Advanced Energy TrendWatch – Q4 2016

The Coming Disruption

This year, I’ve been focusing a lot on what I call the “Disruption Triangle.” It’s a big disruption that’s coming to the energy world.

The Disruption Triangle is the intersection of three elements: solar energy, electric vehicles and cheap energy storage. Each of these is a disruptive event in and of itself. But put them together, and these elements will disrupt the way we generate, use and store electricity.

It’s an event that few people see coming. Yet the tipping point is just a few years away.

In this quarter’s report, I’m focusing on two companies that will play a part in the coming energy disruption. First, let’s delve into previous disruptions and the impacts they’ve had on the world.

History Is Full of Disruptions in the World of Energy

Electricity has been around since the dawn of time. However, it’s only in the last 250 years or so that people have been able to harness its power.

Benjamin Franklin’s famous kite experiment in June 1752 was one of the first attempts to show that we could one day use electricity.

Nearly 80 years later, in 1831, British scientist Michael Faraday discovered how to generate electricity. Faraday used Franklin’s experiments and those of other scientists to make a key discovery…

He found that he could create, or “induce,” an electrical current by moving a magnet inside a coiled copper wire. He had discovered electromagnetic induction.

This disruptive event meant that electricity could now be produced at any time.

That same process is used today, although it is very different from Faraday’s small handheld device. Massive generators powered by water or steam turbines produce huge amounts of electricity that flow onto the world’s power grids.

Faraday’s discovery started the world of electricity. The first application of electricity came only six years later. In 1837, Samuel Morse developed and patented the electrical telegraph.

Alfred Vail, working with Morse, developed the Morse code, a system of “dots and dashes” that represented the alphabet. Now anyone could “talk” to anyone else with a telegraph machine. Within a few decades of its invention, the telegraph network was global.

Suddenly, people and businesses around the world could communicate at the speed of light. The telegraph had become another early disruptor in the world of electricity.

In tandem with the invention and deployment of the telegraph came the harnessing of electrical power to produce light. In the early 1800s, British scientist Humphry Davy demonstrated the first arc lamp to the Royal Institution in Great Britain.

The lighting system consisted of a bank of batteries powering an arc, or spark, of light that continuously flowed between two charcoal rods. These arc lamps became the first street lamps to brighten city streets at night. But arc lamps were expensive. They required frequent replacement of the charcoal and carbon rods.

By 1835, the first constant light had been developed. However, it was Thomas Alva Edison, an American working in West Orange, New Jersey, whose contributions really revolutionized electrical power.

In 1879, Edison developed the first practical, long-lasting lightbulb. He also demonstrated the first system of electrical generation and distribution with his Pearl Street Station in lower Manhattan, which started operation in September 1882.

Initially, J.P. Morgan and a few other customers of means in New York City hired Edison to provide lighting for their homes. While Edison’s generating stations were rudimentary compared to today’s behemoths, they were state of the art at the time.

Edison was introducing Americans to an entirely new form of energy: electricity. Talk about a disruption…

Electricity was an outright threat to the booming gas lighting companies that, at the time, were widespread in New York City. All of a sudden, electricity was disrupting – and replacing – gas distribution and lighting.

Electrical lighting soon became all the rage. Gas lighting companies vanished.

Like most disruptions, this one moved fast. By the 1900s, there were more than 30 competing companies generating and distributing electricity in New York City.

While one of Edison’s projects was to continually improve the generation and distribution of electricity, he was busy with other related projects too. Edison and others in the business of distributing electricity had to find a way to see how much each customer was using.

So Edison got to work again. He developed and patented an electric meter. It involved the weighing of a copper strip at the end of each billing period.

The latter half of the 19th century saw many discoveries in the area of electromagnetism turned into practical applications. Motors, transformers, meters, lamps and generators (called dynamos) all appeared, one after the other.

The time was ripe, not just here in the U.S., but in Europe as well. Electricians and scientists developed many of the above items nearly simultaneously in both Europe and the U.S.

A great example of a European invention was the replacement of carbon filaments in incandescent bulbs with filaments made from tungsten. These lamps were much brighter than lamps with carbon filaments, and they lasted far longer.

Lamp manufacturers produced the tungsten filament lamp for more than a century. Another disruption, the LED bulb, took out incandescents just a few years ago.

By 2050, economists expect the world’s population to reach 9 billion. In order to meet mid-21st-century world energy demands, supply has to grow by 80%.

That means in a mere 33 years, our energy supplies will have to nearly double. Most experts agree that simply isn’t possible.

Back in 2011, Royal Dutch Shell PLC studied the situation. Its study assumed advances in technology, competition and geology would boost energy supplies by 50%, and demand would decrease by 20%.

This would come from a number of factors, including higher prices and smarter urban development. Even with all of this taken into account, Shell’s study indicated an energy “zone of uncertainty” would still exist between supply and demand.

What’s scary is that uncertainty could be equal in size to the entire worldwide energy output in 2000. And it’s even worse than that.

Shell concluded that even if a brand-new energy technology landed in our laps today, it wouldn’t make much of a difference. According to the Shell researchers, “[it would] require 30 years of sustained double-digit growth to build industrial capacity and grow sufficiently to feature at even 1% to 2% of the energy system.”

It was clear that efforts to improve energy efficiency needed to start right away.

Over the last decade, energy efficiency efforts have really started to gain traction.

The federal government has issued a series of energy efficiency mandates. Improving energy efficiency of lights, motors and other electrical equipment is an easy way to reduce our carbon footprint on a per-person basis.

The Department of Energy decided to go after the low-hanging fruit first. It set its sights on the lowly 100-watt incandescent bulb.

It was a mandate that was part of the Energy Independence and Security Act. Congress quietly passed it back in December 2007.

It banned the production and sale of 100-watt incandescent bulbs after December 31, 2011. Two years later, the law banished the 60-watt and 40-watt bulbs.

The first answer to Congress’ incandescent ban was the compact fluorescent lamp – CFL for short. CFLs – or swirl bulbs – emit the same amount of light as incandescents, but they use 75% to 80% less energy.

Manufacturers quoted lifetimes of 10,000 hours. CFLs seemed like a great idea, but their lifetime was to be short-lived.

It turns out CFLs contain mercury, which the bulb requires to produce light. However, mercury is a heavy metal and, as such, presents a disposal problem.

Even though bulb packages advise consumers to properly dispose of used bulbs, most just throw them in the trash when they fail. And premature failure, especially of cheaply made Chinese imported CFL bulbs, has been a big problem.

Thomas Edison once said, “There’s a better way to do it. Find it.” So engineers at Cree Inc. set out to do just that.

They took high-intensity light-emitting diodes, better known as LEDs, and migrated them from flashlights to lightbulbs.

When manufacturers first introduced LED bulbs about seven years ago, a 60-watt-equivalent bulb cost $40. Thanks to the introduction of high-volume manufacturing, 60-watt-equivalent LED bulbs now cost less than $2.50 each.

Instead of drawing 60 watts of power, an LED version draws 9 watts, or about 15% less than an incandescent version. Cree’s bulbs come with a 10-year warranty, are dimmable and have an estimated 25,000-hour life span.

Depending on how many hours a day it’s on, an LED bulb can pay for itself in as little as a few months. LED replacement bulbs are now available in just about every shape and size.

There are even LED replacement tubes for 4-foot and 8-foot fluorescent lights. Now when you go into a big-box store, even CFL bulbs are getting harder to find.

Store shelves are flooded with LED bulbs – another disruption in the electrical world.

How disruptive are LED lightbulbs? If every household in the U.S. replaced just one 60-watt incandescent bulb with an LED equivalent version, we could turn off one average-sized power plant.

Let’s take a look at technology and why it is key to the formation of disruptive events in energy.

My Laws of Technology

Technology fascinates me. I spent much of my adult career as an electrical engineer working in the semiconductor industry.

In college, I was the first engineering student to have a scientific calculator. Up until that point, we were all using slide rules.

Ask one of today’s engineering students what a slide rule is. You’ll likely get a blank look.

Initially, my teachers didn’t permit me to use my new calculator on tests. It gave me an unfair advantage over the rest of the class.

However, by the end of the semester, every engineering student had one.

Another mini disruption. Technology is full of them.

This illustrates what I call the first law of technology: “Technology marches on.” While politicians and the media may think it stops periodically, engineers and scientists know it never does.

When I was in college, no one had a personal computer. It didn’t exist.

In fact, the only computer in the school of engineering was in one lab. It was an old Hewlett-Packard, and it had a grand total of 16,384 bytes of memory.

Compare that to today’s smartphones, which come equipped with 128 gigabytes of memory. That’s 7.8 million times more memory than our massive computer in the lab.

That old HP really couldn’t do much of anything except talk to an ITT Teletype terminal. However, as fledgling engineering students, we were fascinated by its power.

To program it, we used IBM punch cards or rolls of punched paper tape. Fast-forward to 2016.

We now carry more computing power around in our pockets than the astronauts who first landed on the moon had. Technology marches on.

The way we communicate is another great example of technological advances. When I was growing up, my parents’ first telephone line was a “party” line.

We shared it with two other families. It made for some interesting conversations – especially if you really needed to make a phone call, and the other party didn’t want to give up the line.

In December 2015, the Centers for Disease Control and Prevention published a study on telephones. It found that 47% of American households have just a cellphone, 42% have both a cellphone and a landline, 8% have just a landline, and 3% have no phone at all.

A decade from now, I’m sure more people will just have cellphones. People are shunning landlines for one reason: freedom.

With a cellphone, you are reachable just about anywhere. With a handheld satellite phone, you can be reached anywhere in the world. Technology marches on.

Those are a few examples of technology in action. Now I’m going to introduce my second law of technology: “When it comes to technology, changes happen much faster than you expect they will.”

This one is obvious when you look at any 10-year forecast involving something to do with technology. Wait two or three years, and then go back and look at that forecast again.

More than likely, it will be wrong. There’s a good chance that whatever the forecast was measuring turned out to be conservative.

Technological advances happen fast. I witnessed this firsthand in the world of semiconductors.

Back in 1965, the co-founder of Intel, Gordon Moore, made an observation and a prediction. He observed that the quantity of transistors on 1 square inch of integrated circuits had doubled every 24 months since the invention of the integrated circuit.

He predicted that this doubling effect would continue every 24 months for the foreseeable future. Here we are in 2016, and some analysts wonder if Moore’s law is about to run out of steam.

Intel’s original microprocessor, the 4004, had 2,300 transistors on it. The chip was just 12 square millimeters in size. The gap between transistors was “just” 10,000 nanometers (one-billionth of a meter).

Intel’s newest Skylake processors are 10 times as big as the old 4004. While the number of transistors on a Skylake chip is proprietary, they are only 14 nanometers apart.

The transistors aren’t viewable with the human eye, even with the most powerful optical microscope. That’s because the size of the transistors is much smaller than the wavelengths of light humans and microscopes can detect.

We could guess how many chips a Skylake processor has based on Intel’s last generation chip, the Xeon Haswell E-5. It had more than 5 billion transistors, spaced just 22 nanometers apart.

It’s a safe bet that the Skylake probably has close to 10 billion transistors. How much longer will Moore’s law hold up?

No one knows. But one thing is for sure: No one would have ever guessed back in 1971 that it would hold up for the next 45 years.

Solar Is on a Tear

That’s right; the growth of solar continues to blow away forecasts. For instance, no one predicted 2016’s year-over-year growth, which is hitting 45%.

Is there a Moore’s law for solar? Not specifically. If there was, it would be about solar’s drop in price and its meteoric rise as a mainstream source of electrical power.

Electricity production from solar is the first “side” of the Disruption Triangle. Residential solar energy systems have now reached the affordability range for most American homeowners.

Americans are installing solar energy systems like never before. The sector is growing 50% annually.

This is almost entirely due to high-volume manufacturing of solar cells and panels. Up until 2013, the amount of energy we produced from solar was doubling every two years.

As of 2013, worldwide solar installations totaled about 150 gigawatts. From there, all we need is five more doublings, and solar will provide 100% of the world’s energy needs.

Unfortunately, solar’s doubling every two years stopped at the end of 2013. Many countries reduced or eliminated government incentives in 2014, resulting in less growth than in 2013.

By the end of 2015, total global installed solar PV was 256 GW. A November 2015 estimate by research firm IHS predicts the global installed base of solar PV will increase by an additional 272.4 GW between 2016 and 2019.

It expects 65 GW, 65.5 GW, 68.4 GW and 73.5 GW to be added in 2016, 2017, 2018 and 2019, respectively. That’s more than double the total amount at the end of 2015.

A 2015 study by GlobalData predicts that by 2025, total global installed solar PV will hit 652 GW. A January 2016 study by GTM Research was even more optimistic. It estimates we’ll hit 750 GW by 2020.

At current installation rates, installed solar capacity should hit 6,400 GW sometime before 2040. The sun’s energy is there, waiting for us to capture and use it. And there’s plenty of it. Every day, the sun’s energy hitting Earth is 10,000 times more than the energy we use annually.

The next few years are going to be banner years for solar here in the U.S. In late 2015, Congress gave solar a boost by extending the 30% solar investment tax credit through the end of 2019.

The credit drops to 26% in 2020, to 22% in 2021 and to 10% thereafter (though the latter will apply only to commercial systems). By then, mass adoption of solar on mid- to high-level homes will be the norm, not the exception.

EVs: Disrupting the Automotive World

The same thing is happening with EVs, the second side of the Disruption Triangle. They are still in an “exception” phase.

That’s because they are still a year or two away from becoming cost-effective. But that hasn’t stopped nearly every carmaker from investing billions to make them. They are less than a decade away from becoming a mainstream purchase for the car-buying public.

Ten years ago, Tesla was the only company with a road map to a cost-effective EV.

Now nearly every carmaker is producing EVs or has plans to do so. There’s no question that Tesla has a big head start and has set the bar for quality, features and options quite high for the competition. Even the process of buying a Tesla without a dealer could eventually make new car dealers obsolete.

The Key Side in the Energy Disruption Triangle

Since the beginning of the age of electricity, its generation, distribution and use have changed little. Customers use electricity as soon as utilities generate it. The reason is we haven’t had a cost-effective means of storing electricity. But that’s all about to change.

Soon, utilities, industrial users, commercial users and homeowners will all be able to cheaply store electricity and use it at the time of their choosing.

That may not sound like a big change. But it has huge ramifications for the entire energy sector. That includes oil and natural gas producers, refiners, utilities, and their customers too.

When all the dust settles, we’ll have the ability to store energy and use it when we need it. That’s going to have profound and positive effects on our way of life that most people can’t possibly imagine.

However, others, like Elon Musk, already get it. When reporters ask Elon Musk about Tesla, he usually says something like this: “I’m not building an electric car company. I’m building a sustainable energy company.”

Sustainable energy. Up until recently, it wasn’t something most people thought twice about.

For the last decade or so, engineers have been hard at work improving storage batteries. This is especially true of lithium-ion batteries.

Lithium-ion batteries are in cellphones, laptops and EVs. For all of them, it has become the battery of choice.

And for good reason. Lithium-ion battery chemistry works over a wide temperature range. This is important for EVs, residential and commercial solar/storage, and utility-scale storage systems.

Think about it. An EV in Alaska is going to perform differently than an EV in Florida will. The batteries need to work well in both environments.

The same is true for a residential home storage system. If installed as part of a solar-plus-storage system, the battery unit will likely be outside or in an unheated garage. Utility-scale storage systems are all outdoor units.

Another advantage of lithium-ion batteries is they can be recharged thousands of times. They don’t suffer from the “memory effect” that plagues other rechargeable battery technologies, like nickel-cadmium or nickel-metal hydride.

Lastly, battery engineers have been hard at work increasing the energy density of lithium-ion cells. Energy density is the amount of energy available from a given size of battery.

Increasing the energy density ultimately boosts the amount of energy each cell can store. That’s especially important for EVs.

The higher the energy density of an EV battery pack, the further it can go on a single charge. It’s also important for battery storage units designed to work with residential or utility-scale solar power systems.

One of the biggest challenges battery engineers face is reducing cost. The easiest way to reduce cost is to scale manufacturing to very high levels.

An automated, high-speed manufacturing plant can produce billions of batteries. That’s exactly what Tesla Motors is doing. It’s building a battery “Gigafactory” near Las Vegas.

Every Tesla EV has groups of cells packaged together to form battery modules. Groups of modules connect to electric motors that run the car.

Tesla is also using lithium-ion batteries produced at its Gigafactory in its home energy storage system, Powerwall. About a week after the Powerwall was unveiled in mid-2015, Elon Musk announced that it was sold out through mid-2016. Tesla received more than 38,000 reservations for the system, totaling $800 million.

Tesla also manufactures storage systems for utility-scale customers.

The residential and utility energy storage markets are just starting what will likely be a decades-long period of incredible growth. The fourth quarter of 2015 saw 112 MW of storage deployed.

That was more than all of the battery storage installed in 2013 and 2014 combined. The total installed for all of 2015 was 221 MW.

That was a record 243% growth rate over the previous year’s installations. But energy storage is still in the starting gate.

IHS Inc. said that in the fourth quarter of 2015, utility-scale energy storage projects increased 400 MW over those in the previous quarter. That’s a quarter-over-quarter increase of 45%.

The firm expects utility-scale energy storage projects to add another 900 MW to the grid in 2016. That’s double the total energy storage capacity of last year.

According to GTM Research, utility scale, also referred to as front-of-meter storage, is the bulk of energy storage sold to date. In 2015, utility-scale storage was 85% of all storage installed that year.

The rest of the market consists of residential and nonresidential storage that, combined, are the behind-the-meter market. While it is far smaller than the front-of-meter market, the behind-the-meter segment grew a whopping 405% in 2015.

At current growth rates, GTM Research believes the annual storage market in the U.S. will hit 1 GW by 2019. A year later, it will nearly double to 1.7 GW, with an annual valuation of $2.5 billion.

It’s clear from the numbers that 2015 was the year energy storage began a rapid ramp upward. For at least the next decade, energy storage, both behind-the-meter and front-of-meter, will see exponential growth.

It’s what utilities have been waiting for. Peaks and dips in demand will slowly disappear with the strategic deployment of utility-scale storage. Energy storage promises to facilitate the connection of both wind and solar generation to the distribution side of the grid.

The Technology of Choice for Cheap Energy Storage

Goldman Sachs calls lithium “the new gasoline.” And for good reason: As you’ll soon see, consumer electronics demand is going to pale in comparison to demand in another sector.

Demand from consumer electronics sales is boosting lithium demand 4% to 5% annually. That’s projected to continue for at least the next decade.

But the real boost in demand is coming from the EV market. Goldman Sachs predicts EVs are going to rise to 22% of the overall vehicle market in 2025, from just 3% today.

Here’s a few key facts that put the coming demand for lithium from EVs in perspective. The average cellphone uses somewhere between 5 and 7 grams of lithium carbonate equivalent.

A Tesla Model S sedan with a 70 kilowatt-hour battery uses a whopping 63 kilograms. That’s equal to the lithium content of 10,000 cellphones.

The chart below shows why cheap battery storage is finally coming of age. It also shows why the demand for lithium is about to hit launch mode.

The cost for lithium-ion batteries is dropping like a stone. Last year alone, the cost to make lithium-ion batteries dropped 35%.

In just the next four years, costs should drop another 50%. And like anything else, as prices drop, demand soars.

But the opportunity for investors isn’t with the battery makers. It’s with the lithium miners.

All the battery makers need pure lithium carbonate, and they need a lot of it. In 2015, the annual demand for lithium hit 160,000 metric tons.

Goldman estimates that every 1% increase in EV market penetration increases the demand for lithium by 70,000 metric tons annually. That’s nearly half of the current annual worldwide production.

By 2025 or even sooner, demand from EVs is expected to triple the entire lithium market to 470,000 metric tons. And this increasing demand is starting to drive up the price of lithium.

Just two years ago, lithium was selling for $5,000 per ton. Now it’s selling for $15,000 per ton and even higher on the spot market.

Currently, 89% of the world’s lithium supply comes from four companies.

Here they are:

• Tianqi Lithium (a private Chinese company)
• Sociedad Química y Minera de Chile (NYSE: SQM)
• Albemarle Corporation (NYSE: ALB)
• FMC Corporation (NYSE: FMC).

The only problem with the three public companies above is they aren’t pure lithium plays. All of them are diversified chemical companies.

There’s no question that all of them are seeing a boost in sales of lithium carbonate. But as demand picks up, more suppliers of lithium will be needed.

They are going to be needed sooner rather than later. Nearly every car manufacturer on the planet has EV models either in production or coming soon.

Huge amounts of capital are going to be required to develop additional commercial sources of lithium to meet the demand from EVs. Right now, there are a few small miners that are positioning themselves to participate in the upcoming boom in lithium.

This Up-and-Coming Producer Is Doubling Down

You’ve seen the potential demand building for lithium. Investing in the aforementioned big players is a safe bet.

But for potentially huge returns, we need to look at junior lithium miners. And that’s exactly what I’ve been investigating for the last year.

The one we’re going to add to our portfolio already has a number of world-class lithium deposits. Lithium X (OTC: LIXXF) (TSX-V: LIX) is an explorer and developer of lithium resources.

Its first project, the Sal de los Angeles project, is in the Salta Province of Argentina. This is the lithium-rich area known as the “Lithium Triangle.” In most areas of Argentina, lithium is found in salty brines that are below the surface of dry lakebeds called salars.

The Sal de los Angeles project covers 20,154 acres. As you can see in the image below, that’s more than 95% of the Salar de Diablillos.

Previous operators invested $14.4 million in the property.

Lithium X has a resource estimate of the Sal de los Angeles project. It was prepared by an independent company, FloSolutions. The property has an indicated quantity of 194,860 metric tons of lithium.

The average grade is 501 milligrams per liter. That’s equal to nearly 1.04 million metric tons of lithium carbonate equivalent.

But lithium isn’t the only thing found in the chemical-rich brine of the Sal de los Angeles acreage. The property is estimated to contain 2.14 million metric tons of potassium as well. The average potassium grade is 5,512 milligrams per liter.

In a commercial operation, the potassium would be processed into potash. There is an inferred resource of 4.09 million metric tons of potash.

Back in 2011, a preliminary economic assessment for the project was prepared by SRK Consulting for a previous owner. It assumed a production operation producing 15,000 metric tons of lithium carbonate per year and 51,000 metric tons of potash per year.

The assessment estimated an internal rate of return of 34%. The net present value was $561 million.

It also outlined a production scenario of 25,000 metric tons of lithium carbonate per year and 85,000 metric tons of potash per year. Using a slightly higher internal rate of return of 36%, the net present value of this higher-production scenario is $964 million.

But here’s the kicker: The preliminary economic assessment assumed lithium carbonate pricing of $5,000 per metric ton. Now lithium carbonate is selling for at least $15,000 per ton.

That makes the net present value of the Sal de los Angeles deposit worth at least $1.5 billion. And based on the higher-production case, it’s worth nearly $3 billion.

In both cases, the estimated mine life is at least 20 years. The projected payback time for the 15,000 metric tons per year and the 25,000 metric tons per year is 1.6 and 1.5 years, respectively.

Let’s look at Lithium X’s other project. In addition to the Sal de los Angeles project in Argentina, Lithium X has another project in Nevada. See the map below.

Nevada’s Clayton Valley is home to North America’s only producing lithium mine. The Silver Peak mine is owned by Albemarle Corporation, one of the top four lithium producers in the world.

Lithium X’s Clayton Valley acreage is divided into two sections.

The first, Clayton Valley North, consists of 5,480 acres in the northern part of Clayton Valley, Nevada.

Lithium X’s mining claims border those of Albemarle’s production facility. Data from previous drilling done on-site, as well as a geophysical survey, indicates that Lithium X’s Clayton Valley North acreage is similar to Albemarle’s lands that are currently producing lithium brine.

In addition to its Clayton Valley North acreage, Lithium X has acquired acreage in the southern part of Clayton Valley. Totaling 9,540 acres, the Clayton Valley South Expansion project is contiguous with the Silver Peak lithium mine on the northern boundary.

To the east, Pure Energy Minerals Ltd. (TSX-V: PE) owns the Clayton Valley South project, also indicated to contain lithium brine. To the west, the Neptune property is owned by Nevada Sunrise Gold Corporation (TSX-V: NEV).

Let’s look at Lithium X’s financials. Being a development-stage company, Lithium X has a relatively small market cap of $117.3 million.

There are a total of 66.6 million shares issued and outstanding. Company insiders own approximately 9% of the outstanding shares.

The 52-week trading range is $0.29 to $2.20. As of this writing, shares are trading at $1.72 on the U.S. OTC exchange.

Given its significant share ownership, it’s clear that the Lithium X management has a vested interest in the company. The company is perfectly positioned to take advantage of the skyrocketing demand for lithium.

Both Argentina and Nevada are mining-friendly jurisdictions. Lithium X has acquired high-value lithium land packages in both areas.

There’s no question in my mind that Lithium X is one of the best-positioned junior lithium miners available today. That’s why I’m adding it to the Advanced Energy Strategist portfolio.

Since Lithium X is a microcap company, I would strongly recommend you purchase shares using a limit order. Use a not-to-exceed limit price of $1.90 per share.

Action to Take: Purchase shares of Lithium X (OTC: LIXXF) for $1.90 or less. Use a 50% trailing stop to protect your principal and your profits.

Lithium Batteries Need Lots of This Element Too

Lithium is generating lots of interest in the investment world because of the EV boom. But as it turns out, lithium makes up only about 2% to 3% of the total content of a lithium-ion battery.

It turns out there are a number of different kinds of lithium-ion batteries. Each has a different chemical makeup, charge and discharge characteristics, and battery life.

There are two lithium-ion chemistries in use for laptops, cellphones, power tools and, most importantly, EVs. The first is lithium nickel manganese cobalt oxide, or NMC. NMC cells have been in use since 2008.

It turns out that NMC batteries have a cathode that is one-third manganese, one-third nickel and one-third cobalt. Some EV manufacturers prefer NMC batteries for a number of reasons, depicted in the figure below.

Notice that NMC cells have good overall performance, cost, life span, safety and specific power. But they excel on specific energy.

That means that, pound for pound, NMC cells deliver more energy than most other lithium-ion chemistries. Depending on configuration, NMC cells produce 150 to 220 watt-hours per kilogram.

Another important advantage that NMC cells have is the lowest self-heating rate of any lithium-ion battery chemistry. Thermal runaway limits (when the temperature is high enough that it causes a further increase in temperature) are 410 degrees Fahrenheit (210 degrees Celsius).

This is important when these cells are used in large groups, as in EV battery packs. Rapid recharging of these packs can generate heat.

Managing the recharging rate to keep battery pack heating below thermal runaway limits is important to EV manufacturers. NMC cell chemistry makes it easier for EV manufacturers to use higher recharge voltages and currents.

A big reason EV manufacturers have gravitated toward NMC cells is their cost. They can be built using automated assembly equipment, and the end product achieves good performance.

NMC battery chemistry is also the choice of batteries destined for energy storage applications both at the consumer and utility-scale level. In fact, any application that requires frequent battery cycling is a good application for NMC cells.

Cycle life is between 1,000 and 2,000 charges, which is excellent. However, the cycle life of individual applications depends on the depth of discharge and the temperatures to which the batteries are held during recharge cycles.

The second battery chemistry in use by at least one EV manufacturer (Tesla) is lithium nickel cobalt aluminum oxide, or NCA for short. NCA cells have been around since 1999.

NCA cells are typically used in special applications. The addition of aluminum gives this particular lithium-ion chemistry greater stability. In the chart below, we can see some similarities and important differences between NCA cells and NMC cells.

An advantage of NCA cells over NMC cells is they have a higher specific energy. That is, pound for pound, NCA cells produce more energy.

NCA cells can produce up to 300 watt-hours per kilogram. That’s nearly double the energy of NMC cells.

They are slightly less expensive to produce than NMC cells. This is not surprising, since they have been manufactured for almost a decade longer than NMC cells have.

One of the drawbacks of NCA cells that EV manufacturers have to contend with is that NCA cells have a much lower thermal runaway temperature: 302 degrees Fahrenheit (150 degrees Celsius). Fast charging at high rates is much trickier with NCA cells.

Tesla manages to accomplish fast-charging of its NCA battery packs by using a combination of layout, packaging, voltage and thermal management. Charging starts at a relatively high voltage and decreases based on battery temperature and battery capacity.

While NCA cells are typically rated at a shorter cycle lifetime of 500, Tesla has managed to increase this significantly by further managing charge and discharge rates.

NMC battery cathodes contain 33% cobalt, while NCA battery cathodes are 9% cobalt. The bottom line is this: Lithium-ion batteries for EVs use far more cobalt than lithium.

And that’s starting to become a problem. It’s not because there is a physical scarcity of cobalt.

It’s because of where it’s mined. Between 60% and 65% of all cobalt comes from the Democratic Republic of the Congo.

This region also contains half of the world’s known reserves. According to the CIA World Factbook, the Democratic Republic of the Congo has “an uncertain legal framework, corruption and a lack of transparency.”

Take a look at the chart below.

Cobalt is currently experiencing a small rise in price. However, this is likely to accelerate as EV battery demand picks up.

Right now, nearly 50% of all cobalt produced is used for battery cathodes in rechargeable batteries. The chart below shows that superalloys are the second-largest use of this very versatile metal.

In rechargeable batteries, cobalt was first used in nickel-cadmium and nickel-metal hydride cells. But in the early 1990s, when lithium-ion cells first appeared, cobalt consumption for batteries took off.

Since then, nearly all the growth of cobalt has come from the rechargeable battery industry. As mentioned earlier, there are a number of lithium-ion battery chemistries in use today.

Below you can see the six most popular lithium-ion battery chemistries and the percentage of market share each one had in 2015.

Lithium cobalt oxide, NMC and NCA lithium-ion batteries make up about 75% of the entire lithium-ion battery market. It’s expected that demand for NMC and NCA lithium-ion cells will experience rapid growth based on their use in consumer devices, EVs and smart grid storage applications.

It’s clear that battery demand is the key driver of the lithium and cobalt markets. Much more so than for nickel and manganese, other key materials used in rechargeable batteries.

That means that both lithium and cobalt prices will see the biggest effect from the growth in demand. Industry consulting group CRU predicts that 67% of cobalt’s and 78% of lithium’s additional demand growth will be driven by the battery market.

There are a number of large cobalt miners, many of which have operations in the Democratic Republic of the Congo. However, the company I’m adding to the Advanced Energy Strategist portfolio doesn’t.

Another Unknown Pick-and-Shovel Play

The company I’m talking about is eCobalt Solutions Inc. (OTC: ECSIF) (TSX: ECS). It is a Vancouver, British Columbia-based company.

Its primary asset is its 100%-owned Idaho Cobalt Project (ICP). The project is in the advanced stages and has already received environmental permits.

The image below shows the site of the ICP.

ECobalt’s intention is to produce an “ethically sourced, environmentally sound, and transparent supply of battery grade cobalt chemicals, mined safely and responsibly in the United States.” It is developing the ICP to accomplish this.

The mine and mill site is in Lemhi County, Idaho, close to the town of Salmon. A second facility, known as the Cobalt Production Facility (CPF), will be located in southern Idaho.

The CPF will process concentrates from the mine and mill site into cobalt, gold and copper. Annual production is expected to be 1,500 tons of high purity cobalt.

The projected mine life of the CPF is 12.5 years. The ICP has received its final environmental impact statement and its positive Records of Decision.

These were granted by the U.S. Department of Agriculture National Forest Service and the U.S. Environmental Protection Agency. About 90% of the site preparation at the mine and mill site is already completed.

The company has so far spent $65.3 million completing Phases 1 and 2 of its ICP construction program. They were completed in 2012.

In 2013, due to depressed conditions in the commodities markets, the project was placed on hold. However, about $16 million worth of equipment with long lead times that was previously purchased is stored in warehouses and staging areas near Salmon.

In January 2015, eCobalt commissioned a preliminary economic assessment to determine the viability of producing cobalt sulfate heptahydrate for use in the rapidly expanding rechargeable battery sector.

The assessment produced positive results, and eCobalt commissioned a bankable feasibility study on the ICP. The study is still underway, but the company expects it will be completed before the end of March 2017.

Based on a successful outcome of the study, eCobalt will pursue mine and mill financing. At that point, construction will recommence.

Initial production should start 13 months after construction begins. Full production capacity should ramp up within 21 months of the start of construction.

As you can see, eCobalt is still in the development stages. However, there are several reasons why I like this company and am adding it to the Advanced Energy Strategist portfolio.

The first is the U.S. is the world’s largest consumer of cobalt. Yet it has no domestic supply.

ECobalt’s ICP is a relatively small operation. The total mine and mill site sits on 135 acres.

It has the most important environmental and operating permits already in hand. There is very little downside, especially with EVs driving increased demand for lithium and cobalt.

Since eCobalt is a small, development-stage company, I would strongly recommend you purchase shares using a limit order. Use a not-to-exceed limit price of $0.60 per share.

Action to Take: Purchase shares of eCobalt Solutions Inc. (OTC: ECSIF) for $0.60 or less. Use a 50% trailing stop to protect your principal and your profits.

Well, there you have it. I hope you enjoyed reading the latest edition of Advanced Energy TrendWatch. The two companies profiled above are poised to add to some of the gains we’re currently sitting on.

We’ll continue to track our new picks as well as the rest of the Advanced Energy Strategist portfolio stocks in our regular Advanced Energy Strategist weekly updates.

Good investing,

David Fessler