The wonder metal behind EVs: supply crisis and lithium stocks to buy

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As the world races to reduce its greenhouse gas emissions, electric vehicles (EV) stand out as a singularly successful method. Governments around the world have created policies to promote and expand EV adoption, while both big automakers and startups are hurrying to produce fully electric product lines.

But EV batteries are not made from thin air. When it comes to a crucial ingredient in EV batteries – namely, the metal lithium – demand has far outpaced supply. In 2021 alone, lithium prices have more than doubled. China, a top producer of lithium-ion batteries, has seen fit to reign in domestic suppliers’ and manufacturers’ prices. The boom is so big – and the supply so scarce – that Tesla’s leadership has hinted that the company might need to get involved in mining and refining.

In this blog, we provide you with a brief primer on the current lithium market, discussing some of the underlying drivers and considering the metal’s future. We also talk about the pure climate players in the green battery space and which lithium stocks to buy.

The trouble with lithium 

The EV transition is fueled by an ever-growing demand for lithium – one that threatens to become insatiable. Already, demand has surpassed supply. For months, the price has risen sharply, skyrocketing up by almost 500% in a single year. The short supply of lithium is so critical that in China, which makes about 80% of the world’s lithium-ion batteries, the government has demanded that domestic suppliers and manufacturers undertake “a rational return” to lower prices.

Possible problems on the horizon for global markets include a perpetual deficit and an extreme rally, with potentially devastating consequences for EVs, one of humanity’s most successful efforts to halt global warming. Higher lithium prices could add $1,000 to the cost of a new EV, which – when taken together with higher prices for other raw materials in EVs – could put a damper on the cost-competitiveness of clean-energy vehicles, making it harder to hit global emissions targets. For example, Pure Climate Stocks Tesla, Rivian and Xpeng have already raised their prices, and Elon Musk has even said that Tesla might need to consider jumping into the mining and refining of the “wonder metal” directly.

But it begs the question… how did we get to this point?

Lithium’s boom can be traced to a two-year slump (2018 – 2020), one that halved the metal’s value and led to chronic underinvestment in new supply sources. Now, for battery makers, these woes have only been compounded by the pandemic and Russia’s war in Ukraine.

Current conditions have prompted a flurry of acquisitions and joint ventures, as battery makers and EV producers scramble to secure supplies. The quickest way to bolster supply is to intensify output from existing lithium sources. So that raises another question: which Pure Climate Stocks are prepared to take part in this ramp up?

Lithium stocks: the right time to invest in “white gold” 

Anticipating the huge market and demand for the metal ahead, companies across Europe are exploring lithium mining as “white gold.” However, it isn’t a panacea, and environmental protests and other factors have delayed production in many areas.

The precious metal is currently so scarce that even cost-intensive mining projects in Europe are starting to look worthwhile. Even so, the expansion of lithium production on the continent is making relatively little progress, given an inhospitable legal framework for mining and low investment levels. “Not in my backyard” attitudes, are also prevalent, wherever nobody wants these projects near their homes. In Finland, Portugal, and Serbia, mining projects have similarly struggled to find a footing, due to local government resistance and civil protests.

In Germany, two companies (and Pure Climate Stocks) have ambitious plans for lithium production: Zinnwald Lithium (ETR:7WW) and Vulcan Energy Resources (ETR: VUL). Zinnwald had scheduled production to start in the Ore Mountains in 2021, until a series of ownership changes and restructurings caused that timetable to be thrown out. Just recently, the current owner raised new capital for the commission of a bankable feasibility study, but more funding still needs to come through before production can begin.

Other less traditional approaches also exist. For instance, Vulcan Energy wants to use geothermal deposits to pull lithium from hot thermal brine. Currently, the company is working on a process that will extract the metal without emitting any greenhouse gases – all while simultaneously generating energy from geothermal sources. To this end, Vulcan Energy recently took over an existing geothermal plant in Germany and is planning to build others. However, despite a symbolic win against a short-seller who raised doubts about its technology, the company has run up against trouble from a local population that has its own reservations. Vulcan Energy was also awarded research permits in Italy, and it has about a year and a half to find out if commercial lithium mining is actually worthwhile. If drilling and explorations are successful, they could discover the first large lithium deposit in the country.

In Spain, it’s suspected that substantial lithium deposits lie beneath Extremadura, a relatively poor region. The company responsible for mining Tecnología Extremeña del Litio – which is 75 percent owned by the Australian-listed Infinity Lithium (FRA: 3PM) – claims that the area holds enough lithium to build ten million electric cars. But so far, the project has hit roadblocks, due to resistance from the regional government. In 2016, local officials granted the company permission to drill test holes; however, following protests from residents, it ultimately refused to issue a second permit for test drilling at another site last spring.

Another firm, European Lithium (FRA:PF8), has been granted exploration and mining licenses from the Austrian government. But the company has been bogged down with constant delays in mining plans, both due to landowner conflicts and the pandemic. The firm intends to complete a feasibility study by the summer, and it now expects lithium to be mined in the state of Carinthia, a wine-growing region in Spain, by early 2025. So far, European Lithium has been solely exploration-oriented, but it’s now planning to invest some 450 million euros directly into production.

 

How have the stock prices developed?

 

Zinnwald Lithium became public right at the beginning of 2021. It then reached an all-time high by August of that year, only to lose 65% of its value last year.

Vulcan Energy Resources has been on the stock market since 2019. But the company hit its maximum share price in September last year. Since then, the share price has more than halved.

Since its IPO, Infinity Lithium had been steadily growing, but over the last 6 months, its share has also lost around 30% of its value.

Finally, European Lithium reached its all-time high in 2017 and has never regained value since then. Despite an overall 20% increase over the last year, the stock has fallen 40% since December. 

So, what accounts for these price slumps? One main reason has been the anticipation of raised interest rates, a government measure that generally makes investments in the stocks look less attractive. This is particularly true for Zinnwald and Vulcan, since they are only expected to generate profits in the next couple of years, if at all.

 

Summing it all up

 

In summary, these examples showcase how these four stock-listed companies are real venture investments, or ones that involve particularly high risks but could also yield significant returns – assuming everything goes according to plan, that is. However, the rollercoaster developments of the lithium stocks price really highlights the volatility of these shares, a volatility that has only been made worse by the current economic situation.  

Don’t forget to check out our Vulcan Energy stock analysis for an example of how to approach the valuation of such a venture.

Sources

https://www.bloomberg.com/news/features/2022-05-25/lithium-the-hunt-for-the-wonder-metal-fueling-evs  

https://hbapp.handelsblatt.com/cmsid/28254712.html

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