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By now, everyone has heard how the shortage of semiconductors has constrained production from automakers. Well, move over semiconductors, now the lack of lithium supply threatens to hold back the entire electric vehicle (EV) revolution. And just months ago lithium carbonate prices high all-time highs.

Some prices for the key metals used in batteries for electric vehicles—which make up about 40% of the cost of a battery cell and a sizable portion of the overall cost of an EV—have fallen recently in the general selloff in commodities.

But lithium, not so much. It is still a hot commodity.

According to the Benchmark Minerals lithium price index, which covers over 90% of lithium transactions globally, lithium prices are up in excess of 120% this year to date and more than 350% year over year.

The price of lithium carbonate hit an all-time high in April, and it is still eight times what it was at the start of last year!

Importantly, lithium supplies look likely to remain tight. Mines in Australia and elsewhere shut down when the market was weak a few years ago and have been slow to respond to the rebound in demand. Production may not ramp up until next year or even later.

That’s why sourcing lithium has become a major priority in the EV competition among automakers. They are all trying to get long-term deals with lithium miners in Australia, China, Argentina, and Chile, which together account for more than 90% of the world’s lithium mining.

Automakers’ Lithium Woes

As demand threatens to overwhelm supply, vehicle makers will likely battle for the rest of the decade to secure the lithium they need.

Kent Masters is the CEO of Albemarle (ALB), the largest publicly traded lithium producer. During the latest earnings presentation, he said the market for lithium will remain tight despite efforts to unlock more of the metal. “It’s systemic for a pretty long period of time,” he said of the challenge facing the industry. “For seven to eight years, it stays pretty tight.”

As usual for commodities, when it comes to Wall Street, most analysts are pessimistic. With the prospect of higher lithium prices, Wall Street expects technological advances will yield more supply within a couple of years.

Please don’t believe that fairy tale, told by people with little understanding of commodities.

Eric Norris, the president of lithium at Albemarle, said hopes for a rush of supply overestimates the ability of lithium producers to match demand from automakers that has become “broader, deeper and more certain.”

Here’s the reality: lithium companies have historically delivered as much as 25% less production than expected in a given year because of chronic delays and technical mishaps.

Lithium mining projects typically take between six and 19 years from an initial feasibility study to actual production. That is the longest of any of the materials involved in electric batteries, according to a report last month from the International Energy Agency (IEA).

The IEA added that the world needs another 60 lithium mines by 2030 to meet all the decarbonization and electric vehicle plans of national governments.

Scott Yarham of S&P Global Commodity Insights summed up the situation perfectly, saying: “There’s a lot of investment in battery cell manufacturing in Europe and the U.S., but not sufficient enough in the raw materials. There’s going to be a big disconnect.”

Morningstar’s view of the lithium market is also optimistic. Analysts there recently said: “…our current view [is] that the lithium market will remain under-supplied throughout the rest of the decade, supporting prices well above the marginal cost of production…As electric vehicle penetration increases, we expect high-double-digit annual growth for global lithium demand, one of the best growth profiles among commodities.”

This will translate to the lithium mining companies making a lot of money for a very long time.

Here’s the company that has been my favorite for years—and it’s one that pays a decent dividend.

SQM: Lithium Powerhouse

Sociedad Química y Minera de Chile (SQM) is located in Chile.

Here’s what Morningstar said about SQM: “Through its access to high-quality mineral deposits, Sociedad Química y Minera de Chile is a large, low-cost producer of lithium, iodine, and nitrates used in specialty fertilizers. SQM’s crown jewels are its geologically advantaged lithium and caliche ore assets. SQM’s low-cost lithium deposit in the Salar de Atacama”—the lowest-cost lithium deposit in the world, in fact—“boasts the highest concentration of lithium globally and benefits from high evaporation rates in the Chilean desert.”

SQM is a major supplier in the lithium carbonate market. Long term, the company plans to expand its

carbonate capacity to at least 250,000 metric tons from just 70,000 tons in 2019.

As far as its other businesses go, SQM is a market leader in potassium nitrate, a specialty fertilizer used in high-value crops, including fruits and vegetables. And SQM is also the world’s largest producer of iodine, used in X-ray contrast media, pharmaceuticals, and LCD films.

However, lithium remains the big moneymaker. SQM’s lithium business generated 75% of company-wide gross profits during the first quarter, a number that should continue to grow as volumes rise. The company’s average realized lithium price was nearly $38,000 per metric ton during the first quarter, above most other producers globally.

I believe SQM has the best approach to lithium prices among all producers. The company sells 80% of lithium volumes via either short-term contracts or spot prices. By selling the majority of its lithium under short-term contracts, the company can fully take advantage of rising prices, which should result in a higher average realized price and higher profits over the years.

SQM has some outstanding financial characteristics, as well. It boasts an extremely healthy net margin figure of 20.45, cash and cash equivalents of $2.3 billion on the balance sheet, and extremely healthy cashflow pouring in off the back of a surge in demand for its lithium products.

SQM also pays a respectable dividend—its current annual yield is 2.7%. The company normally pays a quarterly dividend and an occasional special dividend. While the dividends may be variable, its 4-year average dividend yield is nearly 84% higher than the sector average.

The stock itself is up 127% over the past year and 120 % year-to-date, as the price of lithium has soared. Expect more price gains for both lithium and the stock. It’s a buy anywhere up to $120 per share.
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Ever since the onset of the pandemic, one consistent characteristic of the global economy has come to the fore again and again: shortages of physical goods.

The latest shortage to rear its head is a worldwide shortage of fiber-optic cable, driving up prices and lengthened product delivery times and endangering telecommunications companies’ ambitious plans to roll out state-of-the art 5G telecommunications infrastructure.

Fiber-Optic Cable Shortage

The consultancy CRU Group says cable shortages are particularly acute in Europe, India, and China. In those locations, prices for fiber-optic cables have soared by up to 70% from the record lows in March 2021, from $3.70 to $6.30 per kilometer (1 kilometer = 0.621371 miles).

Overall, the price for fiber-optic cable has now reached its highest levels since July 2019. And lead times for some products have stretched out from just 20 weeks to nearly a year for many smaller customers.

As CRU analyst Michael Finch told the Financial Times: “Given that the cost of deployment has suddenly doubled, there are now questions around whether countries are going to be able to meet targets set for infrastructure build, and whether this could have an impact on global connectivity.”

CRU told the Financial Times that total cable consumption jumped by 8.1% in the first half of 2022 compared with the same time last year. China accounted for 46% of the total; North America came in as the fastest growing region, with a 15% year-over-year increase.

So why have the shortages occurred? The answer is the same as in the semiconductor industry: shortages and rising prices for many of the crucial components that go into making fiber-optic cables.

There is an ongoing shortage of helium, a key component in the manufacture of fiber-optic glass, thanks to plant outages in both Russia and the U.S. This has caused helium prices to spike by 135% over the past two years. In addition, CRU reports, prices of another key component in fiber production, silicon tetrachloride, have increased by up to 50%.

The CEO of Corning (GLW), Wendell Weeks, said to the Financial Times, “In my professional career I’ve never seen anything like this inflationary crunch.” Corning, which is the biggest producer of fiber-optic cable in the world and played a major role in inventing the technology in 1970, is ramping up production capabilities to meet soaring demand coming from governments, telecoms companies and big tech groups like Amazon, Google, Microsoft and Meta. The company is building new facilities in both the Europe and the U.S.

Let’s take a closer look at Corning.

Corning: Fiber Optics and More

Corning is much more than just a producer of fiber-optic cables: the company is a materials science giant with differentiated glass products for televisions, notebooks, mobile devices, wearables, optical fiber, cars, and pharmaceutical packaging. Corning is also the leading global supplier of precision glass for liquid crystal displays, and participates in the environmental business, with a focus on emission substrates for gasoline and diesel engines as well as producing polysilicon for the solar industry.

The company is also active in the life sciences business, producing vaccine vials. Its specialty materials operations produce Gorilla Glass, the fast-growing, tough-cover glass used in smartphones and tablets.

In its 170 years of operation, the company has always been an innovator, including inventing the aforementioned glass optical fibers and ceramic substrates for catalytic converters. That innovation is a direct result of Corning’s ability to use its scale to invest heavily in research and development—$1 billion or more per year—and spread these expenses across its five segments: optical communications, display technologies, environmental technologies, life sciences, and specialty materials.

Corning is a winner in many of these segments, with a leading market share in four distinct end markets: optical fiber, display glass, cover glass, and emissions substrates/filters.

But, most importantly, Corning, being a key enabler of 5G networks, has a product portfolio that’s nicely aligned toward the worldwide secular trends of increasing connectivity and efficiency.

Secular demand strength in this segment will offset any weakness in demand elsewhere. For example, in the second quarter, the optical fiber segment grew 22% year over year. That turned Corning’s results from just average to a good overall result.

Argus Research said this about Corning: “In our view, GLW shares appear to more than discount the challenges ahead, without fully reflecting the myriad opportunities in Corning’s varied end markets.”

I totally agree, making GLW a buy anywhere in the mid-to-upper $30s per share.
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Last week I spent two days on the road. While driving, I like to listen to business news from CNBC and Fox Business, via SiriusXM radio. I especially like listening to the opinions, and everyone sure has one.

My takeaway from listening is that we’re entering a great period for buy and hold investors – if you know where to look, that is…

Fox Business noted that a 40-year bull market that started with a bottom in August 1982 may have ended. At that time that it began, the Dow Jones Industrial Average bottomed at 776. It now stands at 32,774.

In other words, buy and hold works if your time frame is long enough.

Growth stock investors are facing a dilemma. The growth for profitable companies is slowing. The companies may continue to grow, but at slower growth rates year over year. What does that mean for stock values and valuations? It may take a few months to a few years for the market to figure out what multiples (P/E ratios) should be put on these stocks at lower growth rates.

Non-profitable growth stocks have a problem. Investors are no longer interested in putting in more money now to maybe reap big gains years down the road.

Reddit meme stocks are back in the news, and we’re seeing big price swings with Bed, Bath and Beyond (BBBY), AMC Entertainment (AMC), and GameStop (GME). The online bulletin board crowd watches the short interest in these stocks and then piles in to squeeze the shorts when the selling gets out of hand. One would think that the short sellers would get a clue. I love to see shorts lose their shirts.

One analyst on the radio discussed 3M Company (MMM). This stock has a 4% yield and 63 years of dividend growth. The five-year dividend growth rate isn’t terrible, at 5.4% per year. This is a stock that, if you have 20 years to lock it away, could slowly make you rich.

The big picture is that no one knows when the stock market will return to significant share price appreciation. I suspect we will have several years of the major indexes going nowhere, which will come with waves of 10% uptrends and similar downdrafts.

Investing for high-yield income makes more sense than ever. My Dividend Hunter recommendations list has an average yield greater than 8%. That yield is real cash flow that can fund a retirement or be reinvested to compound and to take advantage of the expected market volatility.

Out of the second quarter earnings, I want to put my money into the good (there is plenty of bad) finance REITs. Recently I made Starwood Property Trust (STWD) the Dividend Hunter Stock of the Week—you can count on an 8%-plus yield for years to come. And to get a high-yield, low-risk Stock of the Week every week, sign up for Dividend Hunter right here.
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Forget oil—the real money is in natural gas.

Or at least that’s the message coming from a pioneer of the U.S. shale revolution, Chesapeake Energy (CHK).

From Prince to Pauper to Prince Again?

Once upon a time—when its stock was valued at more than $35 billion and its CEO, Aubrey McClendon, had the biggest pay package of any CEO of a listed firm—Chesapeake Energy was America’s best-known fracker.

But those glory days disappeared quickly, and Chesapeake became the poster child for the shale sector’s excesses.

About a year and a half ago, in the autumn of 2020, Chesapeake was in the midst of bankruptcy proceedings after the coronavirus pandemic-led crash in energy demand proved to be the final straw in the company’s fall from grace.

And for the industry more broadly, the prospects for liquefied natural gas (LNG) exports were looking bleak after a $7 billion contract to supply the French utility Engie went down the tubes on concerns over the emissions profile of U.S. natural gas.

Fast forward to 2022 and the picture has changed dramatically. Natural gas exports are booming!

Thanks to the Russian invasion of Ukraine and subsequent sanctions, Europe is in the middle of an energy crisis. It is buying up as much American LNG as it can. Those concerns about emissions are long forgotten.

In the first four months of the year, the U.S. exported 11.5 billion cubic feet a day of gas in the form of LNG, an 18% increase from 2021. Three-quarters of those exports went to Europe. And European leaders have pledged to ratchet up their imports by the end of the decade. There is also a massive opportunity in Asia, where LNG demand is set to quadruple to 44 billion cubic feet a day by 2050, according to a recent report released by think-tank, the Progressive Policy Institute.

And even here in the U.S., natural gas supplies look set to be tight this winter. Hot summer weather and high demands for power generation are sucking up supplies and leaving storage precariously low.

The investment bank Piper Sandler believes U.S. storage is on pace to fill just 3.4 trillion cubic feet of gas by the time winter arrives. That would be short of the 3.8 trillion cubic feet buffer usually needed to heat the country through a cold winter season. That could send already-elevated natural gas prices even higher in the months ahead.

These factors combined were behind the decision by Chesapeake Energy management to ditch oil in favor of gas.

Chesapeake: All in on Gas

OnAugust 2, Chesapeake announced its plan to exit oil completely and return to its roots as a natural gas producer. The company said it would offload oil producing assets in south Texas’s Eagle Ford basin, allowing it to focus solely on gas production from Louisiana’s Haynesville basin and the Marcellus Shale in Appalachia.

Its CEO Nick Dell’Osso said the company made the decision because of better returns from its gas assets—it has had more success driving down costs and improving efficiency there when compared with oil.

Chesapeake emerged from bankruptcy in February 2021, vowing to shift from its previous model of growth at all costs to one of capital discipline and higher shareholder returns.

The company has expanded its natural gas portfolio of assets since its emergence from bankruptcy. It bought gas producer Vine Energy for $2.2 billion last August to bolster its position in the Haynesville, which sits close to gas-export facilities on the US Gulf Coast. And in January, it bought Chief Oil & Gas, a gas operator in north-eastern Pennsylvania’s section of the prolific Marcellus shale field, for $2.6 billion. Chesapeake also recently offloaded its Wyoming oil business to Continental Resources, the company controlled by shale billionaire Harold Hamm.

In summarizing Chesapeake Energy’s strategy, Dell’Osso said, “What’s different today than the past… is that we are allocating capital in a way that maximizes returns to shareholders, rather than maximizing [production] growth.”

Speaking with the Financial Times, Del’Osso added: “The industry was built on [oil and gas production] growth expectations, and company stocks were valued on growth expectations. That all had to get broken down.” The “reset” had been painful, but management teams would stick with the new model, the CEO said.

The strategy seems to be working. In May, Chesapeake reported record-high adjusted quarterly free cash flow of $532 million from the first three months of 2022.

Also in the second quarter, it announced an agreement to supply gas with the Golden Pass LNG facility. Golden Pass LNG is a joint venture company formed by affiliates of two of the world’s largest and most experienced oil and gas companies: QatarEnergy (70%) and ExxonMobil (30%).

The company now plans to pay $7 billion in dividends over the next five years. That is equivalent to well over half of its current market capitalization!

Chesapeake boasts of its best-in-class shareholder return program. It has completed about a third of its $2 billion share and warrant repurchase program, and it raised the base dividend by 10%, to $2.20 per share annually.

The company has a juicy variable dividend as well. Its next quarterly dividend will consist of the $0.55 per share base dividend and a variable dividend of $1.77. Management projects that, in the third quarter, it will pay out total dividends of $275 million to $285 million. The total dividend payout for 2022 should come in at between $1.3 billion and $1.5 billion.

Chesapeake’s yield is a very impressive 10% and I do not see that changing much as gas prices stay elevated. The stock is a buy anywhere in the $90s.
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