House Mountain Partners

batteries

A Few Thoughts On A Volatile 2022 for Battery Metals And A View to 2023

Chris BerryComment

What follows is a general listing of takeaways from recent conferences I attended both here in the US and in Europe in 2022. Some of these may seem obvious, but I wanted to include them here as there are ideas that have more momentum behind them than I initially thought (like reshoring.

 

·      The three most talked-about topics I encountered were:

o   Raw material pricing and inflation along the supply chain

o   The outsized role of China in overall EV demand and the general economic outlook for the country

o   How different technologies will affect the supply and demand balance of battery raw materials in the future. Examples include recycling, anode technology, and cathode blending

·      Reshoring of supply chains has enormous momentum behind it

o   Much of this has been turbocharged by the signing into law of the Inflation Reduction Act in the US

o   Every supply chain participant I surveyed throughout the year (auto OEMs, battery component producers, miners – close to two dozen) were actively planning on building a more localized supply chain infrastructure

o   There was widespread agreement that this will take years to materialize and is driven more by geopolitical concerns than cost (it’s hard to see how costs won’t increase as this infrastructure is built and operated)

·      The Inflation Reduction Act (IRA) entered into every conversation in both the US and Europe

o   There is a gigantic lack of clarity around how the law will be implemented (the eligibility for the EV tax credits is a major issue) and by when

o    It appears that the IRA will benefit the downstream portion of the supply chain (refining, cathode/anode production/cell and pack manufacturing/recycling)

·      The fatal flaw in the IRA is that it does not directly address mine permitting reform. As such the US will remain reliant on foreign allies (and some adversaries) for battery raw materials

o   The Department of the Treasury won’t issue guidance on the IRA before Q1 2023 – a slight delay owing to the enormous economic impacts to all involved

·      Traceability has the auto OEMs and battery manufacturers worried

o   As most Western auto OEMs do not have a vertically integrated EV strategy, the ability to trace a battery throughout its entire life has become very important (and exceedingly difficult) as battery manufacturer and EV manufacturer are often different entities

·      Auto OEMs I speak with would generally prefer to see batteries go through a second life use rather than recycling

o   This was a surprise to me as I think second life is much more manual and more of a hassle relative to recycling (which has its own set of challenges)

o   Cathode producers disagreed and were more in favor of recycling scrap and producing CAM and pCAM

·      Western OEMs announced that they are “fully supplied” with respect to batteries to 2025

o   This is new in that these same OEMs historically hadn’t been willing to make these claims. Color me skeptical given that many product offtake agreements are non-binding and with mining companies that either have no production experience or are not currently in commercial production

o   This also begs the question about what happens after 2025 given the decade of lead time needed to bring greenfield mine supply to market and get it qualified for automotive battery use

o   GM has announced a goal to secure 75% of their battery raw materials from the US by 2030. I think this is unlikely unless they plan on producing a miniscule number of EVs.

·      Inflation throughout the battery supply chain feels stickier than many would like

o   BNEF announced that lithium-ion battery pack pricing has flatlined at ~ $151/KWh (up 7% YoY) and this is due mainly to high raw materials and input pricing

o   Another longer-term concern is adequate expertise and labor along the supply chain (recycling, for example)

·      There was a sense that Chinese companies will still have a presence in the North American EV market despite the IRA rules around “foreign entity of concern”

o   All eyes are on potential tie ups between Ford and CATL and VinFast and Gotion to see how they thread the needle here

Happy to discuss any of this in more detail, so please do reach out.

China Outflanks Freeport To Further Consolidate The Lithium Ion Battery Business

Chris BerryComment

By Chris Berry (@cberry1)

For a PDF version of this note, please click here.

 

 

Earlier this week, the deal in which China Molybdenum Co. (603993:SHA) agreed to pay Freeport McMoRan (FCX:NYSE) $2.65 billion for FCX’s African copper assets reaffirms our view that asset shedding from the FCX project portfolio must continue (See the press release here).

FCX, with a $13B market capitalization, made a bad bet in diversifying into the oil business at the cyclical peak and now must reckon with roughly $20B in debt on their balance sheet. The debt maturity profile of the company is shown below:

Another Way to Think About Lithium - The Separator Business

Chris Berry2 Comments

By Chris Berry (@cberry1)

 For a PDF copy of this note, please click here.  

 

 

We’ve just returned from PDAC and lithium is all the rage. The specialty chemical’s parabolic price spike has altered the landscape and as I predicted late last year, a crop of juniors has flocked to the space. While this is dangerous and may serve to confuse investors, it doesn’t negate the fact that the lithium demand story is real.

Given the supply tightness, elevated prices for lithium concentrate, lithium carbonate, and lithium hydroxide are going to remain a fact of life for perhaps the next 18 months. The recent binding off-take agreement Galaxy Resources (GXY:ASX) signed for 60,000 tonnes of lithium concentrate at US $600/t (FOB) with 50% of the total order value paid up front in cash ($18 million) is only the latest exciting example of a lithium market taking shape.

All of this brings us back, however, to a question we’ve discussed publicly: as the lithium mining space continues to evolve, how do you play lithium outside of investing in the miners? 

Is it Different This Time? - Separating Hype from Reality in the Lithium Ion Boom

Chris BerryComment

Here is the link for my recent remarks at PDAC regarding how to interpret the lithium market. The presentation is "picture heavy" as I generally hate powerpoint and minimize words in favor of images.

Nonetheless, reach out to me if you'd like a deeper discussion on these issues.

The presentation looks at the reasons why the lithium ion battery is increasingly important in our daily lives and offers a few thoughts on what to look for and avoid as you start to understand an increasingly interesting and pivotal space. 

The Key To The Way Forward In The Mining Sector

Chris Berry1 Comment

By Chris Berry (@cberry1)

 

For a PDF version of this note, please click here.  

 

·       The mining sector remains challenged by multiple headwinds including a lack of investment, currency headwinds, slower productivity, excess capacity, and deficient global demand.

·       Debt overhangs and slowing emerging markets – specifically China – appear to be the culprits behind slack demand. These forces must be reckoned with.

·       Longer-term, however, innovation, sustainability, and urbanization are legitimate drivers of growth and help promulgate “good” deflation which enhances productivity and can drive returns.

·       This note examines these phenomena and which sector(s) of the mining industry may benefit.

 

Groundhog Day

After three-plus years of a dismal mining investment environment and the potential for it to continue for some time, a number of questions arise from the soul searching many of us have done to try and make sense of this. According to Bloomberg, the value of the TSXV has fallen from its peak by almost 72%. This market environment necessitates a different method of thinking and evaluation about publicly traded mining companies. The good news is that it appears that many metals prices have bottomed, though this doesn’t mean that the cycle has definitively turned. The bad news is that the global economy still appears to be struggling with excess capacity AND muted demand. China, the seemingly endless engine of metals demand is unquestionably altering its paradigm for economic growth from one of infrastructure build out and exports to one more focused on internal consumption. With China’s debt to GDP ratio of 282% according to McKinsey, this move to a new growth model is absolutely necessary to maintain a sustainable growth rate, but there is no overnight fix to achieve this type of change. The success of this transition won’t be known for years, though the effects are already being felt.

What's Not Being Said Amidst the Lithium Ion Battery Hype (Hint: It's a Double Edged Sword)

Chris Berry1 Comment

By Chris Berry (@cberry1)

 

For a PDF copy of this note, please click here

 

Amid the Tesla-infused hype surrounding batteries a number of truths have become evident.

 First, battery costs are falling – fast. The overall cost of a lithium ion battery has fallen by over 90% since its commercial introduction in 1990 and the CAGR in the price decrease in recent years per kilowatt hour (kWh) is roughly 14%. Should this rate of decline continue, electric vehicles should be able to compete on total cost of ownership (TCO) with traditional internal combustion engine vehicles within five years. 

Are Electric Vehicles About to Jump The Shark?

Chris BerryComment

By Chris Berry (@cberry1)

For a PDF version of this note, please click here

 

As if vehicle electrification needed any more hype, Apple Inc’s. (AAPL:NASDAQ) rumored move towards producing its own EV by 2020 may have been the first sign that the whole idea of EVs has “jumped the shark.” For those of you unaware of this term, it refers to the 1970’s sitcom Happy Days when Fonzie was waterskiing and literally jumped over a shark. Happy Days was never the same and the show never quite recovered from this stunt to win viewers.

The rumors leaked last week about AAPL secretly working on developing its own EV have fanned intense speculation about how this would be accomplished. With $170 billion in cash on its balance sheet, obviously hiring the talent and research and development are non-issues. 

 

Tesla Sparks More Questions Than Answers

Chris Berry1 Comment

By Chris Berry (@cberry1)

For a PDF of this note, please click here.

 

Tesla Motors (TSLA:NASDAQ) released Q4 and 2014 full year earnings last night and the results were disappointing. The company missed expectations on just about every conceivable metric one would use to judge success including earnings, deliveries, and revenues. Although disappointing, TSLA should still likely be viewed through a longer-term lens than its competitors as the company is still arguably in its early growth phase and isn’t yet a mature operating entity.

While the numbers we all tend to focus on were down, what was perhaps more concerning were the statements made by Mr. Musk and his team on the call. They include: 

·         Mr. Musks’ statement that in ten years TSLA could have a market cap that equaled that of Apple Inc. (AAPL:NASDAQ). AAPL’s current market cap of US $740 billion would give TSLA a share price of approximately $5,920 per share based on TSLA’s current share count. When was the last time you hear of a company selling what is effectively a commodity (cars) with that sort of valuation and share price?