The next EV wave is coming and it smells like a pencil

The next EV wave is coming and it smells like a pencil.
Are you prepared to invest?  

Think you missed investing in the EV revolution?  You didn’t, and we think you’re going to like what we’ve got for you.

You’ve heard the story hundreds of times about people who were buying shares of Tesla at $20, or NIO at $2.  That jealous twinge we all feel is usually overcome by knowing that at least one working schlub like you and I made it through life’s maze and found a piece of cheese.  But is it the last piece of cheese?

Sir Winston Churchill once said, “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”  

That is where we are today in the EV sector, and the true fortunes that will come from this disruptive technology have yet to be made.  Over a series of articles, I’ll be highlighting companies with promise in the coming years and providing some seeds to grow your own tree of knowledge. 

The Coming Capital Influx

Early capital is flowing into companies that produce electric vehicles and new millionaires are minted daily.  Tesla is, well, Tesla.  NIO, Li Auto, XPEV and others are rising.  Blank check (SPAC) stocks are bandied about with rocket emojis and pictures of the moon as their values double or even triple overnight on rumors linking the SPAC to Lucid, Rivian, or <insert next perceived Tesla killer here>.

To find the next great EV investment, we must look to the past.  When Henry Ford’s assembly line made the Model T affordable enough to sell to the masses at volume, the next fortunes were made in petroleum, steel, service stations, rubber producers, and ore mines.

To make an EV, you need silica, spherical graphite, aluminum, copper, rare earth elements (REEs), and semiconductors.  To convert just half of the ICE vehicle base into EV sales over the next 20 years will stretch the suppliers of these materials beyond the breaking point.  Around 2 million EVs will be made this year.  By 2040?  More than 50 million.

There are already shortages of semiconductors and stock prices in that sector are rising, but mining stocks are lagging due to a perception that there is no shortage, or the belief that current reserves will suffice.  

What drives that perception?  China currently provides most of the Rare Earth Elements and battery metals for the world and the supply keeps flowing, but one day it will stop.  In perhaps as little as a decade or less, China will not have enough resources to produce batteries for its own industry, much less the world markets.

A New World

The Tech Sector currently consumes about 200,000 tons of highly refined spherical graphite per year.  It is estimated that by 2030, when nearly 100 new battery factories are pumping out terawatt hours of battery capacity, our technological revolution will require more than 2 to 3,000,000 tons of high quality spherical graphite.  That’s million, with a capital M, and the only current supplier is China.  They are increasing their output as fast as they can, but analysts do not believe they will be able to keep up beyond 2025 or so.

With needs growing exponentially, the laws of supply and demand suggest it might be a good idea to own stock in a graphite producer.  While there are many graphite claims being activated in the US and Canada, they appear to be early in the process of permitting and construction.  Some older mines can be brought online, but they would require a technology upgrade to produce at today’s quality requirements and may or may not have enough high-grade ore left to do so.

The Graphite Supply Chain

Nouveau Monde Graphite (NMGRF) is a vertically integrated miner based in Quebec, Canada.  Utilizing a proprietary thermochemical method, they will also produce coated spherical graphite materials at a premium.  

Initial production will begin in late 2021 and grow to 100,000 tons per year by 2023.  The entire operation will be carbon neutral and no petrochemicals will be used in processing, as is done overseas to remove impurities.  Think Green.

According to CEO Eric Desaulniers, NMGRF will be less expensive and higher quality, with better energy density than imported material.  Tariffs will be low due to the USMCA agreement.  

The stock closed at $1.85 per share on February 10^th on news of obtaining final environmental approval to build the mine and commence production. The company has asserted a desire to uplist to the NASDAQ in 2021 which would power share price growth in the short term.

Due Diligence

As a mining stock, NMGRF is as we would expect to find:  It has debt.  Future share dilution is likely as they build out and expand production.  The company has invested in the newest, best science, technology, and human capital available, but there is an expected ramp-up period before production begins in earnest.  There will be catalysts throughout this year and next to carry the stock, but good news is always tempered by the spot market for mineral prices.  The earliest investors may take profit.

But, that’s the worst of it and it does get better from here.  Given where and what NMGRF will produce, it may be no coincidence that scalable production will begin at nearly the same time a large American EV manufacturer opens a new vehicle plant in Texas, but that is pure speculation.  Insiders are buying, not selling.

Several deals with battery manufacturers are expected to be announced in Q2-Q3 2021.  If NMGRF can bring the right product to market at the right time, early investors might finally find their own piece of cheese.

At the time of writing, the author has a long position in NMGRF.

ED: Article was edited to remove a reference to environmental permitting that occurred at the time of publishing and a duplicated word.