Part 3 of 3: Use your knowledge about lithium to find the best investment for you

In the first two parts, we have assessed where lithium will most likely be heading to. We have based our analyses on industry assessments on the dynamics of the EV market, what that means for supply, and how politics has influenced this market.

We also drove attention to the fact that the interplay of politics should be carefully watched. Corporations will follow as long as they see a business model, but a few recent developments have shown that this could change.   

3.1 Investment options - a short overview

In case you were looking for it and didn’t see it…stop looking, because you as an individual won't be able to buy it: If you are interested in owning physical lithium, that won’t happen. Unlike bars and coins of precious metals, you can not own lithium in the sense of buying a bar and putting it below your pillow. Ok, this is not entirely true. A few companies will sell you bars as the one below. American Elements for instance does so, and a few others too. But quantities are low, and the product is highly illiquid, which means it will be difficult for you to trade it on, even when prices raise. Your local bank dealer most likely will not be interested.

For this the market has still to mature, and specifically the price difference between spot and contract price needs to minimize. For the same reason, there are also no futures or options on direct lithium metal.  But…you have other opportunities, as the option to buy shares of lithium explorers. 

There are of course other opportunities to take part in the lithium boom as well. Companies that look for new deposist of lithium that can be exploited later will mark the highest rates of return. We'll discuss more below. But independent of where you want to invest in, you should understand that lithium markets are complex. In fact, this market is characterised by the relatively few opportunities that investors have in order to participate. Physical lithium is not publicly traded, but is mostly subject to so-called off-take agreements, i.e. long-term supply contracts between producers and end users. Many producers of lithium-based battery chemicals, battery parts manufacturers (such as cathode or anode producers) but also automobile companies themselves (i.e. the real end users) have meanwhile established stakes in lithium miners or even promising explorers in order to secure the raw material (see discussion in part 1). This leaves virtually no room for the free market. The LME, for example, wanted to introduce a certificate on lithium in 2019 or 2020, but still didn't do so. Until that happens, investors can only participate directly in  producers or explorers, or indirectly via ETFs.  

But, in order to understand where and ahy opportunities are in the lithium market, let us have a glance at the lithium supply chain, i.e. the trail from the mine...all the way down into an EV car.  

3.2 Beware the supply chain!

If we look at the value chain below (courtesy of Industry-All Global Union), we see that a number of steps are involved to get the lithium from the ground and into your car (not mine – I am a petrolhead). If demand for EVs stays robust, we can assume investors to provide money for the lithium refiners (to produce lithium hydroxide and lithium carbonate), but also to battery and component producers. The refineries can sell their proceeds to the component industry, which in turn should make nice profits by selling to battery and car producers. Me as an investor would like the story of this 30% annual growth, really!  

So, if investments are flowing in, production capacities should increase along the value chain. That means not only should investors be rewarded, but consumers too, since increasing production means lower prices. Ok. No, wait, you forget the mines, you might say. You said ‘investors should provide money to the refiners, component- and battery producers’. But mines come before refining. So what about the mines?

The mines too get their funds, relax. Because otherwise the supply growth discussed above would not be feasible. Maybe they profit even more from investment capital than the rest of the value chain, because, unlike lithium processing plants or battery manufacturing plants, you can not just put a lithium mine anywhere. You will need to follow the dictate of the geology. Only where nature had pleased to put a decent lithium deposit in the ground you MIGHT at some time build a mine there. What I want to say is this:

3.3 Lithium mining and the future availability of lithium deposits will be the bottleneck in increasing supply of lithium

In other words, while production capacity will to a large extent follow demand patterns (we speak of ‘supply elasticity’), the beginning of the lithium value chain might not be able to follow - because it has to follow geology. This is where the weak spot in the whole EV story could be located. Because whatever politicians and activists dream and think about, nature might have other plans. I say ‘might’ because exploration always is changing the outlook, and we will have a different knowledge about lithium deposits in 2027 than we have in the year 2023. But for you to keep in mind: the mining stage is one where, due to the relative inelastic supply, problems for the supply chain could start. And if supply (of the minerals) is not keeping up with demand, this means an INCREASE in PRICES! Now we are done. No. Still not (aw, come one).

Because mining IS NOT THE START OF THE VALUE CHAIN!

No? No!

Because guess what. A mine will be built only where there is a deposit in the ground that allows for the economic development and extraction of the same. This is something that needs to happen now, as otherwise the scenario of solid supply around 2025 will break and reverse towards the end of the decade. We calculated further above with highly conservative numbers that 1,78 mio tns will be needed by early 2030, and we might get this supply online. But 500,000 additional tns will be needed in the following year, and at  least the same after that one. That increase is 5 times the 2021 total lithium production! So, two things here:

The true stress for the EV and thus the lithium industry is really going to happen towards the end of this, or with the start of the next decade. Because if we continue to apply the growth scenarios applied earlier, this is where we are going to head to. But, if you think we are safe and can deal with that later, than you are wrong. Because we need new projects in the pipeline now, and I mean battery-grade, i.e. high level project. Development of deposits takes at least 10 years, so if we have a good deposit now, that MAY become a mine in 2033, when it will be IN URGENT NEED!

                  So, someone needs to look for these deposits. And this is not the mine, or the mining company in general.

3.4 Making money through investing in lithium stocks: Lithium exploration companies (Junior Miners) should be on your radar.

Important: This is not investment advice. I present a number of common arguments for and against investing in this commodity. Please seek professional advice before making investment decisions. Also refer to our disclaimer

After all, the demand for lithium is growing so strongly that over the next few years high-quality deposits urgently need to be found. And they need to be converted into ready-to-operate mining sites, as otherwise a looming post-2030 supply deficit might deepen, driving up prices in an unsustainable way and make the project fail. As such, companies that look for and develop deposits of battery-grade lithium could become very interesting investment destinations.

Look for high-grade deposits, jurisdictions outside of China (as these will be funded to decrease dependency), and, ideally, for exploration firms that have already established connections to a battery producer or even a car manufacturer, which considerably increases the financial strength of the junior miner. Also, look into our dedicated blog article that talks more deeply about Junior Mining, and how investors can profit from that. 

Canadian lithium explorer ‘Patriot Battery Metals’ for instance, which is very successfully developing the high-quality Corvette property at James Bay, has increased its share price from USD 0,38 in January 2022 to USD 12,23 in May 2023 (!).

In other words, while we can, as demonstrated in our lithium investment series, safely expect a 25% - 30% year-to-year raise of lithium demand, those who successfully can guarantee that the supply pipeline doesn’t stay dry after 2030 can reap massive benefits TODAY. Share price increases like the one mentioned above are radical. And while not the norm even within the juniors market, it shows how frenetic share prices can develop if the right firm with the right people develops a deposit that the world was waiting for.

I suspect there will be a few more ‘Partiot Battery Metals’ round the corner over the next 5-8 years. Hence, exploration or junior miners in the lithium space should be on your radar if you are interested in gaining above-average (and with a higher risk profile, of course) from the lithium decade that is ahead of us (despite all shortcomings in the EV market). Other lithium explorers with potential for growth include Brunswick Exploration (with a growth of roughly 125% over the last 12 months),

 Please beware: Investing in exploration can generate high returns, but also losses. You need to have some understanding about the   sector. Educating investors about the Junior Mining or exploration industry is the speciality of Explorado. In case you want to venture     out by yourself, make a solid assessment about the company and its projects before you invest money.

In general, it is important to understand that exploration companies or junior miners have a different business model as do have the miners themselves. If you would like to understand more about how the exploration industry works, have a look at this video HERE.

3.5 Lithium stocks: Shares in producing companies

Owning shares (i.e. stocks) of lithium miners is a viable way to invest in the lithium space. In general, the spot price changes don’t directly influence the prices of the miners – only longer term trends will do. The better the longer-term price trends  that will find their ways into the offtake agreements do, the better for the miner. However, also the quality of the mines in terms of extraction costs, as well as the refining costs matter here. You should consult the presentations of the companies involved to get some understanding. We will cover the topic of lithium deposits separately, but note for the moment that lithium in very general terms has two sources: brine solutions, which are found primarily in South America, and hard-rock sources, where the lithium is mined out of a lithium-bearing ore called spodumene.

I fooled you with the picture on the left by the way, because this is a fleur de mère pond in France, used for the production of high quality salt for cooking (instead of for driving). But, to my defence, brine productions in Latin America look quite simillar. The cover image of Part 1 of this series is showing an actual lithium brine production.

The lithium business, at least as far as production is concerned, was basically run by a quasi-oligopoly of a few large mixed mining groups in the 2010s: Chile's SQM mines lithium, but is also a major producer of chemicals and fertilisers (potash-based). Albermarle, from the USA, is currently the biggest lithium producer by market capitalization, and is by now heavily involved Australian hard-rock lithium projects, including activities for processing into battery-grade chemicals. One should point out that in the company has also a separate business unit, Albermarle Energy Storage, which, as the name implies, takes care of the post-mining value chain, the processing and production of carbonate, hydroxide and lithium metal. Through its mining activities in Chile and Australia, the company is also maintaining a portfolio of both brine- and hard-rock based lithium, which ensures balanced exposure to bith sub-markets.

Finally, one should also look at the (former) FMC Corp as well as Orocobre (WKN: A0M61S), which are also among the big players. Of particular interest here is FMC, which spun off its lithium division in the autumn of 2018 by means of an IPO, which now trades under the name Livent. This company is essentially the largest pure-play lithium player....in the West.

China has also launched its two lithium giants (Tianqi and Ganfeng) through IPOs. Both are involved in the mining and processing business and are interesting alternatives to the companies from the West. Similar as to Albermarle, Ganfeng also has downstream processing operations, and is running mining projects across the globe. Feeding the bulging (although quite intransparent) domestic EV market, the company has risen in a few years to a major lithium miner and metal producer. Next to the Chinese market, Ganfeng is also an important supplier to major Western EV producers, Tesla and Volkswagen included. Tianqi is, according to the Investor News Network, by now the world’s largest spodumene-derived lithium producer, through its heavy and aggressive involvement of joint-ventures with Australian firms with exposure to pegmatite operations.

However, despite these companies being global players, note that Chinese companies do have different governance and also financial transparency requirements than is the case in the West. That does not need to deter an investor, but one should have some familiarity with Chinese companies and their governance to understand ones investment target.

Other candidates of interest may include the two Australian lithium majors Allkem (which is, to be honest, only 50% Australian and 50% Argentinian) and Pilbara Minerals. The former is a relatively new JV between Orocobre and Galaxy Resources, that is operating in other mineral sectors too (rather specialized ones, such a boron and potash). As is the case with some other lithium majors, this Aussie-South America combination produces both brine- and spodumen-based lithium, ans is also active in the downstream processing.

Mining majors of course feature less up- and downswings than the exploration firms that were mentioned above. Take note however that a number of the companies mentioned are also active in either other minerals, or in the downstream (i.e. chemical processing) space. This means that other factors than those determining lithium will influence the share price development of these companies.

What also should be investigated is relations (such as offtake- or investment agreements) with OEMs or battery producers. Also, have a look at the company presentations as to how these companies are planning to maintain and grow their supply pipeline, so that they will be able to cater for the lithium market also in the future.   

3.5 Lithium shares (EV battery producers and EV producers)

Of course, these companies have also a weight when we look at the overall lithium value chain. Battery giants like LG, Panasonic or CATL are heavily exposed in the lithium space, although this is also true for other markets. The interesting thing about investing in battery producers is surely that chances are high that they will also be profiting from any future battery type that MIGHT use less, or maybe even no lithium. Also OEMs like Tesla, Mercedes-Benz and Stellantis are becoming more exposed towards battery research and production, which is no surprise. Actually, the latter two have set-up their own battery-producing and researching Joint-Venture, wich runs by the name of ACC (Automotive Cells Company). Of course with these, the lithium segment as such become less and less important, as value here is created through other means.

Also, Explorado being a education service with an emphasis on exploration and minerals and metals, I am leaving my field of competence here. In any case, we can state that investing in these companies is almost a safe heaven, as most of these are industrial giants with a number of branches and sectors where they are involved in, lending them a certain level of insurance against heavy storms in one particular market. On the other hand of course, if you are interested in short-term and/or substantial share price gains, you may look at the previous options, or….at the following (and last) two:

3.6 Lithium ETF

ETF (Exchange-traded funds) are often an interesting investment choice since they lend a broader exposure to a desired market, with price fluctuations on average tending to be less volatile as is the case with individual stocks. Also, one does not necessarily need to acquire detailed knowledge about an individual company – this is what the fund managers should do for you. But of course an investor should look into what companies are in the ETF, what is the focus and why, etc.

ETFs buy into a number of companies and follow an index, which is the average market value of the companies contained in the fund. ETF often follow a specific specialization or focus, in whether it buys along the whole value chain (e.g. from exploration to battery producers), or with a focus on a specific segment along this value chain. To note is the fact that while there is of course managers that put the fund and its strategy together, but, unlike a true investment fund, an ETF is not actively managed. This results in lower fees, but also MAY result in higher losses in case of market disruptions, as the automated system may take some time to activate counter-measures.

One other distinct benefit of lithium-based ETFs is that they don't strictly correlate with the prices of the raw material. Even if prices for the metal itself should raise less than expected, or in case they even fall, a lithium-based ETF could actually gain from that, since the downstream industry would benefit from falling lithium prices. Note however that this is only true if the fund covers it, but to my knowledge, most lithium-based ETFs include downstream or processing industry.

The Global X Lithium & Battery Tech ETF is a good example of an ETF with a strong link to lithium producers and tracks the largest ones. What is particularly interesting about this fund is the fact that it invests quite broadly in the entire value chain of the lithium industry, including explorers and lithium producers from South America and Australia. But manufacturers of battery-relevant lithium chemicals such as lithium hydroxide are included too. Other ETFs, like the Amplify Lithium & Battery Technology ETF focus, as the name suggests, onto companies that drive forward the development of lithium-based batteries.  VanEck is of course also part of the game. With the VanEck Rare Earth/Strategic Metals ETF, the investor would also invest in lithium, but also in other strategic or critical raw materials like rare eaths (REE).

You ask this question because you wanna know if you can’t bet wrong when putting your money into a lithium play, eh? Well, the answer to this question is simple: No

I can’t think of any mineral or metal that has been indispensable, really. Even diamonds now have to compete with high-quality lab-made stones. Maybe gold as an object of value storage is an exception, but that is another story. As I was writing before, ingredients for technical applications become replaced (substituted) either if they get too expensive, or, if another mineral or metal is being developed that shows a higher performance. Or both.

For performance batteries, which are being used to propel EVs, the same mechanisms apply. While pressures for substitution are generally higher for cobalt (for reasons of difficult supply chains, price pressures and challenges in meeting responsible sourcing standards) lithium is also being targeted by engineers. Talks about lithium being the oil of the 21st century did little to reduce this substitution pressure. And we see increasing efforts to reduce lithium for instance in the solid state- as well as in sodium batteries. The latter basically comes without any lithium. However, before any of the two can be mass produced, years will pass. And even then: while solid state batteries will require LESS lithium, they will still need some. And probably, overall demand is still going to raise. Sodium batteries on the other hand will be used for low-performance and cheaper cars, so they will occupy a segment of the market, not the market as a whole.

We will go deeper into batteries and metal compositions of those in another blog. For the moment though we can say that at least as the 2020s are concerned, lithium is and will remain the key metal to allow for good- and high performance EV batteries.  

Please send me comments if you agree, and don't if you don't. No seriously, everyone should always learn, and I welcome remarks that see things differently, for my and that of my readers benefits.