Surging demand for lithium-ion batteries used in electric vehicles produced by Tesla (NASDAQ: TSLA) and other manufacturers has been instrumental in pushing up the metal’s price by more than 50 percent on a year to date basis. Just nine months ago, battery grade lithium carbonate was going for about $5,000 per metric ton compared to $8,500 per metric ton in June and producers expect prices to reach $10,000 before the end of the year.
In fact, the silver-white metal nicknamed ‘white petroleum’ has outperformed gold which has also been on an uptrend recently to become the best performing commodity in the basic materials sector. This upward trajectory of lithium prices is expected to gather more steam going forward with the rising demand which will undoubtedly make lithium mining quite profitable over the next decade.
According to data from Statista, the projected worldwide lithium demand is expected to grow from 197,347 metric tons in 2015 to 292, 682 metric tons in 2020 implying that miners still have lots of catching up to do in order to satisfy both current and future demand.
However, reports from Goldman Sachs appear to imply that Statista’s projections are on the low end based on the fact that the bank expects a 22 percent electric vehicle (EV) penetration by 2025 which could in turn see lithium demand grow more than 11 times.
Gigafactories and EVs driving demand
Announcements of billion dollar investments in gigafactories have no doubt been a major contributing factor to the sharp rise in lithium prices and with good reason. According to a recently released report by Transparency Market Research (TMR), the global lithium-ion battery market is poised to rise from $29.68 billion in 2015 to $77.42 billion in 2024, registering a strong CAGR of 11.6 percent.
With the increasing shift towards sustainable clean fuel in the automotive sector, the report highlights how the demand for high power capacity batteries for the vehicle has gained precedence.
“The increasing level of awareness among consumers and automobile manufacturers alike regarding the benefits of clean fuel, the declining availability of natural resources, and the soaring prices of fossil fuels have warranted the need for alternate solutions and this has significantly driven the global lithium-ion battery market,” the author of the report states.
By power capacity, the low power lithium-ion battery (5-25 Wh) segment holds the lead in the global market, accounting for a 35 percent share in 2015 while the 18-28 KWh segment is projected to witness significant growth in the coming years, registering a 16.7 percent CAGR by value from 2016 to 2024.
It is important to note that apart from Tesla’s $5 billion investment in the new gigafactory which it believes should reduce battery costs by as much as 30 percent, other players are also making big ticket investments in the space.
German car maker Volkswagen recently announced plans to invest in an $11 billion battery factory with a possible location in Germany, Eastern Asia or Europe. This comes on the backdrop of the company facing some serious backlash from consumers after news of its diesel emissions scandal emerged. The company has stated that it plans to produce 1 million EVs and plug-in hybrids per year by 2025.
As such, the following stocks should provide investors with exposure to the lithium mining sector at what we believe are attractive entry points.
Sociedad Quimica y Minera de Chile (NYSE: SQM), the world’s largest lithium producer is an integrated producer of specialty plant nutrients, iodine, lithium, potassium-related fertilizers and industrial chemicals. The stock’s performance has been pretty good over the past as shares have rallied by 69 percent. Just last month the company revealed that it would be upping its lithium hydroxide capacity in Chile from 6,000 metric tons per year to 13,500 metric tons per year in order to keep up with the current demand.
During 2Q16 SQM witnessed increased attention from hedge funds and other institutional investors with the number of funds long on the company shares increasing from 11 to 17 on a quarter-on-quarter basis further reaffirming the bull case for lithium producers.
Currently, the company has plans to enhance efficiency at its current facility which produces 6,000 metric tons per year and has plans of setting up a new plant with a capacity of 7,000 metric tons per year.
Albermarle (NYSE: ALB) has a market capitalization of $9 billion and develops and manufactures engineered specialty chemicals globally which include lithium compounds such as lithium carbonate, lithium hydroxide, lithium chloride, and lithium specialties and reagents for applications in lithium batteries. The company’s share price has been on an uptrend gaining 74 percent over the past year.
According to Albermarle’s most recent quarter, its net sales from lithium amounted to $233 million compared to $213 million for the same quarter in the prior year. Furthermore, the company announced it had reached an agreement with Bolland Minera S.A. for the exclusive exploration and acquisition rights to a lithium resource in Antofalla located in Argentina’s Catamarca Province which it expects to be the biggest lithium resource in the country.
Lithium Americas (OTCQX: LACDF) is a relatively smaller resource company with a market capitalization of $212 million engaged in the production of lithium carbonate and Organoclay Hectatone for industrial and commercial purposes. While the stock has had an impressive run over the past year gaining almost 100 percent, the stock still appears to have more upside potential.
This can be attributed to the company’s 50/50 joint venture with SQM on the Cauchari-Olaroz lithium project in Jujuy, Argentina which we believe is a major catalyst for the company. An initial feasibility study carried out in 2012 revealed that the project has a potential production capacity of 40,000 metric tons per year which if fully exploited will further drive shareholder value.
Cauchari-Olaroz is believed to be the world’s 3rd largest lithium brine resource and is fully permitted for immediate construction and development.
Orocobre (OTCPK: OROCF) is involved in the exploration and development of lithium, potash and salar mineral resources primarily located in Argentina. The company has a market capitalization of $572 million and shares were not left behind as other lithium mining stocks took off. Over the past year, the stock has gained almost 70 percent a rally fueled by a ramp in production capacity at the company’s Olaroz project.
One of the most interesting aspects of this company is that it is in the process of utilizing new proprietary technology developed by Bateman Advanced Technologies (BAT) with a view of doubling production in the second phase of the project. The two companies will be working together to develop a large scale lithium hydroxide plant capable of producing between 15,000 to 25,000 tons per year of lithium hydroxide monohydrate directly from brine utilizing BAT’s technology.