Western Lithium to Profit from Electric Car Stimulus

The lithium market is buzzing as GM, Nissan and other car manufacturers get set to roll out a new series of electric cars that will greatly increase demand for the obscure silver-white alkai metal. GM has announced plans to construct a $43 million plant in Michigan to build lithium-ion batteries for its Chevrolet Volt electric-powered car, which captured headlines with its claim of 230 miles per gallon.

Adding to the lithium mania is Washington’s support in the form of $2 Billion in stimulus funding:

“New plug-in hybrids roll off our assembly lines, but they will run on batteries made in Korea. Well I do not accept a future where the jobs and industries of tomorrow take root beyond our borders –and I know you don’t either. It is time for America to lead again.”

- President Obama

For those with concerns that fuel efficiency alone is not enough to entice America’s automobile consumer, consider the company Tesla Motors. While their roadster is the first production automobile to use lithium-ion battery cells and travel more than 200 miles per charge, it is also capable of doing 0-60 in under 4 seconds. Not only will the Tesla Roadster leave most sports cars in its dust, the car recently set a distance record in April 2009 when it completed the 241-mile Rallye Monte Carlo d’Energies Alternatives with 36 miles left on the charge. While the Roadster’s price tag may be out of reach for the average consumer at just over $100,000, Tesla has taken more than 1,000 reservations for the car and expects to begin production of an all-electric and more affordable sedan starting in late 2011. While Tesla remains a private company whose stock you are unlikely to get your hands on, their success bodes well for the future of lithium battery-powered cars.

Lithium prices have nearly tripled over the past decade with 22% compound annual growth since 2000 for use in laptops, cell phones and other electronics. While this demand is expected to continue rising, the recent lithium mania has been ignited by the fact that electric cars require about 3,000 times the lithium needed for an average cell phone or 100 times the lithium used in a computer battery. This huge spike in demand should propel lithium prices much higher over the next few years. Investors are eager to get ahead of the curve and are scrambling to find the companies that stand to benefit most from this new demand.

While most investors turn to the world’s largest lithium producer, Sociedad Quimica y Minera de Chile (ADR) (NYSE:SQM), only a small percentage of their revenue is derived from lithium sales. SQM generates the bulk of their sales from iodine and specialty fertilizers for the agriculture sector.

My preferred way to profit from the coming lithium boom is through the company Western Lithium (CVE: WLC or PINK: WLCDF), which owns the largest known lithium deposit in North America. The near surface lithium clay deposit is located in Nevada, USA and was initially discovered by the US Geological Survey and Chevron USA in the 1970′s. Engineering work completed by Chevron, and later by the US Bureau of Mines in the 1980′s, is now being advanced by Western Lithium.

The company’s flagship Kings Valley property has a National Instrument 43-101 resource estimate for the initial stage of development and in total hosts a historically estimated 11 million tonnes of lithium carbonate equivalent (LCE). The project has a well developed local infrastructure and Nevada has a long history in the metals and industrial mineral mining industry. The company plans a scoping study during Q3 of 2009, a pre-feasibility study with results from additional drilling during 2010 and projected production by 2013. A chart with the world’s largest lithium deposits is below.

While brine is usually the cheapest to mine and process, followed by clay and then pegamite (hard rock), it really depends on the quality of the material and presence of contaminants. It can be cheaper to develop a good rock or clay than a low-quality brine. Access to roads and infrastructure also play important roles in a project’s economic feasibility. Western Lithium has a clear advantage to competition in this regard as their clay deposit is touted as high-quality (99% commercial quality) and the project already has all of the necessary road access and infrastructure needed to begin construction and production.

Western Lithium is well-funded and debt free with CDN$7.3 million cash on the books. They recently completed a $5.5 million private placement in May of this year and have a market cap of CDN$70 million. As you can see below, the stock has broken out recently on heavy volume. While some might view the stock as overbought, I believe lithium mania is only getting started and that Western Lithium will outperform its peers both in the short and long term. Despite the recent spike in price, shares are selling at a premium of just 20% to their highs which were put in well before the recent flurry of bullish news. The last time the stock made a move like the current one, it continued to produce a gain in excess of 800%!

We might not know for sure “Who Killed the Electric Car?,” but it appears to be making an impressive resurrection.

Disclosure: I am long Western Lithium and sent a trading alert to premium members about the company last week. I expect the company to do very well over the next few years and have no plans to sell my position anytime soon. If you want to become a premium member, receive our trading alerts, view my portfolio and get the monthly newsletter, click here for more information or click here to get started right away. The Gold Stock Bull Portfolio is up 115% year-to-date in 2009 with a record of 29 profitable trades and 14 losing trades. The cost is $35 per month and you can cancel at anytime if you aren’t 100% satisfied.