How To Buy Lithium Stocks UK

Can you buy shares in lithium?

Unlike most commodities, including oil, gas, wheat, and gold, it is not possible to invest directly in lithium.

While this may change in the future, the metal is very different to other commodities:

• Like uranium, the other non-tradable commodity, it is extremely reactive. This makes it expensive to mine, store, and transport.
• It is to some extent non-fungible. While gold is the same whether mined in Russia or Mexico, the same is not true of lithium. Different sources are not entirely interchangeable, the hallmark of a speciality chemical. [1]
• Production is predominantly controlled by a handful of mining companies, and the total amount mined each year is relatively small. This makes it high risk, volatile and difficult to regulate.
• For example, lithium carbonate has skyrocketed by around 500% over the past two years. Of course, past performance is no guarantee.

In summary, investors can only gain capital exposure through various stocks and ETFs that are either directly or indirectly linked to the commodity.

How to trade or invest in lithium stocks

Lithium stocks can be separated into three generic categories:

1. Mining stocks, shares of companies which mine the metal at source.
2. Battery stocks, which develop and manufacture lithium batteries.
3. Dependent stocks, that rely on lithium for their product or service.

A few of the top lithium producers are involved in the entire supply chain, making them more complex instruments to understand.

Many investors choose to invest in a diversified mining giant such as Rio Tinto instead of a dedicated lithium miner to gain exposure to its lithium operation while limiting risk.

Of course, riskier small-cap lithium miner investors could reap far greater rewards.

What is the best lithium stock to buy?

85% of the global market was once dominated by just three top lithium stocks: Albemarle, Sociedad Quimica y Minera de Chile, and FMC. [2] Their stranglehold has loosened over the past decade of rising demand, as investing in new mines has become more economically attractive.

Accordingly, there are now dozens of top lithium shares on the stock market to invest in, across various international stock exchanges.

Some of the most popular include:

• Albemarle, one of the largest providers of battery-grade lithium in the US, produces both carbonate and hydroxide through its international operations. It’s also diversified into over 100 other lithium-based products, as well as catalysts and bromines.With huge financial assets, Albemarle forms a component of most lithium-based Exchange Traded Funds.
• Sociedad Quimica y Minera de Chile, one of the world’s largest producers due to its gigantic Chilean reserves. 21% of the company is state-owned, making it a comparatively low-risk investment.
• Livent Corporation, a 2018 spin-off from FMC, is one of Tesla’s main suppliers. It owns a large operation in Argentina, and is in a global investment expansion phase.
• Allkem, an Australia-based company formed from the merger of Orocobre and Galaxy Resources in 2021. It operates a hard rock mining operation in Argentina in partnership with Toyota Tshusho, and the pair plan to expand operations to batteries in Japan.
• Ganfeng Lithium, the largest Chinese-listed lithium stock, operates predominantly across Australia and Chile. Its business model stretches across the entire supply chain, from mining to refinement and processing, to battery manufacturing and recycling. It has supply deals signed with the likes of Volkswagen, Tesla, and BYD.
• Tianqui Lithium, the second largest Chinese lithium company. It owns a 51% interest in the world’s largest lithium mine, Greenbushes (in Australia), and also operates resources in China and Chile.
• Pilbara Minerals, owns 100% interest in the Pilgangoora project in the Pilbara region of Australia, one of the largest hard rock deposits in the world. The project is well sited for export to China.
• Tesla, whose $930 billion market cap makes it roughly as valuable as every other car manufacturer combined. For context, the US company made less than one million vehicles last year, compared to the OICA estimate of 57 million in total.CEO Elon Musk has previously advised investing in lithium production, enthusing ‘do you like minting money? Well, the lithium business is for you.’ [3]

Where can I buy lithium in the UK?

There are hundreds of speculative smaller-cap companies available to buy shares in, but all come with significantly higher capital risk. Two popular UK lithium shares are:

1. Cornish Lithium, which is planning to mine hard rock lithium in Cornwall. The UK company has secured mineral rights over vast swathes of the county, and the Cornish Lithium IPO is expected to launch within the next 12 months. [4] This is likely to be a huge investor event, as Cornish Lithium is one of the only UK lithium shares that can offer a secure domestic supply of the EV-critical metal. Of course, it faces a long road to consistent capital generation.
2. Kodal Minerals, which owns the Bougouni lithium project in Southern Mali, is expected to mine 2,550 kilotonnes of spodumene over the next eight years.The small-cap has excited investors over the chance that Ganfeng, who bought out the neighbouring Goulamina Project, could do the same with Kodal having already paid for the infrastructure. [5] However, this is a high-risk investment strategy, as its volatile share price can account for. It’s also worth noting that a company registered in London with international operations is not entirely under the purview of the Financial Conduct Authority, and Mali has very different legal requirements.

Top lithium ETFs

Exchange Traded Funds are an extremely popular financial instrument as they help provide exposure to a wide variety of lithium companies.

As the industry is in its early stages, the capital risks of any one stock collapsing are high, especially given the expense, time, and high failure rate of exploration.

However, even ETFs will be vulnerable during any market downturn that hits all producers and battery stocks. They still don’t provide the protection of investing in a generic miner or even spreading investments across a diversified portfolio.

Having said that, some of the best lithium ETFs to invest in are:

• Global X Lithium & Battery Tech ETF, which aims to track the Solactive Global Lithium Index, is widely considered to be the best international benchmark of global lithium performance. 65% of its holdings are based in Asia, so it does come with heightened regulatory risk.
• ETFS Battery Tech & Lithium ETF, an ASX-traded lithium ETF focused on companies that are exposed to the entire supply and battery chain.
• Amplify Lithium & Battery Technology ETF, which tracks the EQM Lithium & Battery Technology Index, and is concentrated on battery stocks rather than lithium mining.
• WisdomTree Battery Solutions UCITS ETF, another battery-focused lithium ETF, which tracks the WisdomTree Battery Solutions Index.

Investments within these ETFs often change rapidly, so it’s important to consider both the specific ETF fact sheet and your own risk attitude before buying in.

What is lithium?

Lithium is a silvery-white alkali metal, with special chemical properties that make it the optimal component of lithium-ion batteries that operate as the power source for electric cars, phones, laptops, wheelchairs, e-bikes, and countless other items.

What is the purpose of lithium?

In addition to batteries, it has dozens of other applications:

• Aluminium-lithium alloys are used in the manufacture of cars, planes, bikes, and trains.
• Magnesium-lithium compounds are used in armour plating.
• Lithium oxide is used to make heat-resistant ceramics and glass.
• Lithium chloride is key to air conditioning.
• Lithium carbonate is used as an anti-depressant and mood stabiliser.
• Lithium stearate is a high-temperature lubricant.
• Lithium hydride is used for hydrogen storage.

However, 80% of the metal mined in 2021 was used for EV batteries, so EV demand is the key price-determining factor. [6]

Lithium vs Nickel

Nickel batteries were popular in early EVs, as lithium ones are around 50% more expensive to manufacture. Nickel batteries also last for more years, as they tolerate more charging cycles. Further, they can already be profitably recycled.

However, lithium’s unique chemical advantages mean it will almost certainly power the EV revolution, bar a giant technological leap forward. It’s the least dense metal and the most effective for conducting electricity. And LI-ION charges faster, and its maximum charging capacity is less affected after each charging cycle.

Nickel also has 40% lower energy density, so more is needed to make a similarly powered EV battery. [7] In addition, nickel gets hotter faster, so needs a water-based cooling system.

For balance, lithium’s major downside is its chemical instability. It has to be stored in a vacuum, or inert atmosphere, such as oil. This makes it far more expensive to mine, transport, store, and manufacture into batteries.

What forms does the commodity appear in?

The metal comes from two key sources: spodumene, mined mainly in Australia, and brine extraction, coming mostly from the South America ‘lithium triangle’ of Argentina, Brazil, and Chile, which contains 75% of the world’s deposits. [8]

Spodumene is a lithium-bearing hard rock mineral, while brine is an accumulation of lithium-containing groundwater that is extracted as a salt.

The two main types of lithium sold at market are lithium carbonate and lithium hydroxide. Lithium hydroxide is regarded as a premium product as it is better for battery manufacturing.

Lithium extracted from spodumene can be turned into either hydroxide or carbonate, but lithium extracted from brine must be turned into carbonate before being converted into hydroxide. This makes spodumene mining far more economically viable.

Where is lithium mined and who are the biggest producers?

Lithium is a common element. However, there are few places in the world where the metal is concentrated enough to economically mine.

Australia is by far the world’s leading producer. While it has fewer deposits than in the lithium triangle, its spodumene is more economically attractive. In addition, its close geography and trading ties with China mean there is always a buyer.

As fossil fuels dry up and become more expensive, lithium is becoming ever more important for national energy security. With few large deposits worldwide, countries that can are already attempting to develop their own domestic supplies. This means opportunities to invest are going to increase.

For example, China’s Sichuan province hosts a high concentration of the metal in its salt lakes, the EU has small reserves in Serbia and Portugal, and the UK has some reserves in Cornwall. All are likely to be developed, as the current energy crisis has demonstrated the dangers of relying on external sources for critical infrastructure materials.

Why should I add lithium companies to my portfolio?

For starters, data from the UN Department of Economic and Social Affairs shows demand for electric vehicles Li-ion batteries increased from just 19 GWh in 2010 to 285 GWh by 2019. And demand is set to soar further to 2,000 GWh by 2030, representing 8% of the global energy supply. [9]

It’s true that there is no real shortage right now, other than that associated with supply chain problems. Goldman Sachs has already predicted the metal’s bull run is at an end, and is about to enter a sharp capital overcorrection due to oversupply. [10]

However, the overarching trend should be one of long term shortages causing price rises.

This is due to a number of factors, including cross-sector reliance. While lithium demand is currently driven by EV adoption, its other uses mean that even if demand for EV batteries falls, the overall market is unlikely to be dragged too far down.

Tell me the future of lithium?

A handful of major players control the vast majority of global production, concentrated inside a few small regions on Earth. This is a problem because it makes it difficult to ascertain lithium’s true value, given that the metal is not publicly traded.

The dozens of smaller exploratory companies constitute a further complicating factor. Supply chains are few and weakened by the pandemic. Further, as many producers don’t disclose the levels of their reserves, it is virtually impossible to know whether there will be a shortage until it comes.

But in the Global Electric Vehicle Outlook report, published by the International Energy Agency, EV sales doubled in 2021 to a record 6.6 million. Further, 2 million EVs were sold in Q1 2022, up 75% year-over-year.

As Executive Director Fatih Birol notes, ‘few areas of the new global energy economy are as dynamic as electric vehicles. The success of the sector in setting new sales records is extremely encouraging.’ [11]

Moreover, legislation prohibiting the manufacture or sale of ICE cars in favour of an electric vehicle future is being passed across vast swathes of the developed world, including in the EU, UK, USA, and even China. [12]

Supply chain changes

Similar to how Taiwan controls 95% of semiconductor manufacturing, China controls 76% of lithium battery cell production, and also holds a market-leading position in lithium refining. [13]

The Ukraine war, Shanghai lockdown, and Sino-Taiwan tensions have all given countries and companies good reason to re-evaluate their supply chains, and consider paying more for security of supply.

In the US, President Biden has given lithium several huge boosts:

• he plans to have half of all new cars be electric by 2030
• he’s invoked emergency Presidential powers under the 1950 Defense Production Act, ‘to reduce our reliance on China and other countries for the minerals and materials that will power our clean energy future’ [14]
• has started a $3.1 billion plan to boost domestic battery production
• is building 500,000 EV chargers
• has signed the Inflation Reduction Act, which extends EV tax credits of up to $7,500 on qualified new EVs and hybrid vehicles through 2032

Moreover, half of the tax credit requires 40% of metals in an EV battery to come from either North America or a US free trading partner, increasing to 80% by 2027. For context, Albemarle has the only operating lithium mine in the country.

Further, the other half relies on 50% of battery components being North American-made, rising to 100% by 2029.

Why is lithium important?

Lithium will power the EV revolution. However, it does not come without risks.

Lithium needs to be concentrated enough to be worth mining, and exploratory projects to determine this are both expensive, and come with a high failure rate.

Moreover, even if a definitive feasibility study is successful, the metal is difficult and time-consuming to mine, and new mines take up to a decade to begin extraction.

While this means demand is likely to eclipse the supply ramp-up, the risk of losing money rapidly over a long investment timespan cannot be ignored. Further, most lithium companies are intent on growth, so any dividend yield is likely to be low.

The wider risk is that any upcoming global recession puts the EV revolution on pause, especially if the economic gap between petrol and electricity narrows and governments lack the capital to drive the EV revolution along.

What about hydrogen fuel cells?

A further risk comes from potential technological advancement. Advances in hydrogen fuel cells, which have an energy-to-weight ratio ten times higher than lithium, could one day replace the metal entirely.

They offer no harmful emissions, an impressive range of 300 miles, and even higher energy efficiency levels. However, developing the tech required to refuel hydrogen-powered cars on a mass scale is highly capital-intensive, as is storing and transporting hydrogen. Further, onboard hydrogen storage is not yet commercially viable. [16]

However, as other industries go, investing in hydrogen stocks could be an intelligent way to diversify risk. The three most popular UK-based hydrogen stocks are AFC Energy, Ceres Power, and ITM Power.

How to buy lithium shares FAQs

References:

1. Why the lithium market needs to take a leap of faith on pricing – Fastmarkets
2. Lithium stocks from top producers to watch in 2022 | IG UK
3. Elon Musk to young entrepreneurs: “Do you like minting money? The Lithium business is for you.” (teslarati.com)
4. Cornish Lithium IPO: When is this Lithium mining company going public? (kalkinemedia.com)
5. China’s Ganfeng to pay $130 million for stake in Mali lithium mine | Reuters
6. Lithium Price Forecast: Will The Price Keep its Bull Run? – Batteries News
7. Nickel Metal Hydride vs Lithium-ion Cells | Insight | Steatite (steatite-batteries.co.uk)
8. The Lithium Triangle: Where Chile, Argentina, and Bolivia Meet (harvard.edu)

9. Li-ion batteries – powering the fossil-fuel-free economy | United Nations
10. Why Goldman Sachs Is Wrong About Lithium Prices | OilPrice.com
11. Global EV Outlook 2022 – Analysis – IEA
12. Global ICE Vehicle Phase-Out | Green City Times
13. China is owning the global battery race. That could be a problem for the U.S. – Grid News
14. FACT SHEET: President Biden’s Plan to Respond to Putin’s Price Hike at the Pump – The White House
15. FACT SHEET: The Inflation Reduction Act Supports Workers and Families – The White
16. House Battery electric vs hydrogen – future of electric vehicles | Blog, Murgitroyd

Please note

This article has been prepared for information purposes only by Charles Archer. It does not constitute personal advice, and takes no account of individual circumstances or any specific person. No party accepts any liability for either accuracy or for investing decisions made using the information provided, and investors should seek personal advice or independent advice.

Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.