With growing demand for batteries from the automobile industry and the wider energy transition, a significant supply deficit is expected in coming years and the investment opportunity is undoubtedly compelling.
But to pick the right winners you need to understand the battery industry and not back companies that are muddying the industry’s environmental footprint, says Mark Smith, fund manager of the TB Amati Strategic Metals Fund.
With the chemistry of the batteries likely change according to supply-demand dynamics, he says the fund has “purposely invested in companies with assets amenable to supplying different battery types”.
Various mixes of ‘battery metals’ are used by different producers, but, as Smith highlights, the common metal is lithium in almost all battery chemistries, and a constant is graphite for the anode.
The current exposure of the fund is 31% in lithium equities, 10% nickel, 8% graphite, 2% rare earth elements and 2% or less in lead, zinc, manganese and copper, 3% uranium and 43% in precious metals miners.
Outlining the investment case, Smith points to various research calculations about diverging levels of industrial demand and supply from the mining industry.
S&P, for example has forecast that even if all lithium projects expected to be online by 2030 are perfectly executed, there will still be a 220,000-tonne deficit in lithium by that time.
By 2035, there will be more than 4mln tonnes of lithium needed from over 50 new mines in order to meet projected demand.
He also points to Tesla battery technology boss Vineet Mehta’s prediction the complete transition to an electrified global vehicle fleet will require 10 trillion terawatt hours (TWh) of battery production in the next decade, with Tesla needing to spend over US$100bn at today’s prices for the 11.1mln tonnes of raw materials it needs to build Elon Musk’s target of 20mln cars per year.
This would also need this single company to buy more than the total volume of lithium and natural graphite produced in 2021, almost a third of the rare earths, 36% of the cobalt.
“If every automaker globally went electric, it would amount to US$1 trillion per year metal spend. It then becomes obvious that supply will be a major concern and we haven’t even discussed ESG yet,” said Smith.
This also makes clear that battery recycling “will need to be drastically increased, and quickly”, he added.
Amati, he said, is screening several recycling companies in which to invest, designed to “complement” investments in miners.
“All our investments are considered within a framework of ESG,” he said, noting that lithium producers are split between those that extract from brines or hard rock, which have very different ESG concerns in terms of carbon emissions, water and chemical use.
This brings the need to “invest smarter”, says Smith, who says the fund has “consciously invested in only the best quality companies and orebodies to try and mitigate or reduce some of the above-mentioned issues.
“The higher the grade of the deposit, the lower the carbon footprint and ability to supply a domestic/regional battery market, rather than shipping concentrate to China.”
He and the team try to understand the complex chemistry and process engineering “to invest in the winners, not the pioneers - select the companies who are second in the queue”, while also keeping an eye on those using new technologies that could be a solution to the environmental problems of lithium extraction, such as direct lithium extraction from adsorption and ionic exchange.
“The decarbonization of the global energy supply will start and end with mining. If you can’t grow it, it has to be mined,” Smith concludes.