Lithium hits record in EV boom, spurring a 'land grab' among miners. These stocks could be winners

Published Sun, Jan 23 20227:01 AM EST

As auto companies race to develop electric vehicles, an opportunity for investors to cash in is emerging: the miners extracting the raw materials needed to fuel these cars and trucks. "I just don't see that there's going to be enough supply of raw materials … and I think it's going to be a massive bottleneck," said Vance Brown, portfolio manager at Williams Jones Wealth Management. "Lithium is a vital, essential element… I would even go so far as to say it's a new industrial revolution." Different combinations of minerals including lithium, nickel, graphite and cobalt are used to make electric vehicle batteries, but lithium is the constant across battery chemistries. Prices for the metal, which is known as "white gold," shot up nearly 300% last year to record highs as demand exceeded supply, according to data from Benchmark Mineral Intelligence. Experts say prices are likely to keep on climbing as supply struggles to keep pace with demand. At present companies across the battery supply chain, as well as automakers themselves, are scrambling to secure lithium. As Brown tells it, a land grab is underway. Why is lithium surging? Lithium's price surge doesn't stem from a lack of supply. Rather, extracting and refining the metal is challenging and expensive. Mines require upfront capital to get off the ground, and projects need to be economical at a wide range of prices. Infrastructure needs to be in place to transport the lithium for refining. Projects also face political headwinds, especially as minerals become increasingly important from a national security standpoint. There are also environmental, social and governance concerns. For one, mining requires a lot of water and can be damaging to local ecosystems. Unlike commodities such as oil and gold, lithium doesn't trade on an open market: Deals are typically private negotiations between the buyer and seller. There are also different grades. The purest form is used for batteries, while others can be used for industrial purposes. Prices shot up between 2017 and 2018, before collapsing shortly thereafter as the market became oversupplied and EV demand didn't accelerate at forecasted rates. The market balanced itself in the next few years, eating away at the surplus as producers scaled back and canceled expansions. But now, the market has swung to a deficit as demand outstrips supply. Deutsche Bank predicts supply will triple by 2030 to 1.47 metric tons lithium-carbonate equivalent, but demand will quintuple, reaching 2.4mt LCE by the end of the decade. Benchmark's global-weighted lithium price rose nearly 300% during 2021, with a more extreme move in China, where the majority of transactions take place on the spot market. There, prices for battery-grade lithium carbonate rose 485% with some transactions topping $40,000 per metric ton, according to Benchmark. China's market is critical because, while the majority of lithium is mined in South America and Australia, more than 80% of battery-grade lithium is processed in China. "We say it's like the early warning system for the rest of the world," said Caspar Rawles, chief data officer at Benchmark. "What happens in China, you typically see global pricing follow that, but with a delay." In prior years, parties didn't necessarily bother to lock in prices: If a manufacturer wanted lithium, it was there to buy. No longer. "We've been saying for a long time 'Yes, the price is low now, but there's no way the supply at the moment and the expansions that are in the pipeline are going to match what's going to happen when demand kicks off,'" said Rawles. Much of the price jump is due to the surge in demand from manufacturers of electric vehicles. Until recently, there were only a few players in the industry, companies like Tesla and Nissan. But now traditional automakers such as General Motors and Ford are getting into the space, while upstarts like Rivian , Lucid and Fisker are vying for market share. Deutsche Bank estimates that lithium demand from e-transportation will grow from around 45% of the market today to nearly 90% by 2030. The 'great raw material disconnect' It's not easy for suppliers to catch up with the new mineral demands: A mine takes around seven years to come online, and mining companies face headwinds along the way, including securing the necessary permits. On Friday, Serbia pulled support for Rio Tinto's $2.4 billion lithium mine after local protests, according to Reuters . "There's nothing in the immediate term that's going to alleviate the tightness, and the deficits that we're seeing growing in the lithium market because of the timeframe to build it out," said Rawles. Nevertheless, automakers are building battery factories, which Benchmark calls the "great raw material disconnect." It might take several years to build a battery factory, but it will take many more years to mine the raw materials that will make those batteries. "[S]upply is falling behind and we see growing risks of further project delays to a market already in a growing deficit," UBS wrote in a Dec. 16 note to clients. It's not just lithium. Other essential raw materials, including nickel, cobalt, and graphite, face their own production challenges. "It's natural that much of the focus on the emerging EV boom is on the downstream segment, with well-known auto manufacturers receiving outsized attention for unveiling sleek new car models," said Pedro Palandrani, research analyst at Global X ETFs. "But we believe that the growth trajectory for EVs will ultimately be determined not by downstream [original equipment manufacturers], but by the upstream lithium miners and battery producers who extract the raw materials and manufacture the batteries for EVs." The lithium price spike isn't lost on industry players. Producers are scrambling to get supply online, while battery and auto companies race to lock in contracts in an effort to shield themselves from these price swings. Where's the opportunity for investors? Deutsche Bank recently said that lithium miners Albemarle and SQM are among its top picks for 2022, with each well positioned to "benefit from market fundamentals." The firm said that both companies can take advantage of renegotiated contracts in this higher-price environment. Evercore ISI said in November that "the lithium decade is upon us." "The equity market has embraced the broader thematic and is attempting to adequately capitalize the winners in what will be a rush across the battery materials supply chain to deliver on Auto OEM (not to mention energy storage) aspirational targets for 2025/30," the firm said. Evercore favors Albemarle and Livent Corporation . Both stocks hit record highs in November, but are down about 27% and 33%, respectively, since. Goldman, on the other hand, cut both stocks to a sell rating in December, saying that while demand momentum for lithium is "unarguably robust," the stocks' current valuations don't reflect the uptick in supply that the firm predicts will come online. President Joe Biden has noted the importance of building out a battery supply chain in the U.S., and Lithium Americas is one of the companies working on domestic production alongside international efforts. "LAC holds the keys to a multitude of game-changing catalysts to help unlock value," Piper Sandler said in a Jan. 11 note to clients while upgrading the stock to an overweight rating. The company has secured provisional permits for its Thacker Pass site in Nevada, following lawsuits and opposition from environmentalists and Native American tribes in the area. Lithium Americas now has a market cap of more than $3 billion, despite the fact that it hasn't yet mined any lithium. Shares climbed to an all-time high in November, but they are down about 14% in 2022. The pullback prompted Cowen to upgrade the stock to a buy rating. "[W]e anticipate a wave of positive catalysts in 1Q… we see LAC perfectly positioned to benefit from robust near-term pricing," the firm wrote in a Jan. 12 note to clients. While Williams Jones' Brown owns major players like Albemarle, he thinks the possibility of outsized returns is greater in smaller companies. This comes with more volatility, but Brown believes his fundamental analysis and mining sector expertise equip him to find the winners. All told, he said there are roughly 200 companies focused on EV metals with a market cap between $50 million and $750 million, the majority of which he predicts will never reach actual production. One company he thinks will be successful is Piedmont Lithium . In September 2020, the company signed a sales agreement to supply lithium for Tesla, sending shares surging 236% in a single session. The project has since faced permitting issues, but Brown said that doesn't derail his bull thesis since delays are common in the industry. He envisions the stock more than doubling over the next 12 to 18 months and hitting $125. Brown focuses on investment opportunities across the battery industry at Williams Jones, which has about $12 billion in assets under management. His largest position is nickel company Talon Metals . On Jan. 10, the company said it entered into an agreement with Tesla to supply the electric vehicle giant with nickel from Talon's Tamarack Project in central Minnesota. A joint venture between Talon and Rio Tinto, it hasn't yet reached commercial production. For investors who might be wary of choosing individual names, there are several funds that track the space, including the Global X Lithium & Battery Tech ETF and the Amplify Lithium & Battery Technology . The funds' holdings differ, but both offer broader exposure to the battery industry, rather than focusing purely on upstream miners. - CNBC's Michael Bloom contributed reporting.

An aerial view shows the brine pools of SQM lithium mine on the Atacama salt flat in the Atacama Desert of northern Chile on Jan. 10, 2013.

Ivan Alvarado | Reuters

As auto companies race to develop electric vehicles, an opportunity for investors to cash in is emerging: the miners extracting the raw materials needed to fuel these cars and trucks.

"I just don't see that there's going to be enough supply of raw materials … and I think it's going to be a massive bottleneck," said Vance Brown, portfolio manager at Williams Jones Wealth Management. "Lithium is a vital, essential element… I would even go so far as to say it's a new industrial revolution."

Different combinations of minerals including lithium, nickel, graphite and cobalt are used to make electric vehicle batteries, but lithium is the constant across battery chemistries.