One of the hot investing themes in 2021 has been a continued search for rising stars in the alternative energy field. From hydrogen to lithium, a variety of companies have vied for investors’ attention. Many are based in the US, but there are some UK lithium shares that have caught investors’ eyes.
What might happen in 2022? Here are my thoughts.
Industry consolidation
Last year, we saw a number of developments that suggest the lithium industry could consolidate further in the near future. For example, London-listed Bacanora Lithium has agreed to a takeover by Chinese giant Ganfeng Lithium. That boosted Bacanora, but after an earlier share price slide, the impact was limited. Even with the takeover premium, its shares had moved only 6% higher than they were a year ago, at the time of writing this article last week.
Leading filtration and chemicals group Johnson Matthey announced it would exit the battery materials market. That is why I no longer consider it when thinking about UK lithium shares. But while some companies are pulling out, others are doubling down on the lithium opportunity. For example, mining giant Rio Tinto announced last week it plans to spend $825m buying a lithium project in Argentina.
So it looks to me as if the market is being whittled down, perhaps to a smaller number of players that can build economies of scale. I expect that to continue in 2022. It could increase investor interest in small London-listed lithium plays like Kodal Minerals and Zinnwald Lithium.
Growing commercialisation
One of the challenges for the lithium industry in recent years has been moving from the laboratory to the factory. It’s fine to make prototypes that have great promise. But I think a long-term investment case relies on proving that any product can be manufactured at scale — and sold profitably.
I reckon 2022 could see growing signs of commercialisation among UK lithium shares. An example is Ilika, the battery maker. This month, the company announced that it has opened the first factory for its Stereax solid state batteries, in Chandlers Ford. There is more work to be done before commercialisation as both the manufacturing process and product quality need to be put through their paces. But if that goes according to plan, the company hopes to start product sales in the second quarter of next year. That is an important step for Ilika. Revenues last year were only £2.3m, so commercialisation could transform its financial performance.
Growing revenues will not necessarily translate into profits. But they are part of a process in which investors can assess which companies might thrive in the commercial arena and which ones lack the right technologies or economics to work on a big scale. If any UK lithium shares show strong improvements in their commercial prospects in 2022, it could boost investor sentiment towards them.
My approach to these shares in 2022
I don’t hold any lithium shares in my portfolio currently. Clearly the industry has significant potential. But I think it remains difficult to see which companies will end up profiting from it. I expect many to continue losing money, due to high development costs and a competitive market.
However, I will keep watching UK lithium shares in 2022. If a company’s investment case becomes sufficiently appealing to me, I will consider buying.
