Risks for EVs equal opportunities for the miners

For those considering investing in EVs, short of buying stocks in Tesla, it’s lithium that grabs the spotlight. But it’s much more than that.

Moving on from part one of this series, where our three contributors discussed the main areas in which you can “buy” this thematic, in the following, they weigh the opportunities against the risks.

The two broad areas are in the categories of supply and demand, and in the following wire, there’s some disagreement over which is the biggest threat.

All three believe demand is locked in for the foreseeable future. And two of them believe supply is also quite safe – though one sees production as a risk.

“The primary risks come from the inability of all projects to really deliver. You need more of these unconventional projects to come online, and if they fail or if they struggle in their ramp-up that puts pressure on the price,” says Acorn Capital’s Rick Squire.

Find out why he holds this view in the following wire, as he joins Ausbil Investment Management' James Stewart and Kingsley Jones from Jevons Global as they run a ruler over EV metals.

Just a matter of price

James Stewart, Ausbil Investment Management

Right now we are seeing ‘the rubber hit the road’, so to speak, in terms of EV sales. A number of the models which are now being presented to customers have been in development for several years, and we are now seeing the inflection point. Customer acceptance is increasing, governmental support for decarbonisation is gaining traction globally, and EV sales are accelerating globally.

In the short term, a risk for sales forecasts is the availability of components (including semiconductors, and battery components and raw materials). In the long run, these issues will be resolved, but there will be road bumps along the way.

A key risk to our long-term forecasts will be materials supply, with the lithium market needing to grow by around 13 times to 2030. This is possible, but investment needs to occur to support this growth. If this doesn’t happen, materials will be a constraint. But for all the individual commodity that goes into batteries, the minerals are there in the ground and with investment, they will be available to meet demand.

In graphite – there’s synthetic and natural, the former relying heavily on oil as a by-product. As a result, the market in China for natural graphite processing has gone through the roof, there are no constraints. You’ve seen very high oil prices and also the China government constraining the operations of any energy-intensive industries.

My view is similar on nickel, where there are two types. This first is nickel briquettes, used as the feed source for battery production. That market will become tight in time because aren’t a lot of new nickel mines. This means there’s also a huge market for the second, nickel pig-iron, which is another way of producing a lower-grade nickel. You can get the nickel needed out of pig iron, it just costs money.

There will be nickel available, it’s just down to the price that will be needed to get that into the market. But I don’t see a physical constraint in the availability of nickel.

And in lithium, the only bottlenecks are in either mining or refining. Here in Australia, it’s the former – there’s not enough brine or spodumene coming out of the ground. But there is plenty of refining capacity currently. And over time, it’s easy to build new mines and bring on new technology to meet the market.

"Now is probably a time to look elsewhere"

Kingsley Jones, Jevons Global

In Chile, where SQM has great brines, they’re capped by government permitting in expanding production because they need to preserve the water within the aquifers.

In the hard rock mining of spodumene in Australia, the scale of production is more limited by the economics of the operation. For example, only around 5% of the total tonnage will be the lithium you want, which you might be shipping halfway around the world.

Companies in Europe might look at the carbon intensity of that and decide it’s not favourable compared to a more locally mined source. For example, Rio Tinto (ASX: RIO) found a big lithium deposit in Serbia recently, which may or may not get developed. For miners that are far from world markets, as are some of the deposits in Western Australia, that can become a factor.

Now is probably a good time to be looking at some of the other things (in EV metals) that are coming on, which may have a tick against their name for reasons related to shipping.

There is also a scale-up risk, which is more for nickel and cobalt rather than lithium. Everyone’s talking about the volumes of lithium that need to be produced, but it’s one of the most abundant metal elements. It’s an issue but it’s not a deal-breaker on the rates of growth.

In nickel and cobalt, you’re limited by the availability of the deposits. Your big constraint is getting enough motivated geoscientists to find what’s there.

The learning curve effects in terms of processing and chemistry will also be really strong with lithium and less so with nickel and cobalt. This is because of the different processes involved.

Bumps on the road

On the demand side, we think of it as an S curve and there’s no doubt we’re moving up that curve to an increasingly higher penetration of EVs. We’d be very surprised if, past mid-century, we don’t see around 90% of all vehicles on the road being EVs.

But some of the bumps we’ll inevitably hit along the way are on the adoption side. How likely are consumers to replace, with a new EV, the fossil fuel car they’ve just bought?

The different average holding periods for new vehicles in different global markets will drive part of that demand equation.

The other factor is the availability of charging networks, and these are likely to see different geographies move at different paces. And even at a country level, for example in Australia, that may vary on whether you’re in a regional or a more urban area.

Production is the real risk

Rick Squire, Acorn Capital

The broader thematic is very positive, and then it's a matter of how quickly they ramp up. And then in terms of risk, if the price runs too high, there’s the threat of substitution. People aren't going to buy an electric vehicle if the costs remain around $80,000 or $100,000. If you can't get that cost base down to a reasonable level, the take-up won't be as fast as we anticipate.

Obviously, the global economy is going to be crucial to that, there needs to be prosperity around the world for people to afford new cars.

There are unpredictable external factors, but I think the transition is occurring due to that combination of social, government and investment pressure. We're heading down that track.

But the primary risks come from the other side, from the inability of all projects to really deliver. You need more of these unconventional projects to come online, and if they fail or if they struggle in their ramp-up that puts pressure on the price.

Projects can fall victim to their lack of success. A slow ramp-up of these projects – or delays in getting them into production – can cause prices to spike so much that substitution might occur. In other words, people will just keep buying cheaper internal combustion engine vehicles.

The wrap-up

In EV metals, (and all commercial ventures, for that matter) it's all about production and demand. In this case, the economics of getting the materials out of the ground for a decent price - preferably without getting the workers killed or jailed in the process - is key.

There were some different views among our respondents about just how risky this side is. Ausbil's Stewart is sanguine on this, with few caveats. Acorn's Squire is more cautious on the production side of the equation. Though they all agreed - Jevon's Jones included - the demand for EVs has a long way to run.

Stay up to date with this series

Make sure you "FOLLOW" my profile to be notified of the upcoming entries of this series. In part one, our respondents discussed the investment case for the different EV metals. And in part three, they will each reveal some favourite stocks for playing the thematic.