1. Sector Landscape and Outlook
'Carbon emissions' has been an area which has recently received a lot of attention given the hazardous impact seen on people, infrastructure and economy as a whole. Factors such as the recent Australian Bushfires, and warmer than normal winters have further cemented the world’s attention towards carbon emissions. In the past, few decades, the global temperatures have risen steeply. In comparison to 1850s, we already have had experienced an average temperature increase of 1.1⁰C. The industry experts anticipate that if the current emissions remain unrestricted, there could be an average increase in global temperatures by over 4⁰Cabove the pre-industrial levels.

Negotiated by 196 state parties in April 2016 and already ratified by 55 state parties accounting to almost 55% of the world’s global GHG (Green House Gas Emissions), the Paris climate accord under the United Nations Framework Convention on Climate Change (UNFCCC), targets the average increase in temperature at 1.5 ⁰Cabove the pre-industrial levels for the 21st century.
 
Let us understand the major contributing factors to the ever-ballooning emission issues and the counter measures taken to address the same. 
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Global Emissions Under Lens
 
Annual Emissions from the transportation sector accounts to almost 14% (including non-carbon dioxide emissions). Transportation is responsible for up to 30% of PM emissions in Europe & ranges from 12-70% varying unduly from transport-generated pollution, especially in Asia, Africa and the Middle East.
 
The per capita GHG emissions for Australia are more than twice as much per person as the average of the "Group of Twenty" (G20) in terms of greenhouse gas emissions. The per capita carbon dioxide emissions stood at 4.981 tonnes of carbon dioxide (2014 data) and at 16.89 tonnes of carbon dioxide in Australia. In Australia, ~61% emissions come from the electricity sectors and ~17.8% emissions from the transportation sector.
 
Considering that the transportation sector is one of the major contributors to the emission issues, it becomes pertinent to mitigate the same via sustainable initiatives. Let’s have a detailed look at the way out. 
 
Electric Vehicle: Solution to the Puzzle
 
To battle the growing menace caused due to conventional vehicles, the Electric Vehicles might be an appropriate solution, reducing the emissions effectively and controlling the temperature rise.
 
The transition to electric mobility is progressing quicker than estimated, with regular reviewal to the sector’s outlook. Automotive majors committed in excess of $200 billion towards EV and its value chain. It is interesting to note that the auto major such as Ford rolled out EV variant of its iconic muscle car Mustang, the all-new “Ford Mustang Mach-E”. Initiatives such as these help to change the mindset of people in favour of electric cars. It is no surprise that market is assigning the electric car pioneer, Tesla a high premium with its market capitalisation almost reaching top spot in the beginning of this year.

Fig 3: Global EV Outlook

Source:The International Council on Clean Transportation

Let us look at the existing market scenario and understand the outlook for the EV sector. 

Current Market Dynamics
The EV sales surpassed the 2 million units' milestone in 2018, and the future depends on multiple factors affecting the sector. As per the EV Volumes portal, the Global plug-in electric sales reached a volume of 1.134 million units during the first half of 2019, which is a staggering 46% growth in comparison to 2018. The global EV adoption increased its market share to 2.5% in H1,2019 in comparison to the total vehicle sales. The first half growth accounted to the implementation of amendment in taxation and subsidy schemes globally, full availability of Tesla Model 3 and Europe’s enactment of rigorous regulations for CO₂ emissions.

Outlook
The Industry, in general, is sanguine about the EV demand, but there is uncertainty over what the actual scenario would be in 2025 or 2030. International organisations such as the IEA estimates that EV sales would reach 44 million units in 2030. Impeding the government reforms and initiative are the price and supply disruption of the key metals like Cobalt and Nickel, which could thwart the cost declines that have been the bases for the affirmative EV future demand estimates.

Governments across the globe have played their part in shaping the EV ecosystem and have been continuously nudging the auto manufactures to meet the goals set by the local authorities. Let’s have a quick look at few of the reform measures undertaken by the major sovereigns. 

Fig 4: EV adoption and reforms 

 
Having understood the EV regulatory framework, we need to now look upon the battery architecture. 

What is considered while selecting a battery pack for EVs?
For electric vehicles, the battery packs are developed with objectives of high power to weight ratio, specific energy and energy density as the lighter and smaller batteries reduce the size and weight of the vehicle, improving its performance. The high specific energy and energy density allows vehicles to last a longer range per recharge cycle. The charging/discharging cycle time and the cost of the batteries are also taken into consideration.

Here is a comparative analysis of the different existing battery technologies and their suitability in future.

Fig 5: Current Battery Technologies

Source: Kalkine Research

The future battery technology would require high energy density, long life and low manufacturing cost to keep the OEMs interested in high-quality battery manufacturing.

The major risks that could hamper the EV adoption rates in future are posed by the disruption in the supply of the metals. Now it calls for an insight into the supply dynamics of the battery metals.

Global Production and Consumption Trend 
Backed by a strong support from various governments across the globe, green energy in general and EV sector, in particular, is seeing a strong push. Which in turn has fuelled the demand for battery materials which includes non-ferrous metals like lithium, cobalt, nickel, and graphite.

Lithium- Supply Overhang
The global consumption for lithium carbonate equivalent stood at 315,000 tonnes in 2019, which is further forecasted by the Department of Industry, Innovation and Science (or DIIS) to grow at an annual average rate of 20 per cent to stand at 489,000 tonnes by 2021.


The increase in battery manufacturing across China and especially across South Korea amid growing uptake of electric vehicles and improvements in battery capacity is particularly supportive for lithium chemicals.

How are the players adopting to cope with the challenges due to lower lithium prices?

Going Up the Value Chain
The trade for lithium chemicals is somewhat picking momentum across the globe, which has prompted many lithium mining companies across Australia to go up on the value chain. Recent examples of such an up move include

(a) Mineral Resources Limited's sell-down of Wodgina to the global lithium chemical giant- Albermarle to obtain hydroxide processing. 

(b) Pilbara Minerals and POSCO JV negotiations for setting up a lithium carbonate and hydroxide conversion facility in South Korea.

The global lithium production surged by 18 per cent on a yearly basis to stand at 470,000 tonnes in 2019, which is further anticipated by DIIS to stand at 489,000 tonnes in 2021.

Let us now dig into the supply scenario for one of the world’s largest lithium producer.

Australia Production Capacity
Australia’s spodumene concentrate production for 2018-19 stood at 1.1 million tonnes to 1.3 million tonnes, an increase of 20 per cent over the previous year. Further, Spodumene production is forecast to increase to 1.9 million tonnes by 2020–21.

Mineral Resources’ Mt Marion Doubles Capacity: Mt Marion-operated by Mineral Resources was initially designed to produce 206,000 tonnes of spodumene concentrate per year; however, a current upgrade for the project, increased the production capacity to 450,000 tonnes at 6 per cent spodumene.

Galaxy Resources’ Mt Cattlin Operations Record Production of 191,000 tonnes of Spodumene: Mt Cattlin-fully owned and operated by Galaxy Resources holds the potential to process 1.6 million tonnes per annum pegmatite ore in order to produce 180,000 tonnes per annum of 6 per cent spodumene. The Mt Cattlin operations produced a total of 191 kilotonnes of Spodumene concentrate with a cash cost per tonne produced of US$391 for the full year, reinforcing Mt Cattlin’s market position as a low-cost producer of spodumene concentrate.

The anticipation of the upsurge in demand has caught the eyes of not only the existing companies but also newer companies throwing in the hat. 

The New Entrants in 2019 
In October 2019, Rio Tinto unfolded a large potential source of lithium while looking for gold in piles of waste rock of borate in California. Rio now plans to invest an initial $10 million over a pilot plant (on-site), which would purify the waste rocks and extract lithium into a form suitable for the electric vehicle batteries, which would mark another phase of $50 million booster towards a plant capable of industrial-scale with a capacity of approx. 5,000 tonnes of lithium carbonate equivalent a year.

In March 2019, Altura Mining Limited announced a commercial production at the Pilgangoora Mine, which is now rated to produce 220,000 tonnes of spodumene concentrate per annum.

We need to look at one of the world’s largest lithium producing nation – Chile to completely understand the supply situation going forward. 

Chile: World’s largest Lithium reserves, moving Slow with Lithium 
The South American nation possesses the world's largest reserves of lithium which is of high quality; however, Chile's government has been slow to allow new players to enter the market. Also, the stringent policy for lithium mining in Chile could keep new entrants at the bay. Chile places lithium under the list of “Strategic Metals” and lithium mining in Chile requires either joining hand with the government or obtain a special permit known as a CEOL to mine lithium.

Albermarle and SQM remain to be the top Chilean producers and the entry of new entrants looks difficult under the stringent policies. For example, as per the current plans of the government, a mining company also needs to set up the value chain in Chile (such as a processing plant for lithium chemical production) to obtain the Chilean lithium brine.

The producers are taking proactive measures to battle the oversupply situation plaguing the lithium market.

How are Lithium Miners Addressing the Supply Glut?
The rush for lithium, which once took the prices to a record high in 2018, witnessed a halt amid higher exploration and large production from big suppliers such as Australia and Chile. However, the large supply created by the lithium mining companies played out negatively for the small entrants amid a massive fall in prices.

Many lithium mining companies such as Alita Resources Limited ran out of business amid higher cost and fall in demand and price of lithium. The shutdown of operation by such small caps served as a signal for the large Australian players such as Galaxy Resources, Pilbara Minerals Limited, Orocobre Limited, and these mining companies kept the production steady in line with the offtake agreements or demand.

The measured production from many lithium mining companies across Australia has resulted in a pullback in spodumene supply, which is expected by a number of industry experts to ease the downward pressure on lithium prices over the short run.

Now, let’s ponder over the measures taken by the lithium producers to mitigate the oversupply issue. 

Short-term Cutbacks on the Spodumene Production Across Australia: Galaxy announced a halt in mining at Mount Cattlin in October 2019, and the company is currently using the existing stockpiles to meet the offtake demand from consumers, whilst adopting cost-cutting measures. The Wodgina prospect (Mineral Resources Limited) has been placed under maintenance, and the deteriorating market condition has led many other producers to concentrate on product quality rather than on volumes, leading to an overall decline in spodumene production across Australia in 2019. 
 
Fig 8: Australian spodumene ore production
 
Source: DIIS

Defer FID for Mount Holland by SQM: The Chilean lithium chemical behemoth- SQM along with its partner Wesfarmers Limited decided to defer the final investment decision (FID) over Mount Holland, which is one of the biggest undeveloped hard-rock lithium projects in Australia, until the first quarter of 2021.

Difficulty for Brine Producers: While the spodumene producers had pulled back their production in 2019, the brine producers across South America (especially Chile) had also faced some hard times, which kept the brine production in check. La Negra- operated by Albermarle in Chile, has been experiencing production setbacks, and Albermarle has delayed works on La Negra III & IV.

Post analysing the scenario for lithium, let us discuss the other battery materials. 

Cobalt 
Cobalt is another battery chemical, which is in focus with the demand for the metal presently strong with EV makers who are continuously looking for a stable supply.

The Australian cobalt mining companies are particularly gaining attention of global investing community amid its potential to provide the clean and ethical supply of cobalt, a quality seemingly lacking in the largest resources holder- Democratic Republic of Congo, over its unethical practices such as child labour, volatile mining policies to increase royalties, and labour abuse.

In terms of projects in Australia, Sconi Project- operated and owned by Australian Mines Limited, is anticipated to be one of the most cost-efficient nickel sulphate and cobalt prospect across the globe with an estimated production capacity of  1,405,000 tonnes of nickel sulphate and 209,000 tonnes of cobalt sulphate over its initial mine life of 30 years.
 
Nickel 
Nickel prices are expected to grow over the short-run amid a push in demand for energy storage devices. Currently, Australia is the sixth-largest miner of nickel with a production of over 200 thousand tonnes of nickel each year.
The export ban for nickel in Indonesia is anticipated to play-out for the Australian nickel mining companies ahead.

Fig 9: Forecast nickel spot price and stock levels

Source: DIIS
 
Graphite 
The prices for natural graphite still remain soft in China; however, the outlook over the lithium and much over the penetration of the battery storage devices into the global energy storage market is keeping the graphite in focus across the battery material space.

The supply chain of the Chinese flake graphite is losing the momentum, which could provide an advantage to Syrah as the Company holds its flagship project in Mozambique, which supplied 17 per cent of the global graphite market in 2018, while we are cognisant of few risks here.


The gradual decrease in China’s flake graphite chain led the country to start importing natural graphite from January 2018, which further led to make China a net importer.

2. Investment Theme and Stocks under Discussion

The demand for the EVs is well placed to follow an upward trend in the upcoming years, with this backdrop, we anticipate the battery materials to be in greater demand with the EV sales approaching inflection point, accelerated by government reforms, improvement in the EV range making it more competitive as against the conventional ICE vehicles. Australia backed by a conducive mining environment would continue to expand the supply for the battery materials.
 
After understanding the sector, let’s take a detailed look at seven miners in terms of their outlook and performance. To gauge the potential of the mining stocks, we have followed the market multiple approach and used ‘EV/Sales’ for most of the cases.