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Lithium Investing: Capital Continues To Flow Into Lithium Assets As Demand Rises

Summary

Battery production continues to climb as automakers bring new options to market; new energy vehicle sales figures continue to rise.

Barriers to mass technology deployment have rapidly been falling over the past three years.

A review of strategic capital entering the lithium chemicals market; why this could indicate an unbalanced market and which segment of the market will benefit.

In December 2017, I visited the Los Angeles Auto Show to better understand the transition to new energy vehicles. I was content with my findings. Every automaker either offered an all-electric or plug-in hybrid vehicle, but it was clear that the industry still requires another year before more options become available to the general population. Total American plug-in hybrid and all-electric vehicle sales have gradually been increasing year over year. In 2016, sales figures amounted to 158,000 units, which grew to 199,000 units in 2017, with the top selling models being the Tesla Model S at 27,000 units and the GM (GM) Chevy Bolt at 23,000 units, followed by the Tesla Model (TSLA) X at 21,000 units. Plug-in vehicle sales in Europe were 307,400 units in 2017, 39% higher than for 2016.

In the passenger car and light commercial vehicle categories, these include all Battery Electric Vehicles (BEV) and Plug-in Hybrids (PHEV) in Europe. The total sales for North America and Europe in the all-electric and plug-in hybrid segment of the market are relatively low, but the industry is evolving at a much quicker rate than anticipated. Looking at Tesla as a benchmark in this segment of the industry, it is reported that the company could achieve a production run rate of 5,000 units per week. In the near term, the focus is on mobilizing assets to ensure that the lithium supply chain is well prepared for the next leg of growth that is already underway. In 2017, the Chinese government had to delay mandates that would force automakers to convert a portion of their production to new energy vehicles. This mandate could translate into volumes representing a range of 5-10% of all new vehicle production in a market that produces nearly 20 million passenger vehicles per year. In December 2017, unofficial Chinese sales figures for PHEV were reported at over 100,000 units, with a 2017 total of over 600,000 units, up 71% in comparison to 2016. Based on the government mandates for more vehicle options plus an improvement in the deliverability and establishment of the lithium supply chain, it is my opinion that these figures are set to dramatically increase well above 1 million units.

At present, there are billions of dollars being invested into battery and material manufacturing facilities with the goal of dramatically increasing lithium battery production. This tidal wave of investment is going to create downward pressure on lithium battery prices, which have already decreased from $1,000/kWh to below $300/Kwh over the past years. Based on the large number of new battery facilities coming into production, there is no doubt that battery prices will continue to decrease over the next few years, dipping below the $100/kWh range by between the years 2020 and 2025. The significant decrease in lithium battery prices is already expediting the mass adaption of secondary applications, such as stationary energy storage systems, electric bus fleets, and various other forms of transportation.

As an example, advanced lithium-based residential energy storage systems in North America did not exist three years ago; in a span of three years, the industry has grown from hundreds of systems per year to a projection of 15,000 systems installed in 2018. Looking at the utility-scale aspect of the market, Tesla was successful in installing a 129MWh utility-scale project in Australia which, based on 80kWh/EV, translates into the same storage capacity as 1,600 vehicles - not bad for one project! It is important to understand that these primary and secondary markets have tipped and the energy evolution has taken flight, so the frequency and volume of these types of projects is now expected to increase. Of course, with the entire lithium supply chain in an undersupply scenario, the limiting factor is going to be de-bottlenecking supply of energy metals and increasing battery and material production allowing for an increase in overall supply. The 15,000 residential energy storage target for 2018 is limited by supply, not consumer demand. With battery prices drifting below the $300/kWh mark, and utilizing existing solar photovoltaic electronics, the cost to attach a battery storage system to a new residential solar PV system quickly declines to less than $5,000 per system after the ITC is taken into account.

Tesla store in Boston

(Author supplied - Tesla Store in Boston - Powerwall on display)

Here are four key points that lead me to believe demand for lithium technologies are on the verge of a significant breakthrough:

Barriers in the consumer market have been removed

My professional background is in bringing new energy technologies to market. I have developed channels for industry-leading companies such as Mercedes-BenzsonnenBatterie and Eguana Technologies (OTCQB:EGTYF) in North America, and I have achieved a very high level of success with these initiatives. In most cases, energy systems, which were sold and installed through networks of contractors, were among the first in their regions or countries. I was involved in the first lithium storage systems deployed throughout North American and Caribbean including: Bermuda, Anguilla, Puerto Rico, US Virgin Islands, British Virgin Islands, Bermuda, Bahamas as well as in Hawaii, California, Florida, along with dozens of other states.

In July 2015, while with Eguana Technologies, we launched our AC Battery product. This was a fully integrated energy storage system utilizing LG Chem (OTCPK:LGCLF) low-voltage battery packs. I specifically recall an event in San Francisco where nearly none of the contractors had ever seen or installed a lithium battery. Experience with advanced lithium technologies was literally zero. They did not understand the use cases and they could not purchase the product from their local wholesaler. Essentially, the market was non-existent.

Fast forward 3 years: everything has changed. Nearly every solar contractor in the USA is offering some kind of energy storage system, with the vast majority having been trained on system installation or having installed product. To sell a product, they must now understand the value proposition and every major solar PV equipment wholesaler stocks and distributes product in local markets. There are a number of incentive programs in New York, California, and Massachusetts that offer incentives for stationary storage systems, such as California's Self Generation Incentive Program, which is actively assisting with the deployment of thousands of storage systems in the state. At a Federal level, there is the Investment Tax Credit, or ITC, which provides a 30% tax credit for solar plus storage assets.

The whole industry is changing. Anyone who understands the mass deployment of new technologies will understand the range of dynamics that must shift in order for the transition to occur. Not only does a product need to be widely and readily available to channel partners, but also homeowners need to understand the technology. Today, home and business owners, along with utilities, are commanding the installation of this new technology. Financing has also become available, which is a major obstacle for any new technology to overcome. Local permitting offices and authorities, such as inspection officers and first responders, now understand the technology. These developments are commensurate with what has happened in the electric vehicle industry, wherein both supply and options have increased, financing has become available, and vehicle-charging infrastructure is both comparatively inexpensive and widely available.

All of the barriers for consumers and businesses to embrace these new technologies have crumbled - this market is on the verge of a major transition and related positive developments are well beyond the point of no return.

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