The Lake Resources N.L. (ASX: LKE) share price went down a slippery slope in early July and then was catapulted to post a 3% gain for the month.
However, the ASX lithium share, Lake Resources, and its share price underperformed the S&P/ASX 200 Index (ASX: XJO), which lifted 5.73% last month.
What made the Lake Resources share price flounder and spurt in July?
The Lake Resources share price started the month at 78.5 cents and closed at 81 cents on 29 July. In between, a scathing report by short-seller J Capital pushed down the Lake Resources shares as low as 60.5 cents each on 14 July.
J Capital peppered the company with some major allegations. These included a claim that its Kachi Project would not reach production in 2024 as planned. It also alleged the processes used at the site would cause environmental damage.
The latter allegation is particularly damaging given Lake Resource's brand is centred on supplying lithium in a responsibly-sourced and environmentally friendly manner.
Such concerns resulted in the Lake Resources share price dropping to as low as 61 cents in July.
Lake Resources share price rebounds on management response
The market's embrace of optimism for Lake Resources shares returned upon management's response to J Capital's allegations on 14 July 2022.
Concerns were further allayed by positive news contained in the company's quarterly results for the three months ended 30 June 2022.
Some key highlights included the advancement of its Definitive Feasibility Study, the progress with assembling its demonstration plant in Argentina, and a positive cash balance of $173 million on the balance sheet.
I believe the recent share price rally is likely linked to the potential for further lithium exploration. In the quarterly results, Lake Resources announced it secured a second drilling rig. This is for its lithium brine projects at Olaroz, Cauchari and Paso in Argentina.
Further, recent discussions with US-based Ford Motor Company (NYSE: F) and Japan's Hanwa Co Ltd is fuelling the prospect of significant offtake contracts.
My take on Lake
Lithium explorers like Lake Resources are experiencing a long industry tailwind because of the structural adoption of electric vehicles (EVs). The lithium explorers that manage to secure the most supply early on will reap the benefits thanks to a first-mover and scale advantage.
The key advantage for such explorers is ensuring they strike '"gold'" – or – lithium – early on. This provides significant commercial contracts with the largest lithium users, being the big EV manufacturers. Once these contracts are locked in, this enables them to consistently reinvest into discovering new lithium sites.
However, over the long term, more competitors will likely erode the early returns on capital because the number of suppliers could outweigh demand.
An investor with technical knowledge in this space could reap significant rewards if they can spot whether Lake Resources possesses an emerging first-mover and scale advantage.
