Lithium: Short-Term Opportunities for a Long-Term Trend

By Steve Schoffstall, Director, ETF Product Management, Sprott Asset Management

The energy transition is in full swing, and record investment is flowing into this emerging sector on a global scale. While some miners of minerals critical to the clean energy transition, particularly those focused on uranium, have seen considerable gains during the year, lithium miners have largely underperformed. What does this mean for the energy transition, and are there opportunities for investors?

Lithium in 2023: A Bumpy Patch on a Long Road?

The returns of lithium miners are largely negative for the year, but the long-term outlook suggests this may be a bump in the road for an emerging sector with significant upside potential. Lithium is a critical mineral essential to lithium-ion batteries, the predominant battery type favored by electric vehicles (EVs). As the proliferation of EVs intensifies, a lithium supply deficit may likely be expected through most of the next two to three decades.

Lithium Supply Unlikely to Keep Up with Demand¹

*Source: McKinsey & Company. Lithium Mining: How New Production Technologies Could Fuel the Global EV Revolution, April 12, 2022.

Unprecedented Investment from Mining Companies and Auto Manufacturers

This growing demand for lithium is drawing unprecedented investment from the public and private sectors. In pursuit of future growth, lithium miners are investing in their businesses and have a reinvestment ratio² of about 60%, compared to 25% for diversified miners.³ Automakers are concerned about the availability of a mineral essential to their ability to manufacture EVs. As a result, Tesla, VW Group, General Motors, Stellantis, BMW and Mercedes-Benz are creating long-term offtake agreements with producers to buy lithium that will be mined in the future,³ while General Motors and Stellantis are investing directly in lithium mining.

Realizing the role lithium may play in the energy transition, the United States, Canada and the European Union have added lithium to their lists of critical minerals. This designation makes it easier for companies to apply for grants and subsidies that support the lithium and EV industries.

The Perils of Market Timing

The S&P 500 in 2023 has given a great illustration of the perils of attempting to time the market. Through the first 215 trading sessions of the year, the S&P 500 had positive performance for 113 days while posting a negative return for 102 days. During this period, the S&P 500 returned 14%, and most of the returns can be attributed to just eight trading days.⁴

The same principle applies to energy transition-related investments. To participate in this growing industry, investors should resist the temptation to try and time the market. Companies leading the energy transition aren’t immune from periods of volatility, but we believe investors may benefit from a long-term allocation to a sector that we believe is underrepresented in major market indexes.

Is There a Short-Term Opportunity?

While timing the market is never a good strategy, there may be a short-term opportunity at hand. Despite the long-term investment outlook for lithium miners, many producers of this critical mineral have seen their stock prices drop considerably this year. This may be an opportunity for investors who want to add an allocation to lithium miners to their portfolio to do so at prices significantly lower than they were at the start of 2023.

Consider Tax Loss Selling Strategies

We believe we’re in the early stages of a lithium bull market. It is our belief that pure-play lithium miners—companies that are upstream in the supply chain—may benefit most from the increased demand for this critical battery metal. Pure-play miners are companies that specialize in mining lithium and devote most of their operations to exploring and/or mining this critical mineral. As lithium suppliers, miners' prospects are not dependent on which EV or battery manufacturers succeed; rather, they may benefit from increases in demand and the price of lithium in general.

Given the recent performance of many companies in the lithium industry, investors may have an opportunity to benefit from closing positions in non-pure-play ETF strategies and realizing a tax loss,⁵ while maintaining exposure to the industry by purchasing a pure-play strategy.

¹ Source: BloombergNEF Transition Metals Outlook 2023. Included for illustrative purposes only.

² The reinvestment ratio compares the cash inflows generated by a company to the cash outflows required for re-investing in the company. It measures how much of the company’s annual cash flow is being reinvested back into the business for future growth.

³ Source: IEA Critical Minerals Market Review 2023

⁴ Source: CNBC Trader Talk, “Why market timing doesn’t work: S&P 500 is up 14% this year, but just 8 days explain the gains,” November 8, 2023.

⁵ This information is for informational use only. Investors should always consult a tax accountant regarding their particular situation.

Past performance is not indicative of future results.

This article is intended solely for the use of Sprott Asset Management USA Inc. for use with prospects, investors and interested parties. Investments, commentary and statements are unique and may not be reflective of investments and commentary in other strategies managed by Sprott Asset Management USA, Inc., Sprott Asset Management LP, Sprott Inc., or any other Sprott entity or affiliate. Opinions expressed in this presentation are those of the presenter and may vary widely from the opinions of other Sprott-affiliated Portfolio Managers or investment professionals.

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