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Cell phones, laptops, mp3 players—they are all powered by
lithium. Bruno del Ama, the portfolio manager of
New York-based, exchange traded fund issuer Global X Management, has recently
launched an ETF targeting lithium companies for just this reason. In this
exclusive interview with The Energy Report, del Ama discusses why sizeable deposits of lithium just now
being developed may not be enough to keep up with the demand generated by
consumer electronics and the emerging electric vehicles industry over the
next decade.
The Energy Report:
Bruno, your firm recently launched the Global X Lithium ETF (NYSE:LIT). Why lithium? Why now?
Bruno del Ama:
Lithium is of huge interest today for a number of reasons. The primary reason
is that demand for lithium is growing by about 10% a year. Most of that
growth is fueled by lithium-based batteries used in small consumer
appliances, cell phones and laptops, as well as other portable electronic
devices.
What really hasn't been factored into that growth is lithium-ion
batteries used in electric vehicles. Lithium-ion batteries are the best
technology and all new hybrid and electric vehicles are adopting it. The
amount of lithium that's required for electric vehicles is much, much larger
than what is needed for a laptop, for example.
That growth hasn't been factored into a market that's already growing
very quickly. We expect the electric vehicle and hybrid market to grow very
significantly from where it is today, which is basically non-existent. That
should have a tremendous impact on the demand for lithium
TER: But why form an ETF for lithium?
BDA: It's basically impossible to invest in
lithium today. There's no futures market for lithium. There are no other
investable products for lithium. The only way to invest in lithium today, or
until these products are available, is to buy individual stocks in lithium
mining or processing companies. What this ETF does is provide an easy package
for investors to get access to the full lithium market.
TER: What type of investor is investing in the
Lithium ETF?
BDA: At one end of the spectrum, we've received
inquiries from some of the largest institutional investors. At the other end
of the spectrum, any investor with a brokerage account can buy into the
Lithium ETF with as little as $20. When it first came to market in July,
shares in the fund were at about $15 and it's trading at over $20 a share
now. The return has been incredible in a short period of time.
TER: How much is lithium per ton currently?
BDA: Lithium was trading at about $2,000 per
ton until 2004. The price has more than tripled to about $6,500 per ton since
then.
TER: That growth is obviously being stoked as
lithium technology replaces existing technologies, but what if lithium
technology is supplanted by something else?
BDA: Lithium is currently the best technology
for batteries. It's the best technology partially because of the
characteristics of the metal. It's the lightest metal in the periodic table
while storing three times the energy density of competing materials.
We don't see developments that would replace lithium in energy
storage. But we do see developments that would replace the anode component of
the lithium-ion molecule, which are typically carbons, that
would eliminate the heaviest part of the material. There is already R&D
looking into lighter lithium batteries like the lithium-air battery, for
example, which takes advantage of freely-available oxygen in the environment
and eliminates anode storage entirely in the battery.
TER: Are there any other growth aspects to the
lithium story?
BDA: Another aspect that is having a big impact
on demand is storage for the alternative energy industry. For example, wind
farms. Wind can blow at any time during the day. It's not very predictable.
When that energy is applied to the electric grid, it's wasted if it's not
consumed quickly. There's significant investment into storage of alternative
energies, be it solar, wind or hydro. There's also a lot of research into
"smart" electric grids where a big battery bank is set up to store
the electricity that we are producing but not using.
TER: There are about 20 companies in the index
that are tracked by your Global X Lithium ETF. How did you select those 20
companies?
BDA: The selection is done by an independent
index provider, Structured Solutions, which maintains what is currently the
only lithium index in the world. The company will continually update the
index to reflect new companies in the space over time. We would expect the
index to expand from its current 20 companies to include additional mining or
battery-producing companies in the future.
The index is meant to reflect the full life cycle of lithium, from
lithium miners and producers to the deployment of lithium where most of the
growth is coming from: lithium-ion battery producers.
The world production of lithium is dominated by three companies: Sociedad Quimica
y Minera de Chile SA (NYSE:SQM; SN:SQM), FMC Lithium Corporation (NYSE:FMC) and Rockwood Holdings, Inc (NYSE:ROC).
This is a global fund. There are a number of junior lithium mining
companies in the U.S. and Canada. A lot of the lithium developments today are
in Latin America. There are also lithium-ion battery producers in the U.S.,
Japan and Europe.
TER: How often do you rebalance the fund? What
parameters do you use?
BDA: Since it tracks an index, we rebalance as
the index rebalances, which is semi-annually, at the end of November and May.
TER: Can you tell us how it is determined that
a new equity is going to make it into the index?
BDA: Basically these indexes will include all
of the lithium mining companies that are above a certain size as well as
those that mainly deploy lithium, which are the lithium-ion battery
producers. So if, for example, some private mining or start-up mining company
becomes public or an existing publicly traded company crosses the minimum
liquidity or minimum size threshold, they will be included in the index. And
similarly with regards to the lithium-ion battery producers—if there's
a new IPO, if there's a stock split, and the company splits in two, for
example, then they both qualify. Or let's say they do a spin-off of just the
lithium business, then that will probably remain in the index and the part
that's not focused on lithium will come out. So, basically, they fully cover
the lithium market and any new publicly traded company that comes in will
come into the index.
TER: A private company, Talison Lithium Ltd. (TSX:TLH), that became a public company by merging with Salares Lithium in July, isn't in your fund. From what
I've read, it appears to be one of the largest, if not the largest, producers
of lithium. So, that's why I was surprised when I looked at your holdings and
did not see it in there. But because you rebalance twice a year, it probably
hasn't moved up the ranks yet, right?
BDA: If it's large enough and liquid enough and
focused on lithium, it will be added, yes.
TER: Another company that I am familiar with is
Western
Lithium USA Corp. (TSX.V:WLC;PK:WLCDF), and that isn't on the index as well. Are
you familiar with them?
BDA: I think I may have seen Western Lithium on
the list of companies considered for inclusion in the index. So, if they
didn't make it, it's not because the index company is not aware of this
company, but because they didn't meet the criteria for some reason. So,
Western Lithium may have been either too small or too illiquid, but all of
these companies are becoming larger and more liquid quickly. So, it is my
expectation that Western Lithium will come into the index at some point.
TER: About 60% of companies in the Global X
Lithium ETF are foreign companies. Does that reflect better opportunity for
the lithium market abroad or a dearth of American companies with strong
lithium-based assets?
BDA: It reflects the composition of the lithium
industry globally. This is a global fund that's meant to reflect the full
lithium industry wherever it may be located, and the reality is that a lot of
the global lithium industry is located outside of the U.S.
TER: Pure-play lithium companies are difficult,
if not impossible, to find. Could you tell us about some junior mining
companies with some exposure to lithium that are among your ETFs holdings?
BDA: Some of the components would include
companies such as Lithium One Inc. (TSX.V:LI), Canada Lithium Corp. (TSX:CLQ;
OTCQX:CLQMF) or Avalon Rare Metals Inc. (TSX:AVL;
OTCQX:AVARF). These are specialized junior mining companies that have a
significant lithium component. They are in the development stage of
prospecting and setting up mines and developing new mining processing.
The easiest lithium mining processing is where the weather basically
does the work for you: a brine operation based on an evaporation process used
in places like Chile where time and the sun have done the work for you. Some
of these companies are looking into spudomene
mining as well. It's more expensive, but it allows mining of lithium
resources in places where the weather may not be as conducive.
TER: Avalon has a big rare earth project in
Canada's Northwest Territories. In an operation like that, do companies
typically send the lithium to market separated from the rest of the metals?
BDA: It typically goes to market separated from
the magnesium, which is the most common metal mixed in with lithium extracts,
and is typically sold and price-quoted as lithium carbonate. All of the
lithium trading is currently done over-the-counter by the industrial
companies that use lithium.
With the expected growth in electric vehicles and the scarcity of
lithium providers, a lot of car manufacturers like Toyota, Nissan and Ford
are entering into direct off-take agreements with these mining companies.
They are entering into one-off agreements to make sure that they secure
long-term availability of lithium before they invest billions of dollars into
development of full electric vehicle brands and cars.
TER: Are there any estimates about how much
lithium Avalon's Nechalacho project could produce
on an annual basis?
BDA: It's actually in the early stages of
development, so they haven't published specific projections on volume. The
company does point out that rare earths are also a
big component of that project and thus it is not a pure-play lithium company.
TER: Would Canada Lithium be something more
akin to that?
BDA: Canada Lithium is much more of a pure-play
lithium company. It also has a more developed lithium mine. It has specific
projects and estimates with regards to the production and is clearly a
company that fits very nicely in the ETF.
TER: What is their proposed production?
BDA: It has an open-pit mine in Quebec called
Val d'Or. The processing plant is capable of producing about 43 million
pounds of battery-grade lithium carbonate by 2012, according to their
estimations. That would place them as a significant player within the lithium
industry.
TER: What is the annual global demand at this
point for lithium?
BDA: Global demand right now is in excess of
27,000 metric tons. If Canada Lithium's Val d'Or project were to come into
production, it would certainly go a long way towards meeting some of the
demand.
TER: Does it make sense to bring the project on
at full capacity at the beginning? It seems like it would flood the market.
BDA: Current predictions from
major investment banks on new supply and demand indicates that the
market will be fully served over the next 8 to 10 years. Depending on the
speed of evolution and adoption of electric vehicles, we'll be in a
significant deficit starting 8 to 10 years from now.
TER: That will obviously affect the price of
lithium. How could that impact the ETF?
BDA: Price has an impact on performance because
the ETF has exposure to the companies that produce lithium and sell lithium.
The more expensive the commodity, the higher the margins of companies in the
fund. However, there doesn't need to be increases in lithium prices to have
high returns through the ETF. These companies can produce a higher profit
just through the increasing demand for the commodity at the same profit
margin. Any increases in margin from there would mean even higher returns as
it not only increases earnings but also the price-to-earnings ratio.
TER: Can you tell us about FMC, SQM and
Rockwood Holdings in terms of their exposure to lithium and their role in the
market?
BDA: Their role in the market is massive. Those
three companies account for in excess of 70% of the lithium supply. They are,
however, diversified mining companies. Lithium may account for less than
one-third of their profits.
TER: They're mining lithium as a byproduct?
BDA: They started as potash producers and
lithium was a byproduct of potash. As demand for lithium increased over time,
and as the prices for lithium started to increase, it became more of a
strategic mineral that they're extremely focused on growing the production
of. The lithium part of their business has the highest margins for all three
companies. It's also the fastest growing part of the business for all three.
It's expected that lithium will be a much, much bigger proportion of their
revenues within a decade.
TER: What are some parting thoughts on the
lithium market?
BDA: To some extent, it's like buying an
option. You have a market that is already growing rapidly without taking into
account any impact from electric vehicles or energy storage.
Look at all the iPads and iPhones—that's a market that's expanding quickly
and all of those technologies are using lithium-ion batteries. Any growth
that materializes from electric vehicles will just be gravy on top of that.
The potential from these markets could have a large impact on growth for lithium.
The ETF allows investors to buy into a market that's already growing
very quickly and to have an option for the market to expand at a much more
dramatic pace if the electric vehicle market ends up becoming a widespread
reality.
TER: Are there any other commodity ETFs on the
horizon for Global X?
BDA: We currently offer Global X Copper Miners ETF
(NYSE:COPX). It has had incredible returns over the last three months. Returns
from this fund have been driven by industrial growth and demand from China.
We also offer the Global X Silver Miners ETF
(NYSE:SIL). It's a basket of all the largest and most-liquid silver mining
companies around the world.
We're looking to bring two new ETFs to market this week, including Global X Gold Explorers ETF
(NYSE:GLDX). This will be comprised of early-stage exploration companies and
pre-cash-flow gold companies. To some extent, we think about this product and
this market as the venture capital of gold.
We're also looking to bring the Global X Uranium ETF (NYSE:URA) to market this week. This will offer access
to the largest uranium mining companies around the world.
TER: Very good Bruno. Thank you for your time.
Bruno del Ama is
the co-founder and CEO of New York-based asset manager Global X Funds. The company is
dedicated to developing innovative Exchange Traded Funds (ETFs) focused on
emerging markets, global commodities and clean tech resources. Global X Funds
has over $1 billion in assets under management and has been ranked by BlackRock as the fastest growing ETF provider YTD.
Previously, Mr. del Ama served as head of
operations in the structured products business at Radian Asset Assurance.
Prior to that, he was a senior consultant at Oliver Wyman, advising leading
financial services firms in a range of strategy matters. Mr. del Ama, a CFA charter holder, received his MBA from the
Wharton Business School.
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