RK Equity

Rising EV demand is charging up the lithium bull market, says RK Equity’s Howard Klein

 


 

While the profoundly destructive impacts of the COVID-19 pandemic were laid bare across multiple industries throughout the global economy last year, some green shoots began to emerge in the lithium sector after a torrid few years following the mini-boom of 2017-18. When non-essential travel was effectively outlawed during the first wave of the pandemic, the world was afforded a vision of a low carbon future, and there was a realisation amongst governments, institutions and consumers that the best of both worlds (unrestricted, low carbon emitting travel) can be achieved only through the decarbonisation of the transport sector.  

 

This discernible epiphany translated into increasing appetite for electric vehicles (EVs) in key markets including China, North America and Europe. According to global sales database EV Volumes, the sector recorded year-on-year growth with 3.24 million sales of battery EVs and plug-in hybrid EVs in 2020, even though total vehicle sales plummeted to record lows as consumers grappled with the economic repercussions of the COVID-19 crisis. At the start of 2021, RGN spoke to RK Equity founder Howard Klein to get the inside track on the key developments in the lithium and wider battery metals space as we enter a uniquely transformational period for the global green economy.  

 

After the initial COVID-19 wave ended in June/July, there was some concern that the Europeans or the Chinese would slow down the aggressiveness of their EV pursuit, but instead there was an acceleration,” Klein explains. 

 

You had three years of innovation in one because of the COVID-19 disruption. The green shoots started in China. Coronavirus happened there first, but they dealt with it sooner. By the second half of the year, there was better uptake in Chinese EV sales. 

 

Increasing EV demand in the second half of 2020 naturally increased demand for a suite of battery metals, including copper, cobalt, nickel, graphite, manganese, aluminium and – above all – lithium chemicalsthe predominant components in lithium-ion batteries powering EVs. 

 

A lithium bull market? 

 

According to Klein, momentum in the sector has been building since the 2019 Nobel Prize in Chemistry was awarded to the makers of the lithium-ion batteryThe Gigafactories under construction in China, the US and Europe have also supported prices for lithium carbonate and hydroxide, which have finally begun to rise in China. 

 

Significant supply curtailments from major Western Australia-based spodumene producers have been a meaningful factor in moderate recent improvements to the price environment (admittedly with lithium chemicals coming off a low base), particularly the bankruptcy of Altura Mining in October 2020. 

 

Klein also highlights an ongoing pricing ‘chess match’ between the battery producers and the auto original equipment manufacturers (OEMs): “Where that price lands is a bit of dance between the buyers of lithium hydroxide and the producers of lithium hydroxide. 

 

We believe as RK Equity that the price should settle for lithium hydroxide outside of China at about US$14,000. For carbonate, it might be a lower and for China specifically a bit lower still.” 

 

Nonetheless, horizons for the lithium sector are brightening, and this is reflected in the capital markets, which have started to bid up lithium development companies and producers throughout the last six months. 

 

Capital raising activity has increased, and there’s been some significant M&A with Australian nickel producer IGO investing $1.4 billion in Tianqi Lithium [December 2020]. There were other financings through the September-December period, so the pace has generally picked up. 

 

“In 2021 there’s going to be a very significant amount of capital raised because the message is out there regarding rising demand for battery metals and the looming lithium shortage from 2021/22 onwards.” 

 

RK Equity’s founder believes that the markets are now realising that funding needs to be poured into special purpose acquisition companies (SPACs), mine developers and into lithium chemicals processing capacity to meet pressing demand projections for the end of this decade. 

 

For example, most industry assumptions have annual lithium demand reaching around 1.8 million tonnes (Mt) by 2030, with much of that figure geared towards lithium hydroxide for use in EVs. This translates into 50 new hydroxide plants – at an average cost of $500-600 million – that would need to come online from 2024 onwards to meet the projected demand uptake. 

 

“With this in mind, the markets have stopped focusing exclusively on the immediate China spot price, or even the next 12 months earnings callsand have begun to start pricing the SPACs with a longerterm time horizon. 

 

That mentality is translating into the lithium producers and development companies, so its an exciting time. As a chemical and mining industry, lithium has an estimated 20% annual growth to 2030, and within that, we’re forecasting 3035% hydroxide growth, with carbonate coming ofa lower base of 16%.  

 

Most commodity industries grow at a pace of GDP. If you’re growing at sixseven, eight times GDP, that’s very exciting, and investors want to be in that space,” Klein asserts. 

 

Tesla – the vanguard 

 

News flow coming out of Tesla throughout the course of last year was followed closely by RK Equity, as Elon Musk’s clean technology behemoth continued to dictate the direction of the EV market and the ongoing development of lithium-ion battery technology. 

 

The corporation raised money three times in 2020 – the last two totaling $5 billion each – and saw its share price valuation increase by over 700%, with a big chunk of this success attributed to the opening of its Shanghai Gigafactory in late 2019. 

 

Tesla’s highly billed Battery Day in September 2020 was a big moment for the sector, as the firm unveiled plans to vertically integrate its battery supply chain by developing lithium hydroxide from spodumene produced in North America. Musk also announced Tesla’s latest nickel-rich cathode and called for greater production of lithium and nickel. 

 

“In general, the enthusiasm towards Tesla’s success begat other interests. In the US, you had a lot of SPACs going public, like HyliionFisker and Lordstown Motors on the auto side, in addition to battery companies like QuantumScape and lidar companies.  

 

There’s been massive enthusiasm from a capital markets perspective to the thematic and increasingly toward the end of last year there was an understanding that regardless of which company ‘wins, ultimately lithium-ion batteries are going into those cars and demand for the components in those batteries – lithium, graphite and nickel – are going to increase significantly.” 

 

Localised supply  

 

Last year also brought a greater appreciation of the need to develop vertically integrated local supply chains in the battery metals/EV space. This was evident none more so than in Europe, which Klein has previously labelled ‘the new China’ of the sector due to aggressive pro-EV policies, specialised fund facilities and the proliferation of hard rock lithium projects within the region. 

 

So much of what’s happening in the EU is policy driven. There are very significant emissions reduction regulations and incrementally severe penalties being applied in the region to auto makers not producing a meaningful quantity of lower emissions vehicles.” 

 

Klein predicts a similar carrot and stick approach in the US under ‘build back better’ Biden. “The Obama-Biden administration in the first two years also controlled the Senate, the House and the Whitehouse,” he recalls. They were very supportive of EVs and renewable energy. I think they’ll start supporting mining projects with low interest loans as well. 

 

Meanwhile, institutions like the European Investment Bank have been ploughing funds into the development of local lithium projects and the broader battery metals supply chain, which is buttressed by a dense network of coalitions including the European Raw Materials Alliance and the European Battery Alliance. 

 

This synchronised approach is being driven by an EU target to be 80% self-sufficient in the lithium-ion battery supply chain by 2025  a seemingly ambitious goal, given that Europe currently imports 100% of its lithium and doesn’t have any current mines financed or in production. 

 

A company we represent is European Metals Holdings in the Czech Republic. They have a very large hard rock deposit that is funded until the construction decision in early 2022. There’s a lot of interest from the OEMs in them and other project developers in the region like Savannah Resources in Portugal. 

 

I think several institutions are going to start providing grants and soft loans, in addition to the commercial banks providing traditional project finance with some credit enhancements from some of these pan-European banks, to help stimulate the goal of becoming more self-sufficient.” 

 

Likewise, auto OEMs in the US are moving quickly to secure local supply. In September 2020, Tesla announced an agreement with Piedmont Lithium for the supply of spodumene concentrate from the firm’s North Carolina deposit. 

 

Musk’s deal with Piedmont is a very telling factor that he and other companies are paranoid about getting access to all aspects of the supply chain. Tesla signed the deal because they want localised supply for the hydroxide plant they are building in Texas, not just from a sustainability perspective but from a manufacturing efficiency perspective.” 

 

A flurry of recent research and development into direct lithium extraction (DLE) technology has provided some compelling new possibilities for the lithium sector. Typifying this new angle is the work of RK Equity’s client E3 Metals in Alberta, Canada.  

 

The company owns a large lithium brine resource within Alberta’s historic oil province, and it is developing a new technology to extract the lithium from the water before distilling into a hydroxide concentrate. 

 

The project remains at an early stage, but E3 put out a PEA in November 2020 with a pre-tax NPV of $1.1 billion ahead of a pilot plant launch later this year. “As we work towards the energy transition, these new DLE technologies are gaining interest, and this company is getting support from the Alberta government as it transitions from an oil province to a new economy. It’s one to watch in North America.

 

Forecasting the boom 

 

In terms of forecasting for the lithium sector in 2021, Klein’s partner at RK Equity Rodney Hooper has crunched the numbers and concluded that lithium demand will increase by 80-90,000 tonnes this year, with hydroxide representing 50-55,000 tonnes of that total, along with 30-35,000 tonnes of carbonate. 

 

That’s reflective of the fact that sales have been surprising on the upside,” Klein says. Tesla is talking about selling 800,000 vehicles this year, after nearly hitting the 500,000 car milestone last year. But we think its possible they may produce 900,000 to one million cars in 2021.” 

 

Barring delays, Tesla’s Gigafactories in Berlin and Austin will come online this year and support the production of new models, including the hydroxide-guzzling Cybertruck, Semi and Model Y. Meanwhile, other auto makers will churn out a succession of more powerful EVs over the next two years, underlining RK Equity’s demand projections for the space. 

 

However, Klein believes that the biggest tailwind for the battery metals/EV story in the coming years will be derived from President Joe Biden’s $2 trillion ‘green infrastructure plan’, as the word’s biggest economy charts its recovery from the COVID-19 crisis.  

 

We will witness very big changes in sentiment toward EVs and government policies to support EV take up, whether it be subsidies for purchases or installing 500,000 charging stations in the US. 

 

I think sales are going to accelerate, and a lot of the expectations are lower than reality. Investment banks are upgrading several stocks exposed to lithium because they see that take up is accelerating. Europe has been leading, but I think America will follow, and China is very committed to this as well.