Unprecedented Investment from Mining Companies And Auto Manufacturers
The growing demand for lithium is drawing unprecedented investment from the public and private sectors. In pursuit of future growth, specialized lithium miners are investing in their businesses and have a reinvestment ratio* of about 60%, compared to 25% for diversified miners (Source: IEA Critical Minerals Market Review 2023).
Automakers are concerned about the availability of lithium, a mineral essential to their ability to manufacture EVs. In a move that harkens back to the days of Ford setting up rubber plantations to guarantee materials for tires, automakers are investing directly in the lithium mining space. 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, while General Motors and Stellantis are investing directly in lithium mining equities (Source: IEA Critical Minerals Market Review 2023).
Figure 3. Demand For Lithium Is Expected To Grow More Than Sevenfold Between 2020 And 2030
Realizing lithium’s role in the energy transition, the U.S., Canada and the European Union have added lithium to their critical minerals lists. 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 Index 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.
The same principle applies to energy transition-related investments. Investors should resist the temptation to try and time the market to participate in this growing industry. Companies leading the energy transition are not immune to periods of volatility. We believe, however, that investors may benefit from a long-term allocation to a sector that is underrepresented in major market indexes.
Is There A Short-Term Opportunity?
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 in 2023. This means that investors who want to add an allocation to lithium miners to their portfolio may have an opportunity to do so at prices significantly lower than they were at the start of 2023.
* 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.
Steve Schoffstall is director of ETF product management at Sprott Asset Management.
Important Disclosure
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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Past performance is not indicative of future results.
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