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Why lithium is the opportunity everyone is looking for

The age of combustion engine automobiles is ending and the age of lithium has begun.

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The passing of the resolution by the German government to ban the sale of internal combustion engines in the European Union by 2030 suggests that we are moving toward the end of the age of combustion engine automobiles and entering the age of lithium. But how will this affect the lithium demand?

I’m making a list of companies like Horizon Minerals (HZNM), and let me tell you why. Horizon Minerals has 20,600 acres of land in the lithium-rich portion of Nevada. This property is in close proximity to Tesla’s (TSLA) lithium-ion battery factory (Gigafactory) that is located just outside of Sparks, Nevada.

It might not happen under the incoming President, but you need to understand that the era of combustion engine automobiles is done. Lithium is here.

Did you know that the combustion engine is already done in Germany? I’m not joking.

Members of the German government have passed a resolution to ban the sale of internal combustion engines in the European Union by 2030. What that would mean is that only vehicles with zero-emissions could be sold after that time.

The resolution was passed in Germany’s Bundesrat, the nation’s legislative body representing the 16 German states, with across-the-aisle support. Again let me stress that this is not a threat of what might happen. The combustion engine is done in Germany within 15 years.

How does that make you feel about your oil producer stocks?

The ban could also get a lot bigger as the Bundesrat wants the entire EU to follow suit.

The resolution that was passed implores the EU Commission to ban the sale of new gas- or diesel-powered vehicles starting in 2030. Cars and trucks that were purchased before the ban was instituted would still be allowed. After 2030 carmakers would no longer be allowed to sell new cars that run on fossil fuels in the EU. The Bundesrat doesn’t have authority over the EU, but Germany is the most powerful economy in the union and has a huge influence.

That is Germany and the EU. We have heard similar plans for California and you know that China and India are going to have to eventually go that route because of their enormous populations and pollution problems.

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If oil is out lithium has to be in

At this point, we all know that the replacement for the combustion engine will be the electric car powered by lithium batteries.

What is hard to appreciate is just how much more lithium we are going to need than what we currently produce.

First, consider that 70 million cars being sold globally every year this is a huge market.

Then consider that while the battery of a normal cell phone uses approximately 5-7 grams of lithium carbonate a battery for a Tesla Model S uses 63 kilograms of lithium carbonate.

The electric car clearly uses a lot more lithium carbonate, but the difference is amazing. It would take 10,000 cell phones to equal the lithium carbonate required by a single Tesla model S.

Goldman Sachs has estimated that just a 1% increase in the penetration rate of electric cars would cause total global lithium demand to increase by 50%.

Given that we could be heading towards a full elimination of the combustion engine it seems we are going to get a lot more than a 1% increase.

Goldman crunched some numbers assuming that electric vehicle sales would amount to 22% of all vehicle sales in 2025, up from less than 3% today. What they concluded was that electric vehicle demand by itself at that level could triple the amount of lithium required annually from 160,000mt today to 470,000mt by 2025.

Source: Goldman Sachs

Growth of electric vehicles in the next few years, as forecasted by Goldman Sachs Global Investment Research. (Source)

The race is now on to lock down as much lithium supply as possible because it is going to become critically important.

The scary thing is that the electric car isn’t the only source of lithium demand growth.

Demand from consumer electronics and devices is continuing to grow. Every year more and more people get a mobile device and as the devices evolve they require more powerful batteries. Just mobile devices alone will cause current lithium demand to grow by more than eight percent per year.

The kicker to the lithium demand explosion could come from renewable energy in the form of grid storage.

A big problem with solar and wind power is that it is intermittent. That means that as we gather this energy we need to be able to store it in order to make it a reliable power source. Lithium batteries could be front and center in the build-out of grid storage capability. The world’s largest lithium producer (Albemarle) believes that lithium demand from grid storage could grow a more than 30% per year through 2024.

(Source: Albemarle)

Lithium demand outlook in the long-term, as forecasted by Albemarle. (Source)

What is an investor to do?

This brings me to Horizon Minerals and other companies like it. These companies have locked down acreage that is highly prospective for lithium in the best possible place, near Tesla’s massive lithium-ion battery factory (Gigafactory) that is located just outside of Sparks, Nevada.

(Source: Tesla)

The  Tesla Gigafactory 1. (Source)

Tesla is going to be generating near insatiable lithium demand in the coming decades. With lithium supplies constrained having a lithium deposit right next to Tesla’s Gigafactory is going to be extremely valuable. Costs of transporting lithium will be much lower from such a close location and we all know that being a low-cost producer is critical in the commodity business.

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I need to make clear that Horizon Minerals is still at the exploration stage. The company has 20,600 acres of land in Nevada’s Great Basin. That land was acquired from Gold Exploration Management Inc. in exchange for 30 million restricted shares of the Horizon common stock, and a 2% carried gross production royalty on any mineral production.

It is encouraging that Gold Exploration kept an interest in the property by taking shares of Horizon and a royalty on production as compensation for the acreage.

As an exploration stage company Horizon has a high level of risk so please keep that in mind. My plan is to build a database of companies with significant lithium potential and watch them closely. If something good happens for Horizon Minerals or any of them I will be able to act before the market catches on.

I’m certain that lithium has a bright future. The hard part will be finding the companies that are best situated to profit from it.

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation in writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

Christopher is a private investor who is focused on off the radar small cap and high-growth opportunities. His approach involves compiling a watchlist of promising companies to provide him with an informational advantage. If one of those key companies hits a key inflection point Christopher's prior knowledge of the company allows him to move quickly before the market becomes aware of the opportunity.

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1 Comment

1 Comment

  1. Arun Lama

    December 8, 2016 at 3:42 AM

    When it comes to personal electronics and most electric cars, the default choice to run them is lithium
    batteries. Lithium batteries are most viable due to their higher energy density
    than other technologies. Sony and several other companies had started the revolution
    of lithium batteries in the early 1990s. The global sales of electric vehicles
    passed 1.5 million in May 2016. With this increasing growth rate of electric
    vehicles (EVs), we can expect strong growth in lithium battery demand.

    Lithium prices have decreased drastically since 2007 as the production volume has doubled every year. Tesla
    is planning to manufacture batteries like the Powerwall
    and much larger grid support batteries. By the year 2020, Tesla’s expected
    lithium demand per year will be 8000 metric tons (at full production). It’s
    interesting to see the world transforming from the combustion engine to lithium batteries.

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