GUILD INVESTMENT
M A N A G E M E N T
GLOBAL MARKET COMMENTARY
Lithium: Lifeblood For a Wired World
Hydrocarbon energy sources, even though
they’ve been sidelined by investors during the
ESG craze, still power the world, and are still
essential for industry’s functioning and consum-
ers’ wellbeing. Overhasty calls for a total de-
carbonization are coming up against the hard
limits of reality, as ideology usually does. Be-
sides the potential fallout from war between
Russia and Ukraine, which is putting Europe’s
dependence on Russian energy in stark outline,
investment in U.S. hydrocarbon production ca-
pacity has been falling off a cliff for almost a
decade.
Source: Bloomberg, LLP and Crescat Capital, LLC
February 24, 2022
Hydrocarbons and fossil fuel energy should not
be considered down for the count. In spite of
lower levels of investment in growing produc-
tion, legacy energy producers can continue to
generate ample cash flow, even if their valua-
tions remain challenged. We’ll write about this
topic in future letters.
Decarbonization and Lithium
But still, it is apparent that decarboniza-
tion is going to proceed inexorably, even
if not at the pace desired and anticipated
© Guild Investment Management Inc.
 GUILD INVESTMENT 2
M A N A G E M E N T February 24, 2022

EDITORS by its more extreme advocates. from homes to cars to smart

This transformation will involve
several new forms of industrial “life
blood,” of which perhaps the fore-
most is lithium -- the most critical
ingredient in the currently domi-
nant lithium-ion battery technology.
(The Department of Defense agrees
that these minerals are critical -- so
it is boosting its strategic stockpile
MONTY GUILD of lithium, cobalt, and rare earths.)
Founder
devices. That demand curve is
headed “up and to the right,” and
battery manufacturers are making
use of whatever form of lithium
they can secure. Even though lith-
ium itself may be plentiful, produc-
ing battery-grade lithium at
the quality levels required for
large-scale battery production
is proving not to be trivial.

Other battery technologies are in Companies capable of doing so,

development, and we follow them; such as Albemarle [ALB] have in
but so far, there is nothing apparent recent years commanded a valua-
in the near- or mid-term that will tion premium to other more pro-
displace the lithium-ion batteries saic commodity producers both for
being churned out (mostly by Chi- this reason (the technical demands
nese factories). of processing) and because of the
significance of the global move to-
Lithium is abundant in the Unit- wards decarbonization.
ANTHONY ed States, although the world’s
DANAHER largest reserves are in Austra- Still, ALB disappointed some
President lia, Chile, and China. (The situa- traders and investors at its re-
tion is thus not dissimilar from that cent earnings conference call.
of the “rare earths,” critical techno- Some people were hoping ALB
logical materials which are not re- was raking in the dough based
ally rare, but whose production is on spiking spot lithium prices.
centered in China and Africa.) It’s
abundant, but production in the U.S. Some traders might take the stocks
is undeveloped. Globally, it is still a of lithium producers as proxies for
young supply chain, and the chem- the mineral itself, and expects them
istry underlying different kinds of to trade in line with these recently
RUDI
© Guild Investment Management Inc.
battery production (for example, spiking spot lithium prices, but this
VON ABELE lithium iron phosphate versus nick- is a long term trend that will require
Senior Research
Analyst el cobalt manganese) is in flux and and understanding of the nuance
can cause short term disruption in and complexity.
12400 Wilshire Blvd the market for different processed
Suite 820 forms of lithium. Only 10% of ALB’s production is sold
Los Angeles, CA 90025
at spot, the rest being tied to vari-
310-826-8600
The big picture is simply expo- ous longer-term contracts. (Also,
guild@guildinvestment.com nentially ramping demand for high spot prices mostly reflect the
Mon–Fri 06:30–16:30 batteries to power everything mainland Chinese market.) That ca-
 GUILD INVESTMENT 3
M A N A G E M E N T February 24, 2022

Battery-Grade Lithium Carbonate Price in China

Source: Bloomberg, LLP

veat applies to lithium producers as a whole: spear; where that goes, the indices follow
they should be bought out of conviction for globally. Those global indices are about half in
their valuation in the context of the long-term some cases of current China prices. So there’s
process of decarbonization and projections for probably room to go in those indices, but…
multi-year growth in battery demand -- as well with prices where they are in China, one could
as their runway for capacity expansion, which only speculate where they would go and could
will allow them to gradually realize rising spot they go down, we don’t know.”
prices in their future contracts.
The company’s full-year guidance was for
Discussing pricing of battery-grade lithium 20–30% growth in lithium volumes -- and a
during the call, the management of ALB said 65–85% growth in lithium EBITDA. And we’re
that China “is the lead, sort of the tip of the still early in the lithium demand cycle.

Investment implications: Like rare [LIT]. Investors with access to Canadi- © Guild Investment Management Inc.

earths, lithium is a long-term theme. As an securities could look at the Horizons

usual, we would prefer to enter a posi-
tion in this theme after a correction and
not at the peak of speculative fervor,
and some lithium producers have al-
ready obliged with a significant correc-
tion from the pandemic liquidity highs
of 2021. One available catch-all is the
Global X Lithium & Battery Tech ETF
Global Lithium Producers ETF [Cana-
da: HLIT]. However, investors should
note that there is likely to be a wide dis-
persion in the performance of the secu-
rities underlying these ETFs -- and that
like cybersecurity ETFs, this may be an
area where due diligence on individual
companies can produce superior results.
 GUILD INVESTMENT 4
M A N A G E M E N T February 24, 2022

The Markets This Week

Vladimir Putin pulled the trigger and has be- that “there is no alternative” to stocks.
gun an apparently full-scale attempt to occupy
Ukraine -- or at least enough of it to create a On the edges, with investors believing that
permanent instability that will forestall its ac- both stock and bond markets are highly valued,
cession to NATO. We have long identified this some will increase their allocations to com-
issue as the lynchpin of Russia’s policy in its modities, and particularly to precious metals,
“near abroad.” Markets are reacting in a pre- as well as to digital assets. But most investors
dictable way, considering Russia’s geostrategic will likely see great pain ahead for bond portfo-
significance in hydrocarbons and many import- lios, and conclude that most of their realloca-
ant minerals. The prospect of a large-scale Eu- tion will have to go to stocks -- where at least
ropean land war is an uncomfortable one and there is the possibility of growth.
adds a new twist to the evolving macroeco-
nomic landscape. Allianz analyst Mohamed El That process will be automated in the case of
Erian has referred to the possibility of a “stag- the vast pool of assets held in “Target Date”
flationary shock” arising from this eventuality. retirement-fund ETFs, which will automatically
Time will tell how the markets, and critically rebalance into more stocks as interest rates
the Fed, respond. rise and the value of bonds falls. These funds
will also be mathematically regular and predict-
We believe that markets -- whether cynically able buyers of the broad indexes every two
or realistically, the reader may judge -- have al- weeks as automatic payroll contributions oc-
ready concluded that Ukraine belongs to Rus- cur -- in a strong employment market.
sia. The question is how long hostilities last,
whether other actors become engaged, and Price-insensitive passive flows and 401K
how disruptive the sanctions are. While these allocation models do not care who con-
uncertainties remain, and they may remain for trols Donetsk and Lugansk. And many
some time, many market participants will be non-machines (discretionary human investors,
on tenterhooks. both individuals and institutions) have been sit-
ting on cash, waiting to buy.
The broad U.S. market is now down about
12% from its early December highs, and Ukraine
the NASDAQ is near or in bear-market © Guild Investment Management Inc.
territory. There are, as always, many reasons The news in Ukraine is sad, particularly for
to be bearish. A reason to be bullish: the first those Ukrainians with a genuine desire to in-
seven weeks of the year saw investors pull tegrate into liberal Europe. However, we be-
$160 billion from money-market funds and lieve that Russia’s determination to prevent
$17.5 billion from bond mutual funds and ETFs, Ukraine’s accession to NATO is an existential
funnelling $50 billion of that back into stocks. matter for Russia, even prescinding from spec-
ulation about any broader ambitions to reas-
To us, the message from this is not unrelated semble the former Soviet Union. The markets
to TINA -- the old trope of the bull market have likely priced in local tensions, but have not
 GUILD INVESTMENT
M A N A G E M E N T
priced in a wider conflict, particularly one in
which NATO becomes directly involved. We
also note that with an 18% debt-to-GDP ra-
tio, stringently managed while much of the
rest of the world splurged on covid-era fiscal
and monetary excess, Russia has been pre-
paring a financial fortress for this occasion
for a long time. It is a despicable regime in
many ways, but not a foolish one.
Crypto
This week, one brief observation about
crypto. Previous crypto crashes (or crypto
“winters,” as some call them) have seen an
evaporation of mainstream and institutional
interest in digital assets. Exactly the oppo-
site seems to be happening now, with regula-
tory developments, technical developments,
institutional adoption, and public interest all
remaining at elevated levels. Perhaps it’s the
specter of inflation, or the news of regula- Thanks for listening; we welcome your calls
tory overreach by Canadian officials shutting and questions.
5
February 24, 2022
down “Freedom Convoy” bank accounts, but
the crypto message is continuing to resonate
widely in spite of the HODLers’ portfolio
pain.
As we said last week, we like innovation,
visible growth, strong balance sheets,
and inflation-defense assets, particu-
larly some precious metals and miners;
tech-adjacent commodities and com-
modity producers (such as lithium, as
discussed above); and brands and com-
panies with pricing power who can turn
inflation into accelerating earnings.
The market may be nearing a bottom in a
few weeks or possibly months, so we are also
holding cash to be able to buy opportunisti-
cally. Consumer stocks do not look good, but
some other sectors will be buys on dips as
monetary and geopolitical tensions resolve.
© Guild Investment Management Inc.
 GUILD INVESTMENT 6
M A N A G E M E N T February 24, 2022
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