The Global X Lithium ETF (LIT) – Why I Don’t Like It

by FI Fighter on May 8, 2016

in Clean Energy, Lithium

LIT

When it comes to index funds and ETFs, in general, I am a HUGE fan. Right now, that may not be so apparent since I don’t currently hold any, but if times were different (like say in 2009), I assure you that I would be buying hand over fist (particularly the S&P 500).

Anyway, these days, the buzz around the world is surrounding the lightest metal on the periodic table, Lithium (Li), atomic number 3. Everyone knows that times are quickly changing, and it’s no longer a question of “if” but a question of “when” the world becomes increasingly electrified. Lately, I’ve been posting a lot about lithium because I feel that we are on the cusp of the next technological revolution, that is in no way or shape all that much different from the smartphone and internet booms that preceded it.

The next paradigm shift.

If you’re lucky, you’ll get to experience one every decade or so…

Last time around, fortunes were made by anyone who was smart enough to invest in companies (internet/smartphone) such as:

  • Facebook (FB)
  • Apple (AAPL)
  • Amazon (AMZN)
  • Netflix (NFLX)
  • Google (GOOG)

 

You know, the good old “FAANG” stocks, that are now completely overbought and overvalued at this time… But for the last 2 decades or so, you really couldn’t have done much better than to have been invested in those stocks.

Fast forward to today, and I really do believe that investors/speculators now have a similar opportunity to reap some hefty gains once again. This time around, I’m betting big on lithium, which is the lifeblood of the lithium-ion battery that is needed to make this paradigm shift a reality.

When you have the following companies investing billions of dollars into building out lithium-ion infrastructure, I would say the odds of success are greatly enhanced.

Battery Factories

In the case of BYD, for example:

BYD Factory

Chinese automaker BYD already produced a number of electric vehicles, even electric buses, and says it will triple its capacity in the next three years, putting it just about the same pace as the Tesla gigafactory, which is currently under construction in Nevada. When the Tesla lithium-ion battery factory is complete, by 2020, production is expected to reach 35 GWh/year (gigawatt-hours capacity per year), which would effectively double world production numbers in 2013. Currently, BYD’s lithium-ion battery production is at 4 GWh/year, with plans to increase by 6 GWh, making for 10 GWh/year by the end of the year. BYD executives say that they can keep up this pace, adding 6 GWh/year production capacity each year, which would put it at 34 GWh/year by 2020.

 

The lithium boom is coming, and it’s most likely going to overwhelm every single last one of us. When these paradigm shifts occur, their growth tends to be explosive, completely blowing away even the most optimistic of forecasts.

ev-sales

Don’t be surprised if Bloomberg’s projected sales figures are wildly off the mark… And I for one believe that mass adoption will take place well before 2040… Just remember the internet and smartphone revolutions… Within one decade, the world had undergone a most profound metamorphosis.

 

So, investors/speculators know that the world is going to need a lot more lithium to supply this insatiable new demand for energy storage. In a perfect world, we would be able to purchase a single “one stop shop” ETF that would help us achieve our investing goals.

On the surface, the Global X Lithium ETF (LIT) sounds like the perfect vehicle to ride the lithium train… but it’s not.

If you dive deeper into the ETF, you will find that it holds the following assets.

From Global X:

LIT Holdings 5_8

Let’s see what we’ve got here…

  • FMC is the largest holding(21.823%), which is not a “pure” lithium play. FMC is one of the “Big 3” lithium producers, but they are a very well diversified company.
  • SQM (Sociedad Química y Minera) is the second largest holding (9.736%) is another “Big 3” lithium producer, also too diversified to give investors a “pure” lithium play.
  • Albemarle (5.552%) is another “Big 3” lithium producer…

Right off the bat, you’ve got close to 40% of the fund’s allocation into the “Big 3”.

As I noted last time around…

From Lithium X:

Big 3

 

If you want to invest in lithium directly, the “Big 3” is NOT how you do it!

Moving along, we have:

  • Samsung (4.489%)
  • LG Chem (4.13%)
  • GS Yuasa (4.107%)
  • Simplo Technology (3.813%)
  • BYD (3.759%)
  • Panasonic (3.345%)
  • And so on…

Yes, it’s true that I want to play lithium… but owning shares of the battery manufacturers is NOT the same thing… The price of lithium hydroxide and lithium carbonate are doubling, and even tripling in 2016, but lithium is just a single component that makes up less than 5% of the total costs of a battery…

From The Economist:

20160116_WBC063_0

The same cannot be said for battery prices, which are in fact decreasing exponentially due to these Gigafactories and the economy of scales that they provide.

From Hybrid Cars:

Chevy Bolt

When it goes on sale later this year, the $37,500 Chevy Bolt will be the first electric car priced in the realm of a Nissan Leaf but with battery about as big as an entry level Tesla Model S. 

The Bolt’s 60-kwh pack is actually the size of what was supplied in the outgoing 208-mile range Model S 60 which sold through 2015 and which was replaced with a 70-kwh pack. 

General Motors says the Chevy Bolt EV will get more than 200 miles range – a credible estimate and perhaps the only question remaining is how much more? 

Incidentally, from its launch Tesla had originally planned to sell a 40-kwh Model S but canceled it after receiving too few pre-orders. And, while Tesla is a large luxury performance sedan offering other advantages over the Bolt, what GM is offering is an indicator of how far it has increased what can be expected in this “mass” market class of EV. 

The Bolt’s LG Chem li-ion battery made along with its drive unit and motor in Incheon, South Korea utilizes cells for which GM pays a comparatively paltry $145/kwh which helps it give this much bang for the buck.

2017-Chevrolet-BoltEV-020

From Hybrid Cars:

GM-Battery-Electric-Vehicles-2

So, we’ve got a 40% allocation in the “Big 3”, and another 20% or so in battery manufacturers (probably even more because I’m not familiar with all those names on the ETF)… Then you’ve got Tesla Motors (4.004%), which is sort of a hybrid like BYD (doubling as both automaker and battery manufacturer) and Johnson Controls (3.955%), more holdings that aren’t direct lithium plays…

TSLA is going to be one of the main catalysts to drive the electric vehicle (EV) and grid storage booms, but why would I want to own shares of a company that is already grossly overvalued, and bleeding cash every month? No offense to Tesla (the company), they are doing unbelievable things, but their stock isn’t one in particular that I would want to own to play this paradigm shift…

The lithium mining companies are quickly and effortlessly increasing their profit margins as demand for their end product outpaces supply… Tesla, in comparison, is losing money every quarter and probably won’t be profitable for quite awhile (they HAVE TO essentially sell their vehicles at a loss/cheap as possible to pique enough interest from the masses to spur demand for this EV revolution)… Do the math.

But that’s not your problem… Let the car/battery manufacturers duke it out, and may the best one(s) win out… Lithium is lithium… If you play the lithium sector, instead, you get to sell your product to ALL OF THEM… You don’t need to pick and choose sides.

Again, if we are out hunting for lithium, I’m not able to find many good prospects from this ETF.

We have…

  • Orocobre Limited (6.05%)
  • Galaxy Resources (4.11%)
  • Lithium Americas (2.006%)
  • Bacanora Minerals (0.835%)

Just ~13% or so of the fund’s allocation is in “pure” lithium plays…

 

Yeah, so not very good…

 

I have no clue why you would call yourself a “global lithium” ETF… To me, LIT looks more like a diversified “electrification” ETF.

 

Don’t me wrong, this type of investment might make sense for someone who just wants broad exposure to the entire clean energy space, but this ETF product makes little sense for any investor who wants to bet big on lithium and wants an appropriate vehicle to do so… Buying the LIT ETF would be like a gold investor buying an ETF that is predominantly made up of companies specializing in mining base metals (copper, lead, zinc, gold byproducts, etc.), and mining equipment companies (e.g. Caterpillar, Komatsu, etc.)… That wouldn’t exactly be the best way to play gold…

 

In summary, if you want “pure” lithium stocks to invest/speculate in, you are probably going to need to construct your own self-made lithium ETF.

 

The LIT ETF just doesn’t cut it… not by a long shot.

{ 6 comments… read them below or add one }

1 FritzNo Gravatar May 9, 2016 at 1:00 am

I totally agree. The problem though is to pinpoint the projects and future producers which are worth an investment and not just a speculative buy, because they happen to have a bit of Li in the ground.
that’s why I like to share some thoughts on various Li newcomers.

Reply

2 FI FighterNo Gravatar May 9, 2016 at 8:55 am

Fritz,

Yeah, there are a lot of spec lithium stories out there, and that number will grow by leaps and bounds as the lithium rush is on now and everyone is going to want to get into the business.

It’s going to get a whole lot more tricky for retail investors…

When it comes to putting projects into production, though, there are only a handful of names…

I would say the following have very good odds of producing soon or in the near-term (by 2018):

-Galaxy Resources/General Mining (Mt. Cattlin just re-started production)

-Orocobre Limited (Olaroz brine in production, but ramp-up has been problematic, they say should be at nameplate by September)

-Altura Mining (they just put out a FS with 20 Mt resource, 12+ year mine life. Should be in production late 2017.)

-Pilbara Minerals (Pilgangoora should be up in early 2018; the resource here is mature and less speculative at this point. DFS expected later this year.)

-Nemaska Lithium (Whabouchi is pretty far along; production expected in mid 2018; they need to raise funding now)

I think Neometals (Mt. Marion; 26.9% ownership) is also already in construction and have an offtake agreement with a large Chinese company…

Lithium Americas has a partnership with SQM, although that brine project won’t be in production by ~2020 or so…

So, the path to production for a few names in the sector seem very likely, although there are no guarantees. Given the market dynamics, I can’t imagine that financing and raising capital would be tough at all, though.

Cheers!

Reply

3 Investment HuntingNo Gravatar May 9, 2016 at 12:56 pm

Great article and I agree with you 100%. As you know, I’ve been dabbling in Lithium investing. Right now, I’m investing in exploration. It’s always good to read your point of view.

Reply

4 FI FighterNo Gravatar May 11, 2016 at 8:28 am

IH,

Thanks, I wish you all the best in your lithium exploration plays. Hope you hit it big with your picks.

Cheers!

Reply

5 FranNo Gravatar April 28, 2017 at 5:33 am

Thank You for the excellent article.
Which one you consider to be the best positioned for buying lithium? how about Lithium-X?

Reply

6 Dman475No Gravatar October 18, 2017 at 9:25 am

Look at LIT now.

Reply

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