Sigma Lithium Stock: Growing In Stature (NASDAQ:SGML)

jasonbennee

The electric vehicle (EV) market's growing prevalence has been well-documented for a while now, with some studies even suggesting that global penetration may well cross the 60% mark by the end of this decade (for context, it was only at around the single-digit levels a few years ago). There are of course different ways to position yourself to profit from this broad EV thrust, but one way to go about it, is to expose yourself to lithium-based offerings. Just for some perspective, note that, in GWh terms (gigawatt hours), lithium-ion batteries for EVs are poised to surge by roughly 3x between the end of this year and the end of the decade.

Statista

The stock in focus- Sigma Lithium (NASDAQ:SGML) looks set to be an integral cog in the EV battery materials supply chain and has ambitions of becoming one of the world's largest, low-cost producers of battery-grade lithium concentrate. If SGML ends up fulfilling its ambitions, it would reflect well on Brazil, as the lithium theme in the Americas has so far predominantly been driven by Chile and Argentina.

Don't be put off by the fact that SGML does not generate any revenues or profits, as things look set to change very quickly, with the company now poised to kickstart commercial production by Q3 of this year.

Investors should note that SGML has been putting the building blocks together since 2018, when it first started producing low-carbon lithium concentrate at a pilot plant (samples of this were then shipped to potential customers). Since then, it has steadily been making progress over time, and this year, has been littered with a slew of landmarks for the Groto do Cirilo project that the company operates; in February 2023, SGML successfully completed its first lithium crushing activities at its Greentech plant, followed by dense medium separation activities in March 2023. SGML will now proceed with its first shipments this month to Asia (15k tonnes of green lithium).

Under Phase 1 of the Groto do Cirilo project, the expectation is they will produce ~37000 tonnes of lithium carbonate equivalent (LCE), which could then transition to a production capacity of ~104000 tonnes of LCE by the end of Phase 3

March-2023 Presentation

One 'X' factor here, which could tilt things even further in favor of SGML is the fact that the company is currently only budgeting for reserves from its open pit operations. Underground reserves are yet to be accounted for and it's something that could play a big role in the future if EV demand ramps up at a better-than-expected pace.

SGML bulls will likely primarily focus on the attractive EBITDA margins that this project could get to at full tilt, and with good reason, but it's also important to reiterate the "green" hues of SGML's underlying tech which would position it favorably under the Lula regime. For instance, note that post-mining, during the purification phase, no chemicals are used. Besides whatever water is utilized from the Jequitinhonha River Valley (where SGML's project is based) is treated and entirely recirculated. All in all, SGML has put in place a few measures that will see it achieve carbon neutrality by 2025.

Naysayers may also question the cost competitiveness of SGML's spodumene concentrates in the far-flung markets of Asia (given the heightened transportation and freight costs) against cheaper Australian alternatives, but I believe its high-purity (validated by low mica and iron oxide content) should hold it in good stead and help it develop credibility.

March 2023 Presentation

If you're enthused by Sigma Lithium's story and contemplating a position in SGML stock, here are a few negative and positive points you should be aware of.

Firstly, it's fair to say that this stock isn't for the faint-hearted as its volatility quotient has stayed elevated for a long time now. Note that since the turn of 2022, the stock's rolling volatility quotient has consistently stayed above the 50% levels, and is currently at the 60% levels, twice as much as some of the larger and more established metal mining plays such as Rio Tinto (OTCPK:RTNTF) and BHP (BHP).

YCharts

Admittedly, this isn't an apples-to-apples comparison as both those larger peers are more diversified in their operations and this plays a role in the respective stock movements. However, there have also been instances where RTNTF and BHP have displayed higher volatility spikes than SGML, but those spikes tend to abate quickly enough. Rather, with SGML, the standard deviation of the stock's movements has been persistently high for the last 12-18 months and it makes you think twice about whether you want to have a large core position in a stock of this ilk particularly if you don't have an aggressive risk appetite. I believe the more sensible approach would be to maintain a small position, if any.

Then, investors fishing for suitable mean-reversion opportunities in the strategic metals and mining space may not be too chuffed to take a position in SGML at this juncture. Over the past year, the stock has already delivered returns of 117%, and currently looks quite overbought relative to its peers from the VanEck Rare Earth/Strategic Metals ETF (REMX), as exemplified by a high relative strength ratio, well above the mid-point of the range.

YCharts

Conversely, on the plus side, it's worth highlighting that the guys with the deep pockets and better due diligence - the institutional segment, continue to show ample appetite for SGML's stock. Since H2-22, both the number of institutions that own the stock (this has more than doubled from 67 in July to 145 as of early May), and the net shares owned by them (up by 17% during the period) have continued to trend up almost every month since.

YCharts

To close, we switch over to SGML's own weekly chart. We can see that since March 2022, the stock has been moving along in an upward trend, making pullbacks every now and then. We saw one pullback in July 2022, followed by a couple more in January and February 2023. All in all, we can see the presence of an upward-sloping support, with the stock now closing in on that support once again.

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