An electric car prototype of Chinese car manufacturer Geely is displayed at the Shanghai Auto Show in Shanghai on April 21, 2011. Major carmakers' high hopes for electric vehicles are on clear display at the Shanghai auto show, but industry leaders say it could be a decade before such eco-friendly cars go mainstream.
Lithium is a metal that may not be top of mind for many investors, but it's common in everything from cellphones and iPods to laptops and tablets.
Now, the rising demand for electric cars will help give an additional boost to lithium prices and stocks, analysts say.
Lithium, increasingly used in the batteries that power electric vehicles, can be mined from rock but most production comes from brines, or salt lakes, in Chile and Argentina. The industry is dominated by Talison Lithium Ltd., with its hard-rock mine in Australia, and three brine players - Chile's Sociedad Quimica Y Minera (SQM), U.S.-based FMC Corp. and Rockwood Holdings Inc.'s Chemetall subsidiary.
Electric vehicles are not yet mainstream, but should grow in popularity as gasoline prices continue to rise, said Jonathan Lee, a battery materials and technologies analyst at Byron Capital Markets Ltd. in Toronto. "There is going to be significant growth in the lithium industry."
Lithium is commonly sold in compounds such as lithium carbonate used for batteries. Production is estimated to grow to 118,000 tonnes this year, 127,000 by 2012 and 300,000 by 2020, he said.
The growth, Mr. Lee said, will come from countries such as China and the United States where there are incentives and programs to promote the use of electric cars. China plans to spend $1.5-billion (U.S.) annually over the next 10 years to build infrastructure such as charging stations.
And in the U.S., the Obama administration, which wants to see one million electrical vehicles on the road by 2015, is looking to spur sales by replacing the existing $7,500 tax credit with a $7,500 rebate at the time of sale.
Existing lithium producers should meet growing demand in the near term, but many junior companies are poised to enter the market and new entrants could cause an oversupply, Mr. Lee cautioned.
How To Play It
The key is to investing in lithium companies is to focus on low-cost producers in case prices fall from oversupply, or ones with a by-product like potash, common in brine projects, to earn additional revenue or as a way of reducing operating costs, he said.
He has a "buy" on Talison Lithium with an 18-month target of $6.55 (Canadian) a share. This pure-play lithium producer is set to double production capacity by next year, and also has future growth potential in its brine projects in Chile, he said.
He also has "speculative buys" on Lithium One Inc. ; Lithium Americas Corp., Orocobre Ltd., Rodinia Lithium Inc. and Western Lithium Corp.
Dundee Securities mining analyst David Talbot is also bullish on rising demand for lithium. In the short term, the demand will mainly come from China, India and Indonesia for use in batteries to power electrical bicycles and mopeds in addition to cars, he said.
Lithium production should grow between 7 and 15 per cent annually and reach 240,000 to 270,000 tonnes by 2020, he suggested.
While the three big brine producers could "turn on the taps and expand production to almost match demand," there is still potential to make money given "fairly high lithium prices," Mr. Talbot said.
Buying Opportunity
He estimates the price for lithium carbonate has risen to the $5,500- to $6,000-a-tonne range after FMC and Chemetall hiked prices by around 20 per cent on July 1. But it can be difficult to get a precise handle on prices because lithium is not traded on an exchange and prices stem from negotiated contracts, he said.
Because some lithium juniors are off 50 per cent amid the downdraft in commodity stocks this year, it is a better buying opportunity now, Mr. Talbot said.
He has a "speculative buy" on several lithium developers, including Rodinia Lithium, his top pick with a one-year target of $1 a share. Its main project is near FMC's brine deposit in Argentina, and the company has a strategic investment from one of China's largest battery materials providers.
Mr. Talbot also likes Nemaska Exploration Inc. Canada Lithium Corp., Orocobre and Lithium Americas.
While junior resource firms can provide plenty of upside, there's always the risk that they might fail to get financing and permits. Investors not concerned about a pure play in lithium might consider Global X Lithium ETF which tracks battery-makers as well as companies exploring for and producing lithium.
The ETF is 40-per-cent invested in SQM, FMC and Rockwood Holdings, but lithium is only a portion of the revenues of these conglomerates. Avalon Rare Minerals Inc., which is focused on a rare earth play but has a lithium project in Ontario, is 11 per cent of the ETF. Since inception on July 22, 2010, this fund is up 21 per cent.
Lithium bandwagon
Lithium-ion batteries are gaining traction as the power-pack of choice in the electric- and hybrid-car markets.
These batteries are lighter and can store a lot more energy than their current rivals. But other batteries, possibly using other minerals such as zinc, could vie for a piece of the electric car market .
In the U.S. market, lithium batteries now power pure electric cars such as the Nissan Leaf and Tesla Roadster as well as the hybrid Chevrolet Volt, which operates on electricity and gas.
The Ford Focus Electric, Honda Fit EV and Mitsubishi i-MiEV, which are electric vehicles that will roll out later this year or in 2012, are also jumping on the lithium bandwagon.
But for now Toyota, a pioneer in hybrid-vehicle technology, is sticking with more bulky, nickel-metal hydride batteries for the Prius model it sells in the U.S. market .