Long Electric Vehicles or Long EV Inputs?

The following is an investigation into who owns the inputs into Electric Vehicle (EV) batteries as well as other uses and recent price movements. This is a fast growing market, and it would be beneficial to every investor to get in early. But where do you put your hard earned money?

“…the market of the lithium-ion batteries that raised to US$ 11.7 billion in 2012 is predicted to increase to US$ 33.1 billion in 2019.” (Mauger, Julien)

That’s a 23.1% annualized rate. The industry will double twice in just over 6 years!

Overview:

A Lithium-ion cell is made of the following:

1) Anode
2) Electrolyte
3) Cathode

Basically, “Anodes and cathodes are the endpoints or terminals of a device that produces electrical current.” (thoughtco.com) The movement of ions within a battery is what produces a current, which powers devices. (Correct me if I’m wrong). Those ions move through an electrolyte which acts as a catalyst for movement; this is the battery acid in layman’s terms. (Popular Mechanics)

The anode and electrolyte in lithium ion batteries don’t differ for the most part from brand to brand; the innovation is happening in the cathode.

Here are your four groups of cathodes in production today, courtesy of Business Insider:

BIcathodesfigure_Jul31.PNG

Your main inputs are: Cobalt, Nickel, Manganese and, obviously, Lithium. Note: Cobalt, Nickel, and Manganese are all transition metals, and Lithium is an alkali metal (highly reactive).  Nickel and Manganese are heavy inputs into the steel industry, and their prices are largely dictated by Big Steel, thus I’ve only outlined Cobalt and Lithium in this exercise, Nickel and Manganese can be found in a following post (link o follow).

Cobalt

Elemental Symbol: Co

Price today: $69,750 per Metric Ton

Uses & Projected Market:

globalenergymetaslcobalt_graphicAug6.PNG

Total cobalt demand to exceed 120,000 tonnes per annum by 2020, up approximately 30% from the 93,950 tonnes consumed in 2016 (Darton Commodities, 2016).

Graphic and text via: Global Energy Metals

cobaltuses_jul31.PNG

Besides serving as a cathode material of many Li-ion batteries, cobalt is also used to make powerful magnets, high-speed cutting tools, and high-strength alloys for jet engines and gas turbines. (Battery University)

World Supply:

Cobalt_reserves2018.PNG

Nearly 75% of the world’s cobalt reserves are located in three countries: Congo, Australia, Cuba.

There was this massive explosion in the price of Cobalt over the last two years (63.56% annually!!). See Chart 1.1.

Chart 1.1

cobalt_jul31.PNG

Chart 1.2: Congolese Franc (currency of the Dominican Republic of Congo):

usdcdf_jul31.PNG

The above represents a depreciation of the Congolese currency. In November of 2016, you could buy 923 Congolese Francs (CDF) for 1 US Dollar. Now you can buy 1621 CDF for 1 USD.

Chart 1.3

cobalt to USDCDF_ jul31.PNG

On the chart above, the purple line is the price of Cobalt in CDF. Local suppliers and miners are getting paid less CDF in relation to dollars despite this massive rally of Cobalt prices. The local currency has depreciated faster than Cobalt prices have risen, meaning local miners are making less per kg than they were before!

Chart 1.4: The Elon Musk Effect

cobaltsincemay_jul31.PNG

See the depreciation of the price since May in Chart 1.1? On May 3, Bloomberg published this article, about how Tesla is planning to use less cobalt in their Lithium-ion batteries. The chart above shows the change in Cobalt’s price since the article was published. Coincidence?

“We think we can get cobalt to almost nothing,” the [Tesla’s] chief executive officer said in response to a question on reducing battery costs. (Bloomberg)

To go long Cobalt, Glencore seems like the best way to get exposure. Absolutely MASSIVE company with $205.5 bil in revenue in 2017. To give you another metric, they paid a base $1 billion in dividends last year plus a variable dividend based on cash flow. Unreal big.

They recently (Feb ’17) boosted their presence in Congo Cobalt mines via a $960 million acquisition of two new mines. You’ll gain exposure to a ton of other segments as well as cobalt. You’re gaining macro exposure to huge mining company if you buy this… the environmentally conscious might be a bit hesitant to invest in such a large company.

Chart 1.5: Glencore

GLEN_Aug6Price.PNG

Lithium

Elemental Symbol: Li

Price today: $290 per Metric Ton

Projected Market, 2019: $1.7 bil. (roughly 5% the size of the Cobalt market)

[By 2019], ….the value of the global lithium market is projected to reach $1.7 billion. (Freedonia Group)

Uses:

The most important use of lithium is in rechargeable batteries for mobile phones, laptops, digital cameras and electric vehicles. Lithium is also used in some non-rechargeable batteries for things like heart pacemakers, toys and clocks.
Lithium metal is made into alloys with aluminium and magnesium, improving their strength and making them lighter. A magnesium-lithium alloy is used for armour plating. Aluminium-lithium alloys are used in aircraft, bicycle frames and high-speed trains.

Note: Emphasis mine.

World Supply:

Chart 2.1:

LithiumReserves_2018.PNG

Argentina, Bolivia, & Chile hold nearly 60% of the world’s reserves. The below image was taken from Google Earth. The white area in southwestern Bolivia is a salt flat, containing a vast majority of the country’s lithium resources.

boliviagoogleearth.PNG

At a projected global growth rate of 13% (USGS), the industry will double in size in about 5.5 years. This lithium goes into cell phones (“spoonful of lithium”), cameras, EV’s (“10-15 kilos of lithium”, power centers, rockets. (Bloomberg)

South America is notorious for their unstable politics. It will be interesting to see who invests and how EV producers will hedge their political risks given the concentration of global resources in this area.

SQMTicker: SQM

This Bloomberg video gives a tour of Chile’s major mining company SQM’s salt flats. Here they are seen from space via Google Earth.

Chile Salt flats.PNG

This area is roughly 16 km x 14 km; and the employee in the Bloomberg video says he would estimate a 100% (!) chance that some portion of your smartphone battery passed through their lithium lakes.

SQM’s Revenues from Lithium & Derivatives are exploding. In 2015, Li & Deriviatives accounted for 12.9% of revenues; in 2017, they accounted for nearly 30% of revenues:

lithiumrevs_SQM.PNG

Lithium revenues’s in bright yellow; COGS in darker yellow.

Here’s the stock price of the SQM US ADR; looks interesting at these levels:

SQMADR_Aug6.PNG

FMC Corp: Ticker: FMC

Total revenue for the massive Philadelphia based company for 2017 was $2.9 billion. FMC company derives 88% of revenues from Agricultural products (herbicides, insecticides, and Fungicides) and 12% from Lithium production as of 2017, but over 20% of their profits are derived from Lithium production. Their Lithium operations are based in Argentina. The company recently acquired Dow Chemical, and Reuters reports:

U.S.-based FMC, which is primarily a pesticides maker, is planning to sell off around 15 percent of its lithium business in the IPO late in the third quarter or early fourth quarter, CFO Paul Graves said in an interview.

In their 2017 Annual Report MD&A, the company stated:

On a long-term basis, we are a technology-driven company with low-cost operations, a world class research and development organization that balances short-and mid-term developments with long-term innovations, and global scale with strong regional expertise to support local customers.

FMC price chart:

fmcprice_aug6.PNG

Might be something worth looking into…

Albemarle Corp: Ticker: ALB

Based in North Carolina, 2017 annual revenue amounted to just under $3.1 billion, with Lithium production accounting for 44.5% of revenues. Price chart:

albprice_aug6.PNG

35.7% of long term assets are held in Chile, and 12.2% in Australia, so they’re (kind of) geographically diversified. See below.

albgeo_Aug6.PNG

Bull case: (Taken from 2017 Annual Report MD&A)

Our long-term outlook is also bolstered by our successful negotiation of long-term supply agreements with a number of strategic customers, reflecting our standing as a preferred global lithium partner due to our scale, access to geographically diverse, low cost resources and long-term execution track record.

Relative Valuation:

RV_Lithium.PNG

ALB looks to be the best investment on a relative value basis, with a good entry point and good Capex (long term growth). SQM has received a lot of media attention recently, so maybe overvalued, but they have the highest dividend yield for income investors, also has a lot of exposure to the Chilean Peso. Keep in mind FMC is mostly a fertilizer company, with plans to divest some of their Lithium assets, so might be a more diversified play with solid dividend income. I would wait for the IPO (Q3 or Q4 2018) if I had plans on investing in FMC.

However, comma:

Chile’s SQM predicts,

If production levels are equivalent to current ones, confirmed reserves of the Salar that belong to SQM, will last at least for 30 more years. (SQM)

Note: Emphasis mine.

That’s assuming a constant production! Keep in mind these companies always have to be prospecting new natural resources to stay in business. Tough, tough, tough to project future supply levels.

30 Years??? THEN WHAT!?

I take to the skies in my next post in this series to identify what celestial bodies have been identified as resource heavy and available for mining.

Thanks for reading,

/tommander-in-chief

 

Read/Watch this:

  1. Cobalt Mining for Lithium Ion Batteries
  2. Awesome Article. Further reading on Lithium Ion battery types.
  3. Bloomberg Video on Chile’s Lithium salt flats
  4. 2016 Documentary on Bolivia’s salt flats
  5. Asteroid mining: Planetary Resources

Sauce:

  1. Featured Image: Bolivian Salt Flats: https://awol.junkee.com/satellite-image-of-bolivian-salt-flats/48655
  2. https://www.businessinsider.com/materials-needed-to-fuel-electric-car-boom-2016-10
  3. http://batteryuniversity.com/learn/article/bu_310_cobalt
  4. Mauger. Julien. Critical review on lithium-ion batteries… July 2017.(https://link.springer.com/article/10.1007/s11581-017-2177-8).
  5. https://www.bloomberg.com/news/articles/2018-05-02/tesla-supercharging-its-model-3-means-less-cobalt-more-nickel
  6. https://investingnews.com/daily/resource-investing/critical-metals-investing/cobalt-investing/glencore-drc-copper-cobalt-mines/
  7. https://www.globalenergymetals.com/cobalt/cobalt-demand/
  8. http://phx.corporate-ir.net/phoenix.zhtml?c=117919&p=irol-sec&control_selectgroup=Annual%20Filings
  9. https://www.reuters.com/article/us-mining-bmo-fmc/fmc-plans-500-million-ipo-of-lithium-business-on-nyse-in-the-fall-idUSKCN1GA2VO
  10. Google Earth
  11. Bloomberg

Disclaimer: These opinions are my own. I do not provide any financial advice. Seek advice from an accredited financial advisor before acting on opinions presented. At the time of writing, I do not own equity in any of the companies mentioned above.

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