Investments in electric vehicles are no longer a surprise. Anyone interested in this topic knows about companies such as NIO Limited (NYSE: NIO), Li Auto (NASDAQ: LI), XPeng (NYSE: XPEV) and of course Tesla (NASDAQ: TSLA). Recently, such giants as General Motors (NYSE: GE) and Ford (NYSE: F)… The latter two automakers also jumped sharply after reports of a focus on electric vehicles.
There are many other companies operating in this sector, and you can continue looking for the very company whose shares have not yet gained in value. But the problem is that almost all companies are unprofitable, and it will not be possible to analyze the financial condition of the automaker in order to understand which of them will be able to survive in this highly competitive market. In the current situation, much attention is paid to the investor supporting the company. If, for example, Jeff Bezos (Jeff Bezos) then the company has a chance to survive.
But there is always another way to invest in the growing electric vehicle market. And today I want to draw your attention to a still unknown company that has a chance to get huge profits from the increased demand of automakers for its products.
The most important and expensive part in an electric vehicle is the battery. Therefore, the next target for investors should be battery companies. But you can go even further. The battery contains a mineral graphite, we are all familiar with it – it is used in a simple pencil. At the moment, scientists have not yet invented a method that does not involve the use of this mineral in the production of batteries for electric cars.
Thus, attention should be paid to the companies that mine and process graphite. It is in this segment that the growth potential of the share price still remains. But first, let’s touch on the topic of batteries and consider exactly what role graphite plays here.
Graphite in batteries
Important! Graphite is used to make the anode in a lithium-ion battery.
The higher the energy density in the battery, the higher the range of the electric vehicle. Scientists are wrestling with how to increase the energy density in a battery without decreasing battery life. As a result, they decided to replace the graphite anode with a lithium metal one. The density has increased, but the flip side of the coin is the rapid discharge of such a battery and a short service life.
The engineers went further and decided to apply lithium metal to the graphite anode. But this led to the destruction of the lithium-ion cells. To avoid destruction, scientists made a special electrolyte that stabilized the processes in the battery. Thus, the engineers managed to increase the energy density and increase the battery’s range by several times. The goal was achieved, but the graphite remained in the battery.
Further, scientists from the company Samsung and it was completely possible to make a battery without electrolyte, due to which its weight and dimensions decreased. The engineers were able to bring the density of a conventional lithium-ion battery from 250 W * h / kg to 900 W * h / kg, and they did this by spraying silver-carbon on the surface of the graphite anode, which protected it from destruction.
As a result, Samsung engineers have brought batteries closer to such a traditional energy source as gasoline, which has an energy density of 2,900 W * h / kg.
Scientists have developed new types of batteries, but all of them still contain graphite. Consequently, this mineral will also be in demand in batteries of a new type, which means it makes sense to invest in companies engaged in the extraction of graphite.
Who supplies graphite to the USA?
Now let’s turn to the countries that are the main suppliers of natural graphite.
90% of American companies consume graphite. The main suppliers are China, Mexico, Canada and Brazil. Graphite has not been mined in the United States since 1990. That is, this mineral is completely imported into the country. The world leader in the extraction of graphite is China, which also supplies a significant part of the mineral to the United States.
What can the disputes between the United States and China lead to?
Recent phone conversation Biden (Joseph Biden) with Xi Jinping (Xí Jìnpíng) made it clear that the confrontation between the countries is very likely to continue.
In particular, Biden drew attention to dishonest economic policies, human rights violations in China and the crackdown in Hong Kong. This signals that the US will try to dictate to the Chinese government what to do. Xi Jinping noted that it is better to solve problems by maintaining a constructive dialogue.
It is worth noting that in 2016, China, in response to US sanctions, introduced export duties on commodities, including graphite. This has led to the fact that in the United States the production of batteries has become more expensive, and the cost of products that include graphite has also increased. Further confrontation could lead to an even greater increase in export duties from China or a ban on graphite exports to the United States.
In this situation, companies that mine graphite within the country will be in a very advantageous position. And one of these companies is Westwater Resources Inc (NASDAQ: WWR)… And since graphite has not been mined in the United States for over 30 years, those who are just starting out in this direction can profit from sales in the future.
Westwater Resources was founded in 1977 and was involved in uranium mining. But in 2016, the company pulled out of the business and focused on mining the U.S. minerals (lithium and graphite) needed to generate clean energy. Westwater management expects demand to grow in this segment amid accelerated production of electric vehicles.
The company entered the graphite market by acquiring in 2018 Alabama Graphite Corp., which is engaged in exploration and production of lamellar graphite. Westwater also owns three lithium brine pools in Nevada and Utah. The company plans to mine about 17,000 tons of graphite per year, and the annual imports of this mineral in the United States exceed 50,000 tons, that is, all the mined graphite can go to the domestic market.
Who will create demand for Westwater products?
Key to Westwater’s future success may be that graphite has been classified as a strategically important resource at the request of the US Department of Defense. According to the law, the military can only purchase such resources from local producers, therefore, the Department of Defense may become a future client of Westwater.
Still, the main customers of the company will be car manufacturers. Westwater management relied on them, since each battery of an electric vehicle contains more than 45 kg of graphite.
Recently, the growth in the production of electric vehicles has been complicated by a shortage of semiconductors, but even in such conditions, automakers are reporting record sales of electric cars.
Consequently, as the semiconductor situation improves, electric vehicle production will continue to grow, with General Motors and Ford among Westwater’s customers.
Another area of using graphite is stationary batteries. The trend in electric vehicles is accompanied by the trend in renewable energy sources. Electricity from the sun or wind is not constant and must be accumulated. For this, batteries are also used, which, of course, contain graphite.
Household batteries also have a significant share of the battery market. They are used in smartphones, laptops, tablets and other battery-powered devices. The projected average annual revenue growth in this market is 12%.
It is enough for Westwater to get a few large clients in one of the above segments and its revenues will start to grow rapidly. And then everything will depend on how quickly they can increase production capacity.
Trump decree pushes Westwater shares higher
Westwater shares are trading in an uptrend. In September 2020, there was a sharp increase in the value of securities caused by the signing of Trump (Donald Trump) a decree to support the development of graphite mining in the United States. This decree was created to reduce dependence on China and other countries importing critical minerals into the United States. It implies support for the mining and processing industries.
The excitement of investors that day around Westwater shares was very high, as a result of which the securities quickly became overbought. As a result, in a few days the shares fell in price by 60%.
But the decree was signed and began to operate, which means that the movement in this industry began, and long-term investors began to gradually buy up Westwater shares, which led to an increase in their price. Over the past 2 months, securities have grown by more than 200%.
Currently, the closest support for the price is the 200-day moving average. It is possible that after a slight correction, which was observed last week, the securities will resume their growth. It makes no sense to set goals, this is a long-term investment, calculated at least until the end of 2021. In the long term, the securities of this company will continue to rise in price as the production of graphite grows.
It is obvious that the United States missed the moment by stopping the extraction of graphite in the country, and now it needs to catch up. But you can understand the reason for the stop. The mining of graphite is associated with very strong environmental pollution. As a result, it is better to print dollars and pay for the import of the mineral than to mine it in your own country.
But the methods of extracting graphite are improving, and now it is no longer as dangerous as it used to be. As a result, we end up with an industry that is starting to revive. Therefore, this direction will be promising for a long time, which means now is the time to look for companies that work in this segment and buy their shares.
The only risk with Westwater is leadership. If they make a mistake in the development of the company, then the investment will not meet expectations. Otherwise, it is difficult to imagine a situation in which, having a huge demand for graphite, it is possible not to bring the company to profit.
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