How to Play Small Caps and the Lithium Boom

Lithium is having a moment.

Right now, there is a lot of excitement over the silvery-white metal. Wall Street analysts have even dubbed it, “white petroleum,” or “the next gasoline”.

Yet, the lithium market is still quite small, worth only about $1 billion, annually.

It is only a matter of time, however, before the market begins to grow exponentially in the years ahead – largely thanks to growth in electric vehicles, and the lithium-ion batteries that power them. The Goldman Sachs Group Inc. (GS) estimates every battery in the Model S from Tesla Motors (TSLA) will use 63 kilograms of lithium carbonate.

Don’t overlook the fact that lithium is a crucial component in our smartphones and other electronic devices as well. While lithium is used in these in much smaller increments, this just goes to show how integral the metal is, to our daily lives.

Lithium Supplies Crucial

One of the many myths that has grown around Elon Musk and Tesla is that its Gigafactory will be the kingpin and that lithium providers will come, on bended knee, to pledge their fealty.

Musk perpetuates this fantasy by saying that lithium is merely, “the salt on the salad.” In other words, it is no concern cost-wise, or supply-wise, to his endeavors.

But, on the contrary, he ought to be very concerned.

There is already considerable tightness in the upstream market for both lithium carbonate and lithium hydroxide. Lithium hydroxide prices, in particular, are expected to accelerate in the years ahead.

That’s all thanks to Asia, likely, re-shaping the demand curve. South Korea, for example, is home to many of the world’s largest battery companies – and a rising demand for lithium.

And don’t forget about China, which is building its own Gigafactories. The government there has set a target of five million electric and hybrid-electric vehicles to be on the road by 2020.

In other words, it’s Tesla’s Gigafactory that will be “the salt on the salad” to the world’s major lithium producers. In 2015, Tesla products accounted for a mere 2% of global lithium demand.

Lithium’s growing importance means that securing a supply will be even more crucial in the years ahead, despite Musk’s seeming unconcern.

In fact, in a report earlier this year, the U.S. Geological Survey said that, “Lithium supply security has become a top priority for technology companies in the United States and Asia.”

Avoid the Big 3

So, how best for investors to play this upcoming scramble for lithium supplies?

Many investors have rushed toward the dominant lithium players of the past two decades. The so-called “Big 3” are Albemarle Corp. (ALB), Sociedad Quimica y Minera de Chile S.A. (SQM), and FMC Corp. (FMC).

However, these companies are not pure plays on lithium. And their market share is now below 50% of the total lithium market and still falling. This is because these companies invested little into their lithium businesses. Lithium wasn’t really high on executives’ radar screen.

But that’s certainly changed.

Albemarle’s CEO is claiming that his firm will capture 50% of the demand growth from the lithium-ion battery market. But noted lithium expert Joe Lowry says ALB doesn’t have a “snowball’s chance in hell” of doing that.

The real money in lithium will made, instead, by investing into lithium juniors.

The Best Smallcap Lithium Plays

Of course, there are lot of smallcap companies out there that say they’re lithium plays. But mostly they are just hot air.

One needs to dig deep – pardon the pun – to find the junior companies with legitimate lithium businesses.

The favorite, by far, is Lithium Americas Corp. (LACDF). This company was formerly called Western Lithium. It was best known for its lithium holdings in Nevada, near Tesla’s Gigafactory.

Until March, that is.

That’s when the company announced a transformative deal with SQM to jointly develop a lithium project in Argentina. SQM says it will cost $500-$600 million to develop the project, which could produce up to 40,000 tons per year. This is significant because SQM – the world’s biggest lithium producer – produced about 38,700 tons last year, alone.

For Lithium Americas to get such a vote of confidence from one of the “big 3” lithium giants is a game-changer for me.

Another strong candidate is Australian firm, Galaxy Resources Ltd. (GALXF).

It announced in May that it was acquiring its partner in the Mt. Cattlin lithium project in Western Australia, General Mining. It, too, is involved with lithium mines in Argentina.

The good news here is that Mt. Cattlin produced lithium as recently as 2012, and could be brought online again with only a reasonable degree of difficulty.

The aforementioned Joe Lowry is very bullish on Galaxy.

He told Lithium Investing News, “I think Galaxy is becoming the premier lithium investment outside China. If they execute well on Mt. Cattlin and Sal de Vida (Argentina), Galaxy will leave the ranks of juniors and take their place as a top three global lithium player within five years.”

So both LACDF and GALXF are set to have exciting futures.

Don’t be scared off by the fact that these two companies are smallcap, “penny” stocks. Get in early and easily. They may become the big winners in the lithium sweepstakes in the years ahead.

Good investing,

Tim Maverick

You May Also Be Interested In:

Investors’ Foolish Rush Into Oil ETFs

Lithium is having a moment. Right now, there is a lot of excitement over the silvery-white metal. Wall Street analysts have even dubbed it, “white petroleum,” or “the next gasoline”. Yet, the lithium market is still quite small, worth only about $1 billion, annually. It is only a matter of time, however, before the market...

Tim Maverick

, Senior Correspondent

View More By Tim Maverick