Lithium Mining Push By Tesla, GM Follows Shareholder Interests

Tesla is following a path already established by its shareholders by acquiring stakes in lithium miners.

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The Toronto-listed Sigma Lithium Corp. is reportedly being pursued by Tesla Inc. Many prominent funds have been buying Sigma shares, even as they cut exposure to the electric vehicle maker, including Manulife Financial Corp., 1832 Asset Management, Maven Securities, and DZ Bank.

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It's easy to see why the attraction exists. It has caused the price of lithium — a component of the batteries that power electric cars, buses, and trucks — to skyrocket as policymakers and governments worldwide have intensified calls for cleaner transportation and poured billions of dollars into EV infrastructure development. Over the past two years, lithium has been the top-performing commodity.

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Investing in lithium at a lower valuation, and without having to deal with ancillary exposure to a CEO selling billions of dollars in stock, gives investors a chance to participate in the electric vehicle expansion. Investing in lithium, cobalt, copper, and nickel futures is the Element EV & Solar Battery Materials Futures ETF (ticker: CHRG) run by EMG Advisors.

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All electric vehicles require lithium as an underlying technology, he said. Lithium remains the cornerstone metal for no prominent player."

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GM became Lithium Americas Corp.'s biggest shareholder this week, helping the company break ground on a new mine. In an effort to secure supply, other car manufacturers attend mining conferences.

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During an interview with Sprott Asset Management CEO John Ciampaglia, he said, "You are only as strong as your weakest link, lithium." Due to a supply crunch, investors are moving their capital upstream, buying lithium producers undervalued in the electric vehicle transition. Sprott launched an ETF in February to capitalize on investor interest in lithium miners.

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Despite the booming demand, the stock prices don't always reflect the surging metal price. Sales and income at Albemarle Corp. have soared. Yet, its stock trades at just a fraction of Tesla's 56-times price-to-earnings multiple - below the S&P 500 Materials Index's 14.8 times and below the S&P 500 Materials Index's 14.8 times.

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Analysts and fund managers see new buyers emerging for these stocks, such as US auto giants, beyond their cheap valuations. According to Pedro Palandrani, head of research for Global X ETFs, these lithium mining deals are probably not the last. 

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Since lithium consumption is expected to quadruple over the next decade, Palandrani anticipates more auto companies will invest in miners. 

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As Palandrani said, lithium miners have margins similar to software as a service company. As most electric car startups struggle and legacy carmakers' gas-powered auto businesses make battery-powered car opportunities murky, EV investors are taking notice.

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It is still risky to invest in early-stage mining companies, which are unique from carmakers, as they might not produce as expected or have the right mineral grade. When commodity consumers move upstream, Jeff Currie, Goldman Sachs Group Inc.'s commodities research head, warns carmakers it always ends in tears.

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EVs continue to drive demand for lithium despite investors and car manufacturers betting that a shift to EVs will boost the metal's supply. Global X's Palandrani believes lithium will remain the common denominator for a decade or more, and he expects lithium producers to outperform.