The lithium industry fuels the electric vehicle industry, which explains the high demand for the metal.
Lithium is a rare earth mineral and a keystone input for the battery industry. Battery technology has been around since the early 1800s, but materials used early on were highly flammable and dangerous. Lithium-ion technology, which used lithium in the cathode, enables a lighter, longer-lasting and rechargeable battery capable of holding much larger quantities of electricity.
The industry is scaling rapidly now, but there are some important factors to keep in mind before pouring your money into lithium:
The lithium industry is capital-intensive. - Potential ESG benefits.
- Ways to invest in lithium.
The Lithium Industry Is Capital-Intensive
Lithium is not traded as a commodity by itself, and as such, investors must look at mining companies to benefit from its meteoric rise.
Before jumping into an investment, James Calaway, executive chairman of lithium and boron miner Ioneer Ltd., notes that not all lithium is created equally. "If you're looking for enduring value, you need to take a look at the actual quality of assets themselves," he explains. The largest mines with quality assets are located in Chile and Australia, but there have been recent pushes to open more within the United States. Lithium Americas Corp. (ticker: LAC) is one company that is pressing forward with such plans. It anticipates opening the largest lithium mine in the U.S. in Nevada.
LAC has been approved to begin production, but the company still faces hurdles before it can build the infrastructure it needs to actually start mining. This underscores the need for investors to consider the scale and viability of mining companies before investing. There's nothing inherently good or bad about a business model that requires large upfront investments before it can become profitable, but investors should know what they're getting into.
Darin Tuttle, chartered financial analyst and founder of Tuttle Ventures, notes that "mining requires a lot of capital expenditure to extract resources from the ground." He recommends analyzing potential performance using the all-in sustaining cost, or AISC, that a company reports. AISC is heavily used in the gold industry, and first rose to prominence in the latter part of 2013 when gold reached a record price but mining companies failed to post notable profits due to costs not traditionally accounted for.
AISC includes on-site mining costs, administrative costs and permitting costs, among others. Nailing this metric down for a company is a good start to ensuring that its operation will be profitable. The metric is catered to the gold industry, and its adoption into lithium mining has been slow. And because lithium has the tendency to bond with other elements, its production also results in valuable byproducts that help bring down the cost of mining. Calaway notes that "the value of the [byproduct] that is produced with [lithium] can be used to offset operating costs and bring down significantly the net cost of producing lithium." Finding mines where this dual production of goods occurs, such as the SQM mine in Chile or the Ioneer mine in Nevada, can help investors find assets that are cheaply produced and highly lucrative.
In addition to operating costs, investors should be mindful that the mining process, especially for lithium, often damages the nearby environment in terms of habitat destruction, water contamination and waste production. These factors have been a major reason that nearby native tribes and ranchers have been advocating for a halt to the LAC mine completely. While the project has been given recent green lights by the Nevada government to continue, staunch opposition still hangs over the mine.
Cleaner alternative mining operations are possible. For example, companies are working to begin lithium extraction near the Salton Sea by pulling lithium out of naturally occurring steam that is also used to make geothermal power. Such a method would not draw on water reserves, since the steam is naturally occurring, and could pull the mineral within a few hours. The Salton Sea is far from economically viable, but has great promise. In addition, Calaway notes, "everybody that's involved in this industry has been making significant progress in recognizing the externality costs of what they do and a [there's a] growing recognition of the importance of excellent environmental practices." This growing trend provides more stable investment opportunities.
Potential ESG Benefits
Lithium offers a plethora of environmental, social and governance, or ESG, potential. Without a change in emissions stemming from transportation, climate change reduction efforts will fall short. Lithium will play a key part in stemming emissions from vehicles, and that is what gives the mineral such broad-based support. Government contracts, especially in the U.S., are underway to bring more of the metal to market, while consumers increasingly choose greener modes of transportation in an effort to reduce their carbon footprint. The reduction in emissions is meaningful, as a study from the University of Michigan found that "on average replacing an internal-combustion-engine sedan with a battery-electric sedan saves 45 metric tons of carbon dioxide equivalent." Those savings should only increase further as more mining operations take their environmental impact into consideration.
Ways to Invest in Lithium
Albemarle Corp. (ALB). Albemarle is one of the largest producers of lithium in the world. They are also one of the most integrated companies that deal with lithium, having a strong vertical approach from mining, extraction and purification. This approach has also ensured that they have the lowest cost in the industry for lithium hydroxide production, the processed lithium that is used in batteries. The company also announced a major lithium processing plant in Arizona, which would have the potential to produce 100,000 tons of lithium annually. The plant would be supplied by domestic lithium production in North Carolina on a preexisting mining plant that was closed in the 1980s. The company is also looking to scale up its extraction operations in Nevada, where it currently operates one of the only lithium extraction sites in the U.S. Albemarle is a large-cap stock with a market capitalization of about $26 billion.
Piedmont Lithium Inc. (PLL). Piedmont Lithium is a mining and conversion company that is well positioned for growth. It owns partial rights to a lithium mine in Ghana, but its claim to fame is in processing lithium into lithium hydroxide, which is the compound needed for EV batteries. The U.S. currently lacks significant processing ability, and relies heavily on countries like China to process the lithium that is later used in domestic battery production. Because of this, the U.S. federal government has placed a heavy emphasis on supporting companies like Piedmont to ensure greater energy independence. While not a mining company per se, Piedmont will play a key role in the lithium industry. And, it expects to produce lithium hydroxide at an AISC of $3,565 per ton, which would be among the cheapest rates in the industry. The company is still relatively small, which comes with a greater degree of risk, but government support should be a big stabilizer. Piedmont Lithium has a market capitalization around $680 million.
Sigma Lithium Corp. (SGML). Sigma owns the largest hard-rock lithium reserves in the Americas, located at the Grota do Cirilo property in Brazil. It has been producing environmentally friendly lithium concentrate on a pilot scale since 2018, but has plans to begin phase 1 production by December 2022. Sigma expects the mine to reach a capacity of 270,000 tons of lithium annually during the first phase, ramping to 531,000 tons in phase 2. The company also received a new green light by the Brazilian government as President Bolsonaro removed regulatory trade requirements that required companies to announce trade quotas of lithium to the nation's nuclear agency. Sigma's market cap is about $1.6 billion.
Global X Lithium & Battery Tech ETF (LIT). Many lithium companies that dominate the industry are not traded in U.S. markets, making it tougher to invest in them directly. Thankfully, exchange-traded funds, or ETFs, like LIT enable investors to still benefit from companies like Ganfeng Lithium Co. Ltd. With 39 holdings and $4.5 billion in assets, LIT can be a valuable diversification tool for investors who want to reap long-term benefits of lithium holdings. Kunal Sawhney, CEO of Kalkine Group, notes another benefit that LIT can offer, stating that "while investing directly in lithium stocks is quite risky, one can look at reducing this risk by investing in lithium-focused ETFs."
While the lithium industry is complex, it is still possible to make rational investment decisions. Rather than simply jumping into the current hot stock, investors will be rewarded by seeking out companies that show promise over the long term.
Lack of Transparency on Lithium Prices
Because lithium is not traded publicly and given that there is only a handful of lithium producers, it can be difficult to grasp its true market value. This could be challenging for investors looking to build an investing strategy with the commodity. Investors may want to diversify with the metal, but how would they hedge against any risks?
“Lithium is certainly part of today’s global economy,” says Rich Messina, managing director and head of retirement at JPMorgan Chase & Co. (JPM). While investing in lithium could be a strategy to diversify a portfolio, the metal is subject to supply volatility and a relatively small sphere of investment choices, he says.
The pricing roadblocks raise concerns about the transparency around the real market value of the commodity. One clue, though, is that production seems to be limited. According to a January 2021 report by the U.S. Geological Survey, global lithium production excluding U.S. production decreased by 5% in 2020.
The only production of lithium in the U.S. comes from a brine operation in Nevada where two companies produce lithium compounds in the U.S. from a variety of domestic or imported lithium. Domestic production data was withheld because of proprietary company data, according to the report.
Traditionally, Uek says, the nature of the end markets, the types of customers and the structure of the contracts have not been very transparent for pricing.
“There are a number of independent research organizations and other entities that are trying to solve this issue, and we think that as the market grows there will be significant improvements on this front,” Uek explains.
Takeaway
Investing in lithium could present buying opportunities as long as the investment fits in your long-term investing strategy and doesn’t interfere with your risk tolerance.
Market participants are observing that lithium is a valuable commodity for its variety of uses and its anticipated demand from electric vehicles. But there are a few layers of research to understand its market value since you can’t trade the commodity directly.
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