ED HARRISON: Welcome to Investment Ideas. I'm your host, Ed Harrison. We're joined today by Howard Klein, who has almost two decades of experience advising clients in the energy and mineral space. He's going to talk to us today about a very different way of investing in green energy.

Howard Klein, it's very good to have you on Investment Ideas. Let's start actually with your background. We're going to talk a little bit about an industry that you're very close to. Tell me how you got involved.

HOWARD KLEIN: Yeah, we're going to talk about the lithium industry. I have been involved advising companies in the natural resource space for about 17 years, and this included copper, gold, iron ore, even coal over the years. But about nine years ago, when the Nissan LEAF and the Chevy Volt, what I call the first round of EVs kind of came, or hybrids came, I got involved in the helping companies that are developing new mines in lithium.

It was a bit of a false start in 2010 period by Tesla and Elon Musk with the Gigafactory, and the success of Model S, and the Model X, and now, the Model 3. And the transformation in China and Europe toward bringing many, many more electric vehicles to market over the course of the next number of years has led to a massive demand shock to a very small industry which is lithium.

Lithium used to be controlled by three companies, Albemarle, SQM, and FMC. But it was only about a $1 billion revenue market, 200,000 tons a year. That now is forecasted to grow to about a million tons a year by 2025 as a result of both electric cars, but also energy storage for utilities.

ED HARRISON: You spoke about Tesla first and foremost. And you know that's a big buzz word, but in terms of this, we're not actually going to be talking about Tesla. So why are we talking about lithium? Why is lithium, rather than Tesla, the investment idea for you?

HOWARD KLEIN: Well, Tesla is, I think, a great company. They make great products. I can't comment on the valuation of the stock. It's very high if you compare it to other car companies, for example. So is it a car company? I don't know.

But if you go back to the 1920s, there's a massive disruption happening to the car sector, the transportation sector, and the utility sector. If you just look at the car sector, if this were 1920, you would have a choice of 300 car companies you could invest in , and maybe a half a dozen or a dozen oil companies to invest in.

Over a very long period of time, the upstream fuel, the oil companies were a better place to put your money than to try to pick which of the car companies were going to be the winners, and we ended up with the big three.

So Tesla's priced to perfection. Battery companies like Panasonic, and Samsung, and LG Chem, it's a very competitive business. But the margin, very substantial margins are available in what I call the lithium fuel for the batteries, which are feeding the cars. And because it's such a small industry that's growing, the lithium is forecast to grow 20% or so per year. That's five to seven times GDP.

So the investment thesis is high sustainable margins in a mega trend, which is as we go from 2% penetration to 30% penetration, I see a 10 to 15-year mega trend or longer. And companies that are developing new deposits have significant upside, and those who are currently producing should grow two and three and four times over the next three, five, seven years.

ED HARRISON: The question I have in terms of for viewers, this is a show about six to 24-month time frame in terms of investment. Where would you put your money in this space over that medium-term time frame?

HOWARD KLEIN: That time frame is it's somewhat complicated, because I believe Albemarle should perform very well in that time frame because it's undervalued. Its overall EBITDA rating is lower than it has been historically.

So to answer your question about a six to 24-month time frame, I do believe we're in a period-- Albemarle stock, has grew from 50 or 60 to 140 around this time last year, but it's fallen back to $85. But sentiment drove their-- when they were at $140, they're EBITDA multiple was something like 20, whereas historically, it was more like 15 or so.

So when Bitcoin went up at the end of 2017, like, a whole host of-- there was a lot of sentiment and risk on into commodities into lithium, partly the Trump tax reform expectation of deregulation, and a lot of that went away in much of last year. So there was a lot of negative headwinds, which has brought Albemarle down.

So I believe within this six to 24-month time frame, we're likely to get another price spike. It may not happen until Q4 of this year, or early next year, or sometime next year, but I believe another price spike is coming.

ED HARRISON: So talk to me about the supply demand. Where is this demand for electric vehicles for lithium coming from?

HOWARD KLEIN: Well, the demand is coming from the electric cars that are-- battery factories are being built significantly. So when Tesla announced their Gigafactory in 2014, they were one of four. There's an industry consultants called Benchmark Minerals that tracks this very carefully. So there were four mega factories. I think five gigawatts or more, I think, is their standard. There were four in 2014.

There are now something like 71 battery mega factories, about 2/3 of which are in China, but also in Korea. There's some in Poland, and Hungary, and other European countries. And there are some being built here. Today in the news, SK Innovation is a Korean company that is building anywhere between 1.7 to 5-gigawatt battery factory in Georgia. So batteries are driving this. These batteries are going into electric cars. So that's what's driving the demand for lithium.

ED HARRISON: And it's not just about Tesla, basically, is what you're saying. It's a demand from all different sources.

HOWARD KLEIN: Yes. Tesla is a story. It's not the story. China is a story. It's not the story. And the story of China, more than anything, is pollution in urban centers. So Shanghai, Beijing, they want their citizens to breathe, OK? Fossil fuel, internal combustion engine car sales are declining. And overall car sales have declined in China, but electric cars have increased.

The government is not so much about subsidies as it is regulations disincentivizing internal combustion engine car consumption so their cities can be clean. So it's not so much a climate change in China. It's pollution, but it's also industry of the future. They realize they can't compete so much on internal combustion engine cars, so they are seeking on a global basis to compete in both batteries, and electric vehicles, and utility storage, et cetera. So it is government directed in China.

And also, Europe is a major story. So Dieselgate, right? I've said this before. Dieselgate was the Fukushima moment for the European car industry. So Fukushima meant that Germany just shut down all their nuclear plants.

ED HARRISON: Right.

HOWARD KLEIN: That was terrible for uranium. The uranium market has not come back yet because of that. Diesel was the means for Europe to kind of meet their emission standards globally. And once they were called out on that, they said, all right, forget diesel. We're now going all electric.

ED HARRISON: So diesel out in Germany, forget about diesel in Germany.

HOWARD KLEIN: Thta's right. And VW, who is one of the biggest car companies in the world, one of the biggest that have China business, but also was at the forefront of the Dieselgate scandal, has been the most ambitious announcing new models. And they're the partnering with Ford here in the US. A further joint venture was announced this week. Mercedes and Daimler are talking about collaboration.

ED HARRISON: It's interesting you didn't mention the US as much. You said Tesla, but you didn't say the United States.

HOWARD KLEIN: That's right.

ED HARRISON: So where is the US? And when you talk about the demand growth story, 20% per year, where does US come into that?

HOWARD KLEIN: It's interesting that although Obama administration, there are subsidies for electric vehicle purchases that haven't yet been replaced, a lot of this is politics, right? America is a bit of a laggard on this. But at the same time, it fuels further potential upside because the expectations are so low for the US that any change to that is more likely to be to the upside than to the downside.

ED HARRISON: So we started out talking about Albemarle in particular, because that's an S&P 500 company. Obviously, S&P 500 means it's a stalwart type of company. This is a US-based company. That's good as one play, potentially. But are there other plays that you would consider in the lithium space other than Albemarle?

HOWARD KLEIN: Yes. I think actually, it's important to take a basket approach to this investment thematic. And a lot of the companies are listed in Australia or Canada. But for the purpose of this conversation, and I think a US audience, I have a newsletter called Lithium Ion Bull. I also have a podcast called Lithium Ion Rocks. And the purpose of both of those vehicles as to educate what I call this Jane and George battery pack investor. Not a Joe six-pack, but your audience, a sophisticated, self-directed. And most of those people can invest in a Canadian stock, can invest in a Hong Kong or Aussie-listed stock.

So if you're looking just at a US focus, there are five companies that are listed either properly on the NASDAQ or the NYSE. I'm not talking about penny stocks on the OTC. And the three that I like the most, well, one is Albemarle.

Two is Livent, which is a spin-off of FMC. It's the only pure play producer in this space. And the stock went public by IPO at $17. The stock is now at about 12 and 1/2, $13. They have an Argentina asset. They have the best technology. They're focused on lithium hydroxide, which is the chemical type that goes into Panasonic batteries which goes into Tesla. That's about a $2 billion market cap company.

And there's one other one, which is earlier stage. It's only about a 50 million market cap, but it's called Piedmont Lithium. It's based in America. It's a North Carolina asset. For a long time, actually, 100% of the world's lithium came from North Carolina from the '50s until the early 1990s. It was part of the Manhattan Project. Lithium was used for the hydrogen bomb, but then it had a whole bunch of offshoots into ceramics and glass, et cetera. But the first lithium battery for Sony back in the early '90s came from ores in North Carolina.

So a lot of the lithium development companies have been in Australia, hard rock mines that have gotten financed. What you have in North Carolina and Piedmont is very similar ores to all of the companies that are getting financed in Australia, but right here in America with all of the history. So it's kind of like a back to the future dynamic in North Carolina.

And it's not a well-known company. It was originally Australian listed. They only did the NASDAQ listing in May of last year, so it's only been available to trade to--

ED HARRISON: Less than a year.

HOWARD KLEIN: Yeah, a Jane and George battery pack for less than a year. But it's getting very good traction. It's still riskier. Risk reward is 50 million market cap. They're still not in production. They won't be in production probably for another two or three years. They're still drilling. They're acquiring land.

But importantly, Albemarle, through a joint venture into Australia, they are investing $2 billion, valuing an asset at about $2.3 billion in Australia, a company that was at a similar stage to Piedmont only two or three years ago. So it gives you an indication of the potential upside in an exploration and development story that's possible. And again, so those would be three names that I would look at as a way to play this theme.

Albemarle probably, in my judgment, has 30% to 50% upside. Then if you look at consensus, it's covered by 20 analysts, right? A lot of them have buys. Some of them have holds. But on balance, their target prices are between $110 and $125. So that's a 30% to 50% upside. Similarly for Levant and something with, like, Piedmont, the upside potentially is substantially more than that, but it comes with commensurate risk.

ED HARRISON: So in terms of this investment thesis over the next six to 24 months, when would you consider the best time to sell? When would you know, this thesis, either it's not working, on the one hand, or now it's time to take some profits?

HOWARD KLEIN: That's a hard question to answer. So like I said, I believe that sometime within a 24-month time frame, we are going to have another price spike. It probably won't be as substantial as this spike we had, this five times increase in the spot price.

But we will, because there's not sufficient investment going into this sector, there's the likelihood for there to be a shortage. And if there is a shortage, you have a shortage combined with positive sentiment toward the sector, it's possible that an Albemarle might get to a 20 times EBITDA, like it did last year. In that case, I would say take some profits. If something is 30% to 50% upside, and it goes up 100%, you should definitely take profits.

How would I know if it's not working? I would watch production hiccups, right?

ED HARRISON: Execution.

HOWARD KLEIN: Execution. And that's why you need to take a portfolio approach. Because if Albemarle, or Livent, or Piedmont, or any other company, it's probable some of them don't execute. So just owning one, the thematic may be fine, but you may get hurt on an individual stock.

So I would watch the execution, because it's a volume story, in the case of Albemarle and Levant. It's a, can they grow the volumes according to what they have guided the market? In a Piedmont case, it's a--

ED HARRISON: Getting to market.

HOWARD KLEIN: Yeah. It's getting funded, and getting into production, and hitting milestones, and getting permitted, and those things. So it's more like, if you can compare it to, like, a biotech that goes from a phase one, to phase two, phase three, and then gets bought by a strategic, or partners, or joint ventures with a strategic, you need to follow those things closely in Piedmont's case.

ED HARRISON: Well, it's been a pleasure talking to you. I wish actually we had more time to talk about the dynamics of the industry, because I think it's a really fascinating story. And I hope to have you back at some point in the future.

HOWARD KLEIN: I would be happy to go in greater detail the next time. Thanks so much, Ed.

ED HARRISON: Thanks, Howard. Howard's idea is to gain exposure to lithium via three specific investments. If you invest in one company, he recommends Albemarle Corporation, the Charlotte, North Carolina-based specialty chemicals producer that is a constituent in the S&P 500. This is the more mainstream play, where Howard sees the potential for gains of 30% to 50%. He would take profits if the stock doubles in the next six to 24 months.

He also recommends Livent as a pure play lithium investment spun-off from FMC Corporation late last year. Livent is a smaller company. But because of its leverage to lithium and its size, it offers greater upside potential.

Finally, Howard also recommends Piedmont Lithium Limited, an emerging lithium company based in North Carolina that hasn't begun production, and is therefore the riskiest play of the three investments. Piedmont is focused on bringing its mine in North Carolina online and beginning production in the next few years.