Don’t Invest in Lithium Mining Companies

The investing premise is quite simple. Lithium batteries are here to stay with Tesla working alongside Panasonic to build the “Gigafactory” which will be the biggest lithium battery factory in the world. We’ve looked at many promising startups in the lithium battery space that are looking to improve upon existing technology such as Nexeon or Amprius. But with all this growth in lithium batteries, what about investing in lithium itself as a commodity? There is actually an ETF dedicated to investing in lithium called the Global X Lithium ETF (NYSEARCA:LIT). The problem is, the ETF continues to hit all-time lows with the current price of $9.85 just 10 cents off the 52-week low:

LIT_Stock_Chart

As we can see in the above chart, this ETF has performed horribly since it first began trading losing -38% in the past 5 years.  If you would have simply put your money in SPY, a much less riskier ETF that tracks the S&P index, you would have realized an +89% return instead. The opportunity cost of investing in LIT is huge since a 5-year investment of $10,000 would be worth $3800 if invested in LIN or $18,900 if invested in a simple S&P tracker.

Forgetting about LIT for now, the first thing we need to determine is what aspect of lithium we want to invest in. If we expect lithium demand to increase, then we want to invest in the commodity itself. However, unlike many other metals, lithium is not traded on any commodity or futures exchange. As a result, lithium producers set their own prices for the metal which are still subject of course to the laws of supply and demand. So how has the price of lithium performed over time? The below is a chart which shows worldwide production of lithium plotted alongside the price of lithium according to a U.S. Geological Survey:

Lithium_Supply_Cost

We can actually see where lithium demand must have exceeded supply between 2006 and 2008 causing the price to almost double. This increase in price caused the producers to begin producing more and consequently the price stabilized.  According to Roskill, a U.K.-based metals market research company, the current price of lithium is anywhere between $5,000 and $6,000 per metric ton with various grades commanding higher price points. Since we can’t invest in lithium as a commodity, we would then want to look at lithium mining companies. One interesting fact is that just a handful of companies produce a majority of the world’s lithium. Here’s an excerpt from a Fortune magazine article published this year on lithium mining:

The three largest lithium producers are the Chile-based Sociedad Quimica y Minera (SQM), American FMC Lithium (FMC), which controls the ominously-named Hombre Muerte mine in Argentina, and Albermarle (ALB), which recently acquired competitor Rockwood. Albermarle is developing lithium brine holdings around Magnolia, Arkansas—the only American deposits that Anderson allows might make economic sense in the near future. Together, these three companies provide more than 90% of the world’s lithium, and have absorbed much of the rising demand simply by bringing untapped capacity online.

Incredibly just 3 companies produce 90% of the world’s lithium with SQM controlling one-third of all the world’s lithium reserves. It’s a textbook example of an oligopolyYou would think it would be very easy to get exposure to the price of lithium then by simply buying a market-cap-weighted basket of these 3 stocks. Using the Motif Investing platform, we built a Nanalyze Lithium Mining Stock motif which contains these 3 stocks:

Lithium_Mining_Stocks_Motif_Performance

Nanalyze_Lithium_Motif

The problem is that none of these companies have performed very well with the motif losing -30% in the past year. The “world’s biggest lithium producer” SQM is actually the poorest performer of the bunch having lost nearly -50% in the past year. A key reason for this is that lithium only contributes 11% of revenues for SQM so the actual exposure you get to lithium is very small. For FMC the exposure is even worse. Lithium sales contributed just 6% to FMC’s revenues. ALB fares slightly better with lithium contributing 13.6% to total revenues.

It’s difficult to get direct exposure to lithium through the stock market since 90% of the world’s lithium is produced by companies for which lithium is a small part of their operations. Additionally, not all lithium is created equal. Panasonic, who supplies Tesla with lithium batteries, is said to be looking to China for a solution to their increased demand for high-grade lithium for batteries. Investors who are bullish on the price of lithium because of the “lithium battery story” are best off looking at other ways to play the story such as battery manufacturers. Any lithium “junior mining stocks” with promises of “valuable reserves” trying to ride on the coattails of Tesla should be avoided like the plague. In a coming article, we’ll take a closer look at lithium battery manufacturing companies and also break down the composition of the Global X Lithium ETF (LIT).

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