The Basic Physics of Energy
Before we can get started on Lithium, we must first take a step back and look at the physics underlying the big picture. At the end of the day, as always, it's going to be about the physics. One of the most fundamental laws of physics is the First Law of Thermodynamics, which basically says:
"The internal energy of an isolated system is constant and energy can be transformed from one form to another, but cannot be created or destroyed."
You may wonder why this matters, but the truth is endless amounts of scientists have gotten lost in the force/energy debacle and spent their lives in pursuit of energy that doesn't exist. The problem is the big misunderstanding underlying gravity, force and energy. If I try to extract the energy of a metal object moving towards a magnet, I will successfully get energy. However, that energy did not come from the magnet because the magnet is using force, not energy. The only way to get the object back away from the magnet is to apply the equal and opposite amount of energy that was gained to attract the object in the first place. The United States Patent and Trademark office has received so many patent applications for perpetual motion magnet motors they have closed the doors and don't even accept them anymore.
If I use a force such as gravity to extract energy from a falling object, the energy did not come from the gravity, it came from the energy that put it there. Once the energy is extracted, the amount of energy required to initially put it there will be required to put it back. If this wasn't true then it would be in direct violation of the First Law of Thermodynamics. On the street they call this Over-Unity (Perpetual Motion), and there is tons of documentation on it and why it's only a pipe dream.
Now, the reason this is so important to understand is because hydrogen follows the exact same rule. Hydrogen is not energy, it is an energy storage mechanism. Whenever you want to consider the future of energy, you must always consider what is behind the dog and pony show. How much energy was supplied to it, how much energy was lost (efficiency), and how much energy did you get from it? So now let's get to the controversial part: is the future of the auto industry going to be fuel cells or batteries? The amount of literature on the debate is unbelievable; and everyone is standing strong on their side of the argument.
Before I start on fuel cells, I must point out that I am only talking about fuel cells as a mass-scale solution for the auto industry. The uses for fuel cells in stationary power plants hold a lot of promise and are a completely different topic of conversation. Now let's get to the basics: Fuel cells run on hydrogen. They are basically 0 emissions and very efficient; quite the dog and pony show. This sounds great, but where do you get the hydrogen? Hydrogen does not occur by itself in the world, it only occurs attached to other elements. The only way to get the hydrogen separated from other elements is to apply energy to it, similar to the energy applied to pick a rock up off the ground. Hydrogen is not energy, it is an energy storage mechanism just like gravity, a spring or a magnet. The energy extracted from the force will not be greater than the energy required to get it back to its original location. The dream of hydrogen sounds wonderful, but the energy applied to the hydrogen is all you are going to get out of that hydrogen which means it's all about efficiency. This in itself does not hinder the fuel cell argument, but it should deductively speaking shift the focus away from fuel cells and into hydrogen production, efficiency, storage, infrastructure and safety. After all these considerations, apply the same set of rules to batteries and pick the most efficient. Whichever one has the greatest net total energy output from the initial source of energy is going to be the answer. That is the sheer physics. Now let's take a look at the different types of fuel cells:
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Take a good look at all the above fuel cell diagrams and most importantly, their input. They either take in hydrogen (top row) or a fuel that gets converted to hydrogen (bottom row). The ones that take a fuel emit carbon dioxide so they are not a viable long-term alternative. The ones that take hydrogen do not emit carbon dioxide, but what fuel was used initially to create the hydrogen? And, how efficient is hydrogen going to be as an energy transportation mechanism?
After I pretty much racked my brain trying to figure out the best energy solution for our country, I had to take a step back and look at the entire equation from a distance. Since energy can only be converted from 1 form into another, the ideal energy solution would obviously be where we lose the least amount of energy in the conversions:
Energy Source -> Conversion(s) Energy Loss -> Mechanical Work (Motion)
If I can get exactly the same amount of energy in the form of mechanical work as I put in, then I would have 100% efficiency. Obviously, this is not possible in the real world but definitely shows that the most efficient system will make the best use of the energy source. The higher percentage of the initial energy source you successfully use for mechanical work, the lower the amount of initial energy source that you need. Now let's get a little more detailed for the auto industry:
Energy Source -> Conversion -> Energy Storage -> Energy Transportation -> Vehicular Energy Storage -> Conversion -> Motion
Ideally, every step along this path must be as close to 100% efficiency as possible. This is the only way to get the most energy from start to finish. If any part of this equation is permanently set with poor efficiency, then in the long term it will hinder the ultimate goal. The chain is only as strong as its weakest link.
Renewable Sources of Energy
We have spent so much time trying to develop renewable sources of energy. I think it is no doubt we are pursuing a future with as many renewable sources as possible, so let's look at 2 popular ones: Wind and Solar.
Please note I gave 99% efficiency for the transport of compressed hydrogen as I could not find this number and wanted to be as generous to the fuel cell argument as possible.
As far as wind and solar are concerned, there is no point electrifying water into hydrogen, compressing it, then transporting it. Even though hydrogen has a high energy density, it has a low volumetric density because it's a gas, which means it requires more energy to compress it. This is nowhere near as efficient as just sending the electricity straight through the grid to a battery. If you create a hydrogen infrastructure then you are already damning wind and solar from the start. Electrifying water (70%) and compressing hydrogen (93%) puts you right from the start at 35% energy loss before it even leaves the source. Why give up such a large amount of energy converting it to hydrogen when it is already in a transportable form (electricity)? Why go from electricity -> hydrogen -> electricity when you can just leave it as electricity. There is no need for this extra conversion process.
Furthermore, it will take years to convert our vehicles to another type. Do we want to create cars that run on a source that has high compatibility (electricity), or cars that run on fuel cells (hydrogen)? Electricity leaves a wide open window to technologies of the future. It doesn't matter how many years it takes to develop a better way of producing energy, as long as we have created a compatible energy infrastructure it won't matter how we currently get the energy. Using electricity as the standard for energy transportation, we can start building products that run on it. Much of the electrical grid is currently 92-94% efficient, now that's a long-term solution. There is also the issue of affordability. What do you think would cost more: developing an entire hydrogen delivery infrastructure or just modifying the current electrical grid to support charging? Basically, the electric vehicles we build now can be compatible with the energy of the future. As long as our auto industry is built to run on an efficient electrical grid, the way that grid is currently powered is inconsequential.
To sum it all up: Energy delivery at almost the speed of light with a grid that's 92-94% efficient, that's a no brainer!
A Second Opinion
If you don't believe me, then maybe you'll believe Elon Musk. In his interview with Spencer Michels he states:
"Okay, so you could do all those things. But it's a tiny fraction as efficient to do that as it is to use those same solar panels just directly to charge a battery pack, as opposed to using the solar panels to split water, then take hydrogen, oxygen, separate them, compress the hydrogen into either a very high pressure gas or liquid, and then put that into a car and then run a fuel cell process and then generate electricity. It's incredibly inefficient to do that. You'll always win by taking that same electrical source and just directly charging a battery. Always, guaranteed. This is a fact of physics."
The obvious argument to that quote is he's not taking into account the reforming of natural gas into hydrogen. This is a likely argument because natural gas reformation is very efficient; however, if you depend on that you are binding vehicles to fuel cells, which in turn kills the efficiencies of wind and solar as a means for powering those vehicles in the future. Natural gas reformation may have a place in stationary power plants, but should not be a reason to build a vehicle fleet running on fuel cells. Mr. Musk solidifies this at the recent D11 conference where he states:
"The other factor is that we have to find sustainable means of electricity production anyway. So, if you believe in that predicate you can write that predicate and say: given that we must have sustainable electricity production, the obvious move for transport is electric."
Questions to Ask Yourself
- Why deliver compressed and explosive hydrogen by truck/pipeline when you can just deliver energy via grid at almost the speed of light?
- What would cost more: modifying the current grid to support electric vehicle charging, or building a complete hydrogen delivery infrastructure?
- What kind of energy will it take to compress, store, transport and deliver the hydrogen?
- Is the future snail-mail or e-mail? :)
Chicken and the Egg
For a very long time, we've had the typical chicken and egg problem. No one will pay to build an electric charging network without electric vehicles to support it; and no one is going to buy electric vehicles when there is no charging network. Luckily, the government has helped fund the charging side of the equation, thereby paving the way for EV's to become ubiquitous. The following two images are the charging networks of ChargePoint and ECOtality (ECTY). They have come together to join their networks into a company known as Collaboratev.
As you can see, the EV charging infrastructure is coming along very nicely. Range anxiety associated with EV's is slowly diminishing as the EV charging infrastructure grows. The days of going to the gas station will soon be over. You can charge your vehicle overnight at your house, and if you need more energy there will be chargers in parking lots all over the place. One big stigma is the wait time to recharge at the gas station. People are not taking into account that you won't need to go to the gas station. When you go to the supermarket, coffee shop, mall, work, lunch, etc... there should eventually be a charger in the parking lot you can plug into. Your vehicle can charge while you are going through your daily errands. Goodbye gas station!
Continued Improvement in Battery Technology
So if you're still with me, then the next question is batteries. How capable is battery technology? Is it possible? What about range, weight, and cost? Recently, Tesla (NASDAQ:TSLA) proved it can make a lithium-ion battery based vehicle with enough range and performance to be practical. The Model-S Performance has a range of approximately 300 miles and a 0-60 in 4.2 seconds. Now that's fast! Also, Tesla is claiming a drive efficiency of 88%. That's huge compared to my estimates above. If we start with a grid that's 92% efficient and a car that's 88% efficient, that's a viable long-term solution. Even though you may be saying 300 miles is not enough range and the car is too expensive, what you should be asking about is the rate of improvement in battery technology and where it is headed. The step forward in battery technology that makes a practical Tesla possible might not be cost effective for the masses. So let's take a look at future battery technologies and their theoretical energy capacities with respect to the laws of thermodynamics:
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As you can see, even though Li-ion technologies have progressed quite a bit, we have a ton of room to grow. The x-axis in the chart is actually exponential, meaning the gap between 100-1000 is approximately 10 times the gap between 10-100. The next step technologies of Lithium-Sulfur and Lithium-Air batteries are promising huge multiples when it comes to energy storage. Oak Ridge National Laboratory has just made a major breakthrough with Lithium-Sulfur batteries that is promising half the voltage at eight times the capacity. This translates to an increase in 4 times the gravimetric density of current Li-ion batteries. This means that your 300 mile Tesla could have a huge increase in range, up to 1200 miles! This doesn't even take into account the potentials of future Lithium-Air technology. Regardless, even though these technologies may not be around now, if we have the energy infrastructure in place to support it we can use it when it becomes available. Tesla has proved it's possible with our current battery technology, just imagine what will happen when we make one more step forward!
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Lithium as an Irreplaceable Metal
So why is lithium so special? What makes it the energy storage medium of choice? Simply put: It's the lightest known metal in the world and it has a high energy density.
Lithium is used in many applications across the world. The current battery component of lithium demand is only a small portion of the total demand. Not only does the future hold an increase in demand for the other uses of lithium, but the demand for batteries has huge potential to increase exponentially:
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Lithium is found in many places across the world. The primary two sources of mining lithium are from hard rock and brines. Unfortunately, the overhead costs of mining rock are significantly higher than mining the lithium from brine. As a result, the brine owners have better odds for an attractive profit margin versus their hard rock mining competitors. The most significant source of lithium brines resides in the Lithium Triangle of South America, otherwise known as the Saudi Arabia of lithium. Many mining companies have sprouted in the Lithium Triangle with hopes of making big money off the lithium boom. Here are two images of the Lithium Triangle in South America:
If you notice the largest deposit is in Salar Uyuni; however, due to problems with the Bolivian government it's been delayed and scaring away potential investors. Also, they have a chemistry problem with too much magnesium mixed in the brine, which incurs more expenses. In Argentina the political situation is much better off. There's a company called Jujuy Energia y Mineria Sociedad del Estado ("JEMSE"), which is government owned and has an equity interest in many of the mining companies. This cooperation of the government, in my opinion, is a very positive sign.
So, as you can see there are many mining companies in the Lithium Triangle. Considering I believe lithium will be the energy storage medium of the future, I'd rather take a little more risk and find the smaller mining companies sitting on piles of lithium. If they have a large mature company as a strategic investor, I'm game. My plan as a lithium investor is to buy and hold for many years. If you are not in the buy and hold frame of mind, I would not recommend the following stocks. Depending on your investment strategy, these are my top three picks for lithium investments in order of risk/reward:
Global X Lithium ETF (NYSEARCA:LIT)
- Professionally managed ETF.
- Provides diversification across many lithium related companies.
- Includes several already established large cap companies, which may minimize risk.
- Fully listed ETF on the NYSE, providing a large pool of potential investors.
Lithium Americas (OTCPK:LHMAF)
- Huge land ownership in the Lithium Triangle amounting to approximately 400,000 acres of land in lithium rich areas.
- Flagship Cauchari-Olaroz project boasts a huge figure of 11.7 million tons of lithium carbonate, which is believed to be the 3rd largest brine resource in the world. This one mine is estimated to have a minimum life of 40 years.
- Mitsubishi Corporation (OTCPK:MSBHY) and Magna International have an equity interest in the company.
- JEMSE has an equity interest significantly decreasing governmental risk.
- Completed feasibility study and on track for production.
- Fully listed company on the Toronto Stock Exchange.
- Inexpensive stock with an attractive market capitalization.
- Investor Presentation
Rodinia Lithium (OTCPK:RDNAF)
- Holds tons of exploration rights in many lakes in the Lithium Triangle.
- Clayton Valley Project controls over 70,000 acres of land in Nevada, one of the only brine deposits in the USA.
- Flagship Salar de Diablillos project has a huge estimated IRR at 36% due to geographics.
- Recently secured 2M in cash without diluting shares, which in my opinion shows shareholder consideration.
- Practically has no debt.
- Huge growth potential.
- Listed on the Toronto Venture Exchange.
- Strategic investment from ShanShan, one of China's largest lithium-ion battery material providers. ShanShan supplies battery components to companies including Apple, Sony, Sanyo, Samsung, Lishen, Benz and BMW.
- ShanShan's massive customer base provides long-term growth potential.
- ShanShan CEO sits on the board of directors at Rodinia.
- Investor Presentation
ShanShan Tech list of customers by logo:
Regardless of whether or not you agree electric cars are going to be the way of the future, we will always need a better means for storing energy. The role that lithium plays in energy storage for our cars, computers, phones, etc. is undeniable. As battery capacity increases, so will the desire for the world's lightest metal. The key to the future of energy is the ability to store it. Whether or not lithium will rule over hydrogen or run alongside it, the future demand for lithium will forever increase.
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Disclosure: I am long OTCPK:LHMAF, OTCPK:RDNAF, ECTY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.