How I’m Playing The Lithium Boom
Let me ask you a question. Do you like heavy, clunky cell phones whose batteries lose their charge quickly? Of course not. Nobody does. And that’s why manufacturers are constantly seeking battery designs that are more compact and powerful.
In the old days, the best we could do was nickel-cadmium chemistries. You can still find them in ancient cordless phones built in the early 1990s. But then lithium-ion made its breakthrough, and the world has never looked back.
Lithium has more uses than duct tape. You’ll find it in fireworks, airplanes, glass cookware, and medicine cabinets. It’s even a key raw material for rocket fuel propellant and nuclear reactor coolant.
But that’s not why I like it. These are just niche applications.
The true utility comes from the fact that lithium is endowed with some curious properties. It is the lightest of all metals (it can actually float on water) and has twice the energy storage density of previous materials. That’s an ideal combination, which is why lithium is coveted by battery makers.
Last quarter alone, approximately 307 million smartphones were produced worldwide (about 140,000 per hour), most of which were outfitted with lithium batteries. And it’s not just phones. Lithium compounds are found in power tools, tablets, golf carts, portable video games… anything that needs to be periodically recharged.
Global annual production of handheld lithium batteries surpassed 5 billion units a few years ago and is showing no signs of stopping. If that were the end of the story, this would already be a compelling investment thesis given consumers’ endless fascination with electronic devices.
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But I believe we are on the threshold of something much bigger.
Consider the following: the average cell phone contains just one-tenth of an ounce of lithium; the average laptop computer about one ounce. By contrast, a plug-in hybrid vehicle needs 20 pounds of lithium materials. That’s 320 times more than a laptop and 3,200 times more than a phone.
So a single electric vehicle battery needs more lithium than a few thousand phone batteries combined. And if you haven’t been paying attention, electric vehicles are no longer a futuristic novelty — but are rapidly becoming mainstream.
Generous government grants and loans have helped get automakers on board, just as federal tax credits (up to $7,500 per vehicle) have given consumers financial incentive to trade in their gas-guzzling SUVs for a new Chevy Volt or Nissan Leaf. This cash has quickened the pace of adoption, pushing lithium-laden electric vehicles from the research-and-development stage to the showroom floor.
Global automakers introduced 42 new hybrid and electric models in 2012. But the real revolution is just now beginning. Outside Reno Nevada, Tesla (Nasdaq: TSLA) is building a cavernous 10 million-square foot factory that is roughly the floor space of 262 football fields. It’s only halfway completed, but will soon be one of the biggest buildings in the world. And it was constructed for a single purpose: to make lithium batteries on an unprecedented scale.
This $5 billion factory will be producing 35 gigawatt hours of battery storage capacity next year — effectively doubling the size of the global lithium battery market. For context, New York City uses about 52 gigawatt hours annually.
Natural economies of scale in this plant will help lower battery costs by up to 30%, in turn making electric vehicles more affordable than they have ever been. Tesla’s Model 3 sedan retails for around $35,000, and the company aims to sell 500,000 units annually by 2018.
After doubling second-quarter revenues to $2.8 billion, CEO Elon Musk confirmed that production rates are headed to 10,000 vehicles per week. And investors seem to be behind that lofty outlook 100%, judging by the stock’s meteoric rise to $350 per share.
And Tesla certainly isn’t the only competitor in this space. Daimler is building a massive lithium battery assembly facility in Germany. There are others under construction in Sweden, Hungary and Poland. And don’t forget about Chinese automaker BYD, backed by none other than Warren Buffett’s Berkshire Hathaway.
#-ad_banner-#And again, this still isn’t the end of the story.
There’s been a tremendous surge of wind and solar power installations worldwide in recent years. But these are intermittent sources — they can’t generate when night falls or when the wind dies down. There’s an acute need to store electricity until it needs to be distributed to homes and businesses.
Where better to store that power than a bank of lithium-ion batteries? With the United States and China pouring money into municipal smart grid development (as well as local home and office battery energy storage systems), this is yet another huge growth driver.
Portable devices. Electronic Vehicles. Solar power storage. These are three massive (and expanding) applications that are fueling demand for the world’s lithium reserves.
Fortunately, there are a handful of companies that are ready to meet that demand. And I’ve been closely watching this space in my premium resource newsletter, Scarcity & Real Wealth.
87% of the world’s supply is found in brine deposits, most notably the Atacama Desert (which holds 7 million tons of high-grade lithium reserves). Those deposits are found in briny water that is pumped to the surface to fill large ponds. From there, it’s just a matter of waiting for the water to evaporate. After a year, the brine takes on the appearance of olive oil, and the concentrated solution is sent by tanker trucks to a nearby purification and processing facility.
The result is battery-grade granulated lithium carbonate.
It’s a simple process — the sun does most of the work. So some efficient suppliers can produce lithium carbonate for just $1 per pound — and then sell it for 3 to 5 times more, depending on grade.
I’ve been an outspoken lithium bull for many years. In fact, when I first launched Scarcity & Real Wealth back in 2011, one of my earliest portfolio additions was Rockwood Holdings, a top-tier producer. I recommended the stock at $42, and it was later acquired by a larger fish a few years later at $85 — doubling readers’ money.
It’s funny how things work out, because that larger fish is about to become my next portfolio member in Scarcity & Real Wealth. If you’d like to learn more about my pick in this space, then consider giving my newsletter a try. You can learn more about it here.