The New “Gold Rush” in EVs

By Eric Fry
Contributor

Metals

In the late 1800s, an enterprising merchant in California accumulated a large fortune by selling blue jeans to gold miners. Today’s electric vehicle “gold rush” is presenting a similar opportunity to forward-looking investors.

The millionaire merchant was a fellow named Levi Strauss, father of the ubiquitous “Levi’s” blue jeans. Young Levi moved to California from New York in 1853, shortly after the California gold rush started, to open a branch of his family’s dry goods store.

A few years later, an acquaintance contacted Levi with an idea for making sturdy denim pants, bound by rivets at key stress points, like pockets. Levi liked the concept and obtained a patent, and the Levi Strauss brand was off and running.

By 1900, he had accumulated a fortune. Very few of the gold miners who purchased his jeans ever struck a bonanza of that size!

Today, a new gold rush is underway… and it is presenting investors with a great opportunity to sell blue jeans to the gold miners.

Thanks to the innovative vision of Tesla’s (Nasdaq: TSLA) Elon Musk, electric vehicles have broken free from their glorified golf cart shackles to become a sexy mode of transportation that genuinely competes with internal combustion engine-powered vehicles.

The company has not yet struck gold, but every major auto manufacturer on the planet seems to believe that EV production could hold a mother lode of profit… and they are rushing to stake their claims.

Throughout 2017, several auto companies announced significant new commitments to EV production…

  • Toyota announced the formation of a new division to focus exclusively on developing and marketing EVs.
  • Daimler and BMW both announced that EVs would represent 15% to 25% of the cars they sell by 2025.
  • Volkswagen announced plans to launch more than 30 EVs and to hit sales of 2 million to 3 million EVs by 2025.
  • Volvo pledged to stop manufacturing combustion engine-only vehicles by 2019. Thereafter, every Volvo model will be powered solely by batteries or by a battery-gasoline hybrid.

These announcements present investors with a bewildering array of possibilities.

Should they invest in the first-to-market but money-losing Tesla? Or should they invest in one of Tesla’s deep-pocketed competitors like Daimler or BMW? Or should they refrain from investing in any of them because none of them has demonstrated that it can actually profit from selling EVs?

These are worthwhile questions. But there is another question investors might want to ask themselves: Rather than trying to mine gold from the EV manufacturers, would it be more profitable to sell shovels – or blue jeans – to these gold miners?

In other words, would it be best to invest in the producers of the “electric metals” that every auto company will need?

“The electric vehicle revolution is happening,” the CEO of a $60 billion company recently observed, “and its impact is likely to be felt faster than expected.”

That CEO was not Elon Musk; it was Ivan Glasenberg of Glencore PLC (OTC: GLCNF), one of the world’s largest mining companies.

Even though Glencore is not an EV manufacturer, Glasenberg’s remark is an informed one. His company mines and sells many of the electric metals the EV industry uses. So he has been able to observe firsthand how the EV industry is affecting demand for these metals.

The rest of us can see the same thing just by looking at the chart below.

Source: Bloomberg

Already, the electric battery market is gobbling up a huge percentage of the available supply of lithium and cobalt, causing their prices to jump sharply higher.

EVs consume only 6.5% of the annual cobalt supply, but batteries for cellphones and other electronics consume an additional 36%. Combined, these two sectors consume 42% of the cobalt supply… and both sources of demand are growing very rapidly.

According to forecasts by CRU Group, EV demand for cobalt will nearly triple to 17% of cobalt demand by 2021.

Meeting this demand will not be easy. Supplies of cobalt are severely constrained by two factors. The first is geological; the second is geographical.

Geologically, cobalt appears as a component of copper or nickel ore, which means cobalt production is a byproduct of copper or nickel mining. That means a mining company cannot simply “ramp up” cobalt production without also ramping up copper or nickel production.

Geographically, two-thirds of the world’s cobalt supplies comes from the Democratic Republic of the Congo – a country with a recent history of cross-border conflicts, civil strife and political instability.

These two factors suggest that cobalt supplies might struggle to keep pace with demand, which also suggests that cobalt prices might continue heading higher.

EV demand for nickel and copper should boost the prices of these metals as well. That hasn’t happened yet because the supplies of these metals are much larger than the supplies of lithium and cobalt. So a much larger surge of demand for these metals would be necessary to boost their prices.

That surge is coming… and the impact could be enormous.

According to calculations from the International Copper Association and IDTechEx, the average battery-powered EV requires 183 pounds of copper. That’s about four times as much as the average internal combustion car contains.

So as a growing volume of these copper-intensive cars rolls off showroom floors, copper demand will soar.

To assess the impact EVs could have on the copper market, let’s examine a few guesses about how quickly the EV market will expand from its current levels.

Sanford C. Bernstein, a Wall Street research firm, expects almost all new cars to be electric by 2035. If that forecast comes to pass, the global copper supply would have to double from current levels. That would not be an easy feat.

Doubling the copper supply between now and 2035 would require bringing a new mine into production every year that is the size of Chile’s Escondida, the world’s largest copper mine.

Obviously, forecasts are just guesses with a fancier name. So the exact pace at which EVs gain market shares is unknowable. But the trend seems quite clear. And the potential impact of that trend on the prices of electric metals is quite large.

So it’s not too early to begin digging around for the mining companies that are best positioned to supply the EV gold rush.

Good investing,

Eric