Today we appear to be on the precipice of the electric vehicle (EV) revolution.
Telsa and other pureplay EV producers are joined by traditional car companies in producing the vehicles which will lead to a lower carbon world. Everyone is onboard from governments to consumers. The possibilities again seem limitless.
And at the heart of this effort are batteries which require lithium to produce. Depending upon the model, a Tesla battery contains between 5 and 75 kilograms of lithium. The link between lithium and EV has not gone unnoticed by investors.
In 2015 lithium was priced at 5,125 USD per tonne. In mid-December 2022 lithium was priced at over 80,000 USD per tonne.
It makes logical sense that miners of lithium will do very well as EV demand continues to rise. In many corners of the investing world lithium mania is in full swing. Investing chat boards are filled with questions about the best lithium miners. I get questions in many of my webinars about lithium. Naysayers like Goldman Sachs get attacked for not following the standard narrative that prices can only go up.
The question for investors is can the widely accepted first order thinking about the linkage between lithium and EV demand lead to strong returns into the future.
Good prospects already baked in
To be an above average investor you need to depart from conventional wisdom. Doing the exact same thing as everyone else will make you an average investor. And average is pretty good. Average is the market return that passive investors achieve minus the fees they pay.
But if you are going to buy a lithium miner today it is important to ask yourself what you know that other investors don’t.
We must always remember that conventional wisdom is baked into share prices.
A share price reflects the consensus view of the future at a particular point in time. At the end of 2021 the consensus view was that inflation was transitory and interest rates would stay low for years. The changing of that consensus view had profound effects on share prices.
There are also additional considerations when investing in mining companies. Mining can be very cyclical. If expected demand is forecast to be high, mining companies invest in more capacity. Those investments may take years to come online but history suggests that we often see capacity gluts which drive down prices. This will have a profound effect on higher cost producers who can’t make money off lower prices.
We’ve seen something similar in the tech industry where forecasts that COVID growth would continue led to widespread hiring. These same workers are currently losing their jobs as reality has dampened these optimistic forecasts.
Does this mean investing in lithium is doomed? Of course not. But just be careful because there is a case to be made that the first order thinking from many investors will not work. Yes, more EV batteries increase the demand for lithium. The simplicity of that relationship doesn’t fully encapsulate all the forces that make something a great investment opportunity.
It may be too late to profit from this trend.
This often happens once an investing narrative becomes conventional wisdom. Remember that short-term high prices for a commodity can lead to long-term bad outcomes for commodity producers. Supply increases often follow and consumers of that commodity search for substitutes. Time will tell if there is a replacement for lithium in EV batteries.
