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Vested EquitiesResearch

8 MAY 2017

THEMATIC INVESTING

THE DISRUPTIVE WORLD OF LITHIUM

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In our view, the long-term drivers of lithium look

very promising. In this report we look at investing

in lithium through the prism of electric vehicles.

In our view the increased penetration of electric

vehicles (EV) is inevitable given government

incentives/polices, global move to clean

technology and technological advances in electric

automobiles. With lithium batteries increasing the

economic viability of electric cars, we believe the

demand for lithium will significantly increase

with the increasing penetration of electric cars.

We must caution investors that this thematic is

unlikely to play out over the short term, but is

more of a medium term story. However, there is

no reason why the price of lithium and

investments exposed to this thematic couldn’t re-

rate ahead of this timeframe should investors

become more comfortable with the story (markets

are meant to be forward looking!). Clients can play

this thematic via Galaxy Resources (Speculative

Buy) and Global X Lithium ETF (Neutral).

EVs growth on the rise. In our view, whilst at least 50%

of current demand for lithium comes from traditional

uses, increasing global demand for electric vehicles,

especially driven by Chinese consumers will likely be

responsible for increased lithium demand. The electric

vehicle global market has grown 10x in the past five

years. This excludes Tesla’s Model 3 pre-orders of

~370,000 cars as of May 2016, which equate to ~30% of

total electric vehicles already on the road. Moreover, in

2015, China became the largest electric vehicle market in

the world where ~330,000 units were sold, or +343%

increase over the previous year. China now aims to put

another 4.5 million EVs on its roads by 2020 which

equates to demand for ~44,000 to 117,000 tons of lithium

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over the next five years, assuming a required ~150-400

grams of lithium per kilowatt hour, and average battery

capacity of 65 kWh (average battery capacity for

passenger vehicles is ~30 kWh, and ~100 kWh for

electric buses).

Governments’ long-term EV targets and incentives. 14

countries have committed to quantitative electric

vehicle stock objectives by establishing regulatory

incentives, with 13 million electric vehicles expected to

be on the road by 2020. For instance, China electric

vehicle sales are increasingly driven by government

subsidies and purchasing quotas on traditional vehicles

in Tier I cities. Subsidies for commercial and passenger

electric vehicles can be as high as 60% of the selling price

of a commercial vehicle, or ~40% in the case of

passenger vehicles. Wood Mackenzie expects electric

vehicles (including PHEVs) to reach ~13% of new light

vehicle sales globally by 2025.

How to play the thematic. We highlighted two

investments by which investors can gain exposure to

the lithium thematic – Galaxy Resources (Speculative

Buy) and Global X Lithium ETF (Neutral). Galaxy provides

investors exposure at the exploration & mining stage,

while Global X Lithium ETF provides exposure to the “full

lithium cycle”.

Primer on Electric Vehicles

and Lithium…

Key macro concerns regarding the lithium market include:

1. At what rate will lithium demand grow at given the

outlook for electric vehicle (and energy storage)

adoption?

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2. What lithium products are required by battery

manufacturers? As well as what are their relative

merits and how they are produced?

3. How and where lithium is mined and what are key

drivers for lithium supply?

The disruption of electric and

hybrid vehicles – Electric

vehicles versus Internal

Combustion Vehicles…

In our view, whilst at least 50% of current demand for

lithium comes from traditional uses, increasing

global demand for electric vehicles, especially driven

by Chinese consumers will likely be responsible for

increased lithium demand. An electric vehicle is a

vehicle that utilises electric motors (capable of

utilizing stored electrical energy) and technically

covers automobiles, rail, air, sea and space vehicles.

Indeed, the electric vehicle global market has grown

10x in the past five years. This excludes Tesla’s Model

3 pre-orders of ~370,000 cars as of May 2016, which

would equate to ~30% of total electric vehicles

already on the road. Moreover, in 2015, China became

the largest electric vehicle market in the world where

~330,000 units sold, or +343% increase over the

previous year. China now aims to put another 4.5

million EVs on its roads by 2020 which equates to

demand for ~44,000 to 117,000 tons of lithium over

the next five years, assuming a required ~150-400

grams of lithium per kilowatt hour, and average

battery capacity of 65 kWh (average battery capacity

for passenger vehicles is ~30 kWh, and ~100 kWh for

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electric buses). Indeed, attributes of lithium ion based

batteries make it superior to competing technologies

and hence a desirable alternative for energy storage,

especially in vehicles (such as electric and hybrid

vehicles) and consumer electronic devices (such as

smartphones, laptops, power tools, cameras) where

weight and durability are crucial factors.

Figure 9: Global electric vehicle growth over the last 5 years by country

Source: IEA, Global EV Outlook 2016

Figure 10: Global electric vehicles growth over the last 5 years by type

* PHEV = plug-in hybrid electric vehicles; *BEV = battery all electric vehicles

Source: Wood McKenzie

Types of electric vehicles. Electric vehicles can be

grouped into three main categories:

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1) Electric Vehicles (EV): are entirely electric vehicles

with a main electric propulsion mechanism and possibly

a smaller gasoline engine to support battery recharge or

provide engine power upon battery depletion. Electric

vehicles consume ~10-20 kg of lithium per vehicle/

2) Hybrid Electric Vehicle (HEV): are electric vehicles

which combines an internal combustion engine (ICE)

and electric power for propulsion. Hybrid electric

vehicles consume ~0.5-2 kg of lithium per vehicle.

3) Plug-in Hybrid Electric Vehicles (PHEV): are electric

vehicles which allow the vehicle’s battery to be

recharged by plugging the vehicle into an electric

system. Plug-in hybrid electric vehicles consume ~1.8-

4.2 kg of lithium per vehicle.

Figure 11: Types of electric vehicle transportation

Source: FMC, SignumBOX, IDTechEx, Boston Power

Power storage. An area of growth not discussed

thoroughly in this report is the use of lithium in

renewable energy and energy storage. signumBOX

expects power storage applications to grow to 7.5ktpa

LCE by 2025.

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Figure 12: Grid, Solar, and Nuclear Applications

Sources: FMC, Sandia National Laboratory, CSP Today, Altran, Greenpeace, IEA

Decline of EVs from 1910s. The first electric car powered

by batteries was built in 1837. By the 1890s, there were

actually ten times as many electric cars sold as gasoline

cars with ~40% of total cars in the US being electric

around the 1900s. However, according to Wood

McKenzie, the emergence of gasoline-powered cars was

the result of: 1) mass production with improved modern

assembly lines for gasoline-powered cars resulting in

reduced costs of production; 2) a significant number of

oil exploration discoveries; 3) improvements and

increasing prevalence of petroleum-based

infrastructure over charging infrastructure (which is

crucial for electric vehicles with significant

distance/range restrictions); and 4) superior driving

distance possible for gasoline-powered cars.

Figure 13: The revival of EVs to rival traditional internal combustion engine (ICE)

vehicles

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Continual re-emergence of EVs since 2010. Though

internal combustion engine-based vehicles have been

increasingly reliable and affordable, the continuing

resurgence in electric vehicles in our view, is the result

of:

1) Sustainability and environmental agenda: increasing

acceptance of climate change science, awareness of

‘sustainability’, and increasing acceptance and attraction in

operating a cleaner energy vehicle beyond environmentally

conscious consumers have contributed to an increase in

electric vehicles on the road. This trend has been reflected

in policy and regulation as regulators look to force

automakers to improve mileage per gallon. In the US, for

instance, regulators have compelled automakers to improve

mileage from 30 miles per gallon (mpg) to 38 mpg by 2020

and 54.5 mpg by 2025. European regulators likewise, have

compelled automakers to improve mileage from 42 mpg to

58 mpg by 2020. Although the 2025 targets for Europe may

change, the currently contemplated target is 71-81mpg. As

such it is inevitable that the marginal cost of conventional

internal combustion technology will increase significantly.

Indeed, US and Europe electric vehicle sales have been

driven by regulatory changes, in our view. Whilst, in

contrast, China electric vehicle sales are driven by

government subsidies and purchasing quotas on traditional

vehicles in Tier I cities. Subsidies for commercial and

passenger electric vehicles can be as high as 60% of the

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selling price of a commercial vehicle, or ~40% in the case of

passenger vehicles.

Figure 14: Corporate average fuel economy standards by country

Source: GFEI

Figure 15: Summary of policy mechanisms for Electric Vehicle uptake by country

(2015)

Source: International Energy Agency, Global EV Outlook 2016

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Figure 16: Examples of Chinese policies tackling traffic and air pollution issues by

restricting opportunities to own conventional internal combustion engine cars by

restricting availability of license plates and waivers for new energy vehicles

Source: International Energy Agency, Global EV Outlook 2016

2) Improved electric vehicle features… relative to internal

combustion engine vehicles such as pricing (which is

largely due to increasingly lower battery costs), extended

range and stronger performance have resulted in making

electric vehicles a more feasible purchase for consumers.

Figure 17: Evolution of battery energy density and cost

Notes: USD/kWh = United States dollars per kilowatt-hour; Wh/L = watt-hours per litre.

PHEV battery cost and energy density data shown here are based on an observed

industry-wide trend, include useful energy only, refer to battery packs and suppose an

annual battery production of 100 000 units for each manufacturer.

Sources: IEA, Global EV Outlook 2016

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Figure 18: Features of the Tesla Model 3


3) Increasing prevalence of charging infrastructure and

facilities… Growth in publicly accessible charging facilities

have mirrored the growth trend of the electric car stock.

The total number of electric vehicle supply equipment

(EVSE) outlets available in 2015 reached 1.45 million, up

from 0.82 million in 2014 or 20k in 2010. Furthermore, in the

US, there are presently 21,846 alternative fuel stations

(excluding private stations). Of that, 14,496 (or 66.4%) are

electric stations. There are also 36,650 charging outlets in

the US.

Figure 19: Global electric vehicle supply equipment outlets from 2010 to 2015

Sources: International Energy Agency analysis

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Figure 20: Geographical distribution of the 2015 stock of electric vehicle supply

equipment outlets by charger type

Note: Private chargers are estimated assuming that each EV is coupled with a private

charger.

Sources: International Energy Agency analysis

Figure 21: 21,846 alternative fuel stations in the US (excluding private stations)

Source: US Department of Energy

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Lithium-ion has secured its

position as the chemistry of

choice for electric vehicle

batteries

‘Lithium-¬ion batteries’ is a generic term for batteries

where electric and chemical properties depend on

lithium. Lithium-ion battery cells are comprised of four

main components: (1) cathodes; (2) anodes; (3)

separators, and (4) electrolytes, which are inserted into

various container types (cylindrical and prismatic

containers). Cathodes, anodes, and separators take the

form of sheets, and are either wound or stacked to form

alternating layers of cathode–separator–anode, with

ions flowing between the cathode and anode sheets via

an electrolyte solution. Lithium-ion batteries are

primarily utlised in consumer electronics applications

due to their high energy density and lifecycle. Their high

potential power output also makes them well-¬suited to

particular automotive applications.

Figure 22: Types of Lithium-ion batteries (LIB)

Source: CEMAC

Lithium-ion has secured its position as the chemistry of

choice for electric vehicle batteries because: (1) higher

charge density: as lithium has the highest

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electrochemical potential of all metals; (2) lightweight:

as lithium has a low atomic mass; (3) rapid recharge:

short charge times; (4) longevity: high cycling ability (the

number of charge-discharge cycles that can be achieved

without capacity drops); (5) efficient discharge rate

(columbic efficiency); and (6) long storage: low self-

discharge that is less than half of NiCd and NiMH

chemistries.

Figure 23: Lithium-ion has secured its position as the chemistry of choice for EV

batteries


Cost of batteries. The purchase cost of an electric vehicle

is the greatest barrier to mass-market adoption with the

highest cost in manufacturing of electric vehicle being

the battery. No doubt, processes for manufacturing have

become more efficient with recent technological

advancements, whilst the cost of battery raw materials

have increased. According to Wood McKenzie, at a

US$100/kWh battery pack cost, electric vehicles are

expected to become competitive with traditional ICE

vehicles.

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Figure 24: Breakdown of Battery costs (2016)


Figure 25: Battery pack cost projections by manufacturers ($/kWh)


Opportunities to lower costs include: (1) increasing

competition from battery producers; (2) More

manufacturing capacity coming online creating

“economies of scale”; (3) development of next generation

technologies; (4) Increasing “cleaner” policies (resulting

in less carbon and lower air pollution) which incentivise

a trend toward electric vehicles; (5) Ability to “arbitrage”

stored energy into power market, by selling back stored

electricity to local utility.

Risks to delay cost reductions include: (1) Increasing

costs for battery raw materials with rising demand for

electric vehicles; (2) Lithium-ion components are not

commoditized or standardised with each component

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being specific to each batteries design/use; (3) Rising

lithium-ion batteries demand from other sub-sectors

such as power storage and consumer electronics.

From exploration and mining

to batteries

What is Lithium… Lithium is a metal with the lowest

molecular weight, but highest electrochemical potential

and largest specific energy per weight of all metals.

These properties (power density and high energy) make

lithium relative to other metals, ideal for use in

lightweight batteries. Raw lithium itself is rarely used

but instead processed into different chemicals for a

variety of uses. Two chemicals used for rechargeable

batteries are lithium carbonate (Li2CO3) and lithium

hydroxide (LiOH). The end result of a battery begins with

exploration and mining of lithium, and processing.

Figure 26: From resource exploration and mining to lithium-ion batterie

*Note: lithium brine deposits are accumulations of saline groundwater that are

enriched in dissolved lithium

Source: CEMAC, Wood McKenzie

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Lithium Mining and

Processing

Battery grade lithium hydroxide and carbonate can be

produced from both mineral deposits and brines, with

lesser processing required for brines than mineral

deposits. Indeed, lithium in meaningful quantities is

found in one of two ways:

1) Mineral deposits (ores): are essentially hard rock

minerals predominately located in Australia, and extracted

via standard open pit or underground mining operations.

The ore is crushed before undergoing a standard

separation processes to isolate lithium from waste

materials (for conversion to lithium chemicals).

2) Brines deposits: are predominately found in the “lithium

triangle”, in Chile and Argentina (~58% of global reserves).

Lithium salts exist at or slightly below the surface and as

water evaporates, the mineral becomes concentrated in

water. Brines are generally more economical to extract

than mineral deposits. Lithium extraction involves ‘solar

evaporation’ to recover lithium from subsurface brines.

Water is pumped from reservoirs into evaporation ponds

which then crystalise with other salts. Thereafter, the

lithium chloride solution is pumped to a recovery plant,

washed with soda ash to precipitate lithium carbonate. It is

then dried and sold to downstream customers who

undertake further processing.

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Figure 27: SQM’s lithium solar solution production

Source: SQM

Supply

According to the US Geological Survey, lithium

resources discovered equate to 40 million tonnes and

reserves equate to 14.0 million tonnes, with ~85-94% of

the commercially viable concentrations at a limited

number of locations in Australia, Chile, Argentine and

China. Two brine deposits in Chile account for ~43% of

global production whilst 30% of supply comes from a

hard-rock mine in Australia. Lithium supply in 2015 was

~150-160kt.

Figure 28: Lithium supply by country (2014) (Total in 2015 ~150kt)

Source: Roskill

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Figure 29: Current Global Primary Lithium Production

Source: Wood Mackenzie; Thomson Reuters Datastream

Long lead times from exploration to production.

Meeting demand growth in the long term will be a

challenge for miners, as lithium operations have

significant lead times to develop and ramp-up

production. As an example, Orocobre developed the first

greenfield brine project the Salar de Olaroz project in

Argentina in over 20 years. It took ~8 years from initial

exploration and first production. No other major mined

commodity has managed to double in scale within the

timeframe required for lithium to meet current demand

requirements; even bauxite, the least capital intensive of

all mined commodities took nine years to double in scale

between 2004 and 2013.

We do not expect any new brine resource to come online

before 2020. In Chile, arbitration continues with CORFO

with no resolution in Atacama for SQM. In Argentina,

SQM continues to push Lithium Americas but no

additional supply is expected before 2019, and FMC has

plans for a hydroxide expansion but there are questions

over its brine source. In China, no significant production

is expected. In Nevada, US, development continues but

again no additional supply is expected in the short term.

Brine supply to come online between 2016-2020 include

Orocobre’s ~10kt LCE and Albemarle (La Negra) ~20kt

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LCE. We expect the 2016-2020 gap to be supplied by

Australian spodumene (from Galaxy Resources and

Neometals).

Figure 30: Significant lead times to develop – the Orocobre example

Source: Wood Mackenzie

Figure 31: Supply growth index for the major mined metals


Figure 32: Supply growth to increase ~13% CAGR 2015-2020

Source: Benchmark Mineral Intelligence

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Cash cost of supply. At currently negotiated prices, the

premium over the production cost achieved by miners

should incentivise capacity additions. Mineral deposit

operations (relative to brine deposits) have higher cost of

production as costs are driven by a technically more

complex and energy intensive process to reach battery

grade lithium carbonate and hydroxide products.

Offsetting these costs is the benefit of by-products. For

instance, brine operations can additionally produce

potash and borates whilst mineral deposit operations

may produce tantalum and feldspar.

Figure 33: Lithium cost curve by company – brine < mineral deposits

Source: Roskill

Lithium Demand

Traditional use represents ~70% of demand. In 2015, the

market demanded ~150kt to ~190kt, ~70% for traditional

use in production of glass, ceramics, air

dehumidification, dyes, chemical synthesis of

pharmaceuticals.

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Figure 34: Lithium historical supply


But increasing prevalence of electric vehicles to boost

demand… Converters such as Ganfeng Lithium, Sichuan

Tianqi and Albemarle/GRM are driving demand. The

lithium content required by electric vehicles is

significantly disproportionate to traditional use. For

instance, pure electric vehicles require 8 to 40kg in

lithium versus 0.002kg in smartphones. Moreover, 14

countries have committed to quantitative electric

vehicle stock objectives with 13 million electric vehicles

expected to be on the road by 2020. Wood Mackenzie

expects electric vehicles (including PHEVs) to reach

~13% of new light vehicle sales globally by 2025. Indeed,

if new EVs from Tesla and other manufacturers spur

wider electric car adoption, then this could have

significant implications for lithium and battery raw

materials. Wood Mackenzie expects total lithium

demand to double before 2024, with two-thirds of that

growth coming from EV demand.

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Figure 35: Electric vehicle penetration (% global new vehicle sales)

Source: Wood Mackenzie; Thomson Reuters Datastream

Figure 36: Lithium demand (LCE kt) forecasts to 2020

Source: Albemarle

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Figure 37: Wood Mackenzie forecast lithium demand (LCE kt) to 2035


Note: supply and demand are measured in Lithium Carbonate Equivalent tonnes (LCE)

Figure 38: 14 countries have committed to quantitative electric vehicle stock

objectives of 13 million electric vehicles on the road by 2020

Notes: * This target includes 4.3 million cars and 0.3 million taxis and is part of an

overall deployment target of 5 million cars, taxis, buses and special vehicles by 2020.

** Estimate based on a 10% market share target by 2020.

*** Estimate based on the achievement of the 3.3 million EV target announced to 2025

in eight US states. All indicators in this table refer to the eight US states; market share

and stock share are assumed to account for 25% of the total US car market and stock.

Source: International Energy Agency

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Figure 39: According to the IEA, meeting 2020 deployment targets requires a sizeable

growth of the electric car stock. Thereafter, meeting 2030 decarbonisation and

sustainability goals requires a major deployment of electric cars in the 2020s.

Source: International Energy Agency

Lithium-ion mega factories are coming. Over US$20

billion have been committed to establishing lithium ion

battery mega factories, which have the intention of

expanding cell plants from megawatt to gigawatt

capacity.

Figure 39: Lithium-ion mega factories to come online


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Lithium Prices

Price support driven by long lead times for supply to

come online coupled with increasing demand… The

prices of lithium carbonate and hydroxide are

negotiated individually through contracts between

buyers and sellers. Hence, there is little transparency in

pricing. In our view, with long lead times for projects,

prices should be supported between 2016-2019 with

some impact from supply coming online around 2020

from brine projects.

Figure 40: Benchmark Mineral Intelligence Lithium Pricing Forecasts


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Figure 41: Benchmark Mineral Intelligence lithium price forecasts with peak of in 2017


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Email: [email protected]: 1300 980 849

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