Lithium Demand Will Grow Faster Than Experts Imagine


Lithium demand, “is spiking,” for several reasons, again heavily influenced by the $5 billion dollar Tesla facility.

It all started with Tesla’s announcement of its battery giga-factory in February, 2014. That news was discussed endlessly with breathless excitement. The news sparked a revival in lithium, cobalt and graphite juniors. For example, Western Lithium USA Corp. (WLC.TO) based in Nevada, more than doubled that month. At the time, I wrote a few articles saying that the giga-factory was great news for select graphite companies. I didn’t mention lithium or cobalt, simply because I was less fluent in those. Today, I’m better prepared to articulate the lithium story, one of the hotter sectors in the natural resources space. Why now? I think that the lithium-ion battery might be reaching a “tipping point,” the phrase made famous by Malcolm Gladwell. Please note, I don’t use catch phrases loosely, lithium’s spike in demand is no, “black swan” event, and we’re not near “Peak Lithium,” although we could see supply shortages on the horizon. Not only did Tesla’s giga-factory catch everyone’s, the idea caught on so well that there’s already 5-6 announced or in construction giga-factories, (Tesla’s is the largest).

Lithium demand, “is spiking,” for several reasons, again heavily influenced by the $5 billion dollar Tesla facility. Interestingly, the original concept was that the Tesla facility would be completed by 2020. Now conventional wisdom says 2017-18, another bullish data point. Tesla’s fully electric car was way too awesome for its own good. It guaranteed that new competition would enter the space and it has. Get ready for it, an abbreviated list of 15 automakers in the plugin-EV (hybrid) or fully EV market….BMW, Mitsubishi, Toyota, Nissan, Honda, Tesla, GM, Ford, Kia, Fiat, Mercedes, Porsche, Volkswagen, Audi and Hyundai. This list probably doesn’t even contain all of the well known brands. Many of these automakers had no offerings of plugin-EV (hybrid) or fully EVs until after Tesla’s. Here’s another fact, not my opinion, there are dozens of less well known brands diving into the race. China and Europe have plenty of them. China is trying mightily to cut down on air pollution and European cities are small enough to be quite amenable to EVs. Check out this article if you don’t believe me! And, just wait until ALL hybrids become full EVs. A certainty in my mind.

So many uses, hard to follow demand, harder to forecast

So far I’ve mentioned Tesla’s new paradigm introduction of a “real” EV. And, it attracting MANY competitors. Next I pointed to the multiple giga-factories spurred on by Tesla’s. But wait, there’s more. About a week ago Tesla announced a much ballyhooed home lithium battery storage system that can run one’s home for up to 8 hours. This product is thought to be especially attractive to homes with solar panels. This is yet another shot across the bow warning of another leg up in lithium demand. I guarantee that Elon Musk’s home storage units will attract a lot of competition, (some superseded Tesla), and perhaps the need for more battery giga-factories? Tipping point or not, lithium demand is moving substantially higher by the day. By the time analysts come around to forecasting a 12%-15% CAGR from 2015-2020, the growth rate could be more like 25%-35%. I have no scientific backing for my 25%-35% projection, I’m just saying that extrapolating 2012-2015 grow factors forward will not work. Don’t make me mention the 200 million electric bikes in China alone, because I will if I have to. Another far less mentioned factoid is the widespread adoption of hybrid buses, taxis & forklifts (and like equipment in warehouses around the globe). Is anyone contemplating the replacement lithium batteries that will be required by many electronic devices, power tools, etc?

Above, I mentioned Western Lithium, that has a well deserved market cap of $105 million. Lithium America’s Corp. (LAC.TO) has a $70 million market cap. Before moving down the list, please also consider Australian-listed Orocobre Limited (ORE:ASX) with a market cap of $425 million for a pure-play, producing lithium company. Of course, Orocobre is several years ahead of small cap companies like Dajin Resources (DJI.V) & (DJIFF) (which trades a combined 365k shares per day) and Pure Energy (PE.V). However, we’ve seen this movie before. When a commodity is in high demand, this is what happens. Small companies acquire or get options on prospective deposits, they stake new ground, they explore and develop as available capital prudently allows.

Time is money. Do new entrants really want to start a green field project? Or might they prefer to save 2-3-4 years time, money and leg work provided by a well-run junior? I believe that in a strong market, or dare I say a bull market in lithium, companies with the lowest market caps, solid management teams and highly prospective deposits will be sought after. I submit that lithium companies with market caps of $5mm to $15 million today have stocks more likely to double, triple, quadruple, quintuple, sextuple, septuple or octuple than some of the above mentioned plays. Sorry, I had to use the word, “septuple” at least once in my life.

For example, for Dajin Resources, a 10x return on its market cap would still place it at a discounted valuation to Western Lithium. Don’t get me wrong, Dajin has considerably more risk, but also considerably more upside. If one shares my bullish view on lithium. Even though Dajin & Pure Energy are behind peers in reaching initial production, they are actually well ahead of new entrants in terms of permitting, environmental studies, seismic, drilling, community relations, access to infrastructure and mining officials, etc.

Conclusion

I wonder if pundits looking at lithium demand are capturing all of these booming markets, or if it’s even possible. Make no mistake, many experts are no doubt better equipped than me. However, even if 2015-2016 runs at less aggressive annual growth rates, 2017-2020 could still be blockbuster years. A key to the tipping point debate is not necessarily when lithium reaches a certain penetration, but when it becomes the go-to standard, which appears to be happening. Beta-max or VHS? Streaming video or videos from the local video store? Penetration will follow. My final point, I swear, consider this– My 79 year old mother has been asking me about lithium-ion batteries, what’s so good about them? Why am I reading so much about lithium in the New York Times. My answer? “I don’t know mom, who said you could come down into my basement room? Go cook my dinner….”

Disclosure:

At the time article(s) was/were written on EpsteinResearch.com, or posted on other websites, Mr. Epstein had no prior or existing relationship with this company. As of [5/1/15] Dajin Resources Nevada is a Sponsor of EpsteinResearch.com on a month-to-month basis. As of the latest updated Terms of Use & Disclosures, and at the time article(s) was/were on EpsteinResearch.com, or posted on other websites, Mr. Epstein owned/owns no shares of this company. Investors should consult with their own advisors before making investment decisions. Mr. Epstein is not an investment advisor. The article(s) on this company on EpsteinResearch.com, or posted on other websites, should be viewed in this context. This company is highly speculative and not suitable for all investors. A link back to this continually updated disclosure page will be included at the top and bottom of any article(s) that appear(s) on EpsteinResearch.com or posted on other websites.

Peter Epstein

Peter Epstein

Contributing Editor

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In 2011, Peter Epstein, CFA, left a $3 billion hedge fund where he was a senior analyst, to help increase awareness of a number of natural resource companies in which he's invested in.

Mr. Epstein formed MockingJay, Inc., a consultancy for companies in the natural resources space and informal (non-licensed) advisor to high net worth investors. Mr. Epstein's areas of expertise include uranium, coal, gold, potash, copper and graphite. He has published hundreds of articles / blogs on investment sites such as Seekingalpha, Au-Wire.com and the Motley Fool and some articles on Stockhouse.com and CEO.ca

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