Another teaser pitch from Nick Hodge to look into, this time a spiel about the “King of Lithium” and the big gains ahead as electric vehicle batteries hoover up more and more of the world’s lithium supply.

It’s an ad for his Foundational Profits newsletter ($199), and the bait he dangles is a special report called “Lithium Boom Profits: Why Tesla, Ford, and GM Want a Piece of This $2 Mining Stock” … so what, one wonders, is that $2 stock?

That’s what we’ll try to discover today.

The big-picture pitch is essentially the same one we’ve heard for lithium for over a decade — electric vehicles need tons of lithium for their lithium-ion batteries, and that spike in battery demand will be dramatic as more and more EVs are sold. There was a previous push for lithium a dozen or so years ago, when expectations of EV sales were far more dramatic… but now the sales of electric cars are finally really becoming meaningful, thanks largely to big growth in EV sales in China (and by Tesla) over the past couple years, and the long-projected growth in lithium demand has finally started to be a reality. EV sales are still a drop in the bucket, globally, compared to gasoline-powered vehicles… but now all the automakers seem to be “all in” on electric, most of them have made commitments to transition to a fully electrified fleet over the next ten or twenty years, and we’re gonna need a LOT of batteries.

They might not all be lithium ion batteries, of course, there are new battery chemistries being tested all the time, and there’s quite a bit of hope for solid state batteries that could be safer and more efficient (though many of those use lithium, too, just in a different form), so it seems pretty safe to say that lithium demand is going to keep rising. Production is rising too, of course, that’s the way mining works — high prices drive new projects — but the future looks pretty rosy for the lightest metal.

And while US production of lithium has been extremely limited, with a few projects over the years that haven’t really been able to compete with the large hard rock mining projets in Australia or the massive lithium brine production projects in the Andes, it’s probably also true that a focus on supply chain security, combined with higher prices, could give US production a boost. Or at least North American production.

Much is made of Elon Musk’s claims that Tesla will need the world’s entire lithium production to meet his production targets by 2030 (20 million cars a year), and he has also made various other comments and Tweets about how Tesla is frustrated by high lithium prices, so might just start buying lithium mines itself… so part of the pitch here is that a viable North American lithium project might become a takeover target, whether it’s Tesla (TSLA), or the other US carmakers, or even the global lithium giants like Albemarle (ALB), Hodge sees the big players wanting to get bitter.

Hodge even manages to throw in a Warren Buffett reference, implying that Berkshire’s long-ago purchase of a big chunk of Chinese EV leader BYD means that Buffett is “building a massive supply chain” for EVs because BYD bought a lithium miner last year… which is a bit of a stretch. The ad hints that, “Buffett is raising capital for another round of expansion… Over the past few months he’s raised almost $1.8 billion to ramp up production even further.”

But that’s really just connecting this too closely to Warren Buffett, trying to leach off of that name recognition. Yes, BYD is a huge EV maker, they did buy that lithium miner last March, and Berkshire’s investment 15 years ago was a major success (Charlie Munger’s idea, not Warren Buffett’s, in case you’re keeping score — and yes, that was before BYD built its first EV), but Berkshire has never invested any further capital in BYD or “raised capital” for them, or exerted any control over the company, and in fact they’ve been reducing their stake recently, taking some of their windfall profits. Not to be a stickler, but when famous name are attached to an investment idea to try to get attention, we want to know what the truth is — lots of novice investors would see that ad and say, “Warren Buffett’s buying lithium?! I should too!”

So that’s the backdrop… what other clues do we get about Hodge’s favorite “$2 to $10” lithium stock?

Here’s his take on “alternative” batteries, which probably makes sense:

“Why It Has to Be Lithium — And Why it Has to Be NOW…

“There is no new battery savior.

“You may occasionally see splashy headlines that tease a “new” battery metal that’ll make lithium obsolete.

“Don’t believe it.

“While innovation will certainly continue — as it always does — there is nothing, and I mean nothing that will take lithium’s place for the next decade…

“Possibly longer.

“It’s taken since 2010 to build the supply chain we already have… more than 12 years!

“And it’s taken billions of dollars, millions of man-hours, and thousands of mining permits to do it.

“For an industry that’s now manufacturing six million cars a year (and is hoping to scale to 5 times that by 2025) there’s simply no changing course now.”

New battery technology certainly takes a long time — we’ve seen that from the wild overpromising of the “next generation battery” stocks, most of which are still being secretive about their designs and none of which is really selling any batteries just yet.

So what other specifics do we get about this North American lithium miner? Can we narrow it down to a name?

“All of North America is making a major comeback, and this $2 firm is already ahead of the game with drills turning on some of the richest lithium ground we’ve ever seen….

“This firm has a full-fledged, federally-approved project that’s ready to be built.”

He shows a few photos of himself visiting lithium projects in Nevada, photos I think I’ve seen before from past promos that pointed at explorers out in Clay County and elsewhere… but he doesn’t actually say that those are photos of the project he’s interested in now, it’s really just a chance to show him looking rugged next to a drilling rig.

Other clues…

“They’re the best-positioned in all of North America to take advantage of these benefits — and at least 1.5 years ahead of the nearest competitor….

“This company has one of the largest lithium land packages in North America
8 projects in development with confirmed reserves from recent feasibility studies, including a construction-ready project with more than $1.9 billion of lithium hiding just below the ground

“And most important of all, news that’s hot off the presses: confirmed testing results for battery-grade lithium from an independent lab — assuring their place as the most viable producer in all of North America”

And he hints at the big player behind this company:

“This Stock is Backed by the “Kingmaker” of Lithium — Who’s Already Made Me 582%!

“The biggest backer of this $2 firm is the president of the company.

“He’s a giant in the junior mining world, and every project he’s taken on has succeeded….

“He was the CEO of a small lithium mining company during the crucial years leading up to the first lithium boom….

“He eventually helped investors sell the company to Albemarle, one of the largest mining companies in the world.

“The price tag? $6.2 billion!”

So… hoodat? That “Kingmaker” must be Dr. Steffen Haber, who was the CEO at Chemetall and Rockwood Lithium until Rockwood was acquired by Albemarle for $6.2 billion in 2015… he is now the President (since 2017) of Critical Elements (CRE.V), which has a package of exploration projects around Quebec but is primarily focused on developing the Rose Lithium-Tantalum project, a proposed mine up in Northern Quebec, not far from Nemaska Lithium’s deposit and several producing mines, including the famous Eleonore gold mine.

So I guess we know why Hodge included so many references to “North America” instead of specifically to the United States… this is a Canadian company, with all of their properties North of the Border. Still, everyone’s certainly a lot more interested in building North American supply chains and mining in Canada or Mexico than they are about relying on China or the Democratic Republic of Congo for minerals.

Critical Elements outlines the basic mining plan and the highlights of last summer’s feasibility study here (a bit more detail in the presentation here), and they say they have the key provincial and federal approvals for the first phase of the project… what they need, it appears, is the construction capital and the final green light. They could theoretically be producing spodumene and selling it to processing companies who can convert it into lithium hydroxide within a few years.

Will they get that financing? I don’t see why not — the financials look good, it’s got a very short payback period (1.4 years to earn back the capital investment), and a long project life (17 years), with extremely high returns (82% internal rate of return), so the fact that interest rates are probably going to be higher than they expected shouldn’t be a deal-breaker, nor would a relatively minor drop in lithium prices, should that happen… particularly because it’s not a hugely expensive project (they say they need $357 for initial capex, which is the funding they’re presumably looking for today). There could be other problems that I don’t know about, but they say they have good relations with the First Nations in the area, they’re close enough to cheap electricity and mining infrastructure (including roads) to make the project easily feasible, and lithium and tantalum are in high demand. Makes sense to me.

Right now, they say they’re planning to start construction this year, and are currently evaluating potential partners who might participate in the financing, and it’s a shallow open-pit mine so they could be making their final investment decision and beginning production of the first spodumene as early as sometime in 2024. It’s possible, if things continue to go well, that they could also begin construction of a lithium hydroxide plant in a year or two, allowing them to move up the food chain a little and capture higher prices for that battery grade material, but they’re not yet committed to that — right now, they’re focusing on getting the initial spodumene mine financed and built.

I’m no mining expert, I must admit, but the numbers are pretty spectacular — with a 8% discount rate, which is probably too low given the risks and given current inflation, they say the project should be worth $1.9 billion after tax. The stock is currently valued at about $380 million, so that gives a bit of wiggle room — mining development is always risky, but this is a pretty advanced project, close to getting the green light, and that’s a very high rate of return for something that could be just a year or two from becoming “real”. We’re in a period of time when people are a little nervous about speculation… but as speculations go, this doesn’t look like a particularly crazy one.

I’ll turn it over to you, dear friends — think that mining lithium in Quebec will be worth your time and money? Know about some skeletons at Critical Elements that should scare us off, or other lithium plays that look more appealing? Let us know with a comment below. Thanks for reading!

P.S. A few folks recently asked about an older tease from Gerardo Real and Nick Hodge about uranium, so I updated our take on that story as well — you can find that piece on the “Next Paladin Energy” here.

Disclosure: of the companies mentioned above, I own shares of Berkshire Hathaway. I will not trade in any covered stocks for at least three days after publication, per Stock Gumshoe’s trading rules.