In this article I present a bullish thesis on the demand for
lithium, but not by naming the usual suspects of batteries & large scale
grid storage. Please read this article and visit the websites of two of the
companies mentioned herein. Dajin Resources (TSXV: DJI) /
(DJIFF) and Pure Energy, (TSXV: PE). As
or April 29, 2015, I have no prior or existing relationship with any named
company. Note:
I believe
that Dajin has one of the best website & corporate presentation of any I’ve seen
in a junior company.
Buying shares in small cap companies is not suitable for all
investors. Readers should consult with their own investment
advisors before buying or selling small cap companies.
As We’ve all Heard, Lithium Demand Poised to Take Off
Investors are aware of the growing need for the metal lithium in
automobiles & large-scale energy storage of renewables such as wind &
solar. But few may realize that lithium-ion batteries are also key in portable dog showers.
Does this represent a, “tipping point?” Perhaps a tipping point for
the dogs! The main uses of lithium in 2014 were ceramics and batteries. [see pie chart]. However,
the “other” slice of the pie represented just 10%. No one mentions
the “other” category because there’s no blockbuster products in it.
Notice that large-scale storage does not have its own slice of the pie. I think
at the very least, 41% of the pie will grow at a CAGR of at least ~15% (see quote below).
The incremental uses of lithium-ion batteries in power tools,
vacuum cleaners, cell phones, lap tops, dog showers, etc, etc. products in the,
“other” category, will be ongoing for years and years to come. I
think the, “other” category will become a more meaningful slice of
the lithium pie. And let’s not forget electric bikes, of which there are 200
million, yes million, in China alone. Why does China dominate the electric bike
market globally? For one, Chinese air pollution is a terribly embarrassing
problem for China’s leading officials. Assuming the lithium in 350 electric
bikes equals that of the average EV, that equates to the equivalent of about
600,000 EV’s.
Are Pundits Factoring in All of the Potential Demand Factors?
Finally, I point to hybrid p-EVs, (plug-in hybrids) there’s a growing number
of them… In a few short years there will be less hybrids coming off the
assembly lines, replaced with 100% EVs. I’m not sure how that presumption on my
part factors into the demand picture. Plug-in hybrids on average use roughly
1/3 the amount of lithium as full EVs. Another angle not appreciated is the
replacement of lithium-ion battery packs in existing EVs and bikes. Aside from Tesla, most EVs will
need replacement battery packs after 5-10 years. Replacements could add
significantly to overall demand for lithium.
In a surprising and controversial move, I’ve waited until the
4th paragraph to introduce an exclusive quote from industry guru Simon Moores of Benchmark Mineral
Intelligence,
“Since the boom and fall in lithium carbonate prices
between 2005-2010, prices have slowly been creeping up. In 2013-14, Benchmark
Mineral Intelligence estimates that average lithium carbonate prices have
increased by 10% a year and now stand in the $5,000/metric tonne (equivalent)
region. Battery demand from Asia is rising, contributing to global annual
lithium demand of ~15%. With at least 5 battery mega-factories announced or
under construction, we expect this rising price trend to exceed $5,500/tonne by
the end of 2015, possibly in excess of 20% this year. Lithium hydroxide, used
as a raw material by companies such as Panasonic and Tesla, is
seeing an even tighter situation with average prices around $8,000/tonne. Lack
of new capacity and availability of the required battery grade material means
hydroxide prices are expected to be more erratic than carbonate, particularly
in the last three months of this year as new battery projects come on
stream.”
How does one articulate exposure to this theme? With few
exceptions, it’s best to invest in lithium juniors that control properties in
key basins, two of which being Nevada and (Argentina / Chile) South America.
Roughly 75% of lithium supply comes from South America, a disturbing fact given
that Argentina is in the mix. Resource nationalism is not unknown in that
country. Recent severe flooding in the region raises questions of security of
supply. Lithium is deemed a critical metal in the U.S. due to its increasing
use in military hardware. Juniors offer compelling risk/return investments.
Playing the top three lithium producers is not going to help much. One derives
just 10% of its revenues from lithium and all three have multi-billion dollar
market caps. Hard to move the needle on those three.
Instead, companies like Venture Exchange-listed Dajin Resources (TSXV: DJI) &
OTC:Pink Sheets (DJIFF) and Venture Exchange-listed Pure Energy (TSXV: PE)
have strategically located exploration targets, tiny market caps and blue-sky
potential if lithium prices continue to move. Well managed and funded juniors
offer investors long-term call options on the demand / price for lithium.
Select lithium juniors will face ample opportunities to be acquired. Dajin
& Pure Energy are worth considerably more to a Compass Minerals, Agrium, Cargill or Mosaic, any of
which would benefit from geographic diversification, could advance projects
faster and have lower costs of capital.
Dajin has staked claims near Rockwood Lithium’s Silver Peak mine,
the only producing brine-based lithium operation in North America. Dajin’s Teels Marsh property
is located 50 miles northwest of the Clayton Valley deposit at Silver Peak,
while its recently
staked Alkali
Lake claims are just 7 miles northeast of the mine.
Dajin Resources is especially interesting in that it has
property in BOTH highly prospective Nevada & South America. While early stage,
it has one of the smallest market caps of a pure play lithium company and could
therefore be one of the greatest percentage gainers. Neither Dajin nor Pure
Energy will double or triple over night, but within 6-18 months, gains could be
spectacular for patient investors.
Staking ground in highly perspective areas is the name of the
game in depressed markets. We see it in junior uranium and gold plays all the
time. The key difference with lithium is that it’s not engulfed in a
fundamentally depressed pricing / demand / supply environment. Lithium is one
of the very few sectors that looks promising. When the market for juniors
rebounds or if lithium prices talk off, Dajin Resources’ stock and select
junior lithium plays will benefit immensely.
