A Fundamental Truth About Natural Resource Investing

It’s Cyclical

In 2015, the excitement around lithium reached a fever pitch. The lure of electric vehicles (EVs), the demand for renewable energy, and the promise of Tesla dominated the market news.

By 2017, the price of lithium tripled from 2015.

China’s demand for EVs spurred massive supply shortages.

It was the commodity of choice for the past seven years:

As you can see, the price skyrocketed in 2022 and began to ease lower in 2023. In June 2024, it dropped below $13,000 per ton. An 81% fall from 2022 and a 35-month low according to S&P Global Insights.

Back in January 2024, we sat through a short course titled “Capital Markets for Geosciences and Engineers.” It focused on the cyclicality of natural resource sentiment and prices.

This is a critical point to understand, when you invest in any commodity, from corn to oil to lithium.

Prices (and feelings) move in waves. Sometimes they are high and other times they are low. The best time to buy a commodity is when sentiment is terrible, and the price is low. Because that’s when we make the most money.

One of the presenters gave a forecast that showed lithium prices moving lower. Here’s a copy of the chart:

Boy did they nail that call. That chart shows a stylized view of commodity cycles. At the time it was created, this was the outlook. And it was right on.

The last eight months were brutal for lithium, as we’ll see.

The lithium market reached the highs in 2022 on the frenzy surrounding electric vehicles (EVs). Demand for EVs drives lithium sentiment. And China dominates the EV market.

However, the market data currently says that China’s economy is in the tank and demand for EVs is weak. That’s supported by all sorts of news like this:

You can see that China’s gross domestic product (GDP) grew from $11 trillion in 2015 to nearly $18.0 trillion in 2021 and then flattened out.

There is a compelling argument that China’s GDP growth will slow over the next couple of years. The recent forecast of 5% growth was revised lower to around 3%. That’s well below the 10-year average. And the market assumes that slower growth in China will reduce consumption of everything, including EVs.

Europe and the U.S. also instituted heavy import tariffs on Chinese EVs. A tariff is a tax on imported goods.

The U.S. put a 100% import tariff on Chinese EVs and excluded them from tax breaks.

That means the U.S. government will collect the price of the car on every Chinese EV sold. That effectively doubles the price of the vehicles. Europe followed suit with heavy tariffs as well.

The inability to buy cheaper Chinese EVs will depress global sales. And lithium demand is tied to EV sales.

So, that drove the price of lithium down from its highs. And the headlines continue to reinforce that theme. Automaker Volvo announced that EV demand slowed. The company backed off its goal to make only EVs by 2030.

And Toyota announced that it will cut EV production in 2026 by 30%.

The bad news just keeps piling on.

As you can imagine that had a huge impact on lithium producers, as you can see:

This is a terrible chart, down 56% in three years. And it shows that the commodity cycle chart we saw in January was tracking commodity price, not sentiment. Because this chart shows us that the outlook on lithium miners changed in 2021. And the trend really went down in mid-2023.

But here’s the thing, a lot of that bad news is overblown.

The lithium price probably soared too high in 2022 and 2023. But lately, it feels like the sentiment is too negative now.

That’s because the news is hiding critical data.

When they talk about EVs, they leave out plug in hybrids (PHEVs). And global sales of EVs and PHEVs grew 20% in the first half of 2024.

Here’s what we recently told Spotlight readers about PHEVs:

What is a PHEV and Why is It So Popular?

A PHEV is a hybrid vehicle with two power sources. It has both electric and gasoline engines.

According to S&P Global, sales of PHEVs grew 44% globally from 2023 to 2024. In the first half of 2024, sales rose 22.3%.

In the U.S. hybrid sales exploded by 34% in the first half of 2024.

This data supports auto industry sentiment that there is a shift from fully electric vehicles to PHEVs. This is particularly noticeable in China. PHEV sales made up half of overall Chinese vehicle sales. H1 2024 PHEV sales accounted for 41% of all Chinese sales compared with 32% the year before.

According to researchers at the Macquarie Group:

“The share of plug-in hybrids in total sales at 35% is the highest since 2017. The move back towards PHEVs mainly reflects strong growth in Chinese “range extender” cars, where the internal combustion engine vehicle is used solely to recharge the battery and not drive the vehicle’s wheels.”

This is an important thing to understand. Range continues to be the main issue with EVs. By combining a small combustion engine to recharge the battery, these vehicles can fix that problem.

The important takeaway here is that EVs continue to dominate car sales in China. And Chinese customers buy the most cars…and it isn’t close. In 2023, China sold 25.8 million cars. That’s twice as many as sold in all of Europe. And it’s 34% more than we sold in the U.S.

That’s important to know, because it comes back to our basic premise that EVs use more odd metals than regular cars. And if you listen to American media, EV sales are dying.

That’s actually a misnomer.

Take Ford, for example. CNN ran a story titled, “Ford is Making Major Changes to its Electric Vehicle Strategy.”

And that’s true. The car maker faces two major headwinds for its EVs – price and range. Those are the same problems all the EV makers face. At Ford, they announced a huge change. They killed plans for a line of electric SUVs.

The company replaced them with PHEVs. The switch will cost the company at least $400 million (with estimates as high as $1.5 billion).

The reason for the shift is that universal problem – buyers want longer driving range and a safety net if the battery dies. That comes from the combined gasoline/battery option.

Additionally, there’s the price. A fully electric SUV starts around $50,000 and goes up to over $100,000. And the electric models tend to cost a lot more than their gas-powered cousins. And the fuel savings isn’t enough to offset the higher price and the “foreign” feeling of a fully electric vehicle.

However, PHEVs have comparable prices, but much higher gas mileage. And because they have gasoline motors, buyers are familiar with them.

We see PHEVs as a more popular alternative to full EVs because of that familiarity. And they all need lithium batteries too.

And Toyota’s cuts are not what they seem. The company cut 30% from its 1.5 million EVs production goal in 2026. But they still plan to produce 1 million EVs. They only produced about 104,000 in 2024. So, it’s still huge growth.

That’s why the market fundamentals still look good:

If we go back to that cycles chart and move forward in time, we see that lithium is near its cyclical bottom.

That’s why this month, we’re dipping a toe into a sorely depressed lithium market. Because sometimes it’s cheap enough…

The Lithium Stock to Buy…Eventually.

Standard Lithium (NYSE: SLI) is a $212 million leader in the future of lithium production: direct lithium extraction (DLE).

This new technology holds enormous promise for the future of lithium production.

Brines are salt laden fluids usually formed from ancient seas or basins that are isolated from drainage.

Most oil fields in the United States have brine under the oil.

And that brine contains elevated amounts of lithium, as you can see in the chart below:

The reason oil field brines are so interesting is that they are currently a waste product from oil drilling. The infrastructure is already in place, so it takes little development to put these systems into production.

The critical part of the process is the filter mechanism to separate the lithium ions from the rest of the brine. That’s where Standard Lithium has a leg up on the competition.

They developed the LIPRO LSS process with partner Koch Technology Solutions.

The company claims that it they can efficiently extract lithium from brine without the need for large evaporation ponds.

Some features of LIPRO:

• Rapid Extraction – it can extract lithium in just one or two days, compared the 1.5-to-2.0-year process for evaporation.
• High Recover Rate – Standard Lithium reports a 96.1% recovery at their El Dorado plant in Arkansas.
• Purity – The process only removes lithium, so it includes less than 1% impurities like sodium, calcium, magnesium, and potassium. It also rejects 95% of boron, a common impurity.
• Concentration – Each liter of production contains more than 10 grams of lithium.
• Continuous Operation – Standard Lithium’s El Dorado plant completed 8,000 operational cycles, processing nearly 15.5 million gallons of brine.
• Brine Reinjection – After extracting the lithium, the brine can be put back into the aquifer. That eliminates a key problem with surface evaporation.

There are a couple things here that point to this process being more economic than the existing technologies of hard-rock mining and evaporation.

There are clear benefits to brines. There DLE technology needs a much smaller surface footprint than in an evaporation pond or a mine. It can rely on existing technology and infrastructure in areas that are used to oil drilling and production. This isn’t happening in greenfields areas that don’t look favorably on industrial extraction.

The second factor that jumps out is the rapidity. DLE can produce lithium in just a couple days, as opposed to up to 2 years. Even mining takes many steps to go from the ore to finished product. With DLE, the lithium quickly gets pulled out of the liquid brine into a saleable concentrate.

Standard Lithium is in the Heart of the Best Play in Lithium Brines

As you would expect from a leader in this new technology, Standard Lithium has great projects. The Smackover formation has up to 597 mg/L lithium brine in Arkansas and up to 806 mg/L in East Texas.

These qualities, in addition to the infrastructure, combine to put Standard Lithium’s projects in the bottom 25% for cost of lithium production.

In the third quarter (ending March 31, 2024) the company announced that it achieved commercial scale production at its DLE demonstration plant near El Dorado, Arkansas. It had a 97.3% recovery and rejected 99% of contaminants.

According to the company, this is the only commercial-scale DLE unit operating in North America.

In May 2024, the company announced a partnership with Equinor (NYSE: EQNR), Norway’s state-run energy company. It was formerly known as Statoil until it changed its name in 2018. Equinor agreed to contribute $160 million gross investment for 45% interest in Standard Lithium’s business.

To put that another way, Equinor thinks the value of Standard Lithium is more than $355 million. And they expect to see a return on that investment. The deal included:

• $30 million in working capital.
• Equinor will solely fund the first $40 million at the SW Arkansas Project
• Equinor will solely fund the first $20 million in exploration and development at the East Texas properties.
• Standard Lithium will receive $70 million in milestone payments subject to final investment decisions.

This is the kind of partnership that drives juniors to become seniors or acquisition targets.

Action to Take: Buy Standard Lithium (NYSE: SLI) up to $1.50 per share. Use a 30% trailing stop on the position.

Our biggest risk is that the lithium market has not bottomed yet.

For those of us willing to take that risk, this is a good time to start a position. For more advanced investors, ease into the position. Buy a little and average down (or up) over the next couple of weeks.

This isn’t a short-term play. Standard Lithium will be developing these projects over the next couple of years. And that works in our favor, as lithium demand is forecast to continue to grow over that period.

For the Good,

The Mangrove Investor Team