In a recent Five from 5i, one of the links featured a story on Tesla Motors and their plans to build a lithium ion battery production facility. In typical Elon Musk fashion, this factory is on a huge scale to the point where the goal would seem unachievable. Tesla plans on building a single factory by 2020 that exceeds the 2013 global cell supply.  While it almost sounds like some sort of April fool’s joke, Tesla does indeed plan to match the current worldwide supply of lithium ion batteries from a single factory by 2020. The main purpose behind this plan is to generate economies of scale so the price of batteries can be driven down, in turn making the Tesla electric cars more affordable. Tesla expects the battery pack cost per kWh to be reduced by 30% in 2017. The real story, in our eyes, isn’t the gigafactory itself but what could be a huge increase in demand for lithium over the next few years.

Admittedly, the supply of lithium shouldn’t be a problem as there are ample reserves around the world and in areas that hold a low amount of geopolitical risk. We think there are two main scenarios that are likely to play out. The first being that supply matches demand, prices remain supportive and lithium producers simply sell more of their product at a stable price. The second scenario one can imagine is that lithium demand comes in waves, outpacing supply in the short term, as battery powered devices/tools/vehicles, etc. become widely accepted. One such wave would be something like the gigafactory coming online in 2017. Others could be the worldwide proliferation of mobile products (cell phones and tablets) or increasing acceptance of battery powered tools (drills, lawn care tools, etc.). For further interest on the lithium industry, here is a fairly good and only slightly outdated (but free) primer on lithium. It is an interesting time for this resource because if you are only looking at electric vehicles, you are only looking at half of the story and missing the general shift toward greener technologies. 

If sourcing potentially lucrative trends/themes is not already hard enough for investors, allocating capital to lithium investments can be even more difficult as there are simply not many viable options out there.  For interested investors here is what we think the best few options are currently:

1.     FMC Corp (FMC): FMC is a diversified chemical company that serves the Agriculture, Health & Nutrition and Mineral segments. The minerals segment concentrates operations on soda ash and lithium and makes up 26% of company revenues, which were a total of $3,874.8 million as of the 2013 year-end. FMC is large at a $10.4 billion market-cap and even pays a bit of a dividend, yielding 0.77%

2.     Rockwood Holdings (ROC): ROC is a developer and marketer of specialty chemicals. Revenues from lithium sales made up nearly 35% of revenues in 2013 and Rockwood seems keen on continuing to invest capital into lithium projects with the recent 49% purchase of one of the larger lithium players, Talison Lithium. On top of a significant exposure to lithium markets, Rockwood pays a 2.4% dividend with a target range of 2.8% to 3.2% and has a $500 million share repurchase program in place.

3.     Global X Lithium ETF (LIT): While there is not much in particular we like about this ETF, it made the list by default simply because it is the only one out there. For investors looking to simply gain general exposure to lithium companies while not worrying as much about company specific risk, this is likely the only game in town. Unfortunately, it is on the small side with net assets of just under $59 million and charges a high fee at 0.75%, although somewhat reasonable given the niche focus of the ETF.  What we like least about this ETF is that 38% of the fund holds FMC and ROC. Depending on the investor, this may not be a make or break issue but it does reduce one of the main benefits of holding an ETF, which is instant diversification.

4.     RB Energy (RBI): For investors with a bit more of a risk appetite that are specifically looking for a Canadian company, RB Energy is one of the few investable options. Formerly Canada Lithium Corp., RBI holds 100% ownership of a Quebec lithium project, of which 75% of the production has been secured through off-take agreements. Commissioning of the mine has been delayed due to a tough winter that has not helped the stock much but they expect to reach nameplate capacity in late 2014. RBI is a much smaller and riskier name than the above options but trades at a reasonable valuation and has some catalysts on the horizon.   

Tesla’s gigafactory could be the start of a trend that sees material increases in the demand of lithium. Between a rising acceptance of electric vehicles, proliferation of mobile technology and general sentiment toward greener energy solutions, demand for lithium could be just getting started.

As always, please ensure you perform your own due diligence before making an investment decision. The above securities mentioned should not be construed as any sort of recommendation to buy or sell. Finally, in an effort to remain truly independent, those employed by 5i Research do not hold any Canadian stocks that are mentioned through the 5i website but employees are able to own U.S. securities. The writer does not own any of the securities mentioned at this time and does not plan to, but he might go out and buy a cordless electric lawnmower after writing this.