Global X Fund Lithium ETF: Taking Advantage of the Renewable Energy Market
With the world’s economies in the cusp of a recovery, and with an ever increasing appetite for renewable energy, clean technology and environmentally friendly low-carbon solutions to our everyday requirements, the outlook for those basic materials has shifted significantly to the bull side during the past few years. Never is this more the case than with the rare earth element lithium, a key component in rechargeable batteries and renewable energy devices, from those found in your cell phone to those driving electric cars and running ‘green’ home projects.
It is in this backdrop that Global X Funds recently set up a ‘Lithium’ exchange traded fund (ETF), looking to take advantage of prospects in this market, by selectively investing in a number of medium and larger size lithium producers. This opens up the potential for investors to gain exposure to the lithium market, through a diverse and actively managed platform, spreading the risk normally associated with investing in mining and resource companies, while looking to take advantage of the broader benefits to those producers.
Lithium is a soft, white colored metal, that under standard conditions is the lightest know metal and has the highest specific heat of any solid element. This leads to its wide use in varying heat transfer applications. Most well know of its uses is as battery anode material in lithium-ion batteries, which comes about thanks to its high electrochemical potential.
Lithium-ion batteries are becoming increasingly important in renewable energy and clean technology, with rechargeable batteries key to the success of low carbon power uses. In addition to this more well know area, lithium is also used to make special glass and ceramics, can be alloyed with metals such as aluminum and copper to make strong, lightweight materials for aircraft, and is even used in the medical industry in the form of lithium carbide.
The Global X Lithium ETF (NYSE:LIT) is effectively a tracker fund, aiming to provide investment results that correspond broadly to the price and yield of the Solactive Global Lithium Index; designed to represent the largest and most liquid lithium companies that are active in the exploration or mining of lithium, or producers of lithium batteries.
Component wise, the fund consists of 20 companies. The heaviest weighted holding in the fund is the Chilean company Sociedad Química y Minera de Chile S.A. (NYSE:SQM), the world’s largest lithium producer, at 23.22%, while the smallest company held in the fund is Canada’s Lithium One (TSX:LI), at 0.69%.
The aforementioned Sociedad Química y Minera de Chile, the world’s largest lithium producer estimated at 30% of the world’s market share. Despite this, SQM is in fact a diversified company, and is the world leader in all three of its business areas; specialty plant nutrition (SPN) and iodine production, on top of the lithium business. It has the largest market capitalization of the index components at around US$12.4 billion, and has shown consistent gains in profit, revenue and cash holdings, for the past five years or so. The company’s nine production plants are located in the Atacama Salt Desert, Chile, where it has exclusive access to natural reserves of what it considers ‘unmatchable extent and quality’, including the biggest iodine and nitrate natural reserves in the world, and the highest lithium and potassium concentrations currently recorded.
A smaller company in the index is Avalon Rare Metals (TSX: AVL, OTC: AVARF), a Canadian based rare earth elements (REE) resource company with a market cap of around C$200 million. Although lithium is just one of the elements the company seeks to produce, it’s unique selling point so to speak, is in the makeup of its key Nechalacho Rare Earth Element Deposit, in the Northwest Territories, Canada. When looking at the rare earth elements, there are two broad categories; ‘lights’, which are very common and found abundantly in mineral deposits, and ‘heavies’, which are very rare and usually found in much lower concentrations than the light metals.
Both types are always found together in RRE deposits, with the balance usually highly tipped in favor of the lights, around 97-99% of the deposit. Avalon’s Nechalacho deposit bucks this trend however, consisting of around 22.5% of the heavier, more valuable REE’s.
The last company in the index we will take a look at is one of the smaller components and indeed companies, in the index; Canada Lithium (TSX:CLQ, OTC: CLQMF). This company has the comparatively small market cap of C$102.6 million, and is weighted at 1% in the Global X Lithium ETF. As the name suggests, and unlike the previously mentioned companies, Canada Lithium Corp currently focuses solely on lithium exploration, and eventually mining. This is done via its primary asset; the Quebec Lithium Project, located in the north-east corner of Lacorne Township, in Quebec, Canada.
Although the Global X Lithium ETF holds many companies which in themselves have a lot of potential returns and value gains, by bringing together investors resources, and holding such a large quantity of the world’s most liquid players in the various lithium markets, this fund offers a lower risk opportunity to take advantage of this growing market.
