There's an extraordinary opportunity unfolding for energy investors today...
Goldman Sachs is calling it “the new gasoline.”
The Economist has called it “the world's hottest commodity.”
Energy experts have dubbed it the "oil" of the future.
I'm talking about lithium: a one-of-a-kind element, used in consumer electronics, computers, and communication — think everything from cell phones all the way up to electric vehicles... basically anything necessitating a compact, rechargeable power source.
Right now, lithium prices are catapulting forward more aggressively than any other energy investment. The main driver for this explosive lithium growth is the rechargeable battery sector. Lithium prices rose by more than a third last year from $6,000 per ton to $8,000 per ton. In some cases, it's even fetched as much as $25,000(!) on the spot market.
Soaring prices of lithium, cobalt, and carbon are not a bubble. They are underpinned both by rapid growth in electric vehicle sales and tight supplies.
Electric vehicles are expected to make up 35% of the automotive market by 2040. Just as importantly, long-range electric cars will cost less than $22,000 by that time.
Prices for used EVs have dropped 15% over the past year, and the price of used plug-in hybrids is down 5%. By comparison, the price of used gasoline-powered cars has fallen just 1% over the same period.
Again, this all goes back to batteries, which have seen a huge reduction in cost. The cost of lithium-ion batteries has fallen by 65% since 2010, reaching $350 per kWh in 2015. Citing Bloomberg surveys, Grant predicted the cost would be just $109 per kWh by 2030.
In addition to being cheaper, these batteries are also more efficient. New and second-generation plug-in models can go farther on a single charge than their predecessors. And this is key.
A year ago, most hybrid and electric vehicles got just 80 to 100 miles per charge, but the incoming generation has doubled that. The Nissan Leaf, Chevy Bolt, and the Tesla Model 3 all have a 200-mile range. And some others, like Audi's R8 e-tron, are up near 300 miles of range.
These technological advancements have accelerated sales. Furthermore, they’ve demonstrated a significant competitive advantage for car companies. It’s a race to build the best battery. The manufacturer with the most efficient — the most cost effective and potent — battery wins.
At the same time, auto demand has completely recovered from its crisis-level depths. Both 2015 and 2016 set records for U.S. sales, and 2017 wasn't far behind.
Furthermore, such batteries are essential for renewable energy sources, specifically solar. The need to store solar power for prolonged periods requires the kind of industrial-grade capacity that only advanced lithium batteries can deliver. That's added another nice tailwind to lithium demand.
Macquarie estimates global lithium demand is currently about 184,500 tons, and it's slated to rise to more than 260,000 tons in 2020. Metals and minerals consultancy Roskill Information Services has a similar estimate, pegging its base scenario for lithium consumption at 290,000 tons in 2020. However, that figure rises to a whopping 420,000 tons in its "optimistic" scenario.
In any case, 2020 supply figures to be less than 238,000 tons. So the projected shortfall is obvious.
So, how can investors play it?
Supply Situation (and Investment Opportunities)
Just four companies produce most of the global lithium supply:
- Albemarle (NYSE: ALB)
- Chemical & Mining Co. of Chile (NYSE: SQM)
- FMC Corp (NYSE: FMC)
- Talison Lithium (a JV by Chengdu Tianqi Industry Group and Albemarle)
Talison operates the Greenbushes hard rock (spodumene) mine in Western Australia, from which it exports over 350,000 tonnes of lithium products annually. It also owns a prospective project in Chile that consists of eight salars (brine lakes). Talison is a private company. It is 49% owned by Rockwood, which was purchased by Albemarle in 2014 for $6.2B.
Albemarle (Rockwood), in addition to its 49% stake in Talison, owns and operates a mine at the Salar de Atacama project in Chile and the Silver Peak mine in Clayton Valley, NV. Albemarle is a $6.5B market cap diversified chemical corporation and is not a pure play on lithium production, though it is positioning itself as the face of the lithium mining industry.
SQM also operates in the Salar de Atacama, with a project adjacent to Albemarle's. It has run into political and legal problems in both Chile and the U.S., and the life of its mine could be reaching an end in the next five years. It is a diversified mining and chemical company and not a pure play on lithium.
FMC operates the Salar de Hombre Muerto brine mine in Argentina, which has had substantial technical problems expanding production. FMC is also a diversified chemical company and not a pure play on lithium.
Obviously, these stocks have done rather well in 2017.
Albemarle jumped 50%, SQM rose 73%, and FMC jumped 60%.
Many Australian miners are benefiting as well, because electric car demand in China is absolutely booming. Australia is the world's top lithium producer and home to the world's two biggest lithium mines.
Galaxy Resources (ASX: GXY) saw its share price rise from less than A$0.01 to A$0.45. And General Mining went from A$0.04 to A$0.74. Those two companies have since merged together.
Galaxy Resources is now the second-biggest listed lithium stock in Australia after Orocobre (OTC: OROCF).
Pilbara Minerals (ASX: PLS) is developing the Pilgangoora Project in the iron ore-rich Pilbara region of Western Australia. It just signed an offtake agreement with Chinese firm General Lithium and plans to start mining next year.
Pilbara chief executive Ken Brinsden says potential Chinese customers are already building new processing operations, noting that most westerners aren't aware that many Chinese electric carmakers there are buttressing demand.
He says his company will increase focus on new lithium developers and choose low-cost operations with proximity to ports. Meanwhile, Pilbara's competitor Neometals (ASX: NMT) is looking to commercialize its lithium resources at Mount Marion in the goldfields region of Western Australia. It will launch a pilot plant in the fiscal year of June 30, 2017.
There's also the Global X Lithium ETF (NYSE: LIT), which seeks to track lithium's price movement.
The fund is a great way to track the overall lithium market while investment and demand grows over the next few years into unparalleled territory in the coming decades.
Included in the holdings of the Lithium ETF are miners, chemical companies, battery manufacturers, and other industrial companies.
By diversifying the exposure to lithium, the Global X Lithium ETF provides investors with less risk and the potential for long-term reward.
— The Outsider Club Research Team