As the world scrambles to replace fossil fuels with clean energy, Lithium-ion batteries have had and are fast becoming the major source of energy storage in off-grid renewable energy. The answer lies within the reactive alkali metal’s ability to power our phones, tablets, laptops, electric cars and houses.
Unlike burning fossil fuels for energy, the carbon used in Lithium-ion batteries does not burn or cause emissions in the process. The carbon electrode serves as a rechargeable hydrocarbon for storing energy. The battery can be charged and discharged making it an ideal component of today’s modern day electric vehicle. In fact, Lithium ion batteries have the highest charge capacity of any practical battery formulation in history. The ability to store energy is what has created this enormous opportunity. The current electricity grid distributes electricity mainly from fossil fuels to households throughout the country very effectively, blackouts are rare. Given there is no ability to store any of this electricity it is an engineering masterpiece.
Think about how energy is generated at multiple isolated power plants, then travels through tens of thousands of kilometers of power lines, to come out exactly when you need it, and then consumed. The planning and adjusting required to produce just enough energy to meet low demand, and then keep up with peak hour demand is a very hard process.
However, if energy could be stored locally (and produced locally, but this is a different conversation) this, removes the constant demand and careful planning and allows for a much more efficient use of energy.
Incremental improvements in Lithium-ion batteries have now allowed automakers to actively use lithium ion batteries to power an electric revolution. So much so, that electric vehicle supply in China is expected to be one of the main drivers of global demand for lithium. By 2030, Goldman Sachs expects China to supply 60% of the world’s electric vehicles, up from 45% in 2016.
Tesla cars in fact are powered solely by the electrical charge stored in Lithium batteries. The Tesla Model S contains about 12 kilograms of lithium in each vehicle. Batteries installed in electric vehicles, will also affect the electric grid reducing the stress. The largest battery created by Tesla is the Powerwall. It can store enough electricity to power the average American home for more than three days.
So as you can see, the opportunities in Lithium storage are endless with consensus estimates for global electric vehicle penetration, seem way too conservative.
Wall Street analysts are tipping a 4% penetration in 2020 and 15% in 2025 while key battery component makers such as LG and Samsung SDI, are predicting a considerably higher 6-10% penetration by 2020. Irrespective of the numbers and estimates, they all point to one thing; higher penetration of electric vehicle demand in the near future. This insight draws an important conclusion – demand for the raw materials required to produce Li-ion batteries are on the rise, namely lithium, cobalt, nickel and graphite. It puts the mining industry at the heart of this Electric Vehicle Growth story. As we know, Lithium isn’t the only material required. Here’s four cathode chemistries and an example of what they are used for:
But for this purpose of this article we will focus solely on lithium.
Lithium can be extracted from brine salt mines or mined from hard rock deposits. Brine is dominated by South American countries and the Australian producers mine hard rock deposits. The countries in the “Lithium Triangle” host a staggering 75% of the world’s lithium resources, they are:
Argentina, Chile, and Bolivia.
Market-friendly Chile, is the easiest of the three to do business in. Argentina is making up lost ground but is relatively a volatile place both politically and economically. And Bolivia, whose resources are as large as Argentina’s, has barely exploited its Lithium reserves. There is another formidable challenger that handles business investment with open arms and that is Australia. Costs are generally higher because lithium must be expensively crushed out of rock and shipped to China for processing, but conditions are a lot friendlier. For that reason, the amount of Lithium exported from Australia rivals that of Chile. In 2016, Australia exported 74,250 tonnes versus 76,000 exported in Chile.
How to invest in lithium?
So when looking for ways to gain Lithium exposure there are two main ASX listed stocks Orocobre (ORE) and Galaxy Resources (GXY). For this article we have chosen Orocobre (ORE), as it operates within the Lithium Triangle and is extracting Lithium from Brine salt mines.
Orocobre (ORE) – Is a lithium miner in Argentina listed on the ASX. The company’s flagship mine is its Olaroz Lithium Facility and Borax Argentina SA. Its primary focus is on the exploration and development of lithium, potash and salar mineral deposits. The miner was an early mover in this space, indeed the Olaroz development was the first new brine-based lithium asset to be built in over 20 years when it was commissioned in 2015. It was perfectly timed with the rapid rise in demand for electric vehicles.
The company recorded strong annual sales revenue of US$152m on total sales of 12,080 tonnes of Lithium. The recent June Quarter production was up 28% to 3,596 tonnes, all this revenue is now turning into cash with the company holding more than US$319m in cash. Its Phase 2 expansion project of Olaroz is fully funded. The miner has had positive talks with Toyota Tsusho Corporation with well advanced plans for a proposed 10,000 ton per annum Naraha Lithium Hydroxide plant to be built in Japan.
Toyota is targeting every model in the Toyota and Lexus product range to have available as a dedicated electrified model by 2025. We see the Toyota agreement with Orocobre that is providing long term, stable supply of lithium in response to growing global demand, as having enormous upside potential. Lithium demand is expected to continue growing with the shift from fossil-fuel powered vehicles to electric vehicles (EV), in addition to the steady growth of lithium-ion batteries for electric devices. Demand growth to date has seen the lithium price more than doubled in the past few years.
ORE shares have however come under pressure of late, one catalyst for the fall could be concerns that an increase in production in Argentina and Australia will lead to an oversupply in Lithium. We think these concerns are too short sighted. Orocobre and other miners are confident that prices will remain favourable for the foreseeable future. In fact there is growing concern about whether there will be enough lithium to keep up with rising demand driven by the rapid growth of the electric vehicle market. Car companies such as Tesla have voiced concerns that Lithium will fall into a supply shortfall over the comping years.
Either way, the message is clear, the world needs more lithium than is currently in supply and this trend isn’t changing anytime soon. On the contrary, electric car production is expected to increase more than thirtyfold by 2030. That means more batteries and more lithium, unless they find something else. Like any of these substantial changes or disruptions, there is a million ways to try to make money from the change, Lithium is an interesting way to bet on a future of electric cars and battery power, our then speculative pick would be Orocobre (ORE).