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Lithium stocks have seen an uptick in interest and demand since 2020 as the world moves toward alternative energy sources. Many investors see lithium as a potential replacement for oil and gas, especially in the automobile industry.
Since Australia is the world’s largest producer and exporter of lithium, let’s explore what this increase in demand means for your share portfolio. Are ASX lithium stocks worth trading? Read on to find out if they are and more.
What are Lithium Stocks?
Lithium stocks are shares of companies that explore, mine and process lithium. Although lithium is a commodity much like gold or copper, you cannot trade it directly. To gain exposure to lithium, you may invest in lithium stocks and publicly traded lithium companies [1] or speculate on those companies’ share prices via contracts-for-difference (CFDs).
There are plenty of uses for lithium, which is why it is valuable. It is an essential component of lightweight rechargeable batteries that power smartphones, laptops, digital cameras and electric vehicles (EVs). Besides that, lithium is also an essential ingredient in many medicines.
Lithium continues to become more valuable as the world transitions to renewable energy sources and more portable devices. One primary demand driver for lithium is the spontaneous adoption of EVs worldwide. As more consumers opt for EVs, the demand for lithium-ion batteries that power them increases.[2]
For this reason, the demand for lithium metal is expected to increase significantly by 2030. That makes supply security a key priority for Australian lithium companies.
How Lithium Mining Works
Let’s first explore how lithium mining works to understand lithium stocks. There are two key ways to mine lithium:
- Brine mining
- Hard-rock mining
Brine Mining
This method is the most common in mining lithium. Companies pump brine (or salty water) that contains lithium chloride and other salts into surface evaporation ponds from dried lake bed deposits. Since most mines are in arid weather conditions, evaporation is much faster. [3]
Once dried, the lithium chloride crystals are first processed into lithium carbonate and, sometimes, into lithium hydroxide. Although both lithium compounds are ideal for lithium-ion batteries, lithium hydroxide is what’s preferred for EVs.
Hard-rock Mining
This type of mining is more direct because it involves open-pit mining of spodumene. Spodumene is the ore bearing the mineral lithium. [4]
Once extracted, spodumene is processed into a concentrate that produces the premium lithium hydroxide compound. Unlike brine, spodumene concentrate can be directly converted to lithium hydroxide without first producing lithium carbonate.
Australia is one of the world’s largest lithium producers because it has the highest number of spodumene mines. South America also produces lithium, although from brine deposits. China is also a significant player in this sector, with both brine and spodumene mines.
Why Lithium Stocks are Popular
Lithium stocks are becoming quite popular in recent days. Why the sudden interest? Here are some reasons for that:
High Demand
Lithium is one of the most sought-after commodities today. Almost all modern electronics, including EVs, smartphones and laptops. As demand for these items increases worldwide, more lithium is needed to power them.
For instance, the EV market now accounts for almost 80% of all lithium-ion battery demand. The adoption of these vehicles doesn’t just fuel this demand. Zero-emission policies across Europe, Asia and Australia also contribute to it. [5]
Clean Energy
Since the United Nations launches the sustainable development goals (SDGs), the push for renewable energy sources continues to increase. EVs are a great example of renewable energy use. [6]
As stated above, many governments worldwide are also developing policies promoting and incentivising clean energy sources, increasing the lithium demand.
Indirect Exposure to Lithium Investments
There is no way to invest directly in lithium as a commodity. However, you can participate by trading lithium shares to take advantage of opportunities in the lithium markets. You can enjoy indirect exposure to lithium by making investments in companies that either prospect, mine, or process lithium.
Different Types of Lithium Stocks
To take advantage of market opportunities in lithium, you may invest in lithium companies, stocks, and other asset classes. Let’s take a deeper look into them.
Lithium Mining Companies
Lithium mining companies are industries that own lithium mines or fund lithium mining activities. Australia is a world leader in lithium mining. Many companies that extract spodumene ore, prospect for new lithium mines or finance mining activities are listed on the ASX.
Here are two examples:
Rio Tinto (ASX: RIO)
Rio Tinto is a behemoth in the Australian mining sector, with interests in copper, lithium, aluminium and iron ore. This company uses a proprietary production process to produce battery-grade lithium hydroxide from spodumene mines in California.
In 2020, Rio Tinto acquired the Rincon project in Argentina, a large and undeveloped brine project capable of producing high-quality lithium carbonate for batteries. Moreover, this company is planning a new project in Serbia, projected to be one of the world’s largest lithium projects.
Rio Tinto’s market capitalisation is at $36.6 billion, and a massive dividend yield of 9.75%.[7]
Pilbara Minerals (ASX: PLS)
Pilbara Minerals is a massive lithium-only company that runs the world’s largest independent spodumene mining lithium operation. This operation runs in Western Australia’s Pilbara region.
The Pilgangoora operation is also running programs to increase the production of spodumene and tantalite concentrate to meet the ever-increasing demand for lithium worldwide.
Pilbara Minerals has a $10.57 billion market capitalisation.[8]
Lithium Battery Stocks
These companies deal directly in lithium battery products. They focus on fulfilling the demand for lithium-based end products, mainly batteries. There is a considerable demand for more than EV batteries. Besides that, laptops, smartphones and housing solar batteries use lithium as an essential component.
Here are two examples:
Magnis Energy Technologies (ASX: MNS)
Magnis Energy is a company that explores and develops lithium-ion batteries. It has also developed mineral properties in the US, Australia and Tanzania. It owns the Nachu graphite project in Tanzania and currently runs a 22,000 square-metre upstate New York plant producing Imperium3 lithium-ion batteries.
It has a $456 million market cap.[9]
Ecograf Limited (ASX: EGR)
Ecograf produces high-quality graphite anodes for the lithium battery market. Besides that, it recycles graphite anode material from used EV lithium-ion batteries. It also has interests in Tanzania’s graphite industry, producing TanzGraphite natural flake graphite with sales agreements with companies in Germany and Japan.
Ecograf has a $173.4 million market cap.[10]
Lithium Exchange-Traded Funds
Lithium ETFs are another excellent way to invest in lithium. Lithium ETFs are funds that combine different companies with shares in several lithium companies. You can trade lithium ETFs on the ASX through your broker.
Here’s one lithium ETF you can explore:
ETFS Battery Tech and Lithium ETF (ASX: ACDC)
ACDC tracks the performance of companies that offer electrochemical storage technology and produce metals used in battery-grade lithium-ion batteries. All the companies in this index are weighted equally, which means they all contribute equally to the index’s performance. [11]
How to Find the Best Lithium Stocks
There are many ASX lithium stocks in the market today. How do you identify lithium assets ideal for your portfolio as a beginner? Here are some indicators to help you make the right decision.
Trading Volumes
If a stock has higher trading volumes, then it is a healthy stock. Always choose a lithium stock with massive trading volumes because the stock has higher liquidity. High trading volumes mean there are plenty of participants in the market, and that’s ideal.
With plenty of participants, you have a potential buyer and seller for each possible price point. High liquidity means you can enter or exit any position anytime because someone will always fill your order. That allows you to lock in any potential upsides to your trades or quick exits in case of a market downturn.
Announcements
Pay attention to the news, company announcements, press releases or profit-and-loss warnings. Watch out for new information across different media platforms about lithium companies.
Stay clear of lithium stocks that announce losses or disasters at mining sites.
Always Check the Fundamentals
Understand the business you’re about to invest in before taking any further steps.
All businesses have fundamental elements that determine their financial health Examples of fundamental indicators to check out include profit margins, dividends, and financial statements.
Often, companies will publish their financials to give investors an insight into the company’s financial position.
Another way to pick an excellent lithium stock is to analyse the pre-tax reports like profits and losses. While most companies quickly profit, a shrink in a firm’s profits or increase in losses may indicate a fundamental problem with the company’s management.
Understand Market Risk
Always pick lithium stocks that meet your risk profile. Ensure you mitigate the risk of your investment losing value during a market downturn, even if the company’s fundamentals have not changed.
Only risk what you’re willing to lose in the unfortunate chance the market moves against any of your lithium stock positions.
How to Speculate on the prices of Australian Lithium Stocks
Here’s how you can speculate on the prices of Australian lithium stocks:
1. Find a CFD broker and set up a trading account.
Research and select your ideal broker and open a trading account on their platform. Vantage Markets is an excellent platform to get started on trading CFDs of lithium stocks and ETFs.
2. Pick your preferred lithium stock.
Select a lithium mining or battery stock of your choice from the stock markets. You can also choose an ETF.
3. Set up your trading strategy
Create a solid plan around how you enter or exit markets. That may also include how to size your capital across your positions.
4. Have a risk management plan
Use risk management strategies to protect your account from sudden losses. You may use take-profit and stop-loss orders.
5. Monitor your position and close your trade
You may monitor your position for movement. If the trade moves in your favour, you may exit that position by closing that trade with your upside. If it moves against you, exit the trade to prevent devastating losses.
Final Thoughts
To recap, Lithium stocks are shares of companies with an interest in the exploration, mining, and processing of lithium. You cannot trade lithium directly, but you can gain exposure to it in three different ways, such as trading stocks of lithium mining companies, shares of lithium battery stocks, and lithium ETFs.
