Warren Buffett Betting Big on Lithium Stocks
While English majors may cringe because the “lithium is the fuel of the future” notion has started to sound like a cliché, investors in lithium stocks should be content. They can enjoy a nap on the hammock. They know that their investment in what some scientists claim was one of the first three elements to emerge from the Big Bang that formed the universe will propel their portfolio for years to come. One of these well-rested investors is Warren Buffett of Berkshire Hathaway Inc. (NYSE:BRK.A) fame.
To better appreciate the value of lithium (Li on the periodic table), note that this least dense of the metals does not occur freely in nature. In other words, it must be extracted from various ores, typically found in igneous rocks and salts. This means that there are few mines that can develop lithium efficiently while maintaining the best grades. Until recently, lithium was used in psychiatric medicine to treat bipolar disorder and depression. Lithium can be added to cadmium or aluminum to make high-performance parts for airplanes. Therefore, demand was moderate.
Here’s Why Warren Buffett is Bullish on Lithium Stocks
The demand for Lithium-ion (Li-Ion) batteries for powering anything from cars to houses—Tesla Motors Inc (NASDAQ:TSLA) will sell you a battery to supply your house with energy—is exploding. Li-ion batteries are even used in airliners, remote-controlled toys, and smartphones; they are everywhere. But electric cars are the main driver of lithium’s value. Lithium is the electrolyte in the battery pack for the “Tesla Model S—and any of its electric rivals—which accounts for over a quarter of the car’s weight.
Warren Buffett has a reputation for farsightedness and investing in things that makes sense. He saw lithium’s potential before most people understood how valuable this metal would become. Buffett’s Berkshire Hathaway bought Duracell, the battery maker, for some $4.7 billion in 2014. Duracell also makes Li-ion batteries in its lineup of electro-chemical products. However, years earlier, in 2008, Buffett bought a 10% share of China’s BYD Company Limited (NYSE:BYDDF). BYD stock has risen almost 24% year-to-date. Over the past five years, BYD stock has gained 162%—in the past 10 years, 250%.
But there’s more. BYD is the world’s largest producer of electric cars and electric buses. While Tesla’s cars may sound innovative because of their sleek designs and even slicker marketing, quietly and on a massive scale, BYD is also making complete domestic battery energy storage systems—even the kind linked to renewable energy. However, the point here is not to discuss the merits of Tesla and BYD.
Rather, it’s to show just how important lithium has become. Buffett understood this a long time ago. Now, Buffett and BYD could make even more money from lithium. Samsung acquired a stake in BYD, as the Korean electronics giant wants a piece of the growing demand for Li-ion batteries.
There is but one Warren Buffett and few have his foresight. So if you were not among the few who bet long on lithium and lithium-related industries, there’s still time to profit from it, because from a mining perspective, it’s almost at startup level, given the scarcity of lithium resources. Lithium production is limited; in a few years’ time, Tesla alone could absorb all of it, if demand for its forthcoming “Model 3” is any indication.
Lithium: The Mineral of the Future
To understand it better, consider the fact that lithium is an irreplaceable component of the current generation of rechargeable batteries used in electric cars and devices like mobile phones. It has unlimited potential for expansion. Most lithium is produced in Australia and Chile, while most of the reserves are in Chile, Bolivia, and Argentina.
Between 2005 and 2015, lithium production has increased 20% per year from about 16,000 to 32,000 tonnes a year. Driven by demand, this increase has led to a price increase in lithium, which has in turn prompted the reopening of some closed mines, such as the open pit Mt Cattlin mine in Australia. In the U.S., new deposits were discovered in Nevada. Not by chance; that’s where Tesla’s battery Gigafactory is being built. Albemarle Corporation (NYSE:ALB) is the company with lithium operations in Nevada.
The market for Li-ion batteries could generate some $46.2 billion worldwide over the next seven years. This implies an average 11% annual growth rate, given present production. The automotive sector will have the greatest growth in this period and high demand for hybrid and electric vehicles. (Source: Lithium-Ion Battery Market is Expected to Reach $46.21 Billion, Worldwide, by 2022, Allied Market Research, Apr. 12, 2016.).
Bottom Line on Lithium Stocks
China, for example, has set a goal of five million electric cars by 2020, so the growth potential of this industry is huge. Once, again Warren Buffett was right. He saw the importance of batteries before most investors did. But he’s investing in the products that lithium makes. The real opportunity now is in the actual raw material. But how can the rest of us invest in lithium? The price of lithium carbonate has reached about $7,000 per ton. Demand for batteries is increasing due to growth in the production of electronic devices that use them, and demand for them as a form of clean energy will continue to grow. That could send lithium prices soaring… along with lithium stocks.
Unfortunately, the investment options are still scarce. You cannot buy lithium in the futures market like gold, nor are there funds dedicated to this mineral. The only way not to miss this interesting option is to buy shares of lithium stocks in the companies that produce them. By clicking here, you will be able to start profiting from this shiny metal.
LPI Price at posting:
47.5¢ Sentiment: Buy Disclosure: Held
