Lithium Stocks - Is a 1216% gain possible? In a
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Posted On: 12/08/2017 8:32:47 AM
Lithium Stocks - Is a 1216% gain possible?
In a Nutshell: The world is moving towards electric cars and in doing so will drive demand for lithium at an accelerating rate. It appears that by 2028-2030 the world may need 3 million tonnes of lithium carbonate yet it appears the supply by 2025 will only be about 715,000 tonnes. The world will need to quadruple the supply in 3 to 5 years to meet projected demand at that point. This jump in demand and dramatic change to the industry indicates potential investment opportunity and if all things go well, it seems junior lithium miners may represent a good opportunity. Specifically AAL.V, LIX.V, LSC.V, ML.V and NLC.V which I will be adding to the SmarterSquirrel Mock Portfolio. Though I am not an investment advisor so these are not recommendations to buy, you must do your own due diligence and/or seek the advice of an investment advisor.
The World is Changed, It Needs Lithium
"The world is changed... I feel it in the water... I feel it in the earth... I smell it in the air... much that once was, is lost... "
Ok so maybe that was Galadriel talking about some horrific one ring to rule them all in The Lord of The Rings, but she could easily have been talking about oil. It's definitely polluted the planet, and that's more horrific than one ring. If you're an oceanographer you definitely feel it in the water. If you've been impacted by fracking you definitely feel it in the earth. If you're in Delhi these days, you can definitely smell it in the air. If you're in areas affected by oil spills you can definitely see that much that once was, is lost. Hmm, maybe Tolkien was using the ring story as an allegory for oil's harm to the environment. Well, it looks like the world's leaders are waking up to this fact and making drastic changes. Oil is being replaced with electricity. There is strong evidence that electric cars are going mainstream. Any time there is a sweeping change like this to an industry, there are investment opportunities to be had. In this article I will discuss my hypothesis for opportunity to invest in Lithium. As I've been researching lithium I've discovered that it's not the only opportunity coming from this change, cobalt and graphite may also be significant opportunities and so I plan to research those as well. For now, this article sticks to examining the sweeping market changes towards electric vehicles and goes all the way down to examining a few key lithium mining companies that may be good long term investments.
THE WORLD WANTS ELECTRIC CARS
The Norwegian Government Pension Fund Global (GPFG) was created in 1990 to invest its revenues from the petroleum industry in Norway for the benefit of its future generations. The Norges Bank manages the $1,008 billion USD fund (that's just over $1 trillion USD!), which is the largest sovereign wealth fund in the world, it alone owns 1.3% of all listed companies worldwide. A quote on the Norges Bank Investment Management site is, "One day the oil will run out, but the return on the fund will continue to benefit the Norwegian population." (Canada's closest cousin to the Norwegian GPFG is Alberta's Heritage Savings Trust Fund which was established much earlier in 1976 to invest petroleum revenues for Albertans. It's valued at $13.4 billion USD, or 1.3% the size of Norway's GPFG. If you live in Alberta ask your representative in government why.)
On November 16, 2017, to reduce Norway's exposure to the ultimate demise of its petroleum industry, the Norges Bank recommended the removal of oil and gas stocks from the GPFG. A brief quote from the Norges Bank on this move away from oil and gas is:
In the Bank’s view, this will make the government’s wealth less vulnerable to a permanent drop in oil and gas prices.
“This advice is based exclusively on financial arguments and analyses of the government’s total oil and gas exposure and does not reflect any particular view of future movements in oil and gas prices or the profitability or sustainability of the oil and gas sector,” said Deputy Governor Egil Matsen.
They try to soften the blow to the oil and gas market, after all they still have a petroleum industry that is providing funds to the GPFG and they have more investments in oil including the nationally held oil company Stat Oil. And to paraphrase Mark Twain, the reports of oil's death are exaggerated. However it is clear that we are heading to a significant change when the world's largest sovereign fund begins to protect itself from a risk of a permanent drop in oil and gas prices by planning to divest all oil and gas holdings in its portfolio. Norway is not only forward thinking with it's finances, it's also forward thinking on the environment. It clearly has it's finger on the pulse of the world when it comes to ICE vs EV cars, already, 40% of cars sold in Norway in 2016 were hybrid or electric. Norway has declared that all cars and vans sold starting from 2025 must be zero emission vehicles. They are not alone...
On September 11, 2017, China, the world’s top automobile market, announced it is planning to ban petrol and diesel cars and boost electric vehicles in a bid to contain air pollution and restrict traffic congestion. Xin Guobin, China’s vice minister of industry and information technology said that Beijing had started research on a timetable to phase out production and sales of fossil fuel cars, though he gave no specific dates.
On July 6, 2017, France announced through its environment minister Nicolas Hulot, that it would ban the sale of diesel and gas internal combustion engine (ICE) cars by 2040. He also mentioned a law was being proposed to end any future licenses for oil, gas and coal mining. France will not be banning hybrid cars at this point.
Britain followed France's lead on July 25 to ban new ICE cars by 2040 which includes a ban on hybrid cars. It also declared all cars on the road by 2050 will need to be zero emissions.
When Germany's Chancellor Angela Merkel was asked about a ban on ICE cars in Germany she said, "I cannot name an exact year yet, but the approach is right because if we quickly invest in more charging infrastructure and technology for electric cars, a general changeover will be structurally possible."
The Indian government has stated that by 2030 every vehicle sold in the country should be powered by electricity though some seem to admit it is an aspirational goal.
Volvo which is based in Sweden and owned by Chinese company Zhejiang Geely Holding Group, has declared that after 2019, all new Volvo cars will be hybrid or electric only, they will no longer produce solely ICE cars.
Tesla of course helped to trigger this wave of electrification with the popularity of it's Model S, followed by the Model X, the coming 'affordable' Model 3, the newly announced Tesla Semi with 300 or 500 mile range (Loblaws has ordered 25 of them and wants a fully electric fleet by 2030, Walmart preordered 15), and the newly announced Roadster with 620 mile range.
Others have created electric cars as well whether it be Nissan, BMW, Mercedes, GM, VW, and many others. Almost all car manufacturers have announced plans for electric cars.
According to Bloomberg, electric cars will be as cheap as ICE cars by 2025. (In case you missed it earlier, ICE cars are Internal Combustion Engine cars, you know, the ones you pump gas into and it explodes in a controlled combustion chamber inside the engine driving pistons in and out, making the wheels go round). I assume Bloomberg means electric cars will be as cheap as ICE cars without government grants being needed. Already in Ontario you can get a pretty slick VW eGolf, which is a purely electric vehicle, for less than its gas powered sister with Ontario government incentives of $14,000. When government hands you money it's often a good idea to take it, if you can afford the car with cash and it's below your means leaving enough to invest for your future, of course.
That makes this slick Volkswagen eGolf Comfortline with 201km range available for $22,000 CAD after Ontario electric vehicle incentives of $14,000, which is before taxes, freight and PDI. Considering the ICE VW Golf Comfortline is $25,095 before taxes, freight and PDI, that means the electric version is $3,000 cheaper today (with incentives).
Also according to Bloomberg, with electric cars as cheap as ICE cars due to lower battery prices (presumably no longer due to government incentives), cars with a plug will account for a third of the global auto fleet by 2040 and displace about 8 million barrels a day of oil production—more than the 7 million barrels Saudi Arabia exports today, and about 25% of OPEC's current daily output. This and the Norges Bank decision are my reasons for eliminating my exposure to oil stocks.
Bloomberg sees electric car sales overtaking ICE car sales globally by around 2038.
Bloomberg New Energy Finance analysis indicates that 2016 power consumption by electric vehicles (EVs) was 6 terawatt-hours. By 2040 that's expected to grow 300x to 1,800 terawatt-hours or 5% of global power demand. This to me indicates another investment opportunity, we are seeing a fundamental shift over the next generation where the retail, distribution and transport of gas for cars is replaced by the retail, distribution and transport of electricity for cars. I believe this will be a boon to electric utilities which will be fulfilling this new future demand. It should then create opportunity to invest in electric utilities that pay growing dividends as they will be supported by the growth in demand for electricity from an increasingly electrified vehicle market.
THE ACCEPTANCE OF ELECTRIC CARS MEANS THE WORLD NEEDS LITHIUM
There is 90 Gigawatt hours of EV lithium ion battery manufacturing capacity today and that's expected to grow 3x by 2021 to 270 Gigawatt hours. They predict the world will need the equivalent of 35 of the Tesla lithium ion battery gigafactories by 2030 to meet the demand for EVs.
Goldman Sachs estimated that there is 63kg of lithium in a 70kWh Tesla Model S battery pack (10,000x the amount in a cell phone), which means you need 0.9kg of lithium per 1kWh. By 2020 a Gigafactory is expected to have 105 GWh of annual capacity. 1 GWh = 1,000,000 kWh. So a gigafactory will produce 105,000,000kwh annually. So that means by 2020, assuming the amount of lithium needed per battery stays the same, that the annual amount of lithium needed per gigafactory would be 94,500,000 kgs or 94,500 tonnes of lithium. Given the world needs 35 gigafactories by 2030 to meet demand that means that by 2030 the world will need 3,307,500 tonnes of lithium annually.
This estimate seems to be closely confirmed by the CTO of Lithium Americas with his estimate of the world needing 3.1M tonnes of lithium annually by 2028:
Deutsche Bank sees a lithium supply and demand balance over the next few years with a supply surplus beginning in 2021.
However this chart to 2025 shows global supply to be just 0.5 million tonnes of lithium carbonate (LCE). Another source shows a similar level of supply just shy of 0.5 million tonnes of lithium mine capacity globally by 2025.
And Albemarle shows a similar trend on the demand side to 2021 in its November 2017 investor presentation. We also can see that it's projections have been raised which is likely to continue to happen as demand may be under estimated.
FMC at the November 2017 Deutsche Bank Lithium Supply Chain and Energy Storage Conference presented materials that indicate that by 2025 demand for lithium will approach 715,000 tonnes of lithium with a combination of lithium carbonate and increasingly a need for lithium hydroxide.
However, just three years later, in 2028 according to Lithium Americas and 2030 according to my own analysis based on inputs from Goldman Sachs and Bloomberg, the demand will be about 4 times that at 3 million tonnes. That will require significant supply growth in 3 to 5 years. How will the world's miners of lithium increase production to 3 million tonnes? To be able to answer that we need to look at who the current suppliers of lithium are, where they are located and what they have stated about their potential production volumes going forward.
THE SUPPLIERS OF LITHIUM MAY NOT HAVE ENOUGH TO MEET THE DEMAND FOR 3 MILLION TONNES OF LITHIUM
This chart above from Neo Lithium's September 2017 Investor Presentation shows us there are 4 major suppliers of lithium controlling 82% of global lithium supply today, and 4 major countries responsible for 91% of the supply. I will now examine Albermarle, SQM, Tianqi and FMC to understand what they are saying about their future production of lithium to see how feasible it is for the global supply of lithium to reach 3.1 million tonnes by the 2028-2030 time frame.
Albemarle:
The largest producer of lithium today, responsible for 32% of global lithium supply has indicated future production volumes for it's lithium carbonate in its November 2017 Investor Presentation. It is not a pureplay lithium provider though as only 45.6% of Albermarle's total third quarter revenues for 2017 came from lithium and advanced materials. They have secured resources of 165,000 metric tonnes of lithium out to 2025. They have Wave II resources being developed that begin delivering supply some time in 2021, yet the blue portion of the chart is only meant to be directional and does not represent specific volume targets. At best we can guess that it will be incremental capacity from their secured resources of 165,000 tonnes of lithium carbonate.
Part of the secured resources in the chart above come from Albemarle's 49% share of Talison Lithium in Australia (51% owned by Tianqi Lithium). Both Albemarle and Tianqi are investing in an expansion at Talison that will say production output grow to 180,000 tonnes of lithium carbonate by 2019.
SQM:
SQM is also not a lithium pureplay investment as 29.5% of its last twelve months of revenue came from lithium. In the past twelve months SQM sold 50,400 tonnes of lithium carbonate and hydroxide. From information provided in the SQM Q2 2017 investor presentation, it appears the capacity SQM will have by 2022 will be 129,000 tonnes of lithium and hydroxide. 12,500 of those tonnes of lithium will be from their 50:50 joint venture with Lithium Americas at Cauchari-Olaroz, Jujuy which will have capacity of 25,000 tonnes with Lithium Americas getting the other 12,500 tonnes of Lithium.
Tianqi Lithium:
Tianqi Lithium does not appear to provide any forward projections of their capacity. However, by reviewing their site and the information they provide on their production plants it appears they have a maximum production capacity with their Shehong, Zhangjiagang, Kwinana and Chongqing plants of 58,400 tonnes of lithium annually.
FMC:
FMC, like Albemarle and SQM, is also not a pureplay lithium provider, in fact it is the lowest of the three in terms of revenues from lithium, being 17% of total Q3 2017 revenues. They note in their investor presentation for Q3 2017 that aggregate market supply is not keeping up with global demand. They also note that lithium carbonate prices are up 20% year over year. Indicating that there is opportunity to benefit from investing in lithium. At the Credit Suisse Basic Materials Conference, they presented materials indicating their lithium capacity out to 2020 would be 70,000 tonnes of lithium (40,000 tonnes lithium carbonate, and 30,000 lithium hydroxide).
For the four dominant players in the global lithium market, that means by 2022 they should be producing 422,400 tonnes of lithium (in some combination of lithium carbonate and lithium hydroxide). Assuming the four top players hold on to their 82% market share, that means global supply by 2022 should be 515,122 tonnes of lithium. That supply amount is above where Deutsche Bank has supply predicted to be. And the 715,000 tonnes of lithium demand in 2025 shown by FMC is above where Deutsche Bank has predicted demand to be. So with global supply at 515,122 tonnes of lithium in 2022, it needs to multiply 6 times over to meet the projected demand of 3 million tonnes of lithium by 2028 to 2030. This indicates then a significant need to bring on more supply of lithium in the long term. At the same time, lithium prices may fluctuate with supply and demand forces up until the acceleration in demand towards 2028 to 2030. Lithium investing then is clearly a long term play as the payout will seem to really gain momentum in that 2028-2030 time frame. If you have a ten year horizon for your investing, then it may be worth further examination of this opportunity.
Albemarle, SQM and FMC being non pureplay investments in lithium, I will look at other miners focused solely on lithium that appear to be good investment opportunities based on lithium resources indicated, financing potential to develop a mine among other factors. These top 3 players may in fact fund and invest in many of the coming junior mining company opportunities, much like SQM already has with its joint venture with Lithium Americas (LAC.TO).
JUNIOR LITHIUM MINERS MAY HELP TO FILL THE COMING LITHIUM SUPPLY GAP
Given I am looking for strong growth candidates I will be examining several miners based on their likely annual production levels, the annual profit potential, what a future market cap could be and compare that to the current market cap and consider potential dilution of shareholders as these mines seek the funding required to get to development. That should enable an estimation of the gain potential from an investment today. Some may already be overvalued even before they begin producing lithium but this analysis should determine that.
After doing a lot of digging for lithium miners, I've settled on these companies that I will examine and compare:
Advantage Lithium
Lithium Americas
Lithium X Energy
LSC Lithium
Millennial Lithium
Nemaska Lithium
NeoLithium
92 Resources
Orocobre Limited
To simplify the research I've done, rather than to write it all out here, I'll put the information into a table to make an easy comparison. Several of these miners are so early on in their development that they don't have a resource estimate, or a cost of production estimate, or an economic feasibility study completed. In those cases, I've made a best guess based on the other miner that have completed a feasibility study. Anywhere there is an estimated number that is not provided by the company itself or from data available from Yahoo! Finance, I have shaded the box in yellow for clarity.
I've also assumed dilution in that as Lithium Americas got funding to move forward with production, it wound up with a 50% claim remaining to its production from its South American mine (it still holds the Nevada assets which I don't include on this table, and so there may be upside to Lithium Americas from any Nevada development). And so I assume the miners requiring external funding will wind up with anywhere between 50% to 65% of their eventual production.
NeoLithium's CEO was formerly CEO at Lithium Americas and so he has the experience that may allow him to make NeoLithium a success.
92 Resources is very early and so they have been coloured in orange to indicate a warning, it may be something for a speculator to look at, but it is far too early and speculative for me to invest in.
Orocobre in its full year report dated September 2017 showed an EBITDAIX (Earnings before interest, tax, depreciation, amortisation, impairment and foreign exchange losses/gains) of $71.2M compared to its current market cap of $1,240M, indicating a p/ebitdaix of 17.4. For all the companies I assume a slightly more conservative 15 p/ebitdaix ratio.
The companies with economic feasibility studies are Lithium Americas, Nemaska Lithium (which has 50% off take agreements with FMC and Johnson Matthey Battery Materials) and NeoLithium.
At the price used by Neo Lithium for its preliminary economic assessment (PEA), a tonne of lithium carbonate costs $11,760 on average though the price has been found to be above and below that number of late. I assume that price holds for all the miners out to 2020 and have assessed annual EBITDAIX based on that revenue per tonne.
The price may rise from there. A price of $11,760/tonne means 1kg of lithium carbonate is $11.76. A Tesla base Model S now has 75kwh so that equates to it having 67.5kg of lithium carbonate. So in a Tesla Model S, there is $794 worth of lithium carbonate compared to the cash price of $74,500. That means the cost of lithium in a Model S Tesla is roughly 1% (1.066%) of the retail price. Given it represents 1% of the cost there may be room for the price per tonne of lithium to increase from the average expected by Neo Lithium. We see from data provided by Lithium Americas in their November 2017 presentation, that prices for lithium in China have gone well above the $11,000 level:
This indicates the $11,760 price is a conservative number and when I evaluate the investment opportunities in the lithium space I am not accounting for any gains if we do encounter an undersupply scenario which appears likely at this point in the 2028 - 2030 timeframe.
Based on all this you can see in the last column of the table the theoretical gains that can be had from where these companies are priced today. I base that on taking the theoretical future market cap when the mine is producing the full volume of lithium expected, the projected EBITDAIX given their share of the mine, the lithium price and their projected cost per tonne and multiplying by the 15 p/ebitdaix ratio and dividing by today's market cap.
There are a lot of things that need to go right for any of these mines to reach success. Orocobre is already producing and is already a profitable company and so there is less operating risk with that company. For all the others, there is still some significant risk. Given that, and ignoring the very speculative 92 Resources, it would seem that there may be significant opportunity for gains with NeoLithium (NLC.V), Advantage Lithium (AAL.V), LSC Lithium (LSC.V), Millennial Lithium (ML.V) and Lithium X Energy (LIX.V).
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In a Nutshell: The world is moving towards electric cars and in doing so will drive demand for lithium at an accelerating rate. It appears that by 2028-2030 the world may need 3 million tonnes of lithium carbonate yet it appears the supply by 2025 will only be about 715,000 tonnes. The world will need to quadruple the supply in 3 to 5 years to meet projected demand at that point. This jump in demand and dramatic change to the industry indicates potential investment opportunity and if all things go well, it seems junior lithium miners may represent a good opportunity. Specifically AAL.V, LIX.V, LSC.V, ML.V and NLC.V which I will be adding to the SmarterSquirrel Mock Portfolio. Though I am not an investment advisor so these are not recommendations to buy, you must do your own due diligence and/or seek the advice of an investment advisor.
The World is Changed, It Needs Lithium
"The world is changed... I feel it in the water... I feel it in the earth... I smell it in the air... much that once was, is lost... "
Ok so maybe that was Galadriel talking about some horrific one ring to rule them all in The Lord of The Rings, but she could easily have been talking about oil. It's definitely polluted the planet, and that's more horrific than one ring. If you're an oceanographer you definitely feel it in the water. If you've been impacted by fracking you definitely feel it in the earth. If you're in Delhi these days, you can definitely smell it in the air. If you're in areas affected by oil spills you can definitely see that much that once was, is lost. Hmm, maybe Tolkien was using the ring story as an allegory for oil's harm to the environment. Well, it looks like the world's leaders are waking up to this fact and making drastic changes. Oil is being replaced with electricity. There is strong evidence that electric cars are going mainstream. Any time there is a sweeping change like this to an industry, there are investment opportunities to be had. In this article I will discuss my hypothesis for opportunity to invest in Lithium. As I've been researching lithium I've discovered that it's not the only opportunity coming from this change, cobalt and graphite may also be significant opportunities and so I plan to research those as well. For now, this article sticks to examining the sweeping market changes towards electric vehicles and goes all the way down to examining a few key lithium mining companies that may be good long term investments.
THE WORLD WANTS ELECTRIC CARS
The Norwegian Government Pension Fund Global (GPFG) was created in 1990 to invest its revenues from the petroleum industry in Norway for the benefit of its future generations. The Norges Bank manages the $1,008 billion USD fund (that's just over $1 trillion USD!), which is the largest sovereign wealth fund in the world, it alone owns 1.3% of all listed companies worldwide. A quote on the Norges Bank Investment Management site is, "One day the oil will run out, but the return on the fund will continue to benefit the Norwegian population." (Canada's closest cousin to the Norwegian GPFG is Alberta's Heritage Savings Trust Fund which was established much earlier in 1976 to invest petroleum revenues for Albertans. It's valued at $13.4 billion USD, or 1.3% the size of Norway's GPFG. If you live in Alberta ask your representative in government why.)
On November 16, 2017, to reduce Norway's exposure to the ultimate demise of its petroleum industry, the Norges Bank recommended the removal of oil and gas stocks from the GPFG. A brief quote from the Norges Bank on this move away from oil and gas is:
In the Bank’s view, this will make the government’s wealth less vulnerable to a permanent drop in oil and gas prices.
“This advice is based exclusively on financial arguments and analyses of the government’s total oil and gas exposure and does not reflect any particular view of future movements in oil and gas prices or the profitability or sustainability of the oil and gas sector,” said Deputy Governor Egil Matsen.
They try to soften the blow to the oil and gas market, after all they still have a petroleum industry that is providing funds to the GPFG and they have more investments in oil including the nationally held oil company Stat Oil. And to paraphrase Mark Twain, the reports of oil's death are exaggerated. However it is clear that we are heading to a significant change when the world's largest sovereign fund begins to protect itself from a risk of a permanent drop in oil and gas prices by planning to divest all oil and gas holdings in its portfolio. Norway is not only forward thinking with it's finances, it's also forward thinking on the environment. It clearly has it's finger on the pulse of the world when it comes to ICE vs EV cars, already, 40% of cars sold in Norway in 2016 were hybrid or electric. Norway has declared that all cars and vans sold starting from 2025 must be zero emission vehicles. They are not alone...
On September 11, 2017, China, the world’s top automobile market, announced it is planning to ban petrol and diesel cars and boost electric vehicles in a bid to contain air pollution and restrict traffic congestion. Xin Guobin, China’s vice minister of industry and information technology said that Beijing had started research on a timetable to phase out production and sales of fossil fuel cars, though he gave no specific dates.
On July 6, 2017, France announced through its environment minister Nicolas Hulot, that it would ban the sale of diesel and gas internal combustion engine (ICE) cars by 2040. He also mentioned a law was being proposed to end any future licenses for oil, gas and coal mining. France will not be banning hybrid cars at this point.
Britain followed France's lead on July 25 to ban new ICE cars by 2040 which includes a ban on hybrid cars. It also declared all cars on the road by 2050 will need to be zero emissions.
When Germany's Chancellor Angela Merkel was asked about a ban on ICE cars in Germany she said, "I cannot name an exact year yet, but the approach is right because if we quickly invest in more charging infrastructure and technology for electric cars, a general changeover will be structurally possible."
The Indian government has stated that by 2030 every vehicle sold in the country should be powered by electricity though some seem to admit it is an aspirational goal.
Volvo which is based in Sweden and owned by Chinese company Zhejiang Geely Holding Group, has declared that after 2019, all new Volvo cars will be hybrid or electric only, they will no longer produce solely ICE cars.
Tesla of course helped to trigger this wave of electrification with the popularity of it's Model S, followed by the Model X, the coming 'affordable' Model 3, the newly announced Tesla Semi with 300 or 500 mile range (Loblaws has ordered 25 of them and wants a fully electric fleet by 2030, Walmart preordered 15), and the newly announced Roadster with 620 mile range.
Others have created electric cars as well whether it be Nissan, BMW, Mercedes, GM, VW, and many others. Almost all car manufacturers have announced plans for electric cars.
According to Bloomberg, electric cars will be as cheap as ICE cars by 2025. (In case you missed it earlier, ICE cars are Internal Combustion Engine cars, you know, the ones you pump gas into and it explodes in a controlled combustion chamber inside the engine driving pistons in and out, making the wheels go round). I assume Bloomberg means electric cars will be as cheap as ICE cars without government grants being needed. Already in Ontario you can get a pretty slick VW eGolf, which is a purely electric vehicle, for less than its gas powered sister with Ontario government incentives of $14,000. When government hands you money it's often a good idea to take it, if you can afford the car with cash and it's below your means leaving enough to invest for your future, of course.
That makes this slick Volkswagen eGolf Comfortline with 201km range available for $22,000 CAD after Ontario electric vehicle incentives of $14,000, which is before taxes, freight and PDI. Considering the ICE VW Golf Comfortline is $25,095 before taxes, freight and PDI, that means the electric version is $3,000 cheaper today (with incentives).
Also according to Bloomberg, with electric cars as cheap as ICE cars due to lower battery prices (presumably no longer due to government incentives), cars with a plug will account for a third of the global auto fleet by 2040 and displace about 8 million barrels a day of oil production—more than the 7 million barrels Saudi Arabia exports today, and about 25% of OPEC's current daily output. This and the Norges Bank decision are my reasons for eliminating my exposure to oil stocks.
Bloomberg sees electric car sales overtaking ICE car sales globally by around 2038.
Bloomberg New Energy Finance analysis indicates that 2016 power consumption by electric vehicles (EVs) was 6 terawatt-hours. By 2040 that's expected to grow 300x to 1,800 terawatt-hours or 5% of global power demand. This to me indicates another investment opportunity, we are seeing a fundamental shift over the next generation where the retail, distribution and transport of gas for cars is replaced by the retail, distribution and transport of electricity for cars. I believe this will be a boon to electric utilities which will be fulfilling this new future demand. It should then create opportunity to invest in electric utilities that pay growing dividends as they will be supported by the growth in demand for electricity from an increasingly electrified vehicle market.
THE ACCEPTANCE OF ELECTRIC CARS MEANS THE WORLD NEEDS LITHIUM
There is 90 Gigawatt hours of EV lithium ion battery manufacturing capacity today and that's expected to grow 3x by 2021 to 270 Gigawatt hours. They predict the world will need the equivalent of 35 of the Tesla lithium ion battery gigafactories by 2030 to meet the demand for EVs.
Goldman Sachs estimated that there is 63kg of lithium in a 70kWh Tesla Model S battery pack (10,000x the amount in a cell phone), which means you need 0.9kg of lithium per 1kWh. By 2020 a Gigafactory is expected to have 105 GWh of annual capacity. 1 GWh = 1,000,000 kWh. So a gigafactory will produce 105,000,000kwh annually. So that means by 2020, assuming the amount of lithium needed per battery stays the same, that the annual amount of lithium needed per gigafactory would be 94,500,000 kgs or 94,500 tonnes of lithium. Given the world needs 35 gigafactories by 2030 to meet demand that means that by 2030 the world will need 3,307,500 tonnes of lithium annually.
This estimate seems to be closely confirmed by the CTO of Lithium Americas with his estimate of the world needing 3.1M tonnes of lithium annually by 2028:
Deutsche Bank sees a lithium supply and demand balance over the next few years with a supply surplus beginning in 2021.
However this chart to 2025 shows global supply to be just 0.5 million tonnes of lithium carbonate (LCE). Another source shows a similar level of supply just shy of 0.5 million tonnes of lithium mine capacity globally by 2025.
And Albemarle shows a similar trend on the demand side to 2021 in its November 2017 investor presentation. We also can see that it's projections have been raised which is likely to continue to happen as demand may be under estimated.
FMC at the November 2017 Deutsche Bank Lithium Supply Chain and Energy Storage Conference presented materials that indicate that by 2025 demand for lithium will approach 715,000 tonnes of lithium with a combination of lithium carbonate and increasingly a need for lithium hydroxide.
However, just three years later, in 2028 according to Lithium Americas and 2030 according to my own analysis based on inputs from Goldman Sachs and Bloomberg, the demand will be about 4 times that at 3 million tonnes. That will require significant supply growth in 3 to 5 years. How will the world's miners of lithium increase production to 3 million tonnes? To be able to answer that we need to look at who the current suppliers of lithium are, where they are located and what they have stated about their potential production volumes going forward.
THE SUPPLIERS OF LITHIUM MAY NOT HAVE ENOUGH TO MEET THE DEMAND FOR 3 MILLION TONNES OF LITHIUM
This chart above from Neo Lithium's September 2017 Investor Presentation shows us there are 4 major suppliers of lithium controlling 82% of global lithium supply today, and 4 major countries responsible for 91% of the supply. I will now examine Albermarle, SQM, Tianqi and FMC to understand what they are saying about their future production of lithium to see how feasible it is for the global supply of lithium to reach 3.1 million tonnes by the 2028-2030 time frame.
Albemarle:
The largest producer of lithium today, responsible for 32% of global lithium supply has indicated future production volumes for it's lithium carbonate in its November 2017 Investor Presentation. It is not a pureplay lithium provider though as only 45.6% of Albermarle's total third quarter revenues for 2017 came from lithium and advanced materials. They have secured resources of 165,000 metric tonnes of lithium out to 2025. They have Wave II resources being developed that begin delivering supply some time in 2021, yet the blue portion of the chart is only meant to be directional and does not represent specific volume targets. At best we can guess that it will be incremental capacity from their secured resources of 165,000 tonnes of lithium carbonate.
Part of the secured resources in the chart above come from Albemarle's 49% share of Talison Lithium in Australia (51% owned by Tianqi Lithium). Both Albemarle and Tianqi are investing in an expansion at Talison that will say production output grow to 180,000 tonnes of lithium carbonate by 2019.
SQM:
SQM is also not a lithium pureplay investment as 29.5% of its last twelve months of revenue came from lithium. In the past twelve months SQM sold 50,400 tonnes of lithium carbonate and hydroxide. From information provided in the SQM Q2 2017 investor presentation, it appears the capacity SQM will have by 2022 will be 129,000 tonnes of lithium and hydroxide. 12,500 of those tonnes of lithium will be from their 50:50 joint venture with Lithium Americas at Cauchari-Olaroz, Jujuy which will have capacity of 25,000 tonnes with Lithium Americas getting the other 12,500 tonnes of Lithium.
Tianqi Lithium:
Tianqi Lithium does not appear to provide any forward projections of their capacity. However, by reviewing their site and the information they provide on their production plants it appears they have a maximum production capacity with their Shehong, Zhangjiagang, Kwinana and Chongqing plants of 58,400 tonnes of lithium annually.
FMC:
FMC, like Albemarle and SQM, is also not a pureplay lithium provider, in fact it is the lowest of the three in terms of revenues from lithium, being 17% of total Q3 2017 revenues. They note in their investor presentation for Q3 2017 that aggregate market supply is not keeping up with global demand. They also note that lithium carbonate prices are up 20% year over year. Indicating that there is opportunity to benefit from investing in lithium. At the Credit Suisse Basic Materials Conference, they presented materials indicating their lithium capacity out to 2020 would be 70,000 tonnes of lithium (40,000 tonnes lithium carbonate, and 30,000 lithium hydroxide).
For the four dominant players in the global lithium market, that means by 2022 they should be producing 422,400 tonnes of lithium (in some combination of lithium carbonate and lithium hydroxide). Assuming the four top players hold on to their 82% market share, that means global supply by 2022 should be 515,122 tonnes of lithium. That supply amount is above where Deutsche Bank has supply predicted to be. And the 715,000 tonnes of lithium demand in 2025 shown by FMC is above where Deutsche Bank has predicted demand to be. So with global supply at 515,122 tonnes of lithium in 2022, it needs to multiply 6 times over to meet the projected demand of 3 million tonnes of lithium by 2028 to 2030. This indicates then a significant need to bring on more supply of lithium in the long term. At the same time, lithium prices may fluctuate with supply and demand forces up until the acceleration in demand towards 2028 to 2030. Lithium investing then is clearly a long term play as the payout will seem to really gain momentum in that 2028-2030 time frame. If you have a ten year horizon for your investing, then it may be worth further examination of this opportunity.
Albemarle, SQM and FMC being non pureplay investments in lithium, I will look at other miners focused solely on lithium that appear to be good investment opportunities based on lithium resources indicated, financing potential to develop a mine among other factors. These top 3 players may in fact fund and invest in many of the coming junior mining company opportunities, much like SQM already has with its joint venture with Lithium Americas (LAC.TO).
JUNIOR LITHIUM MINERS MAY HELP TO FILL THE COMING LITHIUM SUPPLY GAP
Given I am looking for strong growth candidates I will be examining several miners based on their likely annual production levels, the annual profit potential, what a future market cap could be and compare that to the current market cap and consider potential dilution of shareholders as these mines seek the funding required to get to development. That should enable an estimation of the gain potential from an investment today. Some may already be overvalued even before they begin producing lithium but this analysis should determine that.
After doing a lot of digging for lithium miners, I've settled on these companies that I will examine and compare:
Advantage Lithium
Lithium Americas
Lithium X Energy
LSC Lithium
Millennial Lithium
Nemaska Lithium
NeoLithium
92 Resources
Orocobre Limited
To simplify the research I've done, rather than to write it all out here, I'll put the information into a table to make an easy comparison. Several of these miners are so early on in their development that they don't have a resource estimate, or a cost of production estimate, or an economic feasibility study completed. In those cases, I've made a best guess based on the other miner that have completed a feasibility study. Anywhere there is an estimated number that is not provided by the company itself or from data available from Yahoo! Finance, I have shaded the box in yellow for clarity.
I've also assumed dilution in that as Lithium Americas got funding to move forward with production, it wound up with a 50% claim remaining to its production from its South American mine (it still holds the Nevada assets which I don't include on this table, and so there may be upside to Lithium Americas from any Nevada development). And so I assume the miners requiring external funding will wind up with anywhere between 50% to 65% of their eventual production.
NeoLithium's CEO was formerly CEO at Lithium Americas and so he has the experience that may allow him to make NeoLithium a success.
92 Resources is very early and so they have been coloured in orange to indicate a warning, it may be something for a speculator to look at, but it is far too early and speculative for me to invest in.
Orocobre in its full year report dated September 2017 showed an EBITDAIX (Earnings before interest, tax, depreciation, amortisation, impairment and foreign exchange losses/gains) of $71.2M compared to its current market cap of $1,240M, indicating a p/ebitdaix of 17.4. For all the companies I assume a slightly more conservative 15 p/ebitdaix ratio.
The companies with economic feasibility studies are Lithium Americas, Nemaska Lithium (which has 50% off take agreements with FMC and Johnson Matthey Battery Materials) and NeoLithium.
At the price used by Neo Lithium for its preliminary economic assessment (PEA), a tonne of lithium carbonate costs $11,760 on average though the price has been found to be above and below that number of late. I assume that price holds for all the miners out to 2020 and have assessed annual EBITDAIX based on that revenue per tonne.
The price may rise from there. A price of $11,760/tonne means 1kg of lithium carbonate is $11.76. A Tesla base Model S now has 75kwh so that equates to it having 67.5kg of lithium carbonate. So in a Tesla Model S, there is $794 worth of lithium carbonate compared to the cash price of $74,500. That means the cost of lithium in a Model S Tesla is roughly 1% (1.066%) of the retail price. Given it represents 1% of the cost there may be room for the price per tonne of lithium to increase from the average expected by Neo Lithium. We see from data provided by Lithium Americas in their November 2017 presentation, that prices for lithium in China have gone well above the $11,000 level:
This indicates the $11,760 price is a conservative number and when I evaluate the investment opportunities in the lithium space I am not accounting for any gains if we do encounter an undersupply scenario which appears likely at this point in the 2028 - 2030 timeframe.
Based on all this you can see in the last column of the table the theoretical gains that can be had from where these companies are priced today. I base that on taking the theoretical future market cap when the mine is producing the full volume of lithium expected, the projected EBITDAIX given their share of the mine, the lithium price and their projected cost per tonne and multiplying by the 15 p/ebitdaix ratio and dividing by today's market cap.
There are a lot of things that need to go right for any of these mines to reach success. Orocobre is already producing and is already a profitable company and so there is less operating risk with that company. For all the others, there is still some significant risk. Given that, and ignoring the very speculative 92 Resources, it would seem that there may be significant opportunity for gains with NeoLithium (NLC.V), Advantage Lithium (AAL.V), LSC Lithium (LSC.V), Millennial Lithium (ML.V) and Lithium X Energy (LIX.V).
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