August 29, 2022
Gold rose 0.2% to US$1,751/oz this week even as equity markets were hit by hawkish US Fed comments indicating that tight monetary policy would be maintained for an extended period, contrasting earlier indications taken as more dovish by the market.
This week we look at the production and performance of the main battery metals nickel, cobalt and lithium that will support the 'green' energy shift towards electric vehicles and the major TSXV-listed stocks focused on these three metals.
Gold was near flat this week, up 0.2% to US$1,751/oz, even as comments by the US
Fed Chairman Powell, indicating intentions to maintain tight monetary policy for an
extended period, sent equity markets plunging. These comments were apparently
viewed by the market as contrasting with the more 'dovish' seeming ones made by
the Fed after its last rake hike. These previous comments came after the release of
US GDP data that showed the country had entered a recession, with the Fed
indicating that it would be carefully watching economic data and that this could affect
the pace and degree of its interest rate hikes. However, given that the Fed always
watches economic data to guide its decisions, the market may have gotten a bit
ahead of itself interpreting this as indicating a pullback by the Fed soon.
This is especially the case with US inflation still well above 8.0%, and the Fed very clearly focused on reducing it, with neither a bear market nor a recession dissuading them from their continued tightening path so far. With high inflation historically often not curbed until the Effective Fed Funds Rate reaches the same level, a rate at just 2.33% currently suggests a tripling before inflation is truly crushed. While we doubt the Fed would be able to get to that level without politically untenable economic and market fallout, we could still conceivably see the Fed still double its Effective Rate before it moves the needle (down) on inflation and starts to loosen monetary policy. There would likely still be much more pain to come for the economy and markets to come in this situation, and we continue to suggest extreme caution on equities, including the junior miners. As we shown in the past few weeks, the large cap TSXV stocks overall have taken a major hit this year and not participated in the bear market rally of the past two months, with only a few gainers on very exceptional operational progress. We see the risk for the sector as remaining to the downside for this year.
This week we look at the production and performance of the main drivers of the Battery Metals Revolution; nickel, cobalt and lithium, and the large TSXV stocks that are focused on these metals. The demand for these metals is expected to rise significantly over the next decade, both from general economic expansion, given their wide usage across industry, but also with their use in batteries to power electric vehicles a key driver. The expected rise in electric vehicle demand is part of a global political push towards more 'green' energy and lower emissions. For all three metals, the proportion of their demand from Electric Vehicle and Storage batteries is expected to surge, for cobalt from 15% in 2020 to 41% in 2021, for nickel from 3% to 19% and for lithium, from an already high 30% to 68%, comprising the majority of its demand (Figure 4). The big gains in the share of EV and storage for these metals is expected to happen over the next decade, with either a flattening or moderate rise over the following decade to 2040.
These share gains correspond to huge absolute gains in demand volume for the battery metals in the EV and storage segment from 2020 to 2040, with the largest rise from nickel, up 712%, dwarfing its 52% total demand growth, including EV and storage. Lithium EV and Storage demand is expected to rise 645%, also well above its 227% total demand, with cobalt EV and storage demand to rise 424% versus 92% for total demand (Figure 5). We can compare this to copper, another critical metal in the electronic revolution, with total demand growth over the next twenty years at just 19%. While copper is also a component in EV batteries, the sector comprises only a small proportion of overall copper demand, and it is not expected to be propelled as much by the shift towards electric vehicles compared to nickel, cobalt and lithium.
To estimate the overall market size for each of the main battery metals we have applied the average price for each of the metals over the past ten years to the estimated demand. The nickel market is expected to remain clearly the largest of the three, at US$2bn in 2020, or 53% of the total, and forecast to rise to US$20bn, or 63% of the total by 2040 (Figure 6). Cobalt is the second largest at US$1bn, expected to rise to US$7bn by 2040, but decline as a percentage of the total from 34% to 22%, offset by gains in lithium, rising from US$0.4bn, or 12% of the total in 2020 to US$5bn, or 15% of the total in 2040.
The prices of the three metals have followed very different paths over the past ten
years (Figure 7). Nickel trended down from 2012 to 2015-2016 and then rose
consistently until its peak this year, driven by Russia's invasion of Ukraine, with the
former the third largest global producer. However, with an overall metals bear market
starting around March to May 2022, the price has declined back to pre-invasion levels.
After relatively weak prices from 2012 through to early 2016, cobalt has seen two spikes, one in early 2018, driven by expectations for the expansion of the electric vehicle market, and then in the post-global health crisis surge for most major metals. As with nickel and most other major metals, cobalt's price has come down on rising interest rates and economic growth concerns. Lithium also had a similar slow period from 2012 to 2016, before picking up, like cobalt, on the electric vehicle story and then declining prior to the global health crisis.
However, in contrast to cobalt, lithium's price has held up over the past few months, on constraints on supply from Australia, the dominant global supplier of lithium raw materials, and refining capacity in China, the largest global producer of lithium end products. Figure 8 shows the relative price change in the three metals since January 2020, just prior to the onset of the global health crisis, with the performance of lithium, up 863%, dwarfing even the relatively strong performance of nickel, up 85%, and cobalt, up 52%.
Nickel production is concentrated in Southeast Asia, with Indonesia accounting for 37.0% of the total and the Philippines 13.7%, although only Indonesia is in the top four for total nickel reserves, with the Philippines fifth in 2021 (Figure 9). While Australia has nickel reserves equal to Indonesia, it is only the fifth largest producer. Canada ranks sixth for nickel production and seventh for reserves. For cobalt, both production and reserves are concentrated in Congo, at 70.6% and 46.1%, respectively, with Russia the second largest producer and holding the sixth largest reserves, and Australia also a sizeable player in terms of both reserves and production. For lithium, the market is dominated by just four players, Australia, Chile, China and Argentina, which combined comprise 96.4% of production and 84.5% of total reserves.
While the share prices of much of the larger cap TSXV have declined over the past year, the large battery metals focused stocks are mostly up (Figure 10). The group mainly comprises lithium stocks, with their market caps propelled by the rise of the lithium price over the past two years. There is only one larger play on each of the other two battery metals; Jervois Global for cobalt, and Canada Nickel for nickel.
As would be expected given the huge rise in the lithium price, two lithium stocks have been by far the stand-out performers, Sigma Lithium and Frontier Lithium, although the price rise has not been enough to support all of the lithium stocks, with only moderate gains for some lithium stocks over the past year, and even a decline for one. Sigma is by far the largest stock of the TSXV miners, at CAD$3.1bn, and has seen the largest gains, up 254% over the past year. Its Grota de Cirilo project is nearly fully derisked, with Phase 1 of production of 230 tpa expected to start by Q2/22, and a Feasibility Study for Phase 2 outlines production of 220 tpa (Figure 11). The other big gainer has been Frontier Lithium, up 209%, operating the Pak project, with two deposits, Pak and Spark, with a concentrate pilot completed in March 2022 and drilling continuing at Spark with strong results this year.
The performance of the next four gainers has been more moderate, given the
continued overall pressure in the equity markets. American Lithium is up 24%,
operating two PEA-stage lithium projects, TLC in Nevada and Falchani in Peru, but
may have seen some drag on its share price from the PEA-stage, uranium-focused
Macusani in Peru, its third project, given the decline in the uranium price over the
past few months. Critical Elements Lithium is up 22%, operating the Rose Project in
Quebec, at the Feasibility Study stage, with a 25k m drill program ongoing since April
2022 at the project and other targets. Jervois Global is up 20%, and is the largest
direct play on cobalt and nickel on the TSXV, with global operations across the US,
Brazil, Finland and Australia including the fully permitted and under construction
Idaho Cobalt Operations. Standard Lithium, down -12%, is the second largest lithium
stock on the TSXV with a CAD$1.3bn market cap, operating two projects in Arkansas
in the US, Lanxess and Southwest Arkansas, both at the PEA-stage, with a Pre-Feasibility started for the latter in May 2022.
Rock Tech, the only lithium stock in the group to have seen losses over the past year, down -31%, operates the Georgia Lake mine in Ontario, which is to provide raw materials for its planned Guben Convertor, a refinery in Germany, with a target to build up to five convertors across Europe by 2029. Canada Nickel, operating the PEAstage Crawford nickel project, is down -41% this year, and did not see a significant boost either from the spike in the nickel price after Russia's invasion of Ukraine or from the announcement of the newly discovered Reid property with a footprint larger than Crawford.
The performance of the producing gold miners was mixed as gold held up but the equity markets dropped, and none of the companies had major press releases as the post-results news flow slowdown continues (Figure 12) and the large TSXV gold miners were also mixed (Figure 13). For the Canadian miners operating mainly domestically, New Found Gold started an at-the-market equity offering program of up to US$100mn and Tudor Gold reported drill results from Treaty Creek (Figure 14). For the Canadian juniors operating mainly internationally, Minera Alamos reported Q2/22 results with gold sales of 3,100 oz with production reduced by the drought in the US and Mexico Sonora desert region over the quarter (Figure 15).
Disclaimer: This report is for informational use only and should not be used an alternative to the financial and legal advice of a qualified professional in business planning and investment. We do not represent that forecasts in this report will lead to a specific outcome or result, and are not liable in the event of any business action taken in whole or in part as a result of the contents of this report.