Is lithium a smart bet for clean-tech investors?
Tesla Motors (NASDAQ:TSLA) raised eyebrows this month by agreeing to a five-year supply contract with a Mexican mining venture to provide large amounts of lithium for the EV-maker’s Nevada “gigafactory”, which is expected to become the world’s largest producer of lithium-ion batteries. The move angered some Nevada officials, who had approved tax breaks worth more than $1 billion to lure Tesla to the state, in the hope that the company would source its lithium locally. “Tesla to get lithium from Mexico — where’s Trump when we need him?” complained Democratic state Sen. Tick Segerblom.
Tesla CEO Elon Musk sought to dampen down the controversy, saying that Tesla was exploring a range of supply options, and would “definitely” also buy U.S. produced lithium. Still, the kerfuffle highlighted the scrappy nature of the global lithium market: since lithium is not traded as a commodity, miners and battery producers must strike direct purchase agreements, and major market upheavals — such as the opening of Tesla’s factory, which could boost total global lithium demand by a quarter or more — have the potential to throw the sector into flux.
That isn’t due to a shortage of lithium — the U.S. alone has lithium resources totaling around 5.5 million metric tons, and globally identified resources total around 34 million tons, enough to maintain current production levels for well over 150 years. Instead, it’s due to booming demand in a compact marketplace dominated by a handful of chemical giants with significant lithium interests, plus a few tiny startups with promising but largely unproven lithium projects in development.
In theory, increasing demand from e-vehicle projects, energy storage systems, and electronic gadgets make lithium an attractive play for investors — and indeed, the metal’s price per ton has risen about threefold since 2002. But investors can’t bet on lithium directly, and must instead invest in specific companies, few of which are operating exclusively in the lithium sector. That introduces a significant element of complexity and risk: the Solactive Global Lithium Index, which tracks a cluster of 15 companies involved in the production and use of lithium, is down 28.8 percent since launching in late 2010, and Global X Lithium ETF (NYSEARCA: LIT), an exchange-traded fund based on the index, is down 36.48 percent since inception.
Some analysts still see LIT as a potentially attractive long-term play, while others advise against investing directly in LIT, but view the index’s allocation decisions — such as the recent addition of Tesla Motors to the index — as a useful way to stay abreast of industry developments. “The allocation changes that have been made do provide insight for how best to play lithium,” say Ned Davis Research’s Neil Leeson and Wenbo Zhou.
The big three lithium producers, which together account for about 90 percent of the world’s lithium production, are Chile’s Sociedad Quimica y Minera (NYSE:SQM); FMC Corp. (NYSE:FMC), which is working mines in Argentina; and Albemarle (NYSE: ALB), the biggest U.S. producer. Albemarle acquired rival lithium producer Rockwood Holdings (previously NYSE:ROC) earlier this year for $6.2 billion, giving it a virtual lockdown on the U.S. lithium supply, and is currently working to develop lithium deposits in Arkansas that some analysts say are among the few U.S. deposits likely to achieve economic viability.
Among the smaller players, Western Lithium (TSE:WLC) is probably the most promising for investors: it has been developing a Nevada lithium mine since 2009, and had been seen by many as a likely supplier for Tesla’s new factory. Small lithium companies are inherently a riskier bet than the majors, but also allow investors to make a purer lithium play, with the potential for explosive growth as projects prove their viability. Even without a Tesla supply deal, Western Lithium’s share price has increased more than 200 percent over the past two years, versus a 23 percent drop over the same period for Albemarle. “The smaller companies with room to expand is where the real opportunity is right now in the lithium revolution,” writes analyst Keith Kohl.
One tip for investing in smaller lithium projects: pay attention to how the lithium is sourced. Hard-rock extractive projects such as Nemaska Lithium’s (NMX.V) Quebec mine can allow access to large lithium deposits, but are often expensive and environmentally problematic to develop and operate. Newer projects increasingly focus on extracting lithium from mineral-rich brines, which make up about two thirds of global lithium deposits, and are up to 50 percent cheaper to explore and operate. “Materials like lithium are undergoing a paradigm shift,” writes equities researcher Peter Epstein. “The case in favor of hard rock mining in most extractive industries is crumbling.”
Companies to watch
- A supply contract with Tesla Motors has catapulted Bacanora Minerals (CVE: BCN) and Rare Earth Minerals (LON:REM)onto lithium investors’ radars. Their joint-operated Sonora Lithium Project could produce up to 50,000 metric tons of lithium compounds a year, and Tesla has agreed to buy a significant portion of that total.
- Canadian energy metals company Dajin Resources (CVE:DJI) has been picking up thousands of acres of Nevada land and water rights bordering known lithium-brine deposits, and also holds mineral concessions covering almost 250,000 acres of potentially lithium-rich land in Argentina.
- Vancouver-based Pure Energy (CVE:PE) holds mineral claims on about 8000 acres of land adjacent to Nevada’s only working lithium mine, and aims to create the lowest-cost lithium-brine extraction site in the U.S. using new technologies that don’t require large-scale evaporation ponds.
Ben Whitford is the US correspondent for The Ecologist. He has written for the Guardian, Newsweek, Mother Jones, Slate, and many other publications.