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Investing in Lithium-ion Batteries

The Go-to Mobile Power Supply

Written by Joseph Cafariello
Posted July 24, 2014 at 3:43PM

Looking to power-charge your investment portfolio? Look no further than batteries, specifically those composed of lithium-ion.

They’re in almost every wireless device on the planet, from cell phones and music players, to laptops and tablets, even in electric powered automobiles and unmanned aerial drones. In 2013 alone, some 5 billion lithium-ion batteries were sold to consumer across this wide spectrum of products, and their demand will only grow as the consumption of the products they power continually increases worldwide.

In fact, the demand for the lithium metal itself will grow at a much faster rate than the demand for its batteries, thanks in large part to the continued increase in electric vehicle production. Where your typical handheld electronic device’s battery requires on average just a single ounce of lithium, a hybrid-electric vehicle needs 20 pounds of the metal in its battery, while a fully-electric model needs as much as 50 pounds. That’s the same amount of lithium as in 800 electronic devices per fully-electric auto.

At the current pace, lithium demand is expected to increase 18-fold from 165,000 tons per year in 2013 to a minimum of 3 million tons per year by 2030. For this reason, the lithium-ion battery space and the mining of its valuable metal are set to explode.

“Fundamentals are excellent as demand could double over the next 3-5 years for lithium ion batteries,” reports Jeb Handwerger or Seeking Alpha. “Lithium and graphite miners, manufacturers and producers could rise in value exponentially.”

Lithium and graphite miners

Source: Roskill

Lithium’s Unique Advantages

What makes lithium so valuable in a portable power supply is the metal’s light weight. Lithium’s atomic weight of 3 makes it the third lightest of all known elements (behind helium’s atomic weight of 2, and hydrogen weight of1), and thus, the lightest of all the metals.

What’s more, the arrangement of lithium’s electrons around its nucleus allows it to produce an electric current with the greatest of ease. In every element, electrons circle atoms in rings, with the first ring always holding a maximum of 2 electrons (except for hydrogen which has only 1 electron in total), and each subsequent ring holding a maximum of 8 electrons each.

With an atomic weight of 3, lithium’s 3 electrons are arranged on two rings – the first ring holding 2, while the remaining third electron sits on the second ring all by itself. Having just a single electron on its outermost ring means that lithium gives off this third electron very easily in a chemical reaction, making lithium an extremely efficient producer of electric current.

Combine these two characteristics of extreme light weight and extreme ease of current generation and you can understand why manufacturers of portable devices and electric vehicles are so electrified over it. Lithium let’s you pack a lot of power into extremely small and lightweight cells.

The lithium craze is on, with manufacturers already jockeying for position as the top lithium battery producer. To keep up with the expected rise in demand, one auto manufacturer is planning on building the largest lithium battery plant in the world.

Has Tesla’s New Gigafactory Been Found?

The production of lithium batteries for electric vehicles is very much an industry unto itself. Tesla Motors CEO Elon Musk believes that by 2030, some 50% of all vehicles manufactured globally will be electric in whole or in part, nearly all of which will be using lithium-ion batteries.

With his soon to be introduced economy vehicle - the Model 3 which will be affordably priced at around $35,000 – Musk expects his company to be producing as many as half a million electric vehicles annually by 2020 – more than all other competitor electric vehicles combined. That, a smiling Musk proclaimed, is going to require “a lotta battery”.

Ergo, the much anticipated construction of the world’s largest lithium-ion auto battery plant in the world, which Tesla intends to build in America’s Midwest. While Musk has kept his cards close to his chest, Tesla-watchers believe they have found the factory’s construction site just outside of Reno, Nevada. One investigative photo journalist hot on the trail snapped the following photo of a construction site plunk in the middle of nowhere, yet already with an address: 2641 Portofino Drive in the Reno-Tahoe Industrial Center.

Reno Nevada Gigafactory site

Source: GreenTechMedia.com

The clues seem to fit. The locale offers “a Goldilocks combination of renewable power, nearby rail, proximity to Tesla's California headquarters, and a generally Tesla-friendly atmosphere where their direct sales remain unchallenged by lawmakers or court actions,” informs online tech magazine Jalopnik. “In March, Tesla was said to be looking into permits and zoning for prospective sites in the Reno-Tahoe area.”

Consolidation Within the Lithium Battery Space

The location meets another of Musk’s criterion to have the plant powered by renewable energy sources as much as possible. The Nevada location is ideally suited to provide ample sunlight to power solar grids, with plenty of wind over the nearby hills to power wind turbines.

Musk’s reliance on renewable energy to power his plant stems not just from his being environmentally conscious, but also from his being a savvy business entrepreneur. Lithium battery production is extremely expensive from start to finish, from the lithium ore’s complex extraction process to the power consumed in preparing the chemicals inside the batteries.

As the German multinational engineering and electronics giant Siemens AG explains:

“The manufacture of electrodes, cells and modules/packs for large-format power batteries is still in its infancy. One thing, however, is already perfectly clear: the battery manufacturing operation needs to become faster and less expensive if lithium-ion energy storage technology is to establish itself successfully in the target markets. The sensitive chemistry of the cells means that these cost and time savings absolutely cannot come at the expense of quality, which needs to remain very high.”

The high cost of battery production has also lead to the consolidation of production facilities by Japan’s Sony Corp, currently one of the largest producers of lithium-ion batteries in the world.

“Sony Corp. plans to close its design and development base for lithium-ion batteries in Shimotsuke, Tochigi Prefecture, by the end of September,” reports the Japan Times. “Following the closure of the Tochigi plant, Sony will have just three domestic lithium-ion battery plants… By consolidating lithium-ion battery plants and improving efficiency, Sony aims to better compete with foreign rivals.”

One of those rivals Sony is preparing to face is Tesla’s new Gigafactory. If Musk is going to make his new economy class Model 3 affordable to the masses, his new factory had better live up to its cost-saving expectations.

One way to ensure the Gigafactory’s success is to overproduce, and then sell excess battery supply to competitors - which is why Tesla is aiming to produce 200,000 batteries annually by 2017, far more than the vehicles the company plans to manufacture by then, selling the excess supply to other automakers.

Plugging Into Lithium

Tesla’s ambitious plans not just as an auto manufacturer but also as a battery supplier would certainly make its stock a good choice for powering-up your portfolio’s performance. While its 500% rise from $45 a share in early 2013 to around $225 today may scare you, along with its very pricey 72.47 times forward earnings and 30.26 times book value, the company’s soon-to-be introduced economy Model 3 at around $35,000 a vehicle could very easily multiply Tesla sales by five-fold, which would well justify the stock’s lofty valuations.

Still, there are several other lithium plays to choose from, including lithium miners and even a lithium ETF. The three largest lithium producers include:

• Sociedad Quimica y Minera (NYSE: SQM): This $7.49 billion mid-cap based in Chile is the largest producer of lithium in the world in the largest lithium-producing country in the world. However, lithium is only 10% of the company’s mineral production, and as such the stock’s price is not a close lithium play. Worse still, its stock has failed to keep up with other lithium producers, and trails the S&P 500 broader market considerably, as per the graph below.

• FMC Lithium, a division of FMC Corp. (NYSE: FMC): This $9.16 billion American large-cap is the world’s second-largest producer of lithium, with a 23% market share. The company’s main focus is in agricultural, consumer, and industrial markets for crop protection chemicals, including insecticides, herbicides, and fungicides. While its stock has trailed the S&P 500 over the past two years (at +29% versus the S&P’s +49%), it has beaten the broader market handily over the past five years (at +200% versus the market’s +104%).

• Rockwood (NYSE: ROC): This $5.97 billion American mid-cap in May completed its purchase of a 49% share in Talison Lithium, granting it access to the largest known lithium reserves in the world. Paradigm Capital indicated that with this acquisition, “Rockwood will control 55 percent of global lithium supply”. Rockwood’s stock has handily beaten the S&P over the years, rising some 98% over the past 2 years versus the S&P’s 49%, and soaring 378% over the past 5 years versus the S&P’s 104%.

• Global X Lithium ETF (NYSE: LIT): If you want to spread your investments across multiple holdings, you could try this lithium ETF. Trading since 2010, LIT holds all three of the above listed lithium producers as its top three holdings — ROC weighted at 18.63%, FMC at 18.04%, and SQM at 7.26%. While the exchange-traded basket of companies has posted negative returns over the past 3 to 5 years, and barely flat returns over the past 2 years, its share price is up 14% over the past year as compared to the S&P’s +18%.

lithium investments

Source: BigCharts.com

Joseph Cafariello

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