This is an update to our alerts on battery metals from late 2017 (October 2017, cobalt) and early 2018 (January 2018, vanadium). We’re combining all these themes into one theme: Battery technology.
The essence of combining all these individual commodities/technologies into one theme is firstly that the firm is macro oriented and in that context we believe that battery technologies as a whole offer huge growth and asymmetry.
Where we’re not so certain, and therefore unwilling to speculate on, is which technology will experience the greatest upside. When internet search first came about, who could have known that Google would take the crown? Not you and not I. What was fairly clear, though, was that the ability to search and retrieve information rapidly and efficiently was gold to anyone that could get it right.
In other words, it was a space or sector that you needed to be involved in.
But back to battery tech. They all have their merits and, frankly, all appear to offer huge potential asymmetry. Perhaps they all experience significant growth? Perhaps it is one or two that provide really exceptional growth? Either way, it doesn’t matter just so long as we don’t miss out on the technology that really excels.
In the ideal setup we would like to buy just one security that included all the stocks listed below (an ETF). But since one doesn’t exist we have to create our own basket. Just as you would with an ETF you should focus on the theme and not the performance of individual counters.
Due to the length of the report we decided to split it into 2 parts. In the first part we cover cobalt and nickel. Part 2 will cover vanadium and our thoughts on hydrogen.
Our existing trades:
- Cobalt Blue (COB.ASX)
- Ecobalt (ECS.TSX)
- First Cobalt (FCC.TSX)
Nickel (originally included as part of the cobalt Alert)
- Ardea Resources (ARL.ASX)
- GME Resources (GME.ASX)
We’re adding to our nickel exposure:
- Western Areas (WSA.ASX)
- Mincor (MCR.ASX)
- Panoramic Resources (PAN.ASX)
- Poseidon Nickel (POS.ASX)
- Largo Resources (LGO.TSX)
- Australian Vanadium (AVL.ASX)
- Capstone Energy (CPST.NDX)
- King River Resources (KRR.ASX)
After a lot of work on the space we are also going to enter the Hydrogen sector. We’re looking at the following stocks and we will discuss their merits in Part 2:
- Nel ASA
- Powercell ASA
- Ceres Power
- Ballard Power Systems
We will cover vanadium and hydrogen in Part 2 of the report due out next week. The reason for mentioning hydrogen now is as an appetiser.
Our Views on Battery Technology
The first question any long-term deep value investor should ask themselves is this: Has anything changed to our long-term view on battery metals? Or should I rephrase that question: What is the big theme we are trying to lock onto here, and has anything changed from a fundamental perspective that in any way alters our positioning?
We believe that the EV (electric vehicle) story is a subset of a bigger narrative, that of energy storage. Electric vehicles and grid batteries are part of the broader energy storage theme.
We wouldn’t go so far as to say it is a “green revolution” theme, but there is undoubtedly an element of this in the drive for energy storage.
I say only an element because the truth of the matter actually depends largely on individual countries energy complex. In Germany, for example, gasoline is actually far cleaner than electricity. Why? Well, don’t tell the beardies and hairy armpit crowd but most of Germany’s current electric supply comes from coal, which is far dirtier than gasoline. The same is true in many part of the world, but here at Insider our job is to identify trends and profit from them and in this respect there is certainly a trend towards greater usage of electricity and thus battery storage. And not just for EVs either.
At the end of the day, an industry or theme must make economic sense, otherwise it won’t be sustainable and that’s our starting point.
What we have seen in energy storage deployment and development over the last few years is merely the tip of the iceberg.
We are in the very early stages of adoption of the energy storage concept/theme. We could go so far as to say that many of the energy storage facilities that have been deployed to date globally (particularly grid storage) are experimental in nature.
The energy storage theme is about to experience asymmetric growth over the next couple of decades, perhaps the one big growth industry that we will witness in our lifetimes that is reasonably easy to see coming:
So we think it is fairly safe to say that the growth in the energy storage theme will be asymmetric in nature.
Now, here comes the challenging question: How do we play this energy storage theme from an investment perspective?
First of all, like marriage to a beautiful woman, we gotta take a very long-term time perspective and then realise that we need to get in early to really benefit from the relationship.
Which doesn’t mean it’ll be a linear path of uninterrupted bliss. It is going to take fortitude to be able to see through the short term noise of the next couple of years vs what is “likely” to transpire 5 to 10 years from now.
Many investors open these trades with high expectations only to be disappointed, namely because they were expecting big payoffs in a relatively short period of time. We aren’t short-term market timers. As an analogy, we’re aiming for the mountain (the big payoff) and trying not to get caught up in the noise or volatility of the hills and valleys in between.
Secondly, what technologies and/or commodities to back? Which technology will win the race?
Having spent an isht ton of time on research and speaking with industry, it seems to us that different technologies are and will solve different equations.
In short, different technologies will be more appropriate for certain applications., Lithium-ion batteries for EVs, fuel cells for heavy applications like buses, trucks, ships, trains and flow batteries for stationary applications like grid storage.
Then there is the third component: How best to position ourselves in the various technologies to take advantage of the growing energy storage theme as a whole?
Perhaps what I am trying to get at is this: Buying a few “cobalt” stocks is merely a trade that touches the tip of a way bigger theme. And in any event, “cobalt” may not be the best way to trade the broader theme.
So what technologies have we got? And what are their applications?
There is a lot going on here, and we haven’t even mentioned copper, which brings all of this together in one way or another.
Where do we start? And how do I keep this alert update from being another “War in Peace”? It’s difficult to keep the report down to a few pages because we want to do justice to the subject without putting you to sleep.
The best way to capture the lithium-ion theme: Lithium, cobalt, or nickel?
Perhaps the first of the “battery metals” to run and perhaps it still has some legs left in it.
But our issue with lithium is that it isn’t exactly a scarce commodity. The reason for it ramping up so much over the last 4 years was the scarcity of processing capacity, which has increasingly now largely been addressed.
So for these reasons we avoided and continue to avoid lithium. It’s probably not a terrible trade but we believe cobalt and nickel offer superior payoffs at this juncture.
Our initial alert in October 2017 centered around cobalt. In essence, we were investing in cobalt based on a long-term supply deficit expected by 2025 and growing thereafter.
And yeah, I get it. This is a long time to wait but that was, and still is, our time frame.
So has anything changed since then? We don’t believe so. Long term the odds heavily favour demand for cobalt used in lithium-ion batteries heavily outpacing miners’ ability to supply.
And then there’s that little issue of the DRC. You know, the Democratic Republic of the Congo, which is neither democratic nor a republic and one of the most screwed up places on planet earth. There absolutely will be supply disruption in the DRC, we just don’t know when.
Over the last 12 months significant production came online from the DRC and the price of cobalt did get hammered.
And stocks like Cobalt Blue took off and came back to more or less where the ramp up started and where we initially got in on the trade.
Having entered at $0.175, it is easy to say in retrospect that we should have taken profit above $1 or something like that. Perhaps the worst thing that could have happened was what happened. The trade is more or less unchanged on where it was when we got in, but there was this huge spike to the upside. It’s really hard holding a long-term view when there is such volatility.
However, we circle back to the long-term outlook for cobalt. Are we still expect a supply deficit by 2025, if not before?
The more we look at cobalt the more tricky any analysis becomes.
First of all, cobalt is mined as a byproduct of copper and nickel, and as production of electric vehicles has grown, demand for cobalt has come up against limited supply.
Cobalt plays a crucial role in the high-performance cell chemistries used in EV batteries by stabilizing the cathode structure and allowing cells to be charged and discharged at higher rates without overheating or generating large amounts of oxygen which can create a fire risk.
Secondly, cobalt supply is heavily dependent on two countries: Some 65% of the global cobalt supply (and growing) originates in the Democratic Republic of Congo, and almost all of this supply is processed and manufactured into lithium-ion cells in China.
The collapse in the cobalt price suggests that the EV revolution may come more slowly than some anticipated. Or is it just a big pickup in production coming out of the DRC as mines came back on line? We suggest the latter.
The demand for EVs doesn’t appear to be waning and we can see this in the development of gigantic factories in China.
After modest expansions of 39 GWh and 31 GWh in 2014 and 2015, “gigafactory” investments lept to 149 GWh in 2016, 253 GWh in 2017, and 428.3 GWh in 2018. In a rough sense China needed 10x more cobalt in 2018 than just 3 years prior. Think about that and then think about the fact that the vast amount of vehicles on the road in China are still ICE, and it’s tough to come away with a bearish assumption on what demand is going to look like over the next 3 to 5 years.
In fact, looking out even further, by 2028 China will have capacity of at least 1000 GWh (1 TWh).
This will require an increase in battery-grade cobalt supply from 50,000 tons per year currently to more than 200,000 tons per year. And before you say, “Oh, but Chris, China is experiencing a downturn”, also realise this is still a planned economy and one of Xi’s mandates is to try make China’s cities more liveable, which means NOT chewing the air before swallowing it.
So why the collapse in cobalt prices in 2018? It’s easy in hindsight, but this boom in battery production investment and seemingly constrained supply caused China to inventory build in 2016 and 2017 buying way more than they actually needed, perhaps out of fears of limited supply.
Toward the end of 2017 Glencore restarted production at its Katanga copper mine, which had been halted in 2015 due to an infrastructure upgrade. Other DRC miners also increased production.
Add to this “artisanal” miners’ contribution which isn’t small (the Chinese don’t care where the cobalt comes from or who mines it).
…and we had a situation where cobalt production from the DRC was up some 50% in 2018 from 2017, which is about an extra 30k tonnes.
The question to ask is this: Can this ramp up in production be replicated again?
This is a complicated question because even if production can be increased, it doesn’t mean to say that it will be increased. Uranium was mysteriously found in Katanga’s cobalt late 2018, which halted production. Strange because uranium had never been a problem at Katanga before.
Much of the increase in production in 2018 was already the result of developments that started in 2015. And developments from 2020 onwards? Speaking with industry it seems clear to us that substantial increases in supply aren’t forecast. This is evidenced the the lack of any substantial capital expenditure programs in the DRC mines. For there to be big capex plans there would have to be a substantial rise in the price of copper (remember copper is the primary metal mined in the DRC and cobalt is a byproduct of copper production).
We have to concede forecasting production out of the DRC is “tricky” at best.
We are talking of a place with huge political and social unrest. We believe that these factors will ultimately result in the supply of copper and cobalt from the DRC being constrained and not being able to keep up with the demand from battery manufacturers. And if prices really start taking off, the idiots in the DRC will tax the hell out of it, effectively increasing the mining costs and helping to put pressures on supply.
But what about EV uptake? There are some “interesting” forecasts for EV sales.
So EV sales up some 10-fold from current levels by 2030? Where the hell will all the copper, cobalt, nickel, lithium, manganese come from to achieve these forecasts is anybody’s guess.
How were these forecasts put together? We think it more than likely that these forecasts are a tad on the optimistic side. And if human nature is anything to go by, there will be a lot of extrapolation of recent growth rates.
We suspect that EV uptake won’t come in nearly as much as what the average genius is forecasting. However, this isn’t a problem because even if the demand for lithium-ion batteries is half of what is forecast, it will still place huge demands on the mining industry to supply the required materials to produce the batteries.
What about the push toward low-cobalt battery chemistries, like the so-called NMC 8-1-1 (named for its cathode composition of 80% nickel, 10% manganese and 10% cobalt)?
There was big talk of this in early 2018 when the cobalt price went sky high. But this has subsided over the past year due to technical challenges and safety concerns, as well as lower cobalt prices.
We do recognize that there will be technological advances in battery compositions. However, we also know that cobalt has incredible stabilizing properties. Messing around with a tried and tested battery formula can have huge consequences. Remember Samsung’s experience a few years ago with phones catching fire and Tesla’s bursting into flames on a fairly regular basis?
We are reasonably confident that the rise in the cobalt price from 2016 to early 2018 is a prelude of things to come. The price of cobalt will rise to a record again and go substantially higher. So we still believe that being invested in cobalt miners is an attractive asymmetric trade. But good things take time.
While lithium and cobalt have hogged the limelight as far as electric vehicle batteries go, nickel is the “boring one” that is mentioned somewhere in the background. But perhaps nickel is the unsung hero of the electric vehicle revolution.
Nickel is used not just in the lithium-ion technology but also nickel cadmium and various other nickel hybrid battery formulations.
As battery technology has advanced over the the last few years more and more nickel is being used in batteries (and less cobalt and lithium). When you do the long-term math it’s quite interesting… once you’ve picked up your jaw from the floor.
Simply put, substantially more nickel needs to be found and mined, or a substitute for stainless steel needs to be found (possible but unlikely), or a substitute for lithium-ion batteries, maybe hydrogen fuel cells. Something has to give because there is just not enough nickel being mined or developments in the pipeline to satisfy the demands of growth in EVs.
Let me explain…
Last year global auto sales were about 90m and they are growing by some 3% p.a. So 10 years from now that figure will be about 120m vehicles and forecasts (as in the one above from Bloomberg) suggest that EV sales will be about 20m. In other words, 1 in every 6 cars on the road will be an EV — or a 16% penetration rate by 2028. Follow me here and keep this figure in mind.
At this stage the use for nickel in batteries represents a very small percentage of world production — some 2-3%. But this will grow as EV usage picks up.
EVs currently constitute about 1% of auto demand, which translates to 70,000 tonnes of nickel demand (out of approximately a world production of 2m tonnes) — about 3% of the total market. As EV penetration goes up, nickel demand increases rapidly as well. Cool, heh?
Now, if EVs were to constitute 5% of world auto demand, then this would equate to some 350,000 tonnes of nickel required or 18% of world production (in today’s production figures). A 10% adoption of EVs would equal 35% of world nickel demand. 35%!
These figures are based on current EV battery compositions, which may well change with more nickel content being required.
And what about a 16% adoption rate? Well, that is about half of 2018’s global production of nickel.
And a 50% adoption rate as the “forecast” above implies? (we think that’s overly optimistic but hey, let’s run with it for the sake of understanding the math). That is about 3,500 kt of nickel required, which is about 75% more than nickel that is was produced globally in 2018.
Clearly a 50% adoption rate of EVs (ones that depend on resources like cobalt, lithium, and nickel) is delusional to us and we’ll fall well short.
Is a 16% adoption rate realistic 10 years from now? We don’t pretend to know what the figure will be, but at that adoption rate an additional 1m tonnes of nickel would have to come online within the next 10 years.
In 2018 world production of nickel was about 2000 kt. So an increase from 2 mt to 3 mt in 10 years, which is an increase of 50%, when at present there are few significant mines coming online leads us to the obvious conclusion. It ain’t going to happen!
The price of nickel will shoot up. And even if the penetration rate is “only”, say, 10% by 2028, this will place huge demands on world nickel production.
A big complication. And what if the price of nickel shoots way higher. Well, the costs of EVs may not come down as anticipated.
We don’t pretend to know what happens with EVs, but what seems as obvious as mud is that under their current configuration there isn’t enough nickel, cobalt, etc. to build all these EVs. Not without some serious capital investment into additional mines.
Even though much more nickel will be needed for lithium-ion batteries, most nickel in the global supply chain is not actually suited for battery production. Battery demand requires high grade nickel to produce nickel sulphate.
Today’s nickel supply comes from two different types of deposits:
- Class I (nickel sulphides): Higher grade, but rarer deposits that make up 37.5% of current production.
- Class II (nickel laterites): Low grade, bulk-tonnage deposits that make up 62.4% of current production.
Many class II nickel deposits are used to produce nickel pig iron and ferronickel and are generally not suitable for use in batteries.
Technology is now available to profitably process laterite with low grade nickel. However, these mines will struggle with costs related to increased energy and shipping for processing.
Meanwhile, class I nickel sulphide deposits are used to make nickel metal as well as nickel sulphate. Nickel sulphate is used primarily for electroplating and lithium-ion cathode material. Less than 10% of nickel supply is in sulphate form.
Of course the other interesting point to note is that from nickel mining (primarily of the sulphite variety), cobalt is produced as a by-product (the concentrations vary from deposits).
What about demand for nickel in other uses, in particular stainless steel? And how do you forecast where the demand for stainless steel will be in 2025?
Let’s approach it like this: All the “analysis” above assumes that the demand for stainless steel (and other uses for nickel) will remain constant between now and 2025. We think this is a tall order. Realistically the demand for stainless steel will rise and this will only add to the supply deficit for nickel.
We don’t really want to speculate as to whether cobalt or nickel performs better from the energy storage “revolution”. Both offer lots of asymmetry. However, we will say that if cobalt prices take off again and get to new highs there will be significant pressure on battery manufacturers to reduce the cobalt content in batteries and up the nickel content.
Either way, nickel wins and supply deficits start to emerge from about 2022 onwards.
It is interesting to note that many companies purporting to be cobalt miners (particularly in Australia) are merely nickel miners with reasonable cobalt credits.
We note that Andrew Forrest (of Fortescue Metals Group) recently invested in Poseidon Nickel Australia. Forrest was a very early investor in iron ore in Australia, well before the iron ore boom took hold in the 2000s.
Could nickel follow the same path as iron ore? Nothing would surprise us.
If the uptake of EVs is somewhat close to what analysts are expecting, then there will be a mad scramble for nickel sulphide deposits (most of which occur in Western Australia).
Perhaps instead of purchasing more cobalt stocks, one should be concentrating purchases in nickel sulphate miners. We already have Ardea Resources and GME Resources as part of the original cobalt alert (they are developing nickel sulphate deposits with high cobalt credits).
We feel the need to increase our exposure to nickel particularly with companies that are actually in production (or at least near to it). We have chosen four nickel producers in Australia, all with significant nickel sulphide deposits (battery class deposits):
- Western Areas
- Panoramic Resources
- Mincor Resources
- Poseidon Nickel
It is important to note that these stocks were chosen to give a broad exposure to the nickel sector. They aren’t so much individual stock picks.
However, we didn’t blindly include any nickel producer. We gave careful consideration to including stocks with low debt levels to reduce the risk of exposure to a stock that goes tits up.
These six stocks (Ardea, GME, Panoramic, Mincor, Western Areas, and Poseidon) should be seen as one trade, just like if they were all included as one ETF… but part of the broader “battery technology” theme.
Other Ways of Trading Nickel
There are a couple of nickel ETFs that track the price of nickel (just as GLD tracks the price of gold). London listed “NICK.L” or NYSE listed “JJN.N”.
The problem with ETFs based on commodities is that they roll futures contracts, and so you get “roll decay”, which basically acts like a virus eating away at your position. And so we’re not going to personally be positioning in this, though with all that said, when or if nickel runs, this, too, will run.
Sodium Sulphur Batteries
Sodium Sulfur (NaS) Batteries were originally developed by Ford Motor Company in the 1960’s and subsequently the technology was sold to the Japanese company NGK. NGK now manufactures the battery system for stationary applications.
NaS battery technology has been demonstrated at over 190 sites in Japan principally in association with Tepco. More than 270 MW of stored energy suitable for 6 hours of daily peak shaving have been installed. The largest NaS installation is a 34-MW, 245-MWh unit for wind stabilization in Northern Japan. So Japan is pretty much the leader in this space.
Recently, however, Abu Dhabi installed a huge bank of NaS batteries, reputed to be the world’s largest storage device.
The NaS system looks really interesting, but the problem seems to be that NaS technology is limited to one company: NGK Insulator (5333.T).
And now you may say, “Oh, great, we’ll just buy that one”. But to that we’d say, “Hang on a second cowboy or cowgirl, because NaS technology only makes up some 10% of NGK’s revenue so it is hard to get a pure exposure to the technology”.
We point this out so that you can know what the market for battery technology actually looks like. It’s rather fascinating for weirdos like us.
That’s it for Part 1 of battery metals alert update. Next week we will publish our updated thinking on vanadium and introduce hydrogen fuel cells.
As always, thanks for reading and being part of Insider.
Founder & Editor In Chief, Capitalist Exploits Independent Investment Research
Founder & Managing Partner, Glenorchy Capital
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