Interview with Howard Klein, Founder & Partner of RK Equity Advisors, Writer of Lithium-ion Bull and Host of Lithium-ion Rocks!
Make sure you read Klein’s article on our website!
Could EV penetration really be 25% by 2030?
COVID-19 has “crushed” the EV market (the words of Bryce Crocker, Jervois Mining CEO). Lithium has been struggling for the past few years, and lithium investors have been praying for a reprieve. What insights does lithium expert Howard Klein have to share with investors?
Matthew Gordon talks to Howard Klein, 15th June 2020
Klein has been advising companies in the junior resource space for 20-years. There were numerous false dawns for the EV revolution, but once Tesla started powering it forward, Klein became more interested in the lithium space and its potential for exponential growth.
His message is clear: when looking at the EV revolution macro story, investors need to focus on some specific areas of interest in order to make the best decisions possible. Investors need to be looking at EV sales and the success of EV manufacturers. In addition, they should look at policies that are being implemented by national governments that could be favourable for EV manufacturers. Europe has fully thrown itself behind the EV narrative, and since the diesel-related controversy, Volkswagen has been leading the charge. Europe has harsh penalties for emissions violations. Investors should also pay close attention to the relative cost of electric vehicles in comparison to their gas-counterparts. In a post-COVID-19 world, are consumers ready to pay a premium for electric vehicles? Will the guard their cash. Is Jervois CEO correct in his assessment?
While many EV commentators have lamented COVID-19 as deleterious for the American EV narrative, Klein comes that developments in recent weeks in China have proven that COVID-19 could actually be an accelerant for certain markets. Klein is more bullish than most on the American EV industry, and much of his faith is derived from the enormity of Tesla. More gigafactories could be on the cards, as battery costs continue to fall. Klein foresees a need for a green revolution to rescue struggling economies, providing jobs to millions. However, even he sees 2020 as a year to forget for EV investors.
Lithium companies are struggling to get financed across the board. Klein states that there is a clear deficiency of companies that are ready to be funded. Most lithium juniors lack the permits and infrastructure needed to pull the trigger on lithium production. Interestingly, there is some capital available for lithium companies in the exploration-phase, but it is rarely a meaningful amount and it seems to dry up the closer a company is to production, as the numbers get larger. CAPEX funding is not happening. Plateau Energy, a recent Crux interview, is a great example. There are a number of lithium companies that are advancing to definitive feasibility studies, and they should be ready for financing next year. EV investors need to pay close attention to how the market responds and where the money goes. Lithium companies who have capital (a rarity) are well-positioned to raise additional capital on their own terms.
The lithium space is nuanced, very small, and highly complex. Today, it is 300,000t and US$3Bn in size. However, investors need to try their best to keep it simple. For example, lithium carbonate vs lithium hydroxide is a common debate in the disclosure of lithium investors. While it is relevant, investors should not be distracted from the bigger picture. Historically, the lithium space was broken down into hard rock and brine, but clay deposits and direct lithium extraction are now also being discussed. Howard argues that companies that produce lithium carbonate, largely the brine projects in South America, are now less in favour than they used to be. Brines used to be considered cheaper than hard rock, but Howard suggests that brines are not cheaper than hard rock to make hydroxide. Additionally, he adds that brines are generally in less attractive, more unstable mining jurisdictions with an enhanced environmental and political risk, including water issues and indigenous-people-related issues. Howard also discusses why brines are also can be very challenging, as each brine poses its own idiosyncratic technical problems. The recoveries can be as low at 30-50%.
Lastly, Klein explains his view of the outlook for lithium. The 2030 forecast for the lithium market is for 2Mt of lithium: a 1.7Mt increase. This would mean 75 new lithium processing plants need to be constructed, compared to the c. 20 in operation today. That will require c. US$40Bn of investment, when the aggregate market cap of lithium companies that Klein tracks is US$25Bn. Where will the capital come from? The industry itself isn’t well-capitalised, so who will foot the bill? Klein thinks potentially some big chemical or oil companies to jump in when the moment is right.
What did you make of Howard Klein? Are you bullish about lithium? And, as an investor, if you haven’t already done so, when do you think it is time to step in?
If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.
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