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Energy Transition, Part IV: We Are Living in a Materials World

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We are initiating coverage of lithium and rare earth producers. We view these names as derivatives of the energy transition and mobility technology. They provide critical elements to rapidly growing demand centers including electric vehicles (EVs), wind power and energy storage. They provide necessary raw materials for future growth. Coupled with geopolitical tension and supernormal growth, the sector demands focus from investors.

We are Living in a Materials World

The energy transition is real. Governments are looking to decarbonize. Both investors and policymakers are mobilizing to fund increased electrification through renewable means while disrupting internal combustion autos with electric vehicles.

EVs will be the primary demand driver for both lithium suppliers and rare earth materials. We selectively look for investment opportunities that have either unrecognized potential after the recent share price runs or a superior market position that allows for attractive valuation compression over time.

See Greater Upside in Rare Earth Names

Both rare earth and lithium are relatively small markets. Both are also dominated by China as domestic mining has supported a global leading position in EV and battery manufacturing. The US has positioned itself to play catch-up to what may already be a decade-long head start. Regardless, the supply chain is expected to naturally shift away from China as Europe and other parts of Asia also look to expand manufacturing capabilities.

China currently dominates ~85% of the refined rare earth market. That will be more susceptible to politically driven supply disruption amidst a natural backdrop that has demand outpacing supply in our model for NdPr by 20% in 2025. 

In addition, the efficiency gains in EV motors and wind turbines create greater price demand elasticity vs lithium. That potentially has more technologically driven substitutes as battery technology looks to further drive down the competitive cost of EVs vs ICEs. We see a long-term demand picture for lithium that leaves the market 30% under supplied in 2030. However, we generally see equities pricing in this dynamic.

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