……

  • Aspiring graphite miner Black Rock invited to finalise agreement with Tanzanian government
  • Cauldron Energy dusts off Yanrey uranium project, despite government opposition
  • Redstone (copper, cobalt), Latrobe (magnesium) and Empire (gold, copper, nickel, PGEs) up on no news

Here are the biggest small cap resources winners in early trade, Tuesday December 7.

 

CAULDRON ENERGY (ASX:CXU)

(Up on no news)

When the WA state government implemented a ban on most new uranium mines in 2017, CXU stopped work at its flagship ‘Yanrey’ uranium project and began searching for other dirt to play with.

It now has a historic gold project called ‘Blackwood’ in Victoria and a silica sands play called ‘Ashburton’ in WA. It is also poking around Yanrey again, which is a lot more interesting now that uranium prices are on the move.

While government support (or lack thereof) for new mines has not changed, a recent survey uncovered a bunch of “highly prospective targets for follow-up drilling” at Yanrey.

“Our ultimate objective is to explore for uranium mineralisation amenable to extraction by ISR,” CXU exec chairman Simon Youds says.

“Economic deposits of sandstone-hosted, palaeochannel-style uranium can be mined using ISR in the lowest cost quartile of uranium mined globally.”

“This characteristic makes these deposits extremely attractive for mining at any uranium price and necessarily must form the basis of any uranium resource portfolio.”

Yanrey exists within a larger uranium province that is slowly being uncovered, Youds says.

“There is potential here for a scale comparable to the best uranium-endowed province globally and that, with astute leadership, Western Australia is at the threshold of a new energy resources boom.”

At Blackwood, CXU has stumbled upon visible gold in an underground area historically excavated for access purposes only:

“The visible gold observed, coupled with the beautiful sandstone-shale contact and structurally complex geology, provides an exciting new target for drill testing,” Youds said in November.

“The observation of visible gold further increases our confidence in the remaining mineral potential of these historical mines.”

The $11.5m market cap stock is down 6% over the past month, and 30% year-to-date. It had $1.5m in the bank at the end of September.


 

REDSTONE RESOURCES (ASX:RDS)

(Up on no news)

The nanocap, which has partially bounced back from recent losses in early trade Tuesday, is drilling to grow the 38,000t copper, 535t cobalt ‘Tollu Copper Vein’ deposit, part of the ‘West Musgrave’ project in WA.

Tollu hosts “a giant swarm of hydrothermal copper rich veins” in a mineralised system covering a +5sqkm area, ~40km from OZ Minerals’ (ASX:OZL) world-class Nebo-Babel nickel-copper deposit.

A conceptual (theoretical, not real yet) exploration target suggests up to 627,000t of copper may be present, the company says.

Recent portable XRF analysis of new drilling returned hits like 16m at 2.62% copper from a 74m downhole, including 6m at 6% copper from 76m.

These will be confirmed by traditional assay, the company says. Labs are backed up to the hilt, so who knows when that will be.

RDS say exploration will continue “at the earliest opportunity” in 2022 with a deeper RC drilling program at priority targets.

The $12m market cap stock is up 30% over the past month. It had $2.6m in the bank at the end of the September quarter.

 

BLACK ROCK MINING (ASX:BKT)

It’s been a good news week for aspiring graphite miner BKT.

Today it announced it had been invited by the Mining Commission to attend a ceremony in Dar es Salaam, Tanzania on Monday 13 December “to finalise an agreement with the Government of Tanzania”.

Black Rock managing director John de Vries is currently in country and is expected to attend, BKT says.

The company has also just completed a massive 500t pilot plant run – the largest ever, it says — to send off for qualification (testing) to potential customers in North America, Asia and Europe.

This will ultimately support project financing, BKT says.

The company now needs to finalise off-take terms with cornerstone investor POSCO, and secure finance to underpin a $US116m Phase 1 development capex program.

The $183m market cap stock is down 10% over the past month, and up 115% year-to-date. It had $9.3m in the bank at the end of September.

 

LATROBE MAGNESIUM (ASX:LMG)

(Up on no news)

Early works – like fixing fences, site clean-up, contracting — are happening apace at LMG’s magnesium project in Victoria’s Latrobe Valley, with construction on an initial 1,000 tonne per annum magnesium plant due to kick off in Q1 2022.

Production starts up to 12 months later in Q4 2022.

The plant will be expanded to 10,000 tonnes per annum magnesium shortly thereafter, with further plant capacity expansion to be considered once it is operating successfully.

Magnesium has the best strength-to-weight ratio of all common structural metals and is increasingly used in the manufacture of car parts, laptop computers, mobile phones, and power tools.

In November, LMG said current magnesium price was US$6,150 per metric tonne and expected to hold.

“LMG’s revenue estimates are based upon US$3,250 per tonne which was the magnesium price in June 2021, before the China supply shortage commenced in September 2021,” it says.

“If the current price of US$6,150 per metric tonne held long term, it would increase LMG’s estimate of EBITDA for its 10,000tpa plant by some $56m.”

In 2020, world magnesium production was ~1 million tonnes, of which China supplied ~85%.  China has begun a 13-year plan to increase Mg in cars from 8.6kg to 45kg by 2030, requiring an additional 1 million tonnes of new Mg production per annum.

$131m market cap LMG is down 21% over the past month, and up 335% year-to-date. It has raised $11.5m  via placement to help fund the initial $39m 1,000tpa plant.

 

EMPIRE RESOURCES (ASX:ERL)

(Up on no news)

This busy polymetallic explorer has already drilled 13,000m so far in 2021 at the ‘Penny’s and Yuinmery’ projects in WA, with diamond drilling of some juicy gold, copper, and nickel-copper-PGE targets at Yuinmery due to kick off sometime this month.

ERL would’ve drilled even more if not for issues getting hold of a rig, something the company intends to fix in 2022.

“Our exploration plans for 2022 include the lock-in of a core drilling rig and driller for exclusive use by Empire,” chairman Michael Ruane says.

“This should assist in accelerating at least the drilling component of our exploration programs for the forthcoming period. The rig will be particularly useful for the deep drilling required for the promising Yuinmery targets (eg Smiths Well/YT01).”

The rig should be ready for commissioning this month, he says.

The $14.85m market cap stock is up 30% over the past month. It had about $3.5m in the bank at the end of November.


The post Resources Top 5: Hopeful uranium stocks, an important graphite deal, and lots of imminent news flow appeared first on Stockhead.







Author: Reuben Adams

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Energy & Critical Metals

Met testwork proves Sovereign’s Kasiya will deliver a premium natural rutile product

Special Report: Metallurgical testwork has confirmed Sovereign Metals’ Kasiya project in Malawi will deliver a premium natural rutile product, setting…

Metallurgical testwork has confirmed Sovereign Metals’ Kasiya project in Malawi will deliver a premium natural rutile product, setting the stage for the company’s landmark scoping study.

Testwork continues to demonstrate the world class nature of Sovereign’s (ASX:SVM) Kasiya deposit, with simple and conventional processing delivering levels of 95% to 97.2% TiO2 with low impurities at stand-out metallurgical recoveries ranging from 94% to 100%.

That makes Kasiya competitive on TiO2 grades with some of the world’s largest natural rutile operations like Iluka’s Sierra Rutile and Rio Tinto’s Richards Bay Minerals.

It opens the door for discussions with tier-1 offtakers in the markets for TiO2 pigment, titanium metal and welding, where customers are facing widening supply deficits in a strengthening market.

Additionally, testwork has shown conventional flotation methods can be used to produce a coarse flake graphite by-product from rutile gravity tails with 60% at a coarseness of +150µm, suggesting it will have a high basket value when sold to market.

A program at SGS Lakefield in Canada confirmed simple processing methods delivered a very coarse-flake graphite concentrate at 96.3% TGC.

“Consistently achieving premium rutile specifications with stand-out recoveries via conventional “off the shelf” processing methods reinforces the robustness of metallurgical and processing performance of the Kasiya rutile mineralisation ahead of the upcoming Scoping Study,” Sovereign managing director Dr Julian Stephens said.

“These continued very high-quality product specifications should generate further interest from end-users across the titanium sector as the global structural deficit in natural rutile supply continues to widen.”

Processed rutile being despatched to potential customers. Pic: Sovereign Metals

Kasiya scoping study round the corner

With the results in today’s announcement, Sovereign has now demonstrated the impressive metallurgical qualities of the Kasiya resource in two separate rounds of met testwork.

The testwork also confirms Kasiya will deliver strong recoveries and product specifications based on conventional off-the-shelf processing technology, which bodes well for its future development.

Proving the original results were certainly no fluke and opening the door to interest from Tier-1 offtake customers, they set up Sovereign to release a scoping study in the coming weeks.

With most of the technical disciplines now complete, mining optimisation and capital and operating cost estimations are currently being finalised.

A new indicated mineral resource estimate is also on the way after substantial resource drilling to build upon the world-class inferred resource released in June.

That confirmed Kasiya as one of the largest natural rutile deposits in the world, with an inferred resource of 644Mt at 1.01% rutile and a high-grade component of 137Mt at 1.41% rutile.

 


 

 

This article was developed in collaboration with Sovereign Metals, a Stockhead advertiser at the time of publishing.

 

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

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Author: Special Report

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Energy & Critical Metals

Nio Will Bounce Back With Impressive Delivery Numbers

Nio (NYSE:NIO) stock has been under pressure for the past month. The Chinese EV company suffered from the investor sell-off and the Chinese government…

Nio (NYSE:NIO) stock has been under pressure for the past month. The Chinese EV company suffered from the investor sell-off and the Chinese government crackdown.

A close-up shot of the Nio (NIO) ES8 vehicle.Source: xiaorui / Shutterstock.com

However, China is one of the top EV markets in the world and it is expected that there will be a consistent rise in the demand for EVs in the coming years. The EV market in China nearly tripled to 19% in October, according to Forbes. The market is growing bigger, and it is moving very fast.

Nio is making strong strides in the industry and has already made its presence felt with a wide product range. NIO stock is less than half of the all-time high of $66. 

Nio started the year with a bang and was trading close to $53 in January. It hit a high in February and has been declining since then. NIO stock is down 24% in the past six months, but this does not mean you can write off Nio. The company has a long way to go and there are several catalysts working in its favor.

Impressive Delivery Numbers

The entire EV industry was facing a chip shortage and had major supply chain issues which led to a dip in deliveries. Nio did not have a good October, but it did bounce back in November. It reported 3,667 deliveries in October and delivered 10,878 vehicles in November which is a 105% increase from a year ago. This brings the year-to-date deliveries in 2021 to 80,940 vehicles, a 120% increase from 2020, and the total deliveries to 156,581. 

For the fourth quarter, the company expects deliveries between 23,500 and 25,500 vehicles. That means the company will have to deliver extraordinary numbers in December to meet the projections. Considering the current situation of the market, it looks difficult for the company to meet the revenue or deliveries for the fourth quarter, and this may impact the bottom line.

However, I believe Nio should not be judged simply based on the October deliveries. The chip shortage and supply chain issues affected every automaker and it is temporary. Looking at the big picture, Nio shows strong potential to grow and meet the growing demand of consumers in the thriving EV market.

Battery as a Service Is a Major Draw

Nio recently signed an agreement with Shell (NYSE:RDS.A, NYSE:RDS.B) to build and operate the battery charging stations. It includes the installation of 100 swapping stations in China by 2025 and pilot stations in Europe in the next year. The company’s battery-as-a-service (BaaS) offers a huge advantage in the competitive market and this partnership is a clear path towards International expansion. BaaS allows consumers to buy cars without batteries and subscribe to the program to swap batteries at the stations. This reduces the cost of the car significantly. 

It is also setting up a factory at the NeoPark EV industry park in China and expects to roll out the first vehicle in the second quarter of next year. The company will have NIO day on Dec. 18,  when it expects to launch its new ET7 sedan.

The Bottom Line on NIO Stock

Do not panic due to the investor sell-off and instead load up on NIO stock in the dip. Nio is one of the top EV players in the industry and the market is only growing bigger in the coming years. The company has a lot lined up for 2022 and it will benefit investors.

A dip in delivery numbers for one month does not speak anything about the potential of the company. Look at the bigger picture and see how far Nio has come. The company is set to grow bigger on high demand and sales. 

On the date of publication, Vandita Jadeja did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Vandita Jadeja is a CPA and a freelance financial copywriter who loves to read and write about stocks. She believes in buying and holding for long-term gains. Her knowledge of words and numbers helps her write clear stock analysis.

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Author: Vandita Jadeja

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