Battery Materials Facing Supply Constraints as Demand Surges

Supply constraints mean higher metal prices. Higher metal prices convert into higher-valued metal companies. Pay attention to the macro as it drives your ability to make smart and well-timed investments.

There are a few key reasons why battery material supply constraints are an important consideration for investors:

1. Price volatility: Lithium and cobalt prices have already experienced major spikes over the past decade with surges in EV demand. Nickel prices also see frequent swings. Volatile commodity prices make it more difficult for manufacturers to control costs and maintain stable margins. They also introduce uncertainty in projecting future materials costs. For investors, volatility can either provide opportunities to benefit from price swings or create risk depending on their strategy and positions.
2. New sources needed: Most forecasts suggest global lithium demand could grow over 5-10x by 2030. Existing mines will not be able to supply this massive demand growth. New projects and mines will need to be financed and built, especially in locations with low geopolitical risks. This creates potential opportunities for investors to fund new exploration, mining, or processing projects that will be essential in meeting future lithium requirements.
3. Geopolitical risks: The Democratic Republic of Congo produces over 70% of global cobalt. Lithium reserves are concentrated in the Lithium Triangle in Chile, Argentina and Bolivia. Political instability in these regions could severely impact global supply. Export quotas, tariffs, and nationalism around battery materials may emerge as they become viewed as strategic assets. Investors will need to carefully evaluate these risks which could drive up prices and uncertainty.
4. Competition for materials: As EV adoption accelerates, automakers will be competing for limited battery materials against each other as well as the electronics and grid storage sectors. Volkswagen for example aims to have 50% of battery supply come from its own mines. Obtaining raw materials could become both challenging and more expensive. This tighter supply-demand balance reduces market flexibility and potentially increases costs across the board.
5. Vertical integration: Upstream integration by battery and automotive firms limits availability of cobalt, lithium, and nickel for other end-users. Vertical integration can be used to ensure supply, but reduces market efficiencies. Investors will need to factor in the impacts of large manufacturers locking up substantial parts of the raw material supply.
6. Technology risks: If lithium prices rose 5-10x for example, it could accelerate R&D into less constrained chemistries like sodium-ion batteries. But new technologies also carry uncertainty in their development, performance, and scale-up. Investors will need to weigh the potential opportunities vs. risks.

Supply issues create price and market risks, drive vertical integration and competition, and may spur the development of new battery technologies - all key considerations for investors in this space. Anticipating and planning for supply risks will be an important part of battery investment strategies.
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Understanding the Technology

Lithium-ion (Li-ion) batteries, especially Nickel-Manganese-Cobalt (NMC) and Nickel-Cobalt-Aluminum (NCA) chemistries, currently dominate the battery storage market with a 95-99% market share. Their balance of energy density, power density, safety, and most importantly, rapidly declining costs, have led to market dominance. Major brands using NMC include LG and Samsung, while Tesla uses NCA.

Costs for Li-ion batteries have declined 90% over the last decade. As costs continue to fall, expected to reach $100/kWh by 2030, Li-ion batteries become increasingly viable for long-duration stationary storage by simply stacking more modules. The incumbent NCM/NCA products continue optimization of manufacturing methods, supply chains, and economies of scale, making it difficult for new chemistries to compete on cost.

However, new battery chemistries like Lithium-Sulfur (Li-S), Lithium-Oxygen (Li-O), and Magnesium-Ion (Mg-Ion) offer potential energy density improvements of 2-3x over Li-ion. This could double the electric vehicle range or halve battery pack sizes/costs. For investors, key startups in these new chemistries include PolyPlus, Oxis Energy, and SolidEnergy Systems.

Changing liquid electrolytes to solid-state versions in Li-ion batteries improves safety and energy density while enabling faster charging. Major automakers and battery companies are investing heavily in solid-state Li-ion batteries. Key startups include QuantumScape, Solid Power, and ProLogium. Early solid-state batteries may reach 400 Wh/kg by 2030 versus 300 Wh/kg for liquid Li-ion.

Even without new materials, continued incremental improvement of Li-ion batteries will produce 300-400 Wh/kg designs by 2030. Using advanced asymmetric temperature modulation techniques for ultra-fast charging, 300km of EV range could be added in 10 minutes. Current EV batteries could already power over 1.6 million km over 20 years.

What Does the Future Hold

The outlook for Li-ion batteries is highly positive even without breakthroughs. Within 10 years, EVs will outperform conventional gasoline cars while grid storage costs drop 30-75% with improved safety. Our modelling shows EVs reaching 50% of new car sales globally by 2032. Lower battery costs also aid renewable energy integration.

For investors, key battery materials like lithium, nickel, and cobalt face potential supply constraints. Related mining companies, especially those with geopolitically secure resources, could see sustained growth. Battery manufacturing will continue to consolidate around major Asian suppliers like CATL, LG, Samsung, and Panasonic who control IP, supply chains, and economies of scale.

New battery chemistries face challenges competing with the optimized, scaled Li-ion industry. Investments in those chemistries require long time horizons. Nearer-term opportunities exist in improvements compatible with current Li-ion manufacturing like solid-state electrolytes. Startups focused on novel materials or manufacturing processes could be acquisition targets.

Overall, batteries represent a major investment opportunity as the world transitions to electric mobility and renewable energy. Cost declines will continue to accelerate adoption. However, batteries remain on an incremental improvement path, favoring existing major players in lithium, manufacturing, and EV/storage applications. New technologies require patience but could ultimately disrupt the growing lithium battery markets.

Some options for investors to gain exposure to the nickel sector:

• Major diversified miners: Large diversified mining companies like BHP Group, Glencore, and Vale produce substantial amounts of nickel, both from sulfide and laterite deposits. They offer stability but limited pure-play nickel exposure.
• Pure-play nickel producers: Smaller companies focused primarily on nickel production include Sherritt International, Independence Group, Western Areas, and Lundin Mining. Provides direct leverage to nickel pricing and demand growth.
• Development/exploration companies: These companies are advancing new nickel projects but not yet in production, like Canada Nickel Corp, FPX Nickel, Talon Metals, and Grid Metals. Higher risk/reward. Useful for gaining early exposure to potential new supply sources.
• Processing technology companies: Companies developing proprietary extraction/processing techniques for lower-grade nickel deposits and tailings, such as Giga Metals (Turnagain deposit) and Australian Mines (Sconi project).
• Battery nickel companies: Produce nickel sulfate or nickel metal specially formulated for batteries. Includes BHP's Nickel West, Jervois Global, Talon Metals, and Ambatovy JV. Aligns investment directly with battery nickel demand.
• Equity instruments: Options include stocks, warrants, and convertible notes/debentures of both major and junior nickel companies. Provides leverage to the company-specific upside.
• Private investment: Exposure to private nickel companies and projects is possible through private equity, joint ventures, and streaming/royalty financing deals. Gives access to early-stage opportunities not available in public markets.

The optimal approach depends on risk tolerance, desired leverage to nickel prices, jurisdiction preferences, and investment time horizon. Blending exposure across both larger stable producers and smaller explorers/developers is a common balanced strategy.

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Canada Nickel

Canada Nickel is emerging as a major player in the nickel mining sector through its 100% owned Crawford Nickel Sulphide project in Timmins, Ontario. Crawford is the largest nickel discovery since the 1970s and is located in an established mining jurisdiction with good infrastructure. Through over 20 transactions, Canada Nickel has also consolidated a vast regional land package 50 times larger than Crawford with 20 additional targets, demonstrating the potential for further substantial discoveries and resource growth. With its significant existing resource, low carbon production potential and exploration upside across its district-scale land holdings, Canada Nickel is well positioned to become a leading nickel producer.

Pan Global Resources

Pan Global Resources Inc. is a mining company focused on copper exploration and development in southern Spain. The company's main project is the large, wholly-owned Escacena Copper Project, located in a prolific region near active mines. Escacena hosts the La Romana discovery, where significant copper-tin-silver mineralization has been intersected over 140 drill holes since 2019. With the EU seeking to increase domestic copper production to meet rising demand and implement more sustainable mining practices, Pan Global is well-positioned to potentially fast-track permitting and financing for La Romana. The company remains focused on expanding the deposit scale prior to establishing a maiden resource estimate.

Marimaca Copper

Marimaca Copper is a TSX-listed company with an exciting copper discovery - the Marimaca Copper Project in Chile's Antofagasta region. This is the only major new copper discovery globally in the past 5 years and is considered low risk with significant exploration potential. Marimaca's vision is to create value for shareholders by realizing the full potential of Marimaca, which could become one of the most significant recent copper-oxide discoveries, as well as exploring for other large-scale deposits in the region. The Marimaca deposit challenges accepted exploration wisdom as an intrusive-hosted system unlike the typical volcanic-hosted deposits nearby. Its prime coastal location near excellent infrastructure enables potentially low-cost development. As one of the most important new copper projects in Chile in the past decade, Marimaca is a high profile development opportunity in a country with limited new copper exploration success.

Li-FT Power

Li-FT is a mineral exploration company focused on acquiring and developing lithium pegmatite projects in Canada. Their flagship Yellowknife Lithium Project in Northwest Territories contains 13 lithium pegmatite dykes near infrastructure and they have initiated a 45,000 meter drill program in 2023 to define resources. Li-FT also has the early-stage Cali Project in Northwest Territories within a historic lithium pegmatite belt and drilling is planned once permits are received. In Quebec, Li-FT has three large exploration properties near the Whabouchi deposit where 10 targets have been generated and initial drilling of two targets will occur in summer 2023 with more exploration planned for 2024. Overall, Li-FT is advancing a portfolio of Canadian lithium assets through systematic exploration and drilling.

Frontier Lithium

Frontier Lithium is a preproduction company focused on becoming a major domestic supplier of lithium in North America for the electric vehicle and energy storage markets. Its flagship PAK lithium project in Ontario contains the highest grade lithium resource in North America and is the second largest by size at over 27,000 hectares. The project has delineated two premium spodumene-bearing lithium deposits, PAK and Spark, as well as two other discoveries, Bolt and Pennock. A 2023 pre-feasibility study forecasts a 24-year project life with a post-tax NPV of $1.74 billion and 24.1% IRR based on producing spodumene concentrates and downstream lithium hydroxide. The project has significant potential for further exploration and resource expansion.

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