We’ve got a good backlog of teaser pitches to get to, as usual, but this one filtered to the top for our attention today — it’s an ad from David Fessler for his Oxford Resource Explorer newsletter (currently $79), and the ad seems mostly to have gotten folks’ attention because of a link from one of Fessler’s free articles last week about the rise of electric vehicles.
Which means, you’ll be unsurprised to hear, that it’s about lithium — there are other critical resources that go into making electric cars, from copper to cobalt to graphite to aluminum, etc., but the biggie that always comes up is lithium because of the outsize impact that electric vehicles can have on the lithium market.
Lithium has been in use for a long time, of course, and holds price of place as the lightest metal on the periodic table (the lightest solid, really), and it’s very reactive and has great energy density, which makes it appealing for batteries — which is why lithium ion batteries have taken over in most portable electronics and in most electric vehicles.
That has led to the idea that lithium should become far more expensive, because demand for electric vehicles is ramping up. Consumer electronics are one thing — the lithium producing world has pretty well met the required demand for millions of laptops and billions of cellphones, essentially all of which have lithium ion batteries, but millions of electric vehicles is another thing entirely because of the massively different size of the batteries required.
A Tesla, Goldman Sachs estimates, uses as much lithium carbonate as about 10,000 iPhones…. so if that’s true and 1.5 billion iphones (or similarly sized smartphones) are sold a year, which is roughly true, then adding 150,000 electric vehicles to the annual sales mix would effectively double the demand for lithium carbonate and/or lithium hydroxide for batteries.
Tesla is talking up 500,000 electric vehicles as its goal, and says they’ll be close to a 250,000/year run rate by the end of this year (that’s their 5,000 vehicles/week production goal by the end of 2017)… and, of course, though Tesla is the biggest producer of electric vehicles in the US, it’s far from being the only EV maker — just going by the US market, which is expected to grow much more slowly than China and Europe, there were about 85,000 battery-only electric vehicles sold in the US in 2016 (not including plug-in hybrids), and just over half of them were Teslas.
So yes, the demand for lithium ion batteries is expected to explode. Tesla’s Gigafactory has been the poster child of this as it scales up to make batteries and drivetrains for the new lower-cost Model S, which is supposed to see its first deliveries in a ceremony hosted by Elon Musk on Friday.
If you’d like a great overview of the lithium market, including some analysis of why Chile’s production has not kept up with demand (and a good reminder that lithium production could be increased dramatically), I highly recommend this FT article from about a year ago. Chile has changed a little bit in the past year, but remains the potential “Saudi Arabia of Lithium” even as political disputes and quotas hamper their largest producer, SQM (to the benefit, currently, of Albemarle (ALB), which recently boosted its production quota.
But anyway, that’s just a backgrounder — what is the lithium investment that David Fessler is hinting at? Let’s give you a taste of the ad:
“You see… one company is perfectly set up to become THE preferred provider of this metal to industries around the globe.
“This company is like a sheikh holding the deed to the only well in a desert…
“It’s sitting on a HUGE stockpile…
“Enough to help meet worldwide demand, preventing Tesla and other huge global players from running out – just as they desperately need a jaw-dropping amount of this metal simply to stay afloat.
“Better yet, the metal this one small company produces is far superior to other producers on the market today…
“Not surprisingly, the world’s biggest and smartest investors are getting involved… Royce… BlackRock… Vanguard…”
“Far superior to other producers” sounds a little questionable, frankly. This is a commodity, after all — some varieties of it are a little easier to process, or a little higher value, or purer, but my impression is that the end product, whether lithium carbonate or lithium hydroxide, is pretty standardized.
What else do we learn about this “secret” stock?
“My research shows that if its share price follows a substantial bounce in revenues, this $3 stock MUST trade at least as high as $27… a 900% gain over time… simply to reflect the massive increase in demand.”
That’s making some HUGE assumptions about future lithium prices — no one can increase production 900% quickly, so that means he must be assuming that the lithium price will skyrocket from here. Which would, of course, benefit all lithium producers… but we’ll see if he provides more detail on that 900% promise as we go along.
“… what you likely have not heard is that there’s a radically different type of lithium that’s coming onto the market…
“That’s far more powerful.
“Brilliant engineers have figured out how to take lithium and essentially transform it into its purest form…Are you getting our free Daily Update
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“I call it ‘ultra-lithium.’
“This refined type of nearly 100% pure lithium is what I believe will be the most promising form in the coming years.”
I think he must be talking about Lithium Hydroxide, which is not commonly produced by lithium “miners” (most lithium, though certainly not all, is extracted from brines, not really mined), but which is growing to be preferred for battery production. Lithium Hydroxide is made out of Lithium Carbonate in most cases, as lots of different lithium compounds and levels of purity are demanded by different industries (batteries need the purest stuff, ceramics and glass a little less pure, industrial lubricants much less pure, etc.).
If this company is really able to produce lithium hydroxide more easily than competitors, that would perhaps give them a cost advantage, but not necessarily a scarcity advantage — presumably that scarcity advantage would go to the chemical companies in China who have most of the capacity to produce hydroxide, though I’m not at all an expert on the complexity or economics (or chemistry) of that business. And, of course, if prices are going to go up by 500% or 1,000%, as Fessler seems to think, a relatively minor cost advantage won’t be too meaningful.
I’m getting a bit mired in this one already, though, so let’s move on and get this stock ID’d for you…
“Engineers at this company have perfected a breakthrough new technique for pulling already high-grade lithium out of the salty muck…
“And its patented ‘Olaroz process’ lets it produce an even better form of lithium…
“The super high-purity product that’s light-years ahead of anything else….
“Mining Global raves about ‘the high-purity battery-grade product produced’ at this site.”
OK, so those are some decent clues… what else?
“Production is blasting through the roof… Quarterly output soared from 492 to 3,000 tons last year – for a total of about 10,000 tons….
Yet its initial processing facility has a design capacity of 17,500 tons per year. I expect production to keep growing without a hiccup….
“… there’s plenty more lithium to be had in this one unique spot.
“This project is so big, the company estimates that it could operate for a decade or more, and even then, it will have extracted less than half of the resource!”
OK, so sounds like there’s no shortage of reserves… are they making any money? This is what Fessler says:
“Operating costs recently came in at $3,500 per metric ton. They’re projected to plunge to $2,500 per metric ton in fiscal 2018.
“Meanwhile, it receives north of $9,000 per ton for its lithium product!”
OK, so that means they should be profitable, assuming no other major costs (like debt service or capital investment). But it doesn’t indicate a 900% rise… where does that come from?
“Based on my research, it shows that the price should rise to at least $36 per kilogram.
“That’s four times the current rate, which means this small company would then bring in around $36,000 per ton for the lithium it sells today for $9,000.
“With costs of just $2,500 per ton, that’s a mammoth gain of $33,500 per ton… and a whopping profit margin of 93%!”
Ah, so there you go — yes, he’s assuming a massive ramp-up in lithium prices. He sketches out the detail a bit more here:
“This year, this company will produce about 10,00