We are sure you are aware of the increasing global demand for electric vehicles (EVs), the batteries required to run them, and the critical minerals needed to make those batteries.
The main mineral is lithium, of which there is a global deficit, so there are opportunities for investors in the lithium sector.
But some companies are more advanced than others and less risky.
One example is a Canadian-listed, Brazilian-based firm that will be producing lithium by the second quarter of this year.
National Bank of Canada Financial Markets Research has made this firm a top pick and believes the stock could gain more than 50 per cent over the next 12 months.
This after the shares surged nearly 2,400 per cent in the last five years.
First, a brief overview with some nice charts on the lithium sector in terms of pricing, supply and demand, and global sales of EVs.
And then, a snapshot of why National Bank believes this company, with its focus on sustainability, can be a big winner in the big shift to green energy.
by National Bank of Canada Financial Markets Research
Over the course of 2022, battery-grade lithium carbonate and hydroxide prices appreciated ~91% and ~125%, after a near quadrupling of prices in 2021, and have remained strong through the start of 2023 given strong demand, tight supply, and despite COVID-related disruptions out of China.
Several projects are scheduled to be commissioned through the first half of 2023, ramping up through the rest of the year and we expect:
- Incoming supply to ease market tightness,
- Potentially resulting in cooling prices in 2023 and,
- Addressing some lingering concerns of rising material costs impeding electric vehicle (EV) cost parity – the point at which an automaker can theoretically build and sell an EV with the same margin as a comparable combustion vehicle, without the cushioning effect of green subsidies.
Some risks to our outlook this year include a somewhat more hawkish approach from federal governments in Latin America and Africa towards controlling lithium resources, environmental regulatory hurdles in Latin America as well as inflationary pressures on consumables and a tight labour market hampering greenfield project builds.
At the same time, accelerating zero emissions targets, and the loosening of Chinese COVID restrictions, are features we expect to influence the demand landscape in 2023.
Overall, prices are expected to be volatile through the balance of 2023 though long-term fundamentals remain favourable with a notable supply deficit expected to begin showing from 2025.
(Acronyms above: LCE – lithium carbonate equivalent. CIF – Cost, insurance, freight.)
Demand – Lithium Prices Supported by Global Electrification Push
Passenger plug-in electric vehicles (PEVs) comprised ~60% of lithium chemical demand in 2022, up from ~40% and 53% in 2020 and 2021, respectively, and this share is expected to increase to ~75% by 2026, underscoring how rising lithium demand is backed by accelerating electric-vehicle demand, supported by government subsidies and car manufacturer investments.
Europe passenger PEV sales are expected to nearly double to 3.15 million units sold in 2023 from 2022 sales levels partly influenced by a reopening economy and penetration rates edging up across Norway, Germany and France, according to proposed directives.
By the end of 2020, Norway achieved 74% market penetration of EVs, highlighting the success of its decade-long strategy of equalizing purchase prices (emissions-related taxes on new internal combustion engine (ICE) car sales, zero value added tax on EV sales); discounts for EVs on ferries, parking and toll roads; and, crucially, rolling out a nationwide fast-charging network – this figure is expected to be approximately 90% in 2023.
Ex-China passenger PEV sales will also benefit from the wider auto sector sales recovery in 2023.
As a result, EV sales are forecast to grow by ~60% by 2025 and ~25% compound this decade.
Many countries have aggressive targets to phase out ICE vehicles, among them Norway (2025), the UK, Ireland, Denmark and Sweden (2030) and China by 2040.
Several countries, however, have yet to lay out clear policy that sufficiently incentivizes EVs to meet their plans, however this is expected to change in 2023.
Sigma Lithium (SGML:TSX.V; NASDAQ:SGML) $CAD60.00 Target (was $55.50), Outperform).
We highlight Sigma Lithium as a Top Pick in 2023.
Low-cost spodumene developer, expected to achieve initial production at its flagship Grota do Cirilo project in Brazil by Q2 2023, with a potential tripling of production capacity by year-end 2024 at our estimates.
Our positive outlook on the company is partially offset by its tightly restricted share liquidity as well as our modestly delayed production timeline given significant torrential rainfall in Minas Gerais, Brazil in the past month impeding mining and construction operations in the region according to local reports.
Our Outperform rating is justified by SGML’s explicit ESG focus which we expect:
- Positions its product to a wider array of potential customers,
- Attractive asset portfolio which boasts a low-cost,
- Large particle size spodumene ore, with the scale and exploration potential to meet rising lithium demand,
- Partially offset by the company’s tightly held share structure,
- ~50% of shares outstanding are held by A10 Investimentos (the co-founder and managing partner, Ana Cabral Gardner, is also the Co-CEO of Sigma).
We’ve increased our target price to reflect higher commodity price assumptions, partially offset by higher cost estimates and modest adjustments to our operating assumptions.
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