Electric Vehicles and the Growing Opportunity for Lithium

By Steve Schoffstall, Director, ETF Product Management, Sprott Asset Management

Electric vehicle (EV) adoption has been gaining momentum in recent years, bringing with it record-level demand for the lithium used to power EV batteries. With continued lithium demand expected through the foreseeable future, lithium miners find themselves at the nexus of the electric vehicle revolution and investment opportunity.

Exponential Growth in EV Adoption Expected to Continue

Electric vehicles are expected to increase in importance over the coming decades as countries pursue decarbonization goals. In early 2023, the European Parliament approved the Fit for 55 law, which effectively bans the sale of gas-powered cars in Europe by 2035. In the U.S., similar rules have been adopted by California and embraced by several other states.

While the full impact of these rules will be felt in the years to come, significant growth in global EV adoption is underway, with more than 26 million EVs on the road at the end of 2022, representing an increase of 60% relative to 2021 and more than five times the 2018 total.¹

Record Investment in Electrified Vehicle Infrastructure

To pave the way for more electric vehicles, the world is making massive investments in electrified transportation and charging infrastructure, which reached a global record of $466 billion in 2022, an increase of 54% relative to 2021 levels.² This investment is likely to continue, with the International Energy Agency (IEA) expecting that 350 million electric vehicles will be on roads by 2030,³ representing an annual growth rate of nearly 45% for the rest of the decade.

Electric Vehicle Batteries Are Driving Demand for Lithium

Lithium-ion batteries are the predominant battery type used in electric vehicles because they charge quickly and have a higher energy density—allowing for more battery in a lighter package. These batteries are projected to account for more than 80% of the total lithium demand in 2030.⁴ To meet this demand, the lithium supply needs to increase at a compound annual rate of 16% to 20%.⁴ Extending the time horizon past 2030 suggests that we’re likely in the early stages of a long-term period of growth for lithium. In fact, energy transition-related demand for the mineral could increase 16 times by 2040, relative to 2022.⁵

The Race to Secure Lithium Supplies Focuses on Miners

Governments have made electric transportation central to realizing decarbonization goals, and many automakers are planning to go all-electric as soon as 2030. As a result, automakers like General Motors and Stellantis, which are concerned about lithium supply, are increasing their involvement in the supply chain and providing capital to lithium miners by entering into long-term offtake agreements or investing directly in mining.

Increasing the annual lithium supply is no small feat, as new mines can take 10 to 15 years or more to begin producing. The demand for lithium from the energy sector tripled from 2017 to 2022, and miners are investing heavily to meet this growing demand.⁵ Spending on lithium exploration activities increased by 90% in 2022 with specialist miners, like those focused on mining lithium, boasting a reinvestment ratio⁶ of about 60%, compared to about 25% for major diversified mining companies.⁵

Lithium Miners Poised for Growth

The success of the EV revolution invariably hinges on the ability to increase the supply of lithium, and unearthing the investment opportunity inevitably leads to lithium miners. Pure-play lithium miners—companies that are upstream in the supply chain—stand to benefit most from the increased demand for this critical battery metal. Pure-play miners are companies that specialize in mining lithium and devote most of their operations to exploring and/or mining this critical mineral.

As suppliers of lithium, the future prospects of miners are not dependent on which EV or battery manufacturers succeed; rather, they stand to benefit from increases in demand and the price of lithium. Elevated lithium prices and increasing demand and investment are supportive of the long-term growth potential of lithium miners and make them a potential investment opportunity.

¹ Source: IEA, Global EV Outlook 2023, “Catching up with climate ambitions”

² Source: BloombergNEF, Energy Transition Investment Trends 2023

³ Source: IEA Technology Report, September 2022. [https://www.iea.org/reports/by-2030-evs-represent-more-than-60-of-vehicles-sold-globally-and-require-an-adequate-surge-in-chargers-installed-in-buildings]

⁴ Source: McKinsey & Company – The net-zero materials transition: Implications for global supply chains. July 2023

⁵ Source: IEA: Critical Minerals Market Review 2023

⁶ The reinvestment ratio is a measure how much of a firm’s cash flow is being reinvested back into the business.

This article is intended solely for the use of Sprott Asset Management USA Inc. for use with prospects, investors and interested parties. Investments, commentary and statements are unique and may not be reflective of investments and commentary in other strategies managed by Sprott Asset Management USA, Inc., Sprott Asset Management LP, Sprott Inc., or any other Sprott entity or affiliate. Opinions expressed in this presentation are those of the presenter and may vary widely from the opinions of other Sprott-affiliated Portfolio Managers or investment professionals.

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