Lithium miners set to gain from EV-driven demand

Note: A version of this article originally appeared on LibertyFinancialNews.com in April 2023.

The lithium rush

During the California Gold Rush of the 1840s, the entrepreneurs who made the most money were those that sold picks and pans to the prospectors, supplying the speculative boom. 170 years later, this episode is instructive for investors looking to capitalize on the ongoing electrification of the world and the associated scramble for a new precious element: Lithium.

Rather than focus solely on the myriad of headline-grabbing electric vehicle (EV) startups looking to become the next Tesla, investors should be cognizant of opportunities in the lithium production space. Lithium is the main element necessary to create lithium-ion (Li-ion) batteries, the current battery technology used by nearly every EV on the market. According to market research firm Motor Intelligence, global EV sales grew by more than 66% in 2022, a trend which caused the price of lithium to peak at more than ten times its price just two years prior.

While the spot price of lithium has fallen by about 60% since the start of 2023, prices remain historically elevated. According to Joe Lowry, who runs the advising firm Global Lithium, the continued high price of lithium precursor spodumene indicates the pullback is due to temporarily weak EV demand out of China, rather than oversupply. Fundamental mismatch between long-term supply and demand for the element justifies investors looking past short-term market dynamics, and indicates a bright future for lithium miners and producers.

EVs catalyzing record lithium demand

The case for increased lithium demand is strong. To support the global transition from internal combustion engine vehicles to EVs, the world will need more Li-ion batteries.

McKinsey, a consultancy, forecasts global lithium demand to expand by at least 25% per year until 2030. In the past, less than 30% of lithium demand was for batteries, with the remainder going to industrial applications. By 2030, though, electric cars, bikes, and scooters will drive battery production to 95% of global lithium demand. The increasing electrification of the modern world will also play a role, with energy-storage systems and the conversion of combustion-reliant machinery contributing to battery demand.

Regulation will only serve to bolster this trend. The United Kingdom, the European Union, and California have all taken steps to ensure that only zero-emission vehicles can be sold by 2035. Since intermittent renewable energy sources like wind and solar require more storage capacity than fossil fuels, government incentives for renewable energy will also increase lithium demand.

Sluggish supply expansion

The lithium supply forecast is significantly more uncertain than the demand forecast since much will depend on the success of future mining and refining initiatives. Most estimates, though, indicate a shortfall in lithium supply over the next decade.

Benchmark Mineral Intelligence, a research group, believes more than 70 new mines will be needed to fully meet lithium demand by 2035, which would constitute a five-fold production expansion. In their 2023 strategy report, Albemarle, the world’s largest lithium producer, noted an expected supply shortfall of nearly 20% by 2030. The enormous demand growth for lithium, combined with the sluggish production expansion inherent in any natural resource business, indicates a strong likelihood for structural supply shortages over the next decade.

Geopolitical supply chain disruption

Further mitigating production expansion, the world is soon likely to see less-globalized lithium supply chains as a result of geopolitical concerns.

Based on data from the United States Geological Survey, just three countries, Australia, Argentina, and Chile, account for more than 80% of global lithium production. These countries must export their lithium for further use since none offer significant battery production facilities.

Asia imports the vast majority of this lithium, where it is used to create Li-ion batteries for domestic use or further export to America and Europe. According to the International Energy Agency, an intergovernmental organization, China dominates the battery sector, producing more than 75% of lithium-ion batteries in 2022. While China does have lithium deposits, they are of inferior quality and low concentration, leaving China to import more than 86% of its lithium demand, mostly from Australia.

This situation, with the United States depending on China for critical batteries and China depending on a Western country for raw lithium, is untenable for policymakers. Free from worrying about ESG factors, China has made inroads into sourcing lithium from artisanal mines in Africa in addition to expanding domestic production. The Biden administration has made lithium independence a policy goal by supporting domestic battery manufacturing and exploring mining expansion in Nevada and California. While the merits of autarky are a matter of debate, the fracturing of lithium supply chains will only hinder the production expansions needed to meet the demands of the next decade.

Li-ion alternatives: A new king of the jungle?

The foregoing analysis depends on Li-ion batteries continuing to be the premier battery technology, particularly for EVs. While future innovations are inherently unpredictable, current competitors to Li-ion technology do not appear promising.

Sodium-ion (Na-ion) batteries, which operate based on the same principles as their lithium counterparts, suffer from comparatively weak storage density. While sodium’s relative abundance makes Na-ion batteries cheaper, they are unlikely to ever compete with Li-ion in the EV sector. The most likely potential application could be in large-scale energy storage, where space is less of a concern. This application represents a marginal demand for lithium, however, and is unlikely to disrupt the market.

In addition to Na-ion batteries, there has been academic discussion about utilizing solid-state batteries for EVs. While solid-state batteries are attractive due to their high energy density, they have not been successfully commercialized outside the lab. Regardless, lithium is a core component of leading solid-state designs, so adoption is unlikely to greatly impact lithium demand.

High margins of safety

Barring technological disruption, the lithium market is primed for growth over the next decade. High volume, however, is more certain than high prices, particularly due to the uncertainty regarding mine expansions and geopolitical maneuvering. Given this uncertainty, mining companies with higher operating margins are likely to offer a better margin of safety for investors, since these firms can generate profit on volume even if spot prices decline.

A lithium miner’s margins depend primarily on the method of lithium extraction it prioritizes. Brine production, which involves concentrating saline brines through evaporation, is far less capital-intensive than traditional hard-rock mining. According to S&P Global Market Intelligence, margins from brine production are almost twice those of hard-rock operations. The age of operating assets can heavily influence margins as well, with the fully capitalized costs of older mines allowing profit at a lower lithium price.

Livent and SQM are two lithium mining companies that stand out for their high operating margins. Considering that Livent and SQM are older firms with established operations in South America, where brine production dominates, this should come as no surprise.

Company Comparison

Albemarle (ALB)

P/E (TTM): 8.46   D/E: 42.0%   Operating Margin: 34.2%   ROE: 39.5%

Albemarle earns more than 70% of its revenue from its lithium segment.

Livent (LTHM)

P/E (TTM): 16.2   D/E: 17.1%   Operating Margin: 44.0%   ROE: 24.4%

Livent earns 94% of its revenue from lithium and lithium derivatives.

SQM (SQM)

P/E (TTM): 5.7   D/E: 60.9%   Operating Margin: 52.4%   ROE: 99.2%

SQM earns 79% of its gross profit from lithium and lithium derivatives.

The first three are established lithium companies, while the next three are younger companies starting new operations.

Piedmont Lithium (PLL)

P/E (TTM): -   D/E: 0%   Operating Margin: -   ROE: -5.8%

Piedmont is constructing mines in Ghana for production in Carolina and Tennessee.

Lithium Americas (LAC)

P/E (TTM): -   D/E: 26.4%   Operating Margin: -   ROE: -14.0%

Lithium Americas is developing two lithium mining sites, one in Nevada and one in Argentina.

Sigma Lithium (SGML)

P/E (TTM): -   D/E: 0%   Operating Margin: -   ROE: -32.8%

Sigma Lithium is developing a site in Brazil.