Navigating the Lithium Bull Market: Key Questions for Investors

• Experienced significant booms and busts in lithium over the past decade, now entering a new bull market
• Demand surging from electric vehicles and energy storage, lithium prices will remain strong for years
• Supply struggling to keep pace, a limited number of quality lithium projects globally
• Best opportunities are in the North American 'lithium triangle' of Quebec, Ontario and Carolina
• Lithium equities at attractive entry points after pullback, prospects for further gains as demand outpaces supply

We are currently in the early stages of a major secular lithium bull market. Rapidly growing electric vehicle adoption and surging energy storage demand are set to drive lithium prices much higher in the years ahead. However, finding the right lithium investment opportunities requires asking the right questions about project quality, jurisdiction, path to production and management.

Booms and Busts

Lithium has experienced two major boom and bust cycles over the past 15 years. The first boom ran from 2009-2012, driven by optimism around electric vehicle adoption. However, sluggish EV sales led to a bust until 2015. The second boom started in 2015-16 with Tesla's Nevada gigafactory plans. Lithium carbonate prices doubled and lots of capital poured into new projects. However, oversupply fears triggered another slump by 2018-19.

Now in the 2020s, we are early in the third wave of lithium euphoria, with prices again surging to new highs. While temporary pullbacks are likely, the long-term outlook is very bullish. Demand is accelerating while supply struggles to keep pace. After prior busts burned many investors, this boom has learned lessons that can lead to more sustained gains.

Surging Demand

The demand outlook for lithium is extremely bright, driven by two key forces - electric vehicles and energy storage.

Electric vehicle sales globally are forecast to grow at a 50% CAGR over the next decade. Nearly all automakers have announced plans to electrify their model lineups, with some like Volvo committing to go all-electric. First movers like Tesla and China's BYD are leading the charge. Their combined share of the EV market is already close to 40% globally.

However, legacy automakers like Volkswagen, BMW and Ford are falling behind in the EV race despite their efforts to catch up. Most legacy automakers are losing money on EVs today. As the mass market for EVs expands, it will be challenging for these automakers to produce affordable EVs profitably without the cost and technology advantages of leaders like Tesla. This will likely drive more joint ventures and long-term supply agreements between automakers and battery metals producers to secure raw materials.

Alongside surging EV demand, energy storage installations using lithium-ion batteries are forecast to grow at an even faster pace. Strong policy support globally for renewables leads to a need for enormous amounts of storage to smooth out the intermittency. Lithium iron phosphate chemistry dominates the storage market. Major battery makers like CATL are developing larger format lithium iron phosphate cells optimized for stationary applications.

BloombergNEF forecasts over 500 GWh of energy storage deployments by 2030. Benchmark Mineral Intelligence is even more bullish, seeing storage demand for lithium matching or exceeding EVs within the next 5 years. This enormous growth in grids and household storage will be a key pillar of lithium demand going forward.

In total, lithium demand is projected to grow 5-10x over the next decade as EVs and storage adoption accelerates. Securing adequate and low-cost lithium supplies will be critical for the auto and battery industries as they scale up. This sets the stage for those companies controlling significant lithium resources in safe jurisdictions to benefit tremendously.

Constrained Supply

While lithium demand is set to grow exponentially, finding new sources of supply is proving increasingly difficult.

There are a limited number of known lithium deposits globally that can support large-scale, low-cost production. Green-fields exploration to find new resources is progressing slowly. The majority of lithium production still comes from the Lithium Triangle region of Chile, Argentina and Bolivia where development timelines are lengthening.

Politics and nationalist resource policies have become a major headache, especially in Chile which accounts for over 1/3 of global lithium output. Chile's new leftist government is pushing for state lithium companies to take a bigger share of production. This is deterring future investment by incumbent producers like SQM and Albemarle.

In Australia, almost all major hard rock spodumene resources are controlled by two incumbents - Albemarle and Mineral Resources. There is limited spare capacity or availability of spodumene concentrate from Australian operations. Expansion projects for existing Australian mines are facing delays from permitting bottlenecks and cost pressures.

Since lithium prices spiked to record highs in 2022, major incumbent producers have been acting to secure control over more of the lithium value chain. Examples include:

• Albemarle seeking full ownership of Greenbushes mine and acquiring lithium junior Liontown
• Mineral Resources not selling as much spodumene, preferring to process it internally
• Livent restarting Quebec mine to feed its bespoke refining operations

This trend of major lithium players focusing on vertical integration limits feedstock availability for other players and helps maintain a tight market balance. It also constrains overall supply growth from reaching runaway levels that could cause another bust cycle.

In summary, while demand is spiking, major new sources of lithium are challenging to develop with most potential projects delayed or controlled by incumbents. This supply scarcity makes lithium assets in low-risk jurisdictions all the more valuable.

Asking the Right Questions

So where should investors focus against this backdrop? Asking the right questions is critical to avoiding pitfalls and identifying lithium investment opportunities with the best asymmetry.

1. Conventional or Unconventional? - Conventional hard rock deposits and brines have shown the ability to scale production to meet demand. Unconventional sources like oilfield brines and lithium clays remain unproven when it comes to commercial viability.

2. What is the Path to Production? - Earlier-stage exploration companies carry higher risks. Assets with a clear line of sight to production in 1-3 years offer a better risk-reward.

3. Does the Location Check the Boxes? - Jurisdiction risk has become increasingly important. Canada, Australia and North Carolina in the US are geopolitically safe lithium jurisdictions.

4. Is there a Strategic Appeal? - Projects that offer geographic diversity, scale potential and sustainability advantages are likely to attract acquirers and partners.

5. Does Management Have Relevant Experience? - A management team's track record of building and operating mines is essential. Lithium processing experience is a bonus.

The North American Lithium Triangle

Based on global lithium supply/demand dynamics, my bullish investment focus is on the 'North American lithium triangle' spanning Quebec, North/South Carolina and Ontario. This region offers rich mineral endowments combined with low-risk mining jurisdictions.

Quebec and Ontario provide access to abundant hydropower, ensuring a low carbon footprint for any potential operations. Canada also scores very highly on broader ESG metrics important to global battery and auto supply chains. Automakers and battery makers are willing to pay a green premium for responsibly sourced metals.

The North Carolina region was once home to major lithium mining and processing with unique regional expertise. Companies are now looking to resurrect that history by reviving production for the new EV boom. The Southeast US offers low-cost power, infrastructure and favorable legislation supporting critical mineral development and processing.

Together, these advantages make the North American lithium triangle well-positioned to supply the rapidly growing US electric vehicle and battery manufacturing base. The US currently produces less than 1% of the global lithium supply but hosts Tesla's gigafactories, new plants by GM, Ford, Stellantis, SK, LG and others. Securing local lithium resources will be a priority as this build-out accelerates.

I envision over 10 lithium chemical refineries being developed across the North American triangle over the next 10-15 years to provide domestic supply chains. The region could replicate Australia's model of exporting processed lithium chemicals rather than just raw materials.

Companies controlling significant lithium resources within the North American triangle are poised to benefit tremendously from this localization trend. These assets have inherent strategic appeal to battery and auto manufacturers looking for onshore supply chains.

Timing Entries and Exits

Lithium equities tend to follow boom-bust cycles similar to other commodities. However, the current bull market is underpinned by strong demand fundamentals rather than speculative euphoria. This means any pullbacks in lithium stocks should be viewed as potential buying opportunities.

During the 2012-2015 lithium bust period, major lithium assets were acquired for bargain prices by incumbent producers like Albemarle:

• Albemarle bought Rockwood and its lithium assets for just $6.2 billion in 2015, a low double-digit EBITDA multiple.
• SQM paid only $30 million for a 50% stake in Australia's Mt Holland project in 2016 before selling half to Wesfarmers two years later for $550 million.

These deals have already paid off enormously based on current lithium pricing. But they required taking a long-term view and investing counter-cyclically when sentiment was poor.

Similar opportunities may emerge in the current bull market if we see interim pullbacks. The recent sell-off has brought many lithium stocks back near their 2021/early 2022 levels despite much stronger fundamentals now. Using weakness constructively to add exposure makes sense.

Conversely, extracting profits on sharp speculative rallies is prudent. The Ark Funds built and lost fortunes by aggressively buying and selling Tesla on momentum. A measured approach that avoids extremes can do well in lithium equities.

Quality lithium assets with strategic appeal will warrant premium valuations in the years ahead as new supply remains scarce. However, picking ideal entry and exit points requires patience and a long-term perspective. Avoiding irrational exuberance is key while still capitalizing on the secular growth trend.

Key Takeaways

The lithium bull market is still young with major gains still ahead. Avoid unproven technologies and ensure management expertise. Focus on the North American lithium triangle's advantages. Use pullbacks wisely to accumulate positions. The coming decade will reward investors who get the big picture right on lithium.

Lithium 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.

Brunswick Exploration

Based in Montreal, Canada, Brunswick Exploration (TSX.V: BRW) is an early-stage exploration company searching for metals like lithium needed for decarbonization. Using cutting-edge exploration technologies and proven prospecting techniques, Brunswick aims to leverage its team of experienced geologists to identify and discover unknown lithium deposits across Canada. The company believes combining innovative modern technologies with time-tested geology methods will lead to new mineral discoveries.

Frontier Lithium

Frontier Lithium (TSX-V: FL) 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 Power (CSE: LIFT) 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.