How to Invest in Lithium

Real Vision
December 31, 2022

Over the last few years, Lithium has entered the investing spotlight in a big way.

The price of this unusual metal has increased by more than 500% between 2020 and 2021; a price move that has caught the attention of investors the world over. And here’s why. What do a smartphone, a laptop, and an electric car all have in common? They all rely on lithium-ion batteries.

The increasing demand for electronics and electric vehicles coupled with the difficulties of lithium extraction has resulted in a severe imbalance between supply and demand, leaving a potential opportunity for investors.

But the lithium market is not as simple as it first appears. There are several market nuances, and understanding each is vital for smart investment decisions.

To help, we have compiled a guide that will explain exactly what lithium is, what drives the lithium markets, evaluate if the metal is a good investment for the future, and outline the options for gaining exposure.

What Is Lithium Commonly Used For?

Lithium, which takes its name from the Greek word for stone, lithos, is an alkali metal that has been incredibly important in shaping the modern world. The silver-white-colored metal is one of the lightest on earth and can hold a dense electrochemical charge, which makes it perfect for innovative technologies.

The element was first discovered in 1817 by a Swedish chemist called Johan August Arfwedson but wasn’t seen in pure form until 1855 when two chemists separated lithium from lithium chloride.

Although abundant in the earth’s crust, the metal is typically found inside other mineral or salt deposits. Once found it takes several months of mining and refinement to separate lithium into a pure state.

Once in a pure state, the commodity is then used in a vast range of products, including many that you will find around your home. It is used in the manufacture of pharmaceuticals, ceramics, glass, lubricants, and, importantly, in the production of lithium-ion batteries, which power the majority of electrical devices.

Where Is Lithium Found?

While lithium atoms are relatively common in the world, the pure form of lithium is nearly non-existent. The element is always mixed into mineral ore, clay, or brine deposits, with the latter being the most common. As a result, lithium cannot be mined easily.

Once a suitable ore or brine deposit has been found, it can take up to seven years to get a mine operational. Upon operation, the process of extraction and refinement can then take several months before a usable version of lithium is produced.

Consequently, slow production means that lithium producers cannot easily react to increasing demand from manufacturers, which has been witnessed over the last couple of years. The result is severe bottlenecks in supply.

The majority of lithium mines are found in either Australia or South America. Specifically, Australia, Chile, and Argentina produce the greatest volumes of lithium in the world. However, with lithium becoming an important commodity, the U.S. is now also trying to build up its domestic supply. It is hoped that new technology will be able to unlock new reserves, which may also open new mining opportunities in other countries.

What To Look Out For When Investing?

Just like any other commodity, a successful investment in lithium requires an appreciation for all of the nuances that accompany the market.

While supply and demand is the prominent driving force, familiarity with different types of lithium, an understanding of different extraction techniques, and an appreciation for what is driving demand will help you to make stronger investment decisions.

Supply vs Demand

As most of you will know, supply and demand is the key driver behind most markets. Since 2020, increasing demand for lithium and restricted supply have led to higher lithium prices.

On the one hand, there is the potential for increased demand from a growing need for lithium-ion batteries. On the other, there is a potential shortfall in supply due to the time it takes to extract lithium from the ground.

It is for this reason that some experts believe the lithium market provides the perfect supply vs demand imbalance that investors seek. Among lithium investors, this gap between supply and demand is known as the “Great Divide.”

Keen lithium investors need to consider how the Great Divide changes with time. As the gap between supply and demand widens and closes, investment opportunities may change.

The EV Revolution

The second factor all lithium investors need to consider is the demand that is generated from the revolution ensuing within the automotive industry.

The majority of the demand for lithium comes from the need for lithium-ion batteries. According to Statista, batteries composed 74% of lithium usage globally in 2021.

Lithium batteries are lighter, longer lasting, and fully rechargeable, allowing for a large electrical charge to be held for long periods of time. They have been used in electronic devices for decades.

However, alongside electronic devices, lithium has become the metal of choice for the manufacture of traction batteries for electrical vehicles; a product and industry that is being pushed heavily due to its green credentials. It is the demand for EVs that has had the largest impact on lithium prices over the last few years.

According to a 2022 McKinsey report, EV sales grew a whopping 50% in 2020. During the same time, lithium prices skyrocketed by 550%.

Looking to the future, McKinsey expects the demand for lithium to rise from 500,000 tons in 2021 to 3 to 4 million tons by 2030. With claims from President Biden that 50% of all U.S. cars will be electric by 2030, it is easy to see why.

If supply is not increased to meet this demand, the price of lithium is likely to only move in one direction. A potentially exciting prospect for investors!

Tesla is arguably the car manufacturer that first jump-started lithium price discussions. However, the EV revolution is now expanding to other automotive manufacturers, including GM, Ford, BMW, Audi, and VW.

How big will this EV revolution be? Unfortunately, no one can tell. But future lithium investors should pay close attention.

Lithium Carbonate and Lithium Hydroxide

Unlike other metals, there are several forms of lithium that investors need to be aware of. The two most common are known as lithium carbonate and lithium hydroxide.

Out of the two, lithium carbonate is the most abundantly produced. This is because lithium carbonate has a wide range of use cases including within the construction, ceramic, lubricant, and pharmaceutical industries. Up until recently, it was also the lithium of choice for batteries. However, many electric vehicle manufacturers are now turning to its sister product — lithium hydroxide.

Lithium carbonate can be converted to lithium hydroxide by mixing it with hydrated lime. The new compound allows for the production of stronger-performing and longer-lasting batteries, which are now being favored by many electronic and EV manufacturers.

Two lithium compounds, two prices, potentially two opportunities. Lithium investors will need to consider which form of lithium should compose a greater percentage of a portfolio.

Changes to Lithium Extraction

As company stock is one of the very few ways to invest in lithium, understanding the methods of lithium extraction will significantly help when it comes to evaluating lithium producers.

Don’t worry. There is no need to know the intricate details of lithium production. But what could make or break a lithium investment is an awareness of the methods that have a stronger future in the industry.

Lithium extraction techniques include:

Conventional lithium brine extraction. Conventional lithium brine extraction is used on the majority of commercial lithium deposits, particularly those found in Chile and Argentina. The process involves the evaporation and chemical recovery of lithium from salt-flat brine. It can take several months for lithium to be extracted.
Hard rock/spodumene lithium extraction. Lithium is also extracted from hard mineral ores. The most common form of mineral ore is known as spodumene. The process to extract lithium involves crushing the rock and then leaching the lithium using acid.
Direct lithium extraction. Direct lithium extraction (DLE) is a new mining method that is expected to become more prevalent among lithium producers. DLE extracts lithium directly from brine water. The solution extracted is then processed to provide high-grade lithium carbonate or lithium hydroxide.
It is hoped this new method will help to close the ‘Great Divide’ between supply and demand.

According to reports, DLE could result in much higher volumes of lithium entering the market, while significantly reducing the environmental footprint of those that produce it.

What is interesting about DLE is that lithium producers and consumers may turn to this cleaner technique to ensure the materials going toward an EV are sourced in an environmentally friendly way.

The Price of Lithium

Finally, when investing in a commodity it is common to track a publicly listed price. However, this is tricky when it comes to lithium, as it is not publicly traded.

Deals between producers and consumers are completed privately, which means it is very difficult to keep track of the true market value.

As a result, the price of lithium is viewed through a handful of independent companies that use their connections within the industry to provide insights into the spot price. Each of these independents generates price estimates from physical market participants for the majority of lithium end products, including lithium carbonate and lithium hydroxide.

Two of the best private benchmarks to track lithium prices include:

Alternatively, investors can follow the price of lithium-producer stocks. This can provide a proxy for lithium price that can be used to estimate bullish or bearish price action.

In the future, it is hoped that a single lithium benchmark will be created, just as it was for commodities such as oil and gold

Is Lithium A Good Investment?

Lithium is key to so many products worldwide and will likely be required long into the future. As the need for electronics and EVs continues to increase, the argument for demand is clear to see. What is a little harder to predict is the future change in supply as lithium producers try to catch up.

The opportunities available in lithium have not gone unnoticed within business and investment circles. In the past, the CEO of Tesla, Elon Musk, has speculated that “if you want to mint money, open a lithium mine.” A piece of advice that world-renowned investor Warren Buffett appears to have heard.

Buffett’s Berkshire Hathaway has dabbled in lithium extraction via geothermal brine methods, which is a byproduct of its geothermal power plants. A venture that has been backed by stimulus funds from President Biden, who in Q1 of 2022, provided $3 billion as part of an infrastructure package to develop domestic lithium supplies.

However, while lithium is currently enjoying a boom, it would be naive to think that lithium is immune to threats from cutting-edge technology or lithium substitutes.

Calcium, zinc, magnesium, and mercury are all elements that could be substituted into the anode of a battery. The glass and ceramics industry can also replace lithium with sodic and potassic fluxes.

So, is lithium a good investment? Well, looking at some key pros and cons might help you to decide whether lithium is the right investment choice for you.

Pros

Lithium could help to diversify an existing portfolio
It is currently crucial to modern-day life
With the onset of environmental regulations, the need for electric vehicles and electricity storage from renewables could drive demand for the next decade

Cons

It is a commodity that could be replaced if technology changes or a better element is substituted
The price of lithium is not easy to track and, at times, can be extremely volatile
There is less liquidity in the market when compared to other commodities
There are fewer investment products to choose from

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What To Invest In?

Due to the infancy of the lithium market, the list of investment products is lower when compared with other commodities. However, this doesn’t mean investors cannot gain exposure to this exciting market. There are currently two prominent ways an investment portfolio can gain exposure to the lithium industry: (1) lithium stocks and (2) lithium ETFs.

Lithium Stocks

One of the best methods for gaining exposure to the lithium industry is through individual stocks. However, it is important to understand that stocks are a proxy investment.

Soaring costs of the element do not always equate to soaring lithium stock prices. Opening new mining operations can be costly and, at the end of the day, a stock’s valuation depends on the health of the company.

With that being said, lithium stocks have performed extremely well over the last five years.

Here are five leading lithium stocks:

Albemarle (ALB). Albemarle is a chemical company based in North Carolina. Although U.S.-based, the company owns mines in Chile and Australia, which allows them to produce some of the highest volumes of lithium in the world. Although the company’s largest mines are overseas, it is investing heavily in domestic production. One of the company’s biggest customers is Panasonic, which produces lithium-ion batteries for electronics and EVs.
Sociedad Quimica y Mínera de Chile (SQM). SQM is one of South America’s most profitable lithium producers. Based in Santiago, Chile, the company has access to some of the best lithium mines in the world, such as those based in the Atacama Desert. This means that the company can keep production costs low. Although the stock price of SQM has, in the past, been hurt by political concerns, the strength of the lithium market has outweighed those fears. The company regularly generates more than 10% profit margins and holds minimal debts.
Lithium Americas Corp. (LAC). LAC is a new contender in the lithium market and is, therefore, a risker option for investors. It currently does not produce any lithium, but, with its partner, Gangfeng Lithium, is hoping to open revolutionary lithium mines in both the U.S. and Argentina.If the company can bring its mines online, there is likely to be strong demand for the lithium produced, which could mean that the stock price reacts positively.
Gangfeng Lithium (GNENF). Gangfeng is China’s largest lithium producer. The company tackles every aspect of lithium production and utilization. Extracting resources from one of the biggest lithium mines in Australia, the company then refines and manufactures a range of lithium products including lithium-ion batteries.As a Chinese company, Gangfeng can tap directly into China’s expanding EV market. Unlike others, the stock can only be purchased through the Hong Kong and Shenzhen stock exchanges.
Livent (FMC). Livent, a company created by the chemical manufacturer FMC, was formed in 2019. It is both a lithium producer and consumer, creating a range of lithium products including batteries and alloys.Unfortunately, through its short life, it has had to contend with the Covid-19 pandemic, which has played havoc with supply chains. However, the company is now beginning to find its feet. Operating profits are beginning to climb into the mid-high teens, which the company is using to reinvest and expand its production. Advantageously, the company is one of Tesla’s biggest suppliers.

Benefits

High earning potential if an individual stock does well.
Dividends are paid by many lithium stocks. These quarterly or bi-annual payments can be reinvested to increase the growth of a portfolio.
Many lithium producers also have alternative monetary streams, which means that stocks can provide shelter from lithium price volatility.

Risks

Choosing one or two lithium stocks can lead to a lack of diversification.
Like all stocks, the return of lithium stocks is dependent on the health of a company. It is, therefore, important to keep up to date with a company’s fundamentals. Remember to do your own research (DYOR).

Lithium ETFs

If researching and evaluating individual stocks is too time-intensive, investors can also take advantage of lithium exchange-traded funds. Lithium ETFs track an index that is composed of a collection of lithium stocks. By investing in an ETF, an investor can gain access to an instantly diversified portfolio, which can include both lithium producers and lithium manufacturers.

Here are three leading lithium ETFs that can provide exposure to the lithium market.

Global X Lithium & Battery Tech ETF (LIT). LIT is composed of 39 different lithium and battery stocks. The fund holds $4.5 billion in assets and charges an annual fee of 0.75%.
Amplify Lithium & Battery Technology ETF (BATT). BATT is an ETF focused purely on lithium battery providers. The fund holds $194 million in assets and charges an annual fee of 0.59%.
First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN). QCLN is an ETF focused on industries that benefit from the lithium market. The ETF includes companies involved in both the renewables and EV sectors.

Benefits

Instant diversification across a wide range of lithium-focused stocks.
Less risky than individual stocks as it spreads the risk of investment across a large portfolio of stocks.
Like individual stocks, some ETFs can offer the opportunity for positive cash flow through dividend schemes.

Risks

When the lithium market is trending, the returns from ETFs may not be as large as those from individual stocks.
ETFs are not free products. For operating and maintaining an ETF, a provider will charge investors a percentage fee.

What Dividends Can You Get From Lithium Stocks?

Alongside the potential for returns on capital, some lithium stocks also provide investors with strong yearly or bi-yearly dividends. These particular stocks may be of interest to those looking to expand a dividend-based portfolio:

Albemarle Corp. As mentioned above, Albemarle (ALB) is a material and chemical specialist that is consistently working to meet future lithium demand. Its healthy earning reports throughout 2022 resulted in a boost in its stock dividend. As of October 2022, Albemarle pays $0.3950 per share.
FMC Corporation. FMC Corp is the parent company of Livent and is a one-stop shop for lithium production and the manufacture of batteries. As of October 2022, FMC pays shareholders $0.53 per share.
EnerSys. Unlike the previous two, EnerSys is purely focused on the production of batteries, delivering to sectors including aerospace, transport, and the medical industry. The company has broad plans to expand into the EV and 5G technology space in the future. As of October 2022, EnerSys pays shareholders $0.1750 per share.

Summary

The lithium market has been thrust into the spotlight over the last couple of years. After catching the attention of investors worldwide, it is a commodity that could add a whole new level of diversification to an investment portfolio.

With recent demand driven by green industries, interest in the commodity has never been higher. Unfortunately, an investment in lithium cannot be completed with a ‘set it and forget it’ strategy. There are several nuances an investor needs to be aware of.

Investors need to keep up to date with changes to the EV revolution, monitor changes to extraction techniques, and become aware of new mining operations. However, if an investor can keep their finger on the pulse of lithium news and master the drivers for supply and demand, lithium stocks and ETFs provide excellent options for those looking to gain exposure to this exciting market.

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