Since the Inflation Reduction Act is set to introduce rules on the sourcing of raw materials for use in electric cars, the Biden administration has decided to invest in building up local supply chains.
The White House granted almost $3 billion last week to about 20 battery metals companies across upstream mining and midstream processing to boost U.S. capacity, with the money coming from last year’s Bipartisan Infrastructure Law.
The Department of Energy granted qualifying companies, which are constructing or developing battery metals processing facilities in the U.S., lumps of cash ranging from $50 million to $316 million. These companies included industry major Albemarle Corp. (ALB, Financial) and several smaller players like Piedmont Lithium Inc. (PLL, Financial) and Atlantic Lithium Ltd. (LSE:ALL, Financial).
Although American electric vehicle capacity is building up quickly, the government considers the fact that China controls much of the existing battery metals processing outfits as a strategic threat. According to Benchmark Mineral Intelligence, North America is forecasted to provide 12.3% of global output by 2024. In comparison, Europe should provide 12.4% of global batteries by 2026.
“Europe’s battery industry will struggle to keep pace with rising demand for electric vehicles this decade, as the region falls behind the U.S. and Asia in terms of becoming self-sufficient in lithium-ion battery cells,” Benchmark reported last week.
The European Automobile Manufacturers' Association noted the Inflation Reduction Act’s new rules mean, in the long term, vehicles may be restricted from being eligibile for tax incentives if they do not meet very high local-content rules for batteries. In short, the auto industry is going to need to procure batteries from U.S. producers.
Electric batteries require lithium and other materials to be significantly processed to reach the high-purity level needed. Currently, China has the expertise and by far the most capacity, which is causing concern for the U.S. government as the electric vehicle industry grows rapidly. European countries are looking to increase their self-reliance as well to reduce the geopolitical risks associated with importing processed material.
Forecasters at Benchmark predict that by 2040, more lithium will be needed each month than the total volume mined during 2021. The U.S. and Europe do have some lithium reserves, but obtaining the necessary permits has not been easy.
Thacker Pass in Nevada, for example, faces a court battle with first nations groups appealing the government's decision to approve construction. Trident Royalties PLC (LSE:TRR, Financial) holds a royalty on the project, which is owned by Lithium Americas Corp. (LAC, Financial).
Chile and Australia will also continue to be important exporters of the raw material, while Argentina and Brazil are likely to ramp up production and exports. West Africa has reserves but no meaningful production yet, while Ghana and Cote d’Ivoire do have plenty of local mining operations for gold.
Interestingly, some of the Biden administration's handouts have also reached Australia. Syrah Resources Ltd. (ASX:SYR, Financial), a graphite miner, has been looking at an American operation for a long time and has been awared $219 million to kickstart the project.
“Syrah’s Vidalia facility will be the only vertically integrated and large-scale natural graphite AAM producer outside China and the first large-scale natural graphite AAM producer in the U.S.,” the Department of Energy said last week. AAM stands for active anode material.
Another Australian company, which operates in Austria, called European Lithium Ltd. (ASX:EUR, Financial) is seeking a U.S. listing according to the Wall Street Journal. The company has rights to an old underground mine in Austria, and the listing plan is to utilize a special purpose acquisition company.
Another option worth considering is French company Imerys (XPAR:NK, Financial), which is a specialist in the production and processing of industrial minerals. While it was not a recipient of U.S. funds, the company announced earlier this week an investment in a lithium mine and processing plant combination in central France.
CEO Alessandro Dazza told analysts, “Many decisions we are taking do have a cost, but we do believe this is our mission to make this mine an example in France, in Europe, in the world, and to address many of the typical questions that would be posed by environmental institutions.”
Investment strategy
With the U.S. government leading the way in battery metals funding, the European Union is likely to up its game too. A popular hedge fund strategy in a case like this is to take a basket approach and invest in a group of companies exposed to the same theme. Selecting the stocks that the U.S. government is backing could be a good approach.
Of course, some of the smaller lithium stocks will be more speculative given their early stages of development and permitting risks. For investors who want to look for more financially stable plays, look at the Altman Z-Score for guidance. The following companies all have safe Altman Z-Scores: Albemarle at 4.16, Syrah Resources at 3.81 and Trident Royalties with 9.89.
