Speed Is the Name of the Lithium Game

Nov 01, 2021 Investing Strategies

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Last Friday, I explained that lithium’s supply and demand imbalance is a problem for the electric vehicle industry. Although the Biden administration mandated that 50% of vehicles produced in the U.S. be electric, the auto industry must procure gobs of lithium to reach that goal.

Roughly 22 pounds of lithium are required for every electric vehicle, primarily to produce rechargeable batteries. Environmentalists are suing mining companies to prevent the construction of new lithium mines. And we might have to rely on China for our supply in the short term, as that nation has about 60% of known reserves.

The mining industry needs innovation. Luckily, there is one company, which I highlighted last week, that has answered the bell.

Right up front, I will say that TradeSmith Finance has identified the stock as having sky-high risk. But I want to highlight the company’s innovation because it could unlock America’s ability to procure more of this much-needed element.

Let’s talk some more about Standard Lithium.

Let’s Dig Into Lithium

The expected surge in electric vehicles will create drastic demand for lithium. Batteries rely on lightweight, reactive metals to store energy in a chemical form. I don’t want to get into the scientific process of how these batteries work. I’m happy to share some reading material if you’re interested, but a discussion of their mechanics is beyond the scope of this article.

Simply know that lithium-ion batteries have a very high energy density, charge quickly and repeatedly, and are very lightweight compared to other batteries.

I noted that China has the bulk of available reserves. But today, a significant amount of production comes from a small region in South America known as the Lithium Triangle. This is a desert region spread across Chile, Bolivia, and Argentina. Australia also has large deposits.

Lithium mining is an intensive process, and it is extracted from brine, clay, or rock deposits. Typically, brine deposits are on the surface of salt lakes or underground caverns. When brine water is extracted and evaporates, it leaves behind lithium-rich deposits.

Mining companies typically extract these deposits and then use the sun to evaporate the water. It’s quite time-consuming. In specific processes in South America, it can take years to pump the water out from under dry lake beds, wait for the water to evaporate, treat the concentrate, and then separate the lithium minerals.

But it’s not just time-consuming. It’s very energy-intensive and requires a great amount of capital.

Enter Standard Lithium (SLI)

This company has created a new process that reduces water use, reduces lithium project acreage to several dozen acres instead of several thousand acres, requires no diesel mining equipment, and decreases pollution. In addition, its direct lithium extraction technology, LiSTR, can dramatically reduce the amount of time needed on extraction from a year down to just a few hours.

The company has created a joint venture with German chemical company Lanxess on a pilot project to showcase its viability. Lanxess has been around for 50 years and is one of the world’s leading companies in brine extraction. The company has 150,000 acres of brine leases and processes about 5.25 billion gallons of brine each year.

In addition, Standard Lithium’s latest project in Arkansas aims to reduce emissions in the supply chain to meet the requirements for the White House’s carbon capture goals. The company has also created an automated lithium carbonate crystallization plan to produce high-quality lithium carbonate that is 99.9% pure, meeting the standards of 99.5% required for battery technology.

Standard Lithium could be on the verge of something very significant.

Learning How to Trade

Long-term investors might want to trade SLI stock by using a variety of strategies.

The obvious is to use dollar-cost averaging to start slowly building a position. With this strategy, you simply buy a fixed number of shares every month and/or quarter. So instead of going all in on the stock price today, you can purchase shares on a fixed schedule in the future.

The second is to use cash-secured puts. In this situation, you can effectively choose your entry point and generate income right now. As I’ve explained before, you sell a put option in the future. For example — and this is hypothetical — if you sold the Dec. 17, 2021, $10 put on SLI, this contract would give the buyer the right, but not the obligation, to sell the stock at that price should it fall to that level by the expiration date.

On Friday, the contract was selling for $1.10, meaning that you would receive $110 today for each contract of 100 shares. Your broker would require that you set aside $1,000 in margin should you need to buy that stock on or before that date.

But notice that this sale represents an 11% return on that margin since you’re receiving that cash in your account. If the stock does fall to or below that level, you will receive the stock at the price you chose with the put sale. If it doesn’t hit that level and the contract expires worthless, you can pocket the premium.

The nice part about this strategy is that it allows you to generate income from the stocks you want to own. So naturally, you need to pay close attention to the Volatility Quotient (VQ) of stocks when trading cash-secured puts. But with a long-term trend like surging lithium demand, it’s worth consideration as you build your portfolio.

I’m taking questions for a mailbag later this week and would love to hear from you. What do you want to read more about? I can’t respond to every email, but I read them all.

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