Picking major technological shifts doesn’t always equal huge investment gains – just ask any investor who put money into the dotcom boom two decades ago. A more recent example is from 2016 and 2017 when the automotive industry’s move from the internal combustion-engine to electric vehicles (EV) seemed a lock, and the mining industry jumped on board.
The following years have largely proved that thesis. Major carmakers and governments are behind this shift and by the end of this decade EVs will dominate new car sales. But investors who initially dived in were left with large losses by 2019 and London companies struggled to get financing for mines. Lithium, cobalt and graphite prices also crashed as supply overwhelmed demand.
However, share prices are now back up, cash is flying in for mines to be built and new players focused on lithium, graphite, nickel and other EV-exposed raw materials are arriving.
What do we need?
Lithium, graphite, nickel, manganese and cobalt are key ingredients for lithium-ion batteries while copper and rare earths are also needed in large quantities for EV cars. Other demand drivers are stationary batteries, which are used as part of renewable energy systems.
As we explored in our recent feature on EVs (‘Race to Riches’, 28 Jan), demand has shot up in recent years and is expected to grow even more sharply over the next decade. Spending on passenger and commercial EVs and electric buses climbed almost a third to $133bn in 2020, according to Bloomberg New Energy Finance, led by passenger car sales. Looking ahead, Benchmark Minerals Intelligence forecasts almost 200 battery “megafactories” will be built in the next 10 years, more than doubling the existing number.
These factories are largely found in China, Japan and Korea, although capacity is slowly building in Europe and North America.
Bacanora Lithium (BCN) offers a perfect example of the past five years in the battery metals sector. The company quickly rose from Aim tiddler to promising lithium option in London in 2016. Bacanora’s key prospect is the Sonora clay lithium deposit in Mexico.
Construction at Sonora was set to begin in 2018 but a $100m equity raise was withdrawn three days after it was announced. The weaker lithium price and a large uptick in supply from Australian mines had scared off investors, causing its share price to fall from 137p at the start of 2018 to 25p a year later.
But now site preparation has begun for the build, the share price hit a two-year high last month and production is looking likelier from 2023. Fellow Aim-listed Savannah Resources (SAV) is working on a mine in Portugal to supply European carmakers but is not as far into the development timeline as Bacanora.
The forces driving the renewed interest in the sector are simple.
“You've seen a significant increase in uptake in EVs in the last six months, and also you've seen the Europeans move down that EV path,” says Bacanora chief executive Peter Secker.
“Tesla is building plants all over the world, which is great. And the Chinese are still moving down that route. They will be electric before the rest of the world.”
Lithium has a range of pricing markets, based on how close it is to the product battery manufacturers need. Australia, which along with Chile is a major producer of the mineral, largely exports ore to China given the limited local processing capacity. This spodumene feedstock has not seen as much of a price improvement as lithium carbonate or hydroxide, or the battery-grade chemical product that is another stage removed from ore.
Benchmark said the battery grade lithium carbonate price climbed over 40 per cent in January, to $9,450 a tonne (t). The price increase was less dramatic for raw materials, with spodumene up just 6 per cent in the same period.
Lithium miners in London largely plan to sell a product one or two stages removed from the ore they extract from the ground. Bacanora, likely the first locally-listed miner to reach production, will sell a battery grade product from its own processing facility.
“We are going to try and avoid the pitfalls of being at the mercy of the converters, and sell to the downstream consumers, which are the battery manufacturers, and the cathode manufacturers, which is obviously a much, much larger market,” says Secker. The convertors are largely the Chinese companies that buy up lithium ore or concentrate.
But changing investor and consumer expectations could see carmakers chase for local lithium supply, cutting supply chain emissions. Mexico is a major car manufacturing hub for the Americas but does not have the battery making capacity currently, and in any case Bacanora has already committed its supply to major shareholder Ganfeng Lithium and trading company Hanwa.
The other change for Bacanora compared to 2018 is Ganfeng’s investment, which now stands at 29 per cent of the company equity and 50 per cent at the project level, which cuts its share of the $420m mine and plant build cost in half.
UK investors might also want to look closer to home given the push to build up local car and battery-manufacturing capacity. Cornish Metals (CUSN), for example, is offering the whole basket. On top of the traditional tin, it says its United Downs licence area holds copper, and through a royalty agreement with private explorer Cornish Lithium, it might eventually have a lithium income stream.
Cornish Metals is still on the very speculative end of the sector, however, given it is yet to complete a feasibility study into the mine.
Senior options
A handful of pre-revenue options does make picking winners easy for investors. The base metals options are more varied, from the giant Glencore (GLEN) to smaller producers like Atalaya Mining (ATYM) and Central Asia Metals (CAML), which have less direct EV exposure but will still do well from the associated copper demand.
Outside of individual equities, the Global X Lithium & Battery Tech ETF (LIT) and L&G Battery Value -Chain UCITS ETF (SOLBATT) both hold major non-UK-listed lithium players.
