Does EV demand make lithium less speculative?

Lithium is a key ingredient for the lithium-ion batteries of EVs.

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As primarily a tech investor I typically dismiss small and mid-cap mining stocks as high-risk and high volatility.  So, I surprised even myself this week by starting to look more closely at Bacanora Lithium (LSE: BCN) and Savannah Resources (LSE: SAV).  My interest has been piqued by the simple question of whether the prospects of these UK-listed lithium producers has been elevated out from the realms of speculation and into sound long-term investment territory, thanks to rapidly rising demand for electric vehicles (EVs) in a world of limited lithium supply?

Lithium is a key ingredient for the lithium-ion batteries of EVs.  In 2010 there were only 17.000 EVs on the world’s roads.  By 2020 the number had climbed to more than 10 million.  And whilst overall EV penetration remains low, accounting for just 4% of light vehicle sales last year, Bloomberg predicts that by 2037 EVs will account for more than 50% of new vehicles sold globally.  In Q2 of 2021, Tesla alone delivered a record 201,250 EVs globally.

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Lithium has a range of pricing markets, but generally the price of battery grade lithium has more than doubled since December 2020 as EV demand has pushed supply-demand into deficit.  Lithium price rises show no sign of abating.  China has invested $60 billion to support plans to transition completely to EVs by 2035, and already buys up the vast majority of lithium produced by the world’s largest producers, Australia and Chile.

I predict that carmakers will soon be chasing lithium supply and that ‘home grown’ battery-manufacturing capacity will become a hot-button issue for European Governments.  I also predict that European OEMs will increasingly seek to reduce their supply chain emissions by sourcing their lithium locally. 

2020 already saw Norway become the first country in the world where more EVs were sold than fossil fuel cars.  In the United Kingdom, 31,800 battery electric cars were sold in in the first three months of 2021 alone, accounting for 7.5% of UK car sales.  During that same quarter 30,500 EVs were sold in France and another 64,700 were sold in Germany. 

Bacanora looks likely to be the first UK-listed lithium miner to reach production and has already begun to build mining facilities at the Sonora clay lithium deposit in Mexico.  Bacanora plans to derive a battery grade lithium product from its own processing facilities that it will then sell directly to battery manufacturers rather than through exchanges. 

The majority of Bacanora’s supply is already committed to Chinese company Ganfeng, which owns 29% of the equity in Bacanora.  Whilst this undermines my ‘local demand for local supply’ thesis, the combined fact of Ganfeng’s stake and pre-committed supply for me mitigates risk for what could otherwise be regarded as a high-risk early-stage miner.  Bacanora has a market cap of £222m at the time of writing, and its shares are up 152% over the last year.

More aligned with my ‘local lithium supply for Europe’ thesis is AIM-listed Savannah Resources.  The company is working on a lithium mine in Portugal to supply European EV battery OEMs, but is still a long way off production.  Savannah has a market cap of just £62m currently, which makes it a minnow in the mining sector.  Its price is up by 73% over the last year but at 3.64p is currently far short of its 52-week high of 5.97p. 

For a five-year buy-and-hold investment in Savannah, I expect that a rather pleasant return would be waiting by 2026 and that a ten times return may even be possible.  Whilst that may seem outlandish, my prediction is that lithium prices will quickly enter into a self-perpetuating bubble as demand surges far more quickly than mining capacity grows.  I also predict that this will stimulate large-cap miners to buy out smaller producers at high prices.

Let’s be clear that these are currently pre-revenue companies with no dividend yield whatsoever any time soon.  Their price could fluctuate vastly as investors get to grips with the dynamics of local pockets of supply and demand for lithium.  Investors could also get diluted if these companies need more capital to reach production.  All of that is risk.

But in my view the strong correlation between lithium and EV demand make these lithium miners less speculative than other small and medium-cap miners whose product is slave to fluctuating market prices at the time they come on stream.

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