Investing in Lithium Hasn’t Panned Out. Yet.

Drones are now delivering goods and counting inventory in warehouses. Svelte electric vehicles are plying our roadways, powered by green electricity that comes from sophisticated solar microgrids. All this progress is made possible by the lithium ion battery. Intuitively, it may make sense to invest in lithium batteries, but there’s one problem. It’s the same problem that handed solar investors their asses when the price of solar panels plummeted.

Credit: Bloomberg

Lithium batteries have plummeted in price. Consequently, the number of economically viable use cases rises, thus increasing demand. Building more batteries at scale further decreases costs, and the cycle continues. Perhaps the best bet is to invest in the raw materials used to build lithium batteries – like lithium.

Investing in Lithium

Investing in lithium has always been a popular investment thesis, and junior lithium miners have taken every advantage of the opportunity to tout their risky ventures. The most intuitive way to invest in lithium would be to buy stock in companies that are responsible for a large chunk of the world’s lithium production. Back in 2015, we warned against investing in the three lithium producers below who – at the time – were producing 97% of the world’s lithium:

  • Sociedad Química y Minera de Chile S.A. (SQM)
  • FMC Corp. (FMC)
  • Albemarle Corp (ALB)

Our reason to avoid these three stocks was the minimal impact of lithium on each company’s revenues at the time:

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.

Credit: Nanalyze circa 2015

For all three companies, the “pure-play-ness” based on revenues from lithium was indeed low at the time. However, just 15 months later, the contributions of lithium to the bottom line for all three companies increased sharply. For SQM, a majority of their 2016 profits were derived from lithium:

20162015
FMC10.7%2.8%
ALB27.0%5.5%
SQM53.0%19.0%

Was this a “skate to where the puck will be” opportunity that we missed out on? To answer that question, let’s look at how an investment in some of the world’s biggest lithium producers would have fared since our first piece on the topic back in August 2015.

How Lithium Investors Have Fared

You can’t determine how well a stock has performed without comparing it to a benchmark. Let’s use the popular Nasdaq technology index to measure the performance of these three lithium mining companies since Aug 15th, 2015, to the present.

  • FMC until Oct-2018, then Livent (LTHM) until present: +22%
  • ALB: +102%
  • SQM: +135%
  • Nasdaq Tracker ETF (QQQ): +135%

In the case of FMC, the return calculations are a bit tricky. We will assume that when the company spun out their lithium operations on October 11, 2018, investors would have sold their shares of FMC to buy shares in Livent, the largest lithium pure-play trading on a major U.S. stock exchange. Turns out that would have been a bad move, as shares of Livent have since lost -39% of their value.

While SQM matched the returns of the Nasdaq over the past 5 years, you could have taken on significantly less risk by investing in a low-fee Nasdaq tracker ETF instead. The others didn’t fare so well either, which means an equally-weighted basket of all three lithium producers would not have outperformed the Nasdaq index.

Investing in Lithium Going Forward

The lithium boom hasn’t been overly kind to investors who owned shares in some of the world’s biggest lithium producers. If you’re wondering why, go spend some time at a third-world mining operation to get an idea of how pear-shaped things can get in a hurry. Just because these companies are selling lots of lithium doesn’t mean they will automatically generate above-average returns for shareholders. For ALB and SQM, selling lithium is only part of what they do. And that’s a good thing when things go bust.

Boom, Bust… Boom

It’s tough to track the price of lithium because it isn’t traded like a typical commodity. Still, we do have access to annual averages in the U.S. where lithium carbonate averaged $13,000 per metric ton in 2019, a 24% decrease from 2018.

Average lithium carbonate price from 2010 to 2019 (USD per ton) – Credit: Statista

When lithium prices soared in 2017, everyone ramped up production, which increased supply, which drove down prices. Now, experts are speculating that we’ll again face a lithium shortage. Or not, depends on who you talk to.

At the moment, prices are falling and producers aren’t financing production increases. Since there’s no futures market for lithium, it’s hard for any party to hedge risk. The London Metal Exchange is planning to launch an LME lithium futures contract in the first half of next year which should alleviate some of these problems. While that may help the lithium industry, there’s also some consolidation happening as China looks to secure a supply of lithium from abroad.

Rearranging the Global Stage

While the three biggest producers of lithium used to have a dominant market share of the lithium market, that’s changed. China has now come on board with their own players, one of which we covered before – Ganfeng.

Credit: Bloomberg

They’ve since been overtaken by Tianqi, now China’s largest lithium producer, which has been aggressively expanding overseas leading to a debt load they’re struggling to service. An article by the FT talks about this, noting that Tianqi now “owns 51 per cent of Australia’s largest lithium mine, Greenbushes, and last year completed a $400m lithium hydroxide processing plant outside Perth.” They also bought a 24% stake in Chile’s SQM a few years ago, a strategy that makes sense when you consider the countries with the most lithium reserves are Chile with 8.6 million metric tons followed by Australia with 2.8 million tons of lithium deposits.

The Global X Lithium ETF

We last looked at The Global X Lithium ETF (LIT) in September 2015, and looking back at that piece we can observe several things. Firstly, we weren’t producing content back then nearly as good as we produce now. Secondly, we didn’t think The Global X Lithium ETF had a very compelling list of stocks for providing exposure to the lithium thesis. Today, that’s changed.

With $880 million in assets under management (AUM), LIT is lit. The ETF’s composition has changed significantly, so let’s see what we’re buying based on today’s weightings. Just over 90% of the ETF is composed of the following 22 stocks:

  • 25.6% – the five big lithium producers we’ve discussed so far plus one from Australia, Mineral Resources Limited
  • 17.6% – electric vehicle manufacturers Tesla and China’s BYD
  • 7.4% – two Asian giants, Samsung and Panasonic
  • 5.6% – Korea’s LG Chem, the 10th largest chemical company in the world
  • 6.5% – battery manufacturers Simplo, Varta AG, and EnerSys
  • 27.5% – eight Chinese companies you’ve never heard of

That last bullet point helps explain why 46% of The Global X Lithium ETF now contains exposure to Chinese companies.

Like the lithium producers we discussed earlier, LIT hasn’t managed to beat the broader tech benchmark over the past five years returning just +106% compared to a Nasdaq return of +149% over the same time frame. However, past returns are no indicator of future performance, and the industry has changed quite a bit. The Global X ETF is adapting to these changes, which bodes well for its investors going forward.

Conclusion

The lithium investment thesis seems too far detached from the underlying disruptive technologies driving the commodity’s price. There are too many risks such as rapidly fluctuating prices, the operational difficulties of running a mining operation, no futures market to provide pricing transparency, and geopolitical jockeying around who has access to reserves.

The Rona” has now caused a demand shock, which amplifies the oversupply notion. If, as some experts are saying, now is the time to invest in lithium, your best bet might be to consider The Global X Lithium ETF. If you think all that Chinese exposure is risky, then go with the three not-so-big-anymore lithium producers. In another five years, we’ll check back to see if holding lithium over a decade was a wise choice or not.

Are we long any lithium producers? Find out in The Nanalyze Disruptive Tech Portfolio Report, only available to Nanalyze Premium annual subscribers.

Leave a Reply

Your email address will not be published. Required fields are marked *

6 Shares
Tweet2
Share4
Share
Reddit
Buffer