In 2022 there was a ‘white gold’ rush as lithium prices soared thanks to huge Chinese demand. The chemical element is a key component in the manufacture of batteries for electric vehicles and the storage of energy generated by renewable sources. China is at the forefront of battery production.

Many analysts are forecasting a decline in lithium prices, but several executives have told Shares they are not so sure the experts have their numbers right. In this article we will look at the short and long-term prospects for the lithium market, examine the UK and overseas-listed names with big exposure to lithium and highlight our best ideas to play the theme.

CHINA’S ‘INSATIABLE’ APPETITE FOR LITHIUM

Evidence of soaring demand for lithium can be tracked in the surge in Chinese spot prices for lithium carbonate over the last 12 months or so – with China buying up vast quantities of the element to support production of lithium-ion batteries.

According to research provider Bloomberg New Energy Finance, China accounted for 77% of the world’s battery manufacturing capacity in 2022 and is still expected to account for more than two thirds by 2027.

The failure of the UK’s Britishvolt venture has put the spotlight on how other countries are far behind China with battery production.

Anthony Viljoen, CEO of Andrada Mining (ATM:AIM), which recently changed its name from Afritin as a precursor to expanding focus from its tin output in Namibia towards lithium, says the ‘geopolitics are fascinating’ with China demonstrating ‘an insatiable desire to control every lithium deposit on the planet’.

This was reflected in the £285 million takeover of UK-listed Bacanora Lithium by Ganfeng Lithium in 2021 and Kodal Minerals’ (KOD:AIM) recent deal with China’s Hainan Group to give the latter 41% of its Bougouni mine in Mali in exchange for £81 million to help fund its development.

Viljoen even says German car manufacturers are hiring their own geologists as they look to secure new sources of supply.

Perhaps unsurprisingly given the scale of gains for lithium in 2022, with prices hitting a record high of $84,000 per tonne, the big investment banks are forecasting that prices will moderate in 2023.

In November 2022 Morgan Stanley put out a forecast for prices of $67,500 per tonne in the first half of 2023, falling to $47,500 per tonne in the second half of the year. Goldman Sachs went even further in December with a forecast of $53,300 for 2023 as a whole and just $11,000 for 2024 –  compared with a consensus forecast of $29,063.

Charles FitzRoy, the chief executive of prospective lithium miner Bradda Head (BHL:AIM), says: ‘I think it’s important to say analysts were forecasting $30,000 per tonne for 2022 and spot prices are currently above $70,000 so whatever people are forecasting now is probably worth seeing in that context. We’re seeing a new developing market so it’s not surprising analysts find it so hard.

‘If you listen to the research the price was supposed to drop off in the second half of last year, it didn’t really happen because there was more demand than we thought and it’s an important factor that China is opening up again.’

He also points out that while it is relatively straightforward to scale up and predict lithium supply from pegmatite sources, the same is not necessarily true for brines and clays. There are also big technical challenges with recycling lithium-based batteries.

Naturally, those engaged in lithium mining are unlikely to talk down prices, but FitzRoy points out operating costs are below $5,000 per tonne on pegmatite lithium deposits, so most miners would be able to generate substantial margins even at materially lower prices than we see today.

Chemistry lesson: where lithium comes from

Lithium miners derive the element from three main sources. The most established process is to target pegmatite crystals. A pegmatite is a type of igneous rock made up of interlocking crystals like spodumene.

Lithium can be extracted using conventional open-pit or underground mining techniques and the mineral is then processed and concentrated using a variety of methods.

Another approach is extracting lithium from brine. The brine is typically found underground with drilling taking place for access. Most extraction sites are in a set of salt flats found in an area of south-west South America although other sources include oil and gas fields and geothermal waters. The main recovery technique is to pump salt-rich water to the surface and into a series of evaporation ponds.

Over a period of months, the water evaporates, and a variety of salts precipitate out, leaving a brine with an ever-increasing concentration of lithium. Once this concentration hits a certain threshold it is pumped to a recovery facility to extract the lithium.

Less well-established is the method of extracting lithium from clay. Despite having clay-based lithium prospects in his company’s portfolio, Charles FitzRoy from miner Bradda Head acknowledges ‘clays are an unknown’ and notes costs are currently higher than extracting from pegmatites.

WHICH ARE THE MAIN LITHIUM COMPANIES ON THE STOCK MARKET?

The biggest lithium-related stock on the US market is Albemarle (ALB:NYSE). The speciality chemical company is a leader in lithium and lithium derivatives and owns lithium brine and pegmatite deposits. There is also Piedmont Lithium (PLL:NASDAQ) which recently updated a supply agreement with electric vehicle manufacturer  Tesla (TSLA:NASDAQ).

Australia is a hub for pegmatite lithium mining as well as having a large listed contingent. As the executive chair Neil Herbert of Atlantic Lithium (ALL:AIM) told Shares late last year when explaining why the company had sought a dual listing in Australia, ‘No disrespect to the London market but we don’t have serious competition, whereas in Australia the projects are really good – there’s a lot more understanding of and investment in lithium.’

For UK investors diversified miner Rio Tinto (RIO) has a burgeoning footprint in lithium – it acquired the Rincon project in Argentina for $825 million in 2022, for example. However, the largest pure lithium miner listed in London is Atlantic Lithium.

The company owns the Ewoyaa lithium project in Ghana. This is projected to produce more than 30 million tonnes of high-quality lithium ore. Atlantic is partnered on the project with Piedmont Lithium.

Limiting their environmental footprint is an important consideration for lithium miners. This is logical. Environmental factors are a big driver for growth in the electric vehicles space and manufacturers will want to demonstrate that their supply chains are as clean as possible.

For Bradda Head’s FitzRoy this is about limiting use of water and chemicals and developing local projects for domestic supply – so you don’t have supply chains stretching out to China.

Chile-focused CleanTech Lithium (CTL:AIM) is looking to pioneer ‘Direct Lithium Extraction’ powered by clean energy sources to reach its goal of producing carbon-neutral lithium.

It recently published a scoping study for its Laguna Verde project. Canaccord noted the results ‘confirm our expectations for Laguna Verde to eventually be a low-cost producer among brine projects globally.’

Direct Lithium Extraction uses an absorbent to extract lithium from brine water without the need for evaporation – meaning the water can be reinjected into the underground basins once the lithium has been extracted.

THREE INTERESTING WAYS TO INVEST

Investors wary of the risks of a short-term slump in lithium prices could get diversified exposure through Rio Tinto which has lithium interests alongside other metals like copper and aluminium necessary for the transition to renewables and electric vehicles. Despite a strong recent run the shares trade on just 10 times forecast earnings and offer a dividend yield of around 6% and should be a beneficiary of Chinese reopening.

An alternative option is Global X Lithium & Battery ETF (LITG), a type of tracker fund which mirrors the performance of a basket of lithium miners and battery technology firms, with Albemarle the largest holding. Investors should note this product does have a relatively high charge of 0.6% for an exchange-traded fund and is small with assets of around £30 million.

Of the UK-listed lithium miners Atlantic Lithium has the most advanced project. Canaccord Genuity describes its Ewoyaa development as a ‘world-class asset’ and sees it as one of the lowest cost and least capex-intensive hard rock lithium projects available for development globally, adding that it benefits from close proximity to port and infrastructure.

Neil Herbert argues that Australian firm Core Lithium (CXO:ASX) is around two years ahead of Atlantic in its development but has five times the market valuation. With Atlantic’s shares significantly below highs of 66p hit last year at 41.4p, there could be a good opportunity to invest for those prepared to bear the development risks.

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