Five million tonnes.
That’s the impressive amount some analysts expect global lithium demand to hit by 2030, from just 500,000 tonnes today. Moreover, with supplies on track to fall considerably short of this figure, new sources of lithium stand to become increasingly valuable moving forward.
Getting exposure to lithium could open the door to outsized returns over the long term. And with prices dipping temporarily this year in the face of wider market volatility, now could be a good time to move.
Maximising upside exposure
Perhaps the best way to benefit from the potential structural bull market in lithium is to invest in the companies exploring it.
They are likely to benefit from rising prices as it increases demand for (and in turn the value of) any discoveries they have made or may make in the future. They can also present more upside potential as they usually have a smaller valuation than their peers producing the metal.
That’s not to say investing in metals explorers is without risk; discoveries are by no means guaranteed. But there are ways for smart investors to mitigate this while still retaining exposure to that outsized upside potential.
For one thing, they can pick stocks with provably high-quality lithium exploration assets. For another, they can pick stocks whose assets are situated in stable jurisdictions supportive of mine development.
Three companies that tick both of these boxes are Frontier Lithium (CVE: FL), Green Technology Metals (ASX: GT1), and First Class Metals (LSE: FCM).
Indeed, this trio not only hold projects highly prospective for lithium but they are all focused on the ultra-mining-friendly Canadian territory of Ontario.
Why and how to invest in lithium
The investment case for lithium largely boils down to one thing: batteries. More specifically, lithium-ion batteries.
These are used in a wide range of consumer electronics. But perhaps their most pertinent use here is in electric vehicles or EVs.
A combination of escalating environmental consciousness, improving performance, and regulatory support is set to bolster EV adoption massively. From around 16.5 million vehicles today, the IEA expects 350 million EVs to be on the road by the end of the decade.
More EVs mean more EV batteries. And more EV batteries means more demand for lithium – as mentioned, up to 5 million tonnes a year by 2030. The problem, however, is that even if today’s pipeline of new lithium projects were all to come online, it’s thought annual supply would only reach 2.7 million tonnes by the end of the decade.
The deficit could widen further as EVs become more and more normalised beyond this point, too. When you combine this with today’s over-reliance on China in the sector’s supply chain, it’s no surprise many nations have added lithium to their “critical minerals” list.
Long story short, the search to secure supply security and plug the gap is very much on. And as it advances, Ontario is emerging as a leading area of focus.
Its established mining industry, supportive legislation, and ease of access to the North American EV market aside, the territory is highly prospective for lithium. And as such, it has attracted a wide range of explorers looking for new discoveries they can either develop themselves or use to attract producers hoping to boost their reserves.
Three of the most exciting of these are Frontier Lithium, Green Technology Metals, and First Class Metals.
Beginning with the most advanced of the three, Frontier has a market cap (as of writing) of CAD$440.8 million (£265.2 million) with a share price of CAD$1.94 (£1.17). This is down from CAD$3.00 (£1.79) in February, in line with the recent dip in lithium prices.
The upside Frontier presents stems largely from its PAK lithium project in northwest Ontario. This project contains North America’s highest-grade, large-tonnage hard-rock lithium resource. It is in the development stage with two deposits and an exploration upside.
A preliminary economic assessment has already pegged PAK as having a 28-year project life producing 23,174 tonnes of lithium hydroxide monohydrate annually for a post-tax net present value (at an 8% discount) of US$974.6 million (£784 million).
If Frontier can continue to develop on this very strong foundation, it will be interesting to see how much value PAK can deliver to shareholders over time.
Source: Frontier Lithium
Moving on, and, with a market cap of AUD$127.8 million (£69.3 million), Green Technology Metals represents an earlier stage play than Frontier. However, its large, wholly-owned tenement package already holds much promise.
Perhaps most excitingly, the company’s flagship Seymour project hosts numerous targets and a 9.9Mt resource at 1.04% lithium dioxide resource open along strike and down dip.
Green Technology’s clear development pathway (along with its wider portfolio’s exploration potential) positions it well to enjoy the benefits of any long-term lithium price advance. Indeed, a preliminary economic assessment is on the horizon, project construction is planned for 2024, and AUD$29.8 million (£16.2 million) sat in the firm’s bank as of February 2023.
Source: Green Technology Metals
Our third stock, First Class Metals, is also the newest entrant to the lithium exploration space. With a market cap of £8.25 million, it could also present the most upside potential. After all, a significant success can move the dial a great amount for stocks of this size.
First Class recently bolstered its already-significant Ontario exploration portfolio, which is prospective for a wide variety of metals, with the addition of the Zigzag project.
Limited work has taken place on Zigzag to date. However, what has taken place has been encouraging.
The project’s previous holder encountered shallow historic grades of up to 1.168% lithium dioxide over 7.9m within a pegmatite more than 900m in length and 20m thick at surface.
Pegmatite, in simple terms, is a type of rock containing large long bladed “crystals” composed of the lithium mineral spodumene. So, this large target area could hold great potential.
Sampling from Zigzag has also returned strongly anomalous mineral values, peaking at 3.55% lithium dioxide. Meanwhile, the project itself is located in proven lithium-prospective geology just 10.5km from the Seymour project owned by the last stock we mentioned – Green Battery Metals.
Source: First Class Metals
First Class has a lot of exploration irons in the fire that could light a fire under its valuation in the event of success. But with reconnaissance now underway at Zigzag (helped along by the recent receipt of a grant from Ontario’s government), a lithium bull market could be supportive here.
Move now, before it’s too late
Rounding up, the investment case for lithium over the long-term is a simple case of the positive impact of supply/demand economics on price when the former falls short of the latter.
What makes this opportunity particularly attractive right now is the fact that lithium prices have cooled somewhat this year after soaring through 2022. At writing, lithium carbonate sits at CNY187,500 (£21,925) a tonne from just under CNY500,000 (£58,257) a tonne at the start of the year.
That might sound like a big drop. Perhaps it is. But the truth is that the widespread adoption of EVs is unavoidable over the long-term – a future where we collectively revert back to petrol and diesel vehicles exclusively almost seems an impossibility at this point.
It means there’s a strong argument to be made that this drop is a short-term issue rather than being indicative of a longer-term trend. And that means that when prices resume their long-term upwards course, those who bought the three stocks discussed here during the dip could enjoy considerable upside exposure.
The author has been paid for the production of this piece by the company or companies mentioned above.
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