Mad Hedge Technology Letter
May 10, 2023
Fiat Lux
Featured Trade:
(FRONT RUN THE LITHIUM PIVOT)
(LIT), (MVST), (LICY)
Posts
I remembered the moniker data was the new oil and there is a salient argument that still holds true, especially with software companies.
However, the CEO of Tesla Elon Musk has something to say about that when he described lithium batteries as the new oil.
Musk said that as he was hyping up a new lithium-ion factory Tesla intends to construct in Corpus Christi, Texas.
The EV leader plans on a $375 million facility so it can produce more domestic battery-grade lithium than the rest of North America is currently capable of.
Given lithium is a key component of the batteries that power Tesla’s cars, and EVs are set to gain widespread adoption over the coming years, Tesla is obviously an outsized winner here.
Here are two other companies that could participate in the lithium gains as well:
Microvast Holdings (MVST)
The company’s advanced battery solutions are designed to power a wide range of electric vehicles, from small passenger cars to heavy-duty trucks and buses.
The stock is up around 50% today after yesterday’s earnings.
The companies delivered better-than-expected results and announced record-breaking backlogs of delivery orders.
Sitting at $2 per share, it’s still cheap to jump in.
Li-Cycle Holdings (LICY)
Next is Canadian company Li-Cycle Holdings, a specialist in advanced lithium-ion battery resource recovery.
Essentially, the firm recycles lithium-ion batteries, reintroducing the materials back into the supply chain, and the proprietary tech is designed to recover up to 95% of the materials used in the battery manufacturing process, including lithium, cobalt, nickel, and other valuable metals.
Li-Cycle has also secured several partnerships with other companies, including Kion, Glencore, and Renewance.
The transportation and energy markets are evolving in unpredictable ways, but most prognosticators agree: no matter what happens, battery recycling will be crucial.
LICY still strikes me as an investable option in this segment; the company has a multi-year head start, as well as a growing list of strategic partners (including KION, a German multinational that manufactures 1.7 million forklifts per year).
Perhaps most importantly, a $375M loan from the Department of Energy helps de-risk Li-Cycle’s balance sheet, so unlike many asset-intensive peers in the battery supply chain, LICY should have no problem funding its expansion.
If readers want to take a broader approach to investing and reach for a basket of lithium-based exposure then one of the most popular ETFs providing exposure to lithium is the Lithium & Battery Tech ETF (LIT).
It invests in the full lithium cycle, from mining and refining the metal, right through to battery production.
There are options for the reader because these small companies are highly speculative and aren’t a sure thing.
Going with LIT is a safer way to ride the lithium trend but by reducing risk by a great deal.
EVs aren’t going away anytime soon, and the heaps of policies introduced to the global economy mean that car manufacturers will be forced to pump out more EVs in the future.
Mad Hedge Technology Letter
January 31, 2022
Fiat Lux
Featured Trade:
(THE NEXT WAVE OF LITHIUM BATTERY DEMAND IS HERE)
(LAC), (ALB), (LTHM), (LIT), (BAT)
The theme of consumer price inflation is here to stay as the largest increase in inflation since 1982 has been fueled by major price spikes.
Energy and mobility are high up on the list of inflationary items and in 2022, when you combine these two, the result is electric vehicles.
2022 is the year of the EV and that means the world needs to produce more lithium batteries.
Inflation has penetrated deep into the consumer psyche and consumers have started to mentally adjust to the realities that we must pay higher prices permanently.
In phone interviews with a random sample of more than 800 Americans, energy prices were one of the leading items of discontent because of the reliance on gas-guzzling cars.
High oil prices along with global government policy is promising to be a boon for EV makers.
We sit here on the precipice of a massive transformation into advanced mobility.
I believe that lithium stocks are poised for higher highs in 2022’s as the demand for EV soars.
To satisfy the industry's insatiable appetite for lithium, global supply will have to quadruple to 2 million metric tons by 2030.
Current and expected projects should be able to meet demand until 2025, but after that, the world will need to explore more supply.
Over the longer term, high prices will fix themselves by spurring miners to increase production. Higher prices will also encourage more lithium recycling, further boosting supply. Meanwhile, companies that buy lithium will look for cheaper alternatives.
Lithium companies that need to be looked at:
- Lithium Americas (LAC)
- Albemarle Corporation (ALB)
- Livent Corporation (LTHM)
There are more native plays involved in more of the lithium supply chain than simply mining. Livent Corp. (LTHM), which is on track with its own near-term lithium expansion plans and has a decent cash-to-debt ratio, adds value to the lithium it mines by turning it into compounds for the electric vehicle market and other industries.
ALB stock is also among the best lithium stocks to consider for the medium to long term.
For Q3 2021, the company reported lithium sales of $354 million, which was higher by 33% year over year.
Remember that some of these companies have never extracted any lithium and are trading on the prospect of mining lithium so it’s important to differentiate who actually has meaningful sales.
Overall, ALB’s lithium, bromine and catalyst business segments reported $863 million for the third quarter. The key point to note is that Albemarle expects earnings to increase three-fold by 2026. A large part of this growth is likely to come from lithium expansion.
Lithium Americas (LAC) got a boost right as 2021 kicked off when its Thacker Pass project in Nevada, which had been delayed for years because of the inability to receive a federal permit.
Thacker Pass is said to have the largest lithium resource in the U.S. and holds the key to the company's growth.
Finally obtaining the Thacker Pass permit was a big deal, but the $400 million in issued debt means it will cost a pretty penny to extract.
Lithium Americas continue to make inroads on its other project, the Cauchari-Olaroz mine in Argentina, which it owns alongside China's Ganfeng Lithium.
The two companies announced second-stage expansion to add additional annual capacity of at least 20,000 tons of battery-grade lithium carbonate equivalent (LCE) by 2025.
Investors also have the choice to reduce risk by buying into a Lithium ETF.
The Global X Lithium & Battery Tech ETF (LIT) and Amplify Lithium & Battery Technology ETF (BATT) are some that readers should look at.
Global Market Comments
October 12, 2021
Fiat Lux
Featured Trade:
(ON THE AIR WITH CASEY STUBBS),
(HOW TO HANDLE THE FRIDAY, OCTOBER 15 OPTIONS EXPIRATION),
(SPY), (GS), (MS), HPM), (BAC), (BLK),
(UNP), (TLT), (C), (BAC), (BRKB)
Inflation is everywhere — at your grocer, coffee shop and the bad news is — it’s likely to stay transitory for quite a while as it transits into even higher prices.
This isn’t the Mad Hedge Agricultural Letter so I will stay in my lane — this letter is about one of the building blocks of technology and specifically Electric Vehicles (EVs) — Lithium Batteries.
Lithium-ion batteries are the most popular type of batteries used in electric cars.
This kind of battery may sound familiar — these batteries are also used in most portable electronics, including cell phones and computers. Lithium-ion batteries have a high power-to-weight ratio, high energy efficiency and good high-temperature performance.
In practice, this means that the batteries hold a lot of energy for their weight, which is vital for electric cars — less weight means the car can travel further on a single charge.
The cost of Lithium-ion batteries is critical to EVs because it comprises about 50% of the total cost of producing an EV.
So what’s the deal with Lithium-ion batteries?
Prices have more than doubled in the past year because demand for the materials used in electric cars and renewable-energy storage has gone bonkers.
Miners cannot issue the supply to satisfy the current demand.
Instead of getting more into the weeds — I will tell you that your new Tesla (TSLA) you’re about to buy will become more expensive, so start budgeting wisely!
Increased costs will be passed onto electric vehicle (EV) manufacturers and not necessarily battery cell manufacturers, thereby potentially leading to a cost increase in EVs in the near future.
The price inflation from lithium is actually derailing a decades-long trend of a fall in lithium-ion battery prices.
Then coupled with a persisting semiconductor shortage (impacting microchip availability) — supply shortages could lead to EV demand destruction as EVs simply fail to come to market in significant quantities or do so at higher prices in limited availability.
Demand destruction is highly likely to accelerate if new lithium projects do not come to market relatively quickly, or miners might simply choose to collude together to keep prices high.
On the supply side, it’s just not guaranteed that miners can keep their costs of exploration, mining, engineering, and executing as low as they did before.
Hiring the proper talent to execute a new mine is facing headwinds like many other businesses in terms of spiking salary costs and lack of engineering talent.
For the EV industry, price points are a sore point because many consumers are on the fence about whether to buy an EV or not.
Simply put, if EVs are too expensive, consumers will just go with a gas guzzler because that’s what they know and they don’t need to deal with waiting hours at a charging station to charge their EV with a gas station across the street.
It’s true that the quality of EVs from Tesla to Mercedes has improved leaps and bounds in the past few years so the quality issue is a non-issue today.
To have a circular and sustainable bull market, EV uptake would need to surpass 50%. Until then, it’s a war of price points.
There’s also a strong possibility that not enough lithium can be mined, and this will keep EV prices high.
Battery makers are also facing higher prices for other key inputs like cobalt and copper.
Instead of doing risky things like short Tesla, which is a dangerous strategy, I would buy a lithium ETF.
The one I recommend is Global X Lithium & Battery Tech ETF (LIT).
The stock is up over 300% in the last 2 years and if this lithium inflation narrative persists, which I highly believe it will, then any substantial drawdowns should be bought.
