Small Canadian hedge fund Vivid Capital Management Inc. has made 39% this year through November from its bets on the lithium sector.
The Toronto-based firm manages a single fund with a focus on investments in the energy transition and currently has less than C$50 million ($36.5 million) under management.
According to President James Bradford “We saw the lithium industry this year was still not very well understood,”. “Investors were buying these companies with really poor assets because they had a slick management team. It seemed to us like people weren’t valuing the high-quality projects properly.”
The fund is short companies that rely on direct lithium extraction, such as Standard Lithium Ltd., a Vancouver-based company that has fallen 61% this year.
In February, Hindenberg Research published a short-selling research report on Standard that voiced doubts about its technology.
Hundreds of companies are seeking to save costs with direct lithium extraction, a technique used to speed up the production of lithium. Although it appears to be “great on paper,” Bradford said it has a number of issues, including impurities.
In contrast, Bradford is long lithium companies like Australia’s Lithium Power International Ltd. that have projects with high-quality conventional brine deposits. The firm also invests in companies with hard-rock lithium deposits including Frontier Lithium Inc. and Grid Metals Corp.
Battery Growth
The global economy is in need of more and more lithium, with supply required to grow fivefold by 2030 in order to meet projected demand, coming mostly from the EV sector, according to BloombergNEF.
A potential shortage of the battery silver metal has led mining companies to engage in M&A for control of assets in Lithium-rich countries such as Chile and Argentina.
Most recently Lithium Americas Corp has entered into a definitive arrangement to acquire Arena Minerals Inc and its flagship Salar de Pastos Grandes in Argentina. The strategic transaction would see Lithium Americas add to its Argentina-based project pipeline, where the company already owns the near-term producing Caucharí-Olaroz project and the Thacker Pass advanced development project.
Vivid is also focused on alternative ways to gain exposure to battery inputs and technologies. Even if the energy density of batteries triples over the following several decades Bradford stated that “we’re still going to require 15 times more battery materials” based on the projected shift away from fossil fuels. “We feel that battery metals or critical elements are more durable than a typical economically-sensitive sector such as zinc and iron ore, given the robustness of the growth and political will and support.”
The fund also owned the Sprott Physical Uranium Trust, which is an investment based on the thesis that nuclear power appeal will grow as governments turn to it to cut emissions.
Because of its stellar year in 2020, when it returned 116%, Vivid has increased by more than 300% over the past three years.
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