By Peter Epstein , CFA, MBA
It all started with Tesla’s announcement
of its battery giga-factory in February, 2014. That news was discussed
endlessly with breathless excitement. The news sparked a revival in lithium,
cobalt and graphite juniors. For example, Western Lithium USA Corp. (TSXV: WLC) based in Nevada, more
than doubled that month.At the time,I wrote a
few articles saying that the giga-factory was great news for select
graphite companies. I didn’t mention lithium or cobalt, simply because I was
less fluent in those. Today, I’m better prepared to articulate the lithium
story, one of the hotter sectors in the natural resources space. Why now? I
think that the lithium-ion battery might be reaching a “tipping point,” the
phrase made famous by Malcolm Gladwell. Please note, I don’t use
catch phrases loosely, lithium’s spike in demand is no, “black swan” event, and
we’re not near “Peak Lithium,” although we could see supply shortages on the
horizon. Not only did Tesla’s giga-factory catch everyone’s, the idea caught on
so well that there’s already 5-6 announced or in construction giga-factories, (Tesla’s
is the largest).
Lithium demand, “is
spiking,” for several reasons, again heavily influenced by the $5 billion
dollar Tesla facility. Interestingly, the original concept was that the Tesla
facility would be completed by 2020. Now conventional wisdom says 2017-18,
another bullish data point. Tesla’s fully electric car was way too awesome for
its own good. It guaranteed that new competition would enter the space and it
has. Get ready for it, an abbreviated list of 15 automakers in
the plugin-EV (hybrid) or fully EV market….BMW, Mitsubishi, Toyota,
Nissan, Honda, Tesla, GM, Ford, Kia, Fiat, Mercedes, Porsche, Volkswagen,
Audi and Hyundai. This list probably doesn’t even contain all of the well known
brands. Many of these automakers had no offerings of plugin-EV (hybrid) or
fully EVs until after Tesla’s. Here’s another fact, not my opinion, there are
dozens of less well known brands diving into the race. China and Europe have
plenty of them. China is trying mightily to cut down on air pollution and
European cities are small enough to be quite amenable to EVs. Check out this article if you don’t believe
me! And, just wait until ALL hybrids become full EVs. A certainty in my mind.
So many uses, hard to
follow demand, harder to forecast
So
far I’ve mentioned Tesla’s new paradigm introduction of a “real” EV. And, it
attracting MANY competitors. Next I pointed to the multiple giga-factories
spurred on by Tesla’s. But wait, there’s more. About a week ago Tesla announced
a much ballyhooed home lithium battery storage system that can run one’s home
for up to 8 hours. This product is thought to be especially attractive to homes
with solar panels. This is yet another shot across the bow warning of another
leg up in lithium demand. I guarantee that Elon Musk’s home storage units will
attract a lot of competition, (some superseded Tesla), and perhaps the
need for more battery giga-factories? Tipping point or not, lithium demand is
moving substantially higher by the day. By the time analysts come around to
forecasting a 12%-15% CAGR from 2015-2020, the growth rate could be more like
25%-35%. I have no scientific backing for my 25%-35% projection, I’m just
saying that extrapolating 2012-2015 grow factors forward will not work. Don’t
make me mention the 200 million electric bikes in China alone, because I will
if I have to. Another far less mentioned factoid is the widespread adoption of
hybrid buses, taxis & forklifts (and like equipment in warehouses around
the globe). Is anyone contemplating the replacement lithium batteries that will
be required by many electronic devices, power tools, etc?
Above, I mentioned Western
Lithium, that has a well deserved market cap of $105 million. Lithium
America’s Corp. (TSXV: LAC) has a
$70 million market cap. Before moving down the list, please also consider
Australian-listed Orocobre Limited (ASX: ORE) with a market cap
of $425 million for a pure-play, producing lithium company. Of
course, Orcobre is several years ahead of small cap companies like Dajin
Resources (TSXV: DJI) & (OTC: DJIFF) (which trades a combined 365k
shares per day) and Pure Energy (TSXV: PE). However, we’ve seen
this movie before. When a commodity is in high demand, this is what happens.
Small companies acquire or get options on prospective deposits, they stake new
ground, they explore and develop as available capital prudently allows.
Time is money. Do new
entrants really want to start a green field project? Or might they prefer to
save 2-3-4 years time, money and leg work provided by a well-run junior? I
believe that in a strong market, or dare I say a bull market in lithium,
companies with the lowest market caps, solid management teams and highly
prospective deposits will be sought after. I submit that lithium companies with
market caps of $5mm to $15 million today have stocks more likely to double,
triple, quadruple, quintuple, sextuple, septuple or octuple than some of the
above mentioned plays. Sorry, I had to use the word, “septuple” at
least once in my life.
For example, for Dajin
Resources, a 10x return on its market cap would still place it at a
discounted valuation to Western Lithium. Don’t get me wrong, Dajin has
considerably more risk, but also considerably more upside. If one shares my
bullish view on lithium. Even though Dajin & Pure Energy are behind peers
in reaching initial production, they are actually well ahead of new entrants in
terms of permitting, environmental studies, seismic, drilling, community
relations, access to infrastructure and mining officials, etc.
Conclusion:
I wonder if pundits looking
at lithium demand are capturing all of these booming markets, or if it’s even
possible. Make no mistake, many experts are no doubt better equipped than me.
However, even if 2015-2016 runs at less aggressive annual growth rates,
2017-2020 could still be blockbuster years. A key to the tipping point debate
is not necessarily when lithium reaches a certain penetration, but when
it becomes the go-to standard, which appears to be happening. Beta-max or
VHS? Streaming video or videos from the local video store? Penetration will
follow. My final point, I swear, consider this– My 79 year old mother has been
asking me about lithium-ion batteries, what’s so good about them? Why am I
reading so much about lithium in the New York Times. My answer? “I
don’t know mom, who said you could come down into my basement room? Go cook my
dinner….”
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THANK YOU! Disclosure: Please
see applicable disclosures here. Peter Epstein, CFA, MBA
