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Gwen Preston – “Exploring the Potential for Explosive Upside in the Lithium Market”

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Gwen Preston – “Exploring the Potential for Explosive Upside in the Lithium Market”

 

 

 

 

 

 

Lithium prices soared in 2021 and 2022, reaching as high as $80,000 per tonne. Then they plummeted to $25,000.

 

 

But a month ago that dive reversed. Lithium hydroxide is back above $40,000 per tonne today. So where it is going next? And is there an opportunity for investors?

 

The driver here is electric vehicles. EV sales are now expected to triple from current levels by 2030. And since most EVs use lithium-ion batteries, lithium demand is expected to triple right alongside in the next seven years.

 

Supply will struggle to keep up.

 

Let’s set the scene: in 2010 the world used only 100,000 tons of lithium. By 2030, the demand will best 3 million tons. It is incredibly difficult to increase the supply of any mined commodity 30-fold in 20 years.

 

Here’s another way of looking at it: Tesla alone plans to make 20 million cars a year by 2030. To put batteries in all those cars would require twice the lithium that the world produces annually today.

 

As it turns out, lithium is relatively abundant. The challenge is in finding good deposits, permitting them to become mines, and getting to production successfully. Since lithium is a relatively new market of scale, there is not a long deep history of lithium exploration; there is not a roster of shelved lithium projects that companies can reignite. Instead, we need new lithium discoveries. This is definitely happening (and creating some great investor opportunities – more on that in a moment) but it takes a long time for a new discovery to become a mine.

 

As for getting to production successfully, production success is always a challenge for new mines but it’s a particularly tough ask when new technologies are in play. With lithium, forecasts that suggest we will produce enough lithium to meet demand all assume that Direct Lithium Extraction (DLE) will work easily across the board. DLE is a new way of pulling lithium out of brines, which is usually done by letting the water slowly evaporate and collecting the evaporite left behind. DLE is better because it’s faster, doesn’t require huge evaporation fields, and should recover more of the contained lithium. But it’s a chemistry experiment that has not yet been commercially deployed.

 

DLE will work (where there’s a will and lots of funding, there’s a way!) but it will not happen quickly or smoothly.

 

Between DLE struggles and a shortage of new mines, analysts are now forecasting that lithium prices will double by the end of the year. That’s because the market knows that new mines – lithium or other – are slow to permit and build, so if a project is not already being built or close to it won’t be producing for three years…when the shortage in the lithium market is expected to be as much as global demand totalled last year.

 

That shortfall is why car makers are moving to buy stakes in lithium mines or secure offtakes from projects that aren’t yet built.

 

Volvo keeps talking to lithium miners about becoming a major shareholder. Volkswagen’s CEO said his company is not going to become a mining company “but certainly we will get significantly closer.”

 

Ford paid last year for a third of the lithium that will be produced at a proposed Nevada mine. A few months later, GM inked a similar deal. Mercedes Benz is looking to do the same.

 

To me, these moves underline how tight the market is for this essential commodity.

 

How to Play

 

I currently only have one lithium stock in the portfolio. That will change very soon.

 

I love the lithium miner in my portfolio, Sigma; how could I not love a new mine with clear and significant expansion potential that just started producing in a market that’s so tight participants are clamouring for new supply. Doesn’t hurt that Sigma is also debt free, produces at a very low cost, and is very green (no refinery).

 

I think Sigma will get bought. IF it doesn’t, I think the stock will do very well over the next three years.

 

But in a commodity bull market, it’s new discoveries that dole out explosive upside. So either in or before next week’s letter, I will highlight the lithium explorer that I am buying.

 

We’ve seen many examples of it just in the Quebec lithium scene alone. Here are a few stock charts to illustrate.

 

Patriot Battery Metals is the standout example. It discovered a large zone of spodumene (a lithium mineral) of good grade and its share price has run from under $1 to over $15 in return. It expects to define an initial resource shortly that it will put into a mine plan as quickly as possible while also drilling the other spodumene targets on the Corvette project.

 

 

A share price ride like that attracts attention, so it’s no surprise that other explorers have jumped in value when they announce Quebec projects with spodumene potential. We saw it happen with a Maven holding: Azimut Exploration spiked from $0.70 to $1.75 when the market realized it has ground adjacent to Corvette with evidence of lithium.

 

 

Q2 Metals is similar: its Mia project is a few hundred kilometres west of Corvette but has the same kind of rocks (a graphitic unit with pegmatite intrusions) and initial sampling returned some high lithium grades. The company will conduct its first drill campaign this summer. As for its share price: it jumped in November when Q2 acquired Mia, it ran in January when the company made its lithium focus clear (including rebranding away from gold), and it has been running again of late as field work gets underway. It’s currently valued at $61 million.

 

 

What really stands out here is that companies are jumping in value when the market sees the potential for their projects to host Corvette-like mineralization.

 

It’s been a long time since I saw the market want to get in ahead of discovery like that in gold or silver or copper. Fun times.

 

And so I am finishing up my research into a company that I think will have a Q2 Metals-type move this summer.

 

Courtesy of the Resource Maven

 

Posted June 12, 2023

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