Lithium Demand Will Grow Faster Than Bulls Imagine

It all started with Tesla Motors’ (NASDAQ:TSLA) announcement of its battery gigafactory in February 2014. That news was discussed endlessly with breathless excitement. The news sparked a revival in lithium, cobalt and graphite juniors. For example, Western Lithium USA (TSX:WLC), based in Nevada, more than doubled that month. At the time, I wrote a few articles saying that the gigafactory was great news for select graphite companies. I didn’t mention lithium or cobalt, simply because I was less fluent in those. Today, I’m better prepared to articulate the lithium story, one of the hotter sectors in the natural resources space. Why now? I think that the lithium-ion battery might be reaching a “tipping point,” the phrase made famous by Malcolm Gladwell. Please note, I don’t use catchphrases loosely — lithium’s spike in demand is no “black swan” event, and we’re not near “peak lithium,” although we could see supply shortages on the horizon. Tesla’s gigafactory not only caught everyone’s attention, but also caught on so well that there are already five to six announced or in-construction gigafactories (Tesla’s is the largest).

Lithium demand “is spiking” for several reasons, again heavily influenced by the $5-billion Tesla facility. Interestingly, the original concept was that the Tesla facility would be completed by 2020. Now conventional wisdom says 2017 to 2018, another bullish data point. Tesla’s fully electric car was way too awesome for its own good. It guaranteed that new competition would enter the space, and it has. Here’s an abbreviated list of 15 automakers in the plugin-EV (hybrid) or fully EV market: BMW, Mitsubishi, Toyota, Nissan, Honda, Tesla, GM, Ford, Kia, Fiat, Mercedes, Porsche, Volkswagen, Audi and Hyundai. This list probably doesn’t even contain all of the well-known brands. Many of these automakers had no offerings of plugin-EV (hybrid) or fully EVs until after Tesla’s. Here’s another fact, not my opinion: there are dozens of less-well-known brands diving into the race. China and Europe have plenty of them. China is trying mightily to cut down on air pollution and European cities are small enough to be quite amenable to EVs. Check out this article if you don’t believe me! And just wait until ALL hybrids become full EVs. A certainty in my mind.

So many uses, hard to follow demand, harder to forecast 

So far I’ve mentioned Tesla’s new paradigm introduction of a “real” EV and the fact that it is attracting MANY competitors. I’ve also pointed to the multiple gigafactories spurred on by Tesla’s. But wait, there’s more. About a week ago, Tesla announced a much-ballyhooed home lithium battery storage system that can run one’s home for up to eight hours. This product is thought to be especially attractive to homes with solar panels. This is yet another shot across the bow warning of another leg up in lithium demand. I guarantee that Elon Musk’s home storage units will attract a lot of competition (some superseded Tesla), and perhaps the need for more battery gigafactories? Tipping point or not, lithium demand is moving substantially higher by the day. By the time analysts come around to forecasting a 12- to 15-percent CAGR from 2015 to 2020, the growth rate could be more like 25 to 35 percent. I have no scientific backing for my projection of 25 to 35 percent, I’m just saying that extrapolating 2012 to 2015 growth factors forward will not work. Don’t make me mention the 200 million electric bikes in China alone, because I will if I have to. Another factoid mentioned far less often is the widespread adoption of hybrid buses, taxis and forklifts (and similar equipment in warehouses around the globe). Is anyone contemplating the replacement lithium batteries that will be required by many electronic devices, power tools and more?

Above, I mentioned Western Lithium, which has a well-deserved market cap of $105 million. Lithium Americas (TSX:LAC) has a $70-million market cap. Before moving down the list, please also consider ASX-listed Orocobre (ASX:ORE), which has a market cap of $425 million and is a pure-play, producing lithium company. Of course, Orcobre is several years ahead of small-cap companies like Dajin Resources (TSXV:DJI) (which trades a combined 365,000 shares per day) and Pure Energy Minerals (TSXV:PE). However, we’ve seen this movie before. When a commodity is in high demand, this is what happens. Small companies acquire or get options on prospective deposits, they stake new ground and they explore and develop as available capital prudently allows.

Time is money. Do new entrants really want to start a greenfields project? Or might they prefer to save two, three, four years’ worth of money and leg work provided by a well-run junior? I believe that in a strong market — or dare I say a bull market — in lithium, companies with the lowest market caps, solid management teams and highly prospective deposits will be sought after. I submit that lithium companies with market caps of $5 to $15 million today have stocks more likely to double, triple, quadruple, quintuple, sextuple, septuple or octuple than some of the abovementioned plays. Sorry, I had to use the word “septuple” at least once in my life.

For example, for Dajin Resources, a return of 10 times on its market cap would still place it at a discounted valuation to Western Lithium. Don’t get me wrong, Dajin has considerably more risk, but also considerably more upside, at least if one shares my bullish view on lithium. Even though Dajin and Pure Energy are behind their peers in reaching initial production, they are actually well ahead of new entrants in terms of permitting, environmental studies, seismic, drilling, community relations, access to infrastructure and mining officials.

Conclusion

I really wonder if pundits looking at lithium demand are capturing all of these booming markets, or if it’s even possible. Make no mistake, many experts are no doubt better equipped than me. However, even if 2015 to 2016 runs at less aggressive annual growth rates, 2017 to 2020 could still be blockbuster years. A key to the tipping point debate is not necessarily when lithium reaches a certain penetration, but when it becomes the go-to standard, which appears to be happening. Betamax or VHS? Streaming videos or videos from the local video store? Penetration will follow. My final point, I swear, consider this — my 79-year-old mother has been asking me, “what’s so good about lithium-ion batteries? Why am I reading so much about lithium in The New York Times?” My answer? “I don’t know, mom. Who said you could come down into my basement room? Go cook my dinner…”

Applicable disclosure: All of the companies named in this article with the exception of Dajin Resources are not prior or existing sponsors of EpsteinRearch.com. I, Peter Epstein, do not own any shares of any company named herein. As of May 1, 2015, Dajin Resources is a paid sponsor of of my website, EpsteinResearch.com. The engagement is on a month-by-month basis. Any shares of any company mentioned herein would be acquired through open-market transactions. Please note, several of the companies, including Dajin Resources, are speculative in nature and have low trading volumes. Small-cap stocks typically exhibit high volatility. As such, the stocks mentioned below should not be bought or sold without proper due diligence, including consulting with one’s own investment advisor.