New vitality funding patterns look set to repeat themselves with the most recent race to snap up belongings associated to the mining of lithium, a key component used to make electrical car (EV) batteries.
That’s our newest evaluation following phrase that EV maker Nio Inc. (NYSE:NIO) has agreed to take a position in an Argentine lithium mining challenge by way of a brand new tie-up with Australia’s Greenwing Assets Ltd. (OTCPK:BSSMF) This transfer seems to be suspiciously just like an analogous race by photo voltaic panel makers to spend money on polysilicon a decade in the past when the photo voltaic trade started to take off and costs for his or her key uncooked materials soared.
Inexperienced vitality historians will know that the polysilicon value surge in the end turned out to be an enormous bubble whose later collapse left many panel makers caught with belongings and procurement contracts that have been value far lower than their authentic costs. The identical factor is occurring now with lithium costs, which have roughly tripled during the last 12 months.
Some may say that rise is justified as a consequence of hovering demand for brand new vitality autos (NEVs), that are certainly hovering. However that mentioned, NEV purchases – that are coming largely from China – are nonetheless a fraction of demand for conventional gas-powered automobiles. That results in our broader evaluation that the large run-up in lithium costs seems to be suspiciously just like the polysilicon bubble a decade in the past, and a rising flock of downstream gamers shopping for up lithium-related belongings now may in the end discover themselves massively writing off those self same belongings later.
All that mentioned, let’s return our consideration to the most recent announcement that got here earlier this week from Greenwing. Curiously, Nio didn’t appear to really feel it wanted to make its personal announcement, more than likely as a result of the overall worth of the deal was lower than $100 million, which is comparatively small in contrast with the corporate’s newest market cap of almost $30 billion. The quantity can also be only a tiny fraction of Nio’s 54.4 billion yuan ($7.5 billion) money holdings on the finish of June, in keeping with its newest quarterly earnings report.
Greenwing, itself, is kind of a small firm, with its most up-to-date market worth at simply A$46 million ($30 million). Nio has agreed to purchase about 12% of the corporate’s shares for A$12 million, representing an enormous premium, however one which Nio can definitely afford.
Actually, Greenwing’s shares have been buying and selling as little as A$0.285 as lately as final week, earlier than taking pictures as much as A$0.40 when the deal was introduced. Nio shareholders have been much less impressed, with the corporate’s Hong Kong-listed shares sagging 7% over the three buying and selling days after the deal was introduced.
The large prize within the deal isn’t Greenwing itself, however slightly the corporate’s management of the San Jorge Lithium Mission in Argentina, whose working entity, Andes Litio SA, is owned by Greenwing. As a part of their new tie-up, Nio will obtain an possibility to purchase between 20% and 40% of Andres Litio for an train value of $40 million to $80 million. Nio has as much as a 12 months after the publication of a report on the challenge by an Australian trade affiliation to determine whether or not it desires to train the choice, giving it a while to desert the deal if lithium costs collapse.
Nio’s transfer seems to be considerably vital in signaling the race for lithium is shifting to a brand new stage amongst Chinese language EV makers. International carmakers have been making comparable strikes during the last couple of years, with Basic Motors (GM) and BMW (OTCPK:BMWYY) each investing in lithium tasks final 12 months, in keeping with Quartz. Business large Tesla (TSLA) additionally owns the rights to a lithium declare deposit within the U.S. state of Nevada.
China is house to 2 of the world’s largest lithium producers, Ganfeng (OTCPK:GNENY) and Tianqi, which have additionally been lively over the previous 12 months in acquisitions and capital elevating. In July, Gangfeng introduced its greatest buy up to now with a deal value as much as HK$7.75 billion ($962 million) for Argentinian miner Lithea Inc. Meantime, Tianqi raised HK$13.46 billion in a Hong Kong IPO the identical month, with a few of these funds earmarked for the acquisition of its personal new mining belongings.
Notably, Ganfeng shares have misplaced a couple of quarter of their worth since its July announcement. Tianqi’s shares are additionally down, although by a milder 7% from their IPO value, indicating buyers could already be cooling to lithium shares.
Additional downstream within the EV provide chain, CATL, the world’s largest EV battery maker, received right into a bidding warfare for an Argentinian mining challenge final 12 months, however in the end misplaced out to Lithium Americas Corp. (LAC) Nonetheless, the Chinese language battery maker managed to safe rights in April this 12 months to a lithium mine in China’s personal Jiangxi province for 865 million yuan ($120 million).
BYD, China’s largest EV maker which manufactures batteries as nicely, additionally agreed in June to purchase six lithium mines in Africa, in keeping with Chinese language media stories. Earlier within the 12 months it additionally acquired an award to mine lithium in Chile.
As we’ve famous above, Nio can definitely afford the newly introduced buy as a consequence of its robust money place. The corporate is rising, although that development slowed a bit within the newest quarter amid Covid-related disruptions in China. Gross sales of its core EVs rose 14% to 25,059 autos on this 12 months’s second quarter. Its income rose 21% to 9.57 billion yuan, although its non-GAAP loss rose sharply to 2.3 billion yuan from 336 million yuan a 12 months earlier.
We’ll want to look at from right here and see how the corporate’s different home rivals react, together with names like Li Auto (OTCPK:LAAOF) and Xpeng (XPEV). Among the many group, buyers appear to love Nio essentially the most, giving it a price-to-sales (P/S) ratio of 5.1. By comparability, Li Auto and Xpeng commerce at decrease multiples of 4.5 and three.0, whereas BYD trades at a decrease 2.0. Maybe that premium displays Nio’s extra forward-looking method with its newest lithium foray, which features a security valve that lets the corporate abandon the cope with comparatively little harm if lithium costs collapse.
Editor’s Notice: The abstract bullets for this text have been chosen by Searching for Alpha editors.