There's Probably Truth Behind the Lithium Hype - Don't Miss This One...

Peter Epstein |

Lithium.jpg

As We've all Heard, Lithium Demand Poised to Take Off

Investors are aware of the growing need for the metal lithium in automobiles and large-scale energy storage of renewables such as wind and 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 below]. 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).

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The incremental uses of lithium-ion batteries in power tools, vacuum cleaners, cell phones, cameras, lap tops, dog showers, etc. products in the "other" category will be ongoing for years to come, and the category will become a more meaningful slice of the lithium pie.
 
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, the country's 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), of which there are a growing number. In a few short years, there will be fewer 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. Plig-in hybrids on average use roughly one-third 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 to 10 years. Replacements could significantly add to the overall demand for lithium.

Surprisingly, it's taken me until the fourth 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 to 2010, prices have slowly been creeping up. In 2013 to 2014, 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 $5,500/tonne by the end of 2015, possibly in excess of 20% this year. Lithium hydroxide, used as a raw material by companies such as Panasonic Corporation ($PCRFY) and Tesla Motors Inc. ($TSLA), 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 South America (particularly Argentina and Chile). 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 US 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.

Lithium-Mining Companies That are Well-Positioned for Success

Instead, companies like Venture Exchange-listed Dajin Resources ($DJI.V), OTC: Pink Sheets ($DJIFF) and Venture Exchange-listed Pure Energy ($PE.V) have strategically located exploration targets, tiny market caps and blue-sky potential if lithium prices continue to move. Well managed and funded juniors offer investors long-term call options on the demand / price for lithium. Select lithium juniors will face ample opportunities to be acquired. Dajin and Pure Energy are worth considerably more to a Compass Minerals International Inc. ($CMP), Agrium Inc. ($AGU), Cargill or Mosaic Co ($MOS), 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 seven miles northeast of the mine.

Dajin Resources is especially interesting in that it has property in BOTH highly prospective Nevada and 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 six to eighteen 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.

Please visit the websites of two of the companies mentioned above: Dajin Resources (DJI.V) / (DJIFF) and Pure Energy, (PE.V). 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 websites and corporate presentations 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. 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
MOS Mosaic Company (The) 29.45 0.07 0.22 1,580,973
AGU Agrium Inc. 104.06 0.82 0.79 169,432
TSLA Tesla Motors Inc. 187.20 1.35 0.73 1,203,979
CMP Compass Minerals Intl Inc 78.93 0.38 0.48 63,301

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