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Skyrocketing demand for electric vehicles (EVs) – critical in the energy transition from fossil fuels – has sparked a “white gold” rush.
The push to net-zero emissions has caused a boom in lithium, a silver-white elemental metal needed for batteries that power EVs and the build-out of renewable-energy storage systems.
And now a supply crunch has fuelled a red-hot rally in the lithium-carbonate spot price to around US$74,300 a tonne from US$6,750 a tonne at the start of 2021, according to S&P Global Platts data.
“I don’t see any major price decline anytime soon because demand is going to keep growing as more EVs come into the market,” says Seth Goldstein, energy and resources equity analyst at Chicago-based Morningstar Research Services LLC.
With growing lithium supply, the market will be closer to balance in the middle of the decade, he says.
“I see prices averaging at US$30,000 to US$40,000 a tonne – still well above the marginal cost of production.”
Lithium, which is usually found in brines or mineral deposits, is “one of the best ways to invest in EV adoption because you are not betting on a specific car company,” he says.
“You’re investing in the notion that there will be more EVs on the road tomorrow than there are today.”
“We think they’re undervalued” because the market appears skeptical that lithium prices will stay high, he says.
His top pick is Lithium Americas Corp. LAC-T, which recently announced plans to split its North American and Argentinian lithium units into two companies by the end of 2023.
He favours the move, saying that the two companies can now more easily obtain financing instead of multiple projects having to compete for capital. Lithium Americas is not in production yet, but its Cauchari-Olaroz brine project in Argentina is poised to do so early next year.
Thacker Pass, its lithium-clay mining project in Nevada, is awaiting the outcome of an appeal in January of a court decision striking down an environmental lawsuit. It should proceed because the company has the federal and state permits to proceed with construction, he says.
Lithium Americas’ shares trade well below his fair-market value estimate of $88 (US$65) a share. “For investors who can tolerate the risk, it’s an excellent opportunity,” he says.
Jeremy Lin, portfolio manager with Purpose Investments Inc., is also bullish on lithium.
“I think the lithium price will stay higher for longer,” but not at its current, excessively high level, he says.
Lithium carbonate should pull back to about US$22,000 to US$23,000 a tonne in five to six years amid growing supply, but that’s still well above its historical range, he says.
The U.S. Inflation Reduction Act could be an “additional tailwind” for lithium because it provides a US$7,500 consumer tax credit to stimulate EV purchases, he says.
However, the credit will also require that a proportion of the battery metals to be extracted or processed in the U.S. or countries with which it has free-trade agreements.
Mr. Lin owns six pure-play lithium companies in Purpose Global Climate Opportunities Fund CLMT-T, ranging from early-stage miners to producers. Some of his Australia-listed stocks trade in the U.S. over-the-counter market, but he buys them on the domestic exchange.
Holdings include Australian-based producer Pilbara Minerals Ltd. PILBF, whose Pilgangoora project is the world’s largest, independent hard-rock lithium operation.
His near-term producers include Sigma Lithium Corp. SGML-X, whose Brazilian hard-rock lithium project should start operating soon, as well as Lithium Americas with its Cauchari-Olaroz project.
Early-stage plays include Frontier Lithium Inc. FL-X, a developer of a hard-rock lithium project in northern Ontario.
“What I like is that it’s geographically close to auto plants in Ontario and Detroit,” he says.
His other mining juniors include Vulcan Energy Resources Ltd. VULNF, which is developing a geothermal lithium project in Germany and has supply deals with some car makers, as well as Leo Lithium Ltd. LLLAF, which has a joint-venture partnership in its Mali project with China-based Ganfeng Lithium Group Co. Ltd. GNENF
Having a diversified basket of lithium players reduces the downside risk, Mr. Lin says. “That is how we are playing it.”
Price to fall as supply increases
Robert Lauzon, managing director and chief investment officer at Middlefield Capital Corp. in Toronto, has a more cautious outlook on lithium.
“I’m not overly bullish on lithium, but what I am bullish on is the secular trend for more EVs, which will drive demand for lithium,” he says.
“The risk-reward is not as attractive as prior to the run-up in the commodity price.”
He expects the lithium carbonate price to peel back over the next five years as supply increases.
“The true price of lithium to make a profit is probably in that US$15,000 to US$30,000 a tonne range,” he says.
Mr. Lauzon holds Sociedad Quimica y Minera de Chile, which gets 75 per cent of its revenue from lithium mining, in Middlefield Global Energy Transition Class.
“It’s a more conservative way to play lithium,” he acknowledges, although there could be political risk because it operates in Chile.
The company is a low-cost producer, has a healthy balance sheet, pays a very healthy – albeit lumpy – dividend, he says. It also has a more attractive valuation and dividend yield than U.S.-based Albemarle, he adds.
Risks with ETFs
Exchange-traded funds (ETFs) offer a more diversified way to play the lithium growth story. Still, there are caveats, says Tiffany Zhang, ETF analyst with National Bank Financial Inc. in Toronto.
“If you lift the hood and look at their exposure, they’re quite different,” says Ms. Zhang. For example, “there is sovereign-country risk, especially from companies in emerging markets and China. … We have seen how volatile the Chinese market can be.”
Horizons Global Lithium Producers ETF gained 12 per cent this year and is up 62 per cent since launching in 2021.
“It’s the most sensitive to the lithium price because it invests in miners,” Ms. Zhang says.
The other two U.S.-listed ETFs are more diversified but have risks too, she says. They own some hard-hit EV stocks, which may be consumer-discretionary names, but are often lumped into the technology or growth sectors by investors because of their high valuations.
Amplify Lithium & Battery Technology ETF, which lost 27 per cent so far this year, has about 20 per cent in EV stocks that including several Chinese automakers, she says. Global X Lithium & Battery Tech ETF is off 18 per cent for the same period.
“It’s hard to say which will work better each year, but the overall volatility of these broader baskets would be much better compared with a single-exposure [metal] ETF,” Ms. Zhang says.
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