Lithium Outlook Remains Strong Despite Recent Volatility

• The lithium price has been volatile in 2023, influenced by multiple factors including unreliable information from China, economic uncertainties, and evolving incentives for electric vehicles (EVs).
• The spot price for lithium is not necessarily a reliable indicator of the market's health, as long-term contracts and varying prices in different countries give a fuller picture.
• Predictions for lithium price by year-end 2023 remain uncertain, but if major factors remain constant, the price could potentially rise higher than it was in 2022.
• Strategic investments from automakers and producers like General Motors and Albemarle are securing the value chain, and this trend is expected to continue into 2024. Energy companies are also showing interest in lithium.
• Despite a recent pullback in lithium prices, there are buying opportunities in the sector. The lithium industry is still in its early stages of growth.

Volatility in 2023 Lithium Prices Driven by Multiple Factors

Lithium prices have experienced significant volatility in 2023, pulling back sharply from the over 500% surge seen in the prior two years. However, the long-term fundamentals for lithium remain highly favorable despite the recent turbulence.

Data coming out of China has influenced analysts to paint an overly pessimistic demand picture. When China ended its COVID lockdowns, economic uncertainty ensued, EV incentives came on and off, and some buyers rushed to purchase internal combustion engine vehicles ahead of a regulatory change. This dampened near-term lithium demand. Additionally, China's highly complex lithium supply chain contains many players willing to utilize low-quality lithium unsuitable for Western EV and battery makers. Inventory buildups across the supply chain are also contributing to price swings as excess production in one period becomes inventory to be drawn down in the next period.

Long-Term Contract Prices More Stable Than Volatile Spot Market

Mainstream media focuses heavily on the volatile lithium spot market. However, the real long-term market is driven by contracting between producers and automakers. These contract prices do not strictly follow the ups and downs of the spot market. For example, June 2022 contract prices ranged from $45/kg in China to $73/kg in Chile. SQM's Q2 2022 contract price averaged $34/kg, down from the mid $40s but still at historically high levels. Overall, Lowry believes 2023 annual contract prices will exceed 2022 levels. First-half data supports this view, though the trajectory depends partly on China's production discipline in the second half of the year.

Current Pullback Presents Buying Opportunity in Lithium Stocks

The recent pullback in lithium equities potentially represents a major buying opportunity for investors. Lithium Americas, for instance, now trades far below its 2022 highs despite being much closer to commercial production. Albemarle's stock and many other lithium players are also attractively valued after the correction.

Strategic Investments to Secure Supply Will Continue

In 2023, major automakers and lithium producers have already made over $1 billion worth of strategic investments to lock in future supply. For example, GM invested $650 million in Lithium Americas while Albemarle put $110 million into lithium developer Patriot Battery Metals. These types of deals will continue as automakers and battery manufacturers scramble to ensure adequate future raw material supply.

There may be more involvement from major oil and gas companies. The CEOs of Exxon and Chevron have both recently spoken about entering the lithium industry. Lowry is currently advising a large private energy company that is looking to invest in lithium assets to support the global energy transition.

Chile's New Nationalization Policy Adds Uncertainty

Chile's president recently proposed nationalizing the country's lithium resources. While existing contracts would remain unchanged, all future contracts would require a 51% stake for the Chilean state. If this policy, if fully enacted, could slow lithium development in Chile outside of the Atacama salt flats.

Western mining companies are unlikely to invest significant capital with only 49% ownership. This risks handing Chile's undeveloped resources over to China. The impact on total global lithium supply and pricing remains unclear, but the policy change certainly adds uncertainty to the market.

Strong Investor Interest Despite Recent Price Pullback

At recent battery metals conferences, there has been strong ongoing investor interest in lithium despite the price pullback. There is a "gold rush mentality" as investors regret missing opportunities early in the lithium boom. Now that major automakers have concrete EV adoption targets, confidence is high that demand will accelerate rapidly. However, with long lead times required to bring new projects online, there are challenges "playing catch-up" with surging demand. New projects take years to develop, pointing to structural shortages.

Mass EV Adoption Still in the Early Innings With a Huge Runway for Growth

The lithium industry is still in the very early phases with a massive runway for growth. When prices first started recovering in late 2020, EV penetration was less than 3% globally. As this reaches 5-10% in the next few years, demand will dramatically exceed supply as EVs go mainstream. China has historically received most lithium from Australia's spodumene mines. But with new Western converters being built, much more Australian supply will stay within Europe and North America. Despite China's ambitious domestic growth plans, it will struggle to maintain market dominance as the Western supply chain scales up.

Forecasts of Oversupply Conflict With Projections of Shortages

Many major investment banks predict large lithium shortages persisting through the end of this decade. Yet contradictory to this, these same analysts forecast prices falling below $20/kg, which would not support the projected supply deficits. This potentially reveals a lack of lithium market understanding by major financial institutions. Lithium does not behave like commodities such as iron ore or gold. If demand figures stack up and we apply a discounted supply factor, $20-$40/kg is a realistic long-term price range based on the global lithium cost curve.

With an optimistic outlook for lithium demand and prices, investors have options to position themselves:

• Buy shares of leading lithium producers like Albemarle, SQM, Livent, etc. These companies benefit directly from higher lithium pricing through expanded profit margins. Their stocks should perform well if lithium demand stays strong.
• Invest in emerging lithium developers. Many junior mining companies offer huge upside potential but also risk if projects get delayed. Diversification across developers can help mitigate risks.
• Target lithium-adjacent industries like battery tech, EV materials/mining, energy storage, etc. The entire lithium-ion supply chain should see growth.
• Consider exchange-traded funds (ETFs) focused on lithium/batteries. Provides diversified exposure to avoid betting on individual stocks.
• Take a long-term view and avoid panic selling on volatility. Lithium demand is still early stages. Short-term price swings don't change the positive long-term trend.
• Focus on companies with high-quality management, assets, and vision. The sector will see mania but disciplined picks could yield multi-bagger returns.

Downside risks and considerations for investors looking at lithium stocks:

Supply Overshoot Risk - Many new projects are planned which could potentially lead to oversupply and price crashes if too much capacity comes online.

High Production Costs - Hard rock lithium mining can be expensive and low prices could force high-cost producers to cut production.

Technical Risk - New extraction technologies like direct lithium extraction have not been proven at a commercial scale yet.

Substitution Risk - Improvements in battery tech could reduce lithium demand long-term if other minerals can be substituted.

Geopolitical Issues - Chile's nationalization policy shifts and potential export bans could disrupt supply.

Commodity Price Cycles - Like any commodity, lithium is prone to boom-bust cycles and prices could stay depressed during downturns.

High Valuations - Lithium stocks have seen premium valuations during bull markets that may not be sustained.

Investor Enthusiasm - "Fear of missing out" and hype can inflate stock prices beyond reason.

To manage these risks, investors should focus on lowest-cost producers, miners with long mine lives, and companies with solid balance sheets, and verify that management has a sound strategic vision. Diversification and avoiding the herd mentality can help mitigate the downside in this potentially volatile sector.

Companies to Watch

American Lithium

American Lithium is developing large-scale lithium projects in Nevada and Peru as well as one of the world's biggest uranium projects, with the goal of playing a major role in the transition to sustainable energy. The company's core assets are the advanced-stage TLC lithium project in Nevada and Falchani lithium project in Peru, which have robust preliminary economic assessments. American Lithium also owns the Macusani uranium project in Peru, which has seen significant historical development. With assets at various stages of pre-feasibility and feasibility studies, American Lithium is positioned to be a major player in lithium and uranium mining.

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.

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.

Brunswick Exploration

Brunswick Exploration has made a significant new lithium discovery called Mirage in Quebec's James Bay region. The company will be aggressively drilling at Mirage starting in September, with a minimum 4,000 meters planned. The discovery consists of spodumene-bearing pegmatite dikes up to 80 meters wide, representing a potential large-scale deposit. Brunswick is focused on advancing Mirage as their flagship lithium project, allocating most of their $13M cash towards drilling and exploration work there. Additional prospecting continues across their other targets in the region. Drill results expected over the next 2-4 months should help validate Mirage as a premium lithium asset.