Electric Vehicle Metals: The New Gold Rush is Here
Demand for lithium, nickel and rare earths is already skyrocketing
Have you heard of DeepGreen?
It is a Canadian company that wants to extract metals for electric vehicle (EV) batteries from rock formations found deep in the Pacific Ocean. Vancouver-based DeepGreen Metals Inc. announced that it will merge with Sustainable Opportunities Acquisition Corp. in the second quarter of the year.
DeepGreen’s valuation? $2.9 billion. The company does not even have a proven technology.
DeepGreen may be an extreme example but its unicorn status indicates the red-hot appeal of EV metals such as lithium, nickel and others. Some mining companies such as Lithium Americas (NYSE:LAC) have seen their stocks surge 200% in the past year. Many of them are spending millions to ramp up operations.
Junior exploration companies — both traditional (e.g. Nickel Rock Resources) and speculative (e.g. DeepGreen)— are also gaining traction. Global mining leaders such as Glencore are lining up to invest in or acquire them.
Commodities such as metals are cyclical. Demand for lithium and nickel has grown, often in jagged spurts much to the dismay of investors, with the advent of personal electronics such as smartphones and tablets. There have been previous surges, such as the rally in 2018, but the current, relatively modest, spike is a little different. Current prices are more grounded in reality with greater stability expected in the next 10 years, thanks to the growing electrificatio demand.
Electrification boom
In its Electric Vehicle Trends report, Deloitte predicts that global EV sales will cross 30 million by 2030. Analysts have been making such forecasts since the first Tesla Model S rolled out the factory floor but recent developments finally make them seem an actual possibility.
Automakers, both new and legacy, will be launching hundreds of new EV models in the next five years. Many of them, such as General Motors and Volvo, have pledged to completely phase out gasoline vehicles by the next decade. Automakers and their battery suppliers such as LG and Panasonic will need a steady stream of these metals to meet this rising demand.
Governments are also getting more serious about EVs. China and the European Union were already leading the curve in creating legislation and infrastructure. The current Biden administration policies will now accelerate push and subsequent adoption in the U.S.
Metal madness
Lithium supply is approaching a critical juncture — probably the reason behind its surging price and the rise in stocks of mining companies that produce the metal.
Commodity intelligence specialist Roskill expects the demand for lithium carbonate, one of the forms of lithium used in EV batteries, to double by 2026 from current levels, according to an article in The Northern Miner.
“To meet this increasing demand for lithium products, we would need to see not just an expansion in output from existing producers but also new producers looking to commission new capacity. This will require significant new investment in the industry.” — Roskill battery materials expert David Merriman, The Northern Miner
The situation is similar with nickel, which is being increasingly used in EV batteries as cathode material to boost range and lifecycle. A recent report published by Roskill and the European Commission predicts that nickel demand will rise from 92 kiloton in 2020 to 2,600 kiloton (or 2.6 megaton) by 2040. Growth in battery production will be the primary driver of this demand.
The report also says that EU27 countries only have “the ability to meet internal demand until 2024/2025 before deficits emerge.”
Cobalt, despite the ethical concerns around its extraction and the decision by Tesla to phase out its use in batteries, will also see growing demand. Usage is expected to double by 2030.
Then there are the rare earths, particularly neodymium, which are used in traction motor magnets for EVs. They will have trajectory similar to the other metals — demand is expected to surpass availability.
North America playing catch up
Geopolitical factors will further complicate supply, creating need for more localized production. Australia provides most of world’s lithium, closely followed by Chile and China. China is also one of the largest producers of nickel, as well as rare earth metals.
China’s overall dominant position in these metals poses a problem for Western economies, particularly North America. In the past, the Asian powerhouse has not refrained from bottlenecking the supply chain for leverage. Given the current political posturing, I wouldn’t be surprised if China makes it more difficult for its “political and economic rivals” to obtain these materials in the future.
Moreover, China has pretty ambitious electrification goals itself. As domestic demand grows, the country will likely prioritize its national needs leading to potential shortages for rest of the world.
The good news is that miners and producers are getting serious about exploring North American deposits. North Carolina-based Albemarle, one of the largest lithium producers globally, is planning to double the capacity of their operations in Nevada. Newcomers such as Piedmont Lithium and Lithium Americas are increasingly chasing U.S. and Canadian deposits for production growth.
Given the geopolitical backdrop, there seems to be tacit federal support for these intiatives. Last year, Reuters reported that “Joe Biden’s campaign has privately told U.S. miners it would support boosting domestic production of metals used to make electric vehicles, solar panels and other products crucial to his climate plan.”
Wall Street meets lithium
The investment world smells opportunity as EV demand, supply chain security concerns, and government action gather momentum. Wall Street analysts are increasingly betting on lithium demand— particularly companies that are exploring or expanding operations in North America.
Bloomberg recently reported that mining companies have raked in $3.4 billion from the markets this year alone — a seven-fold increase from the doldurms of 2018–2020. Junior exploration companies, which often don’t get much love from investors, picked up $529 million.
Some companies stand out in this new gold rush. According to this Barron’s article, majority of analysts are bullish on Lithium Americas (NYSE:LAC), which is still pre-production but has eyes on extraction from the Thacker Pass deposit in Nevada [Disclosure: I have a stock position in Lithium Americas]. The company raised over $500 million in 2020 to fund the operation.
Piedmont (NASDAQ:PLL) is another investor favourite. The company is riding high on its deal with Tesla, struck in September last year for its North Carolina-based lithium project. It recently raised $122.5 million through a public offering.
The outlook
As I write this blog, lithium prices continue to rise. I think the enthusiasm is peaking right now and a reality check is on the horizon. However, the coming surge in battery demand is real as automakers juice up their EV lineup, so the market fundamentals are strong.
In fact, I like EV supply chain companies — lithium miners, battery manufacturers — better than many of the new EV manufacturers that have gained eye-popping valuations in the last few months. I doubt if the the Electrameccanicas and Workhorses of the world have the legs to outpace the Teslas and GMs in the intensifying EV race. But all of them will need to plenty of lithium, cobalt and nickel to get them to the finish line.
