Gerardo Del Real
April 18, 2023
Carmakers, chemical companies, and mining companies looking to catch the next 30 years of profits don’t want lithium — they need it!
I love investing in things that are needed, not just wanted. And lithium investing fits that bill perfectly in 2023.
Elon Musk, whatever you think about the guy, has his finger on the pulse of the energy shift the world is undergoing – as stated in Tesla's Master Plan 3, it will take $1.4 Trillion to invest in critical mineral mining, refining, and cathode/anode making for the energy transition to be sustainable.
$2 trillion for gigafactories and battery recycling; nearly $3 trillion will need to go towards mining, refining, and chemicals.
Lithium alone will need to see at least $170 billion in mining investment.
Those carmakers, chemical companies, and mining companies I mentioned know this: the lithium market has grown from a $1 billion market to over $40 billion today… in a global EV-fueled megatrend that will only escalate from here.
Lithium Demand: On-the-Rise!
Albemarle, the world’s biggest lithium producer, says 1.8Mt of lithium carbonate equivalent will be needed by 2025 to meet demand. That’s in two years.
By 2030, it thinks 3.7Mt will be needed — 10x 2020 levels — matching 4700GWh of battery capacity from EVs and energy storage technology, up from 690GWh last year.
Joe Lowry, dubbed “Mr. Lithium,” is quoted as saying,
“If we frame Albemarle’s numbers in terms of what it’s going to take from a project perspective to meet that demand, 1.8 million tonnes in 2025 would be 1.1 million tonnes more than the market produced last year.
That would take 25 world-class brine projects to come online in three years. I promise you that is not going to happen.
If you want to frame it from Western Australian mining, that would be the equivalent of six Greenbushes (on) 2022 production (the world’s biggest hard rock mine).
That would be the equivalent of 13 times what Pilbara Minerals (ASX:PLS) are going to do this year.
There are a lot of new lithium projects out there, but from an execution perspective, you are not going to see a response that meets that kind of demand.”
I couldn’t agree more and plan on profiting from the false narrative around lithium oversupply and waning demand.
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M&A: Heating Up
2023 has seen a flurry of buyout rumors (Tesla wants to buy miners) and real takeout offers with significant premiums that are being flat out rejected.
In January, GM struck a $650 million deal with Lithium Americas Corp. to develop the largest U.S. lithium deposit in Nevada.
Australia-based Liontown Resources (ASX: LTR) has been courted aggressively by Albemarle (NYSE: ALB). In late March, Liontown was offered US$3.7 billion for the flagship Kathleen Valley project in Western Australia and the Buldania Project in the Eastern Goldfields Province of Western Australia.
Kathleen Valley is a world-class lithium deposit with a Mineral Resource Estimate of 156Mt at 1.4% Li2O. It is scheduled to go into production in 2024, and Liontown has secured offtake agreements with both LG and, guess who, Tesla!
That, my friend, won’t be the last of the lithium mergers and acquisitions that deal in billions.
New Tax Incentives Driving Lithium Valuations Higher
A little appreciated but very material reason for the premiums North American deposits will continue to command is the tax incentive for companies in North America.
The treasury department just announced new guidance to clarify how manufacturers may satisfy the critical mineral and battery component requirements of the clean vehicle tax credit introduced by the Inflation Reduction Act (IRA).
To be eligible for a tax credit, by 2027, 80% of the minerals contained in a battery must be from America or a country with which the U.S. has a free trade agreement. For batteries, by 2029, 100% of the value of the components in the battery must be manufactured or assembled in America or an FTA country.
Here are the details for the researchers out there. I suspect Europe will provide similar guidance soon… the same Europe that plans to ban all fossil fuel-powered vehicles by 2035.
Benchmark Mineral Intelligence argues that the EU's plan to ban the sale of cars powered by conventional engines means that demand for lithium will increase fivefold by 2030 to 550,000 tons per year, more than double the 200,000 tons that the region will be able to produce.
"We have fundamentally made the decision that if a deep sourcing opportunity presents itself down to the mine, we are able and willing to allocate capital to that," said Mercedes-Benz Chief Executive Ola Kaellenius.
Tesla Inc., General Motors Co., Ford Motor Co., Rivian Automotive Inc., Stellantis N.V., Mercedes-Benz Group AG, and Jaguar Land Rover Automotive Plc were all eager attendees at the 2023 BMO mining conference. A conference, as the name states, that is traditionally attended by the world’s biggest miners, not automakers.
How to Invest in the Lithium Space
So how do you profit from this megatrend? That depends on your risk tolerance, your timeline, and your expected return on capital. Let’s take a look at a couple of different ways to invest in lithium stocks and lithium-focused ETFs.
One liquid, conservative (by lithium sector metrics) way to gain exposure to lithium prices is the Sprott Lithium Miners ETF (Nasdaq: LITP).
The fund is the pure-play U.S.-listed ETF focused on lithium mining companies that are providing a critical mineral necessary for the clean energy transition. The index is designed to track the performance of a selection of global securities in the lithium industry, including lithium producers, developers, and explorers.
It holds 45 of these securities in all, and a peek at the top 5 provides a perfect segway into a different – my favorite – way to gain exposure to the space, by picking specific stocks.
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A quick scan of the top 5 holdings for the Sprott Lithium Miners ETF (Nasdaq: LITP) provides a good snapshot at what the index believes merits top 5 status.
- Allkem Ltd. (ASX: AKE)
- Pilbara Minerals Ltd. (ASX: PLS)
- Sociedad Quimica y Minera de Chile SA (NYSE: SQM)
- Albemarle Corp. (NYSE: ALB)
- Livent Corp. (NYSE: LTHM)
My top pick – and top personal holding – last year, is up over 10,000%. And by the time all is said and done, I believe that one play will have provided us over 30,000% gains.
Now let me be clear that is not the norm. But just one of those with sufficient capital allocated into an early stage speculation – which is what Patriot Battery Metals (TSX-V: PMET)(OTC: PMETF) was when we helped finance it in late 2021 – can change your life.
The criteria for that lithium stock pick was me looking for an early-stage explorer in a top-notch jurisdiction with a large land package that could yield multiple discoveries, which is exactly what it’s done. Being situated in Quebec has and will continue to lead to a significant premium compared to lithium explorers in volatile jurisdictions.
Whether you decide to speculate through a diversified ETF, an established producer, or an early-stage exploration play… you’ll want exposure to this exciting sector.
Gerardo Del Real
Editor, Daily Profit Cycle