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Lithium Producers for Tesla's Batteries to Get a Dedicated Hedge Fund

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【Summary】The increasing sales of electric vehicles (EVs) has led to rapidly increasing demand for lithium. As a result, the financial industry is stepping up to help investors looking to cash in on the demand.

Original Eric Walz    Jan 19, 2018 12:32 PM PT
Lithium Producers for Tesla's Batteries to Get a Dedicated Hedge Fund

Westbeck's fund will target opportunities among more than 200 companies with a combined market capitalization of about $650 billion.

Tesla Motors founder and chief executive Elon Musk once said that lithium was only the "salt on the salad" for the batteries that are vital to the company's electric cars. He was referring to lithium salts, a raw material that is mined to make lithium-ion batteries. However, Musk was downplaying the role of lithium in Tesla's batteries —lithium is a vital component for the company's battery production.

The increasing sales of electric vehicles (EVs) has led to rapidly increasing demand for lithium. As a result, the financial industry is stepping up to help investors looking to cash in on the demand.

Will Smith, a former partner at Michael Hintze's investment firm CQS U.K., is starting a dedicated hedge fund that will bet on companies whose products and services will benefit from a boom in electric cars.

The Westbeck Electric Metals Fund is expected to begin trading next month and aims to raise a maximum of $250 million, according to a document seen by Bloomberg News. Smith, who was the head of natural resources at CQS before starting London-based Westbeck Capital Management in 2016, declined to comment.

Westbeck Capital Management is a London-based firm founded in February 2016 by Smith, formerly of CQS, Landsbanki Securities and Panmure Gordon, and Jean-Louis Le Mee formerly of Abydos Capital, BlueGold and Goldman Sachs.

Westbeck's fund will target opportunities among more than 200 companies with a combined market capitalization of about $650 billion. The firm has also tapped a former chief executive of a lithium company as an adviser for the fund, according to the document, which did not name the person.

Westbeck's existing energy fund has gained 20 percent through Jan. 12 this month after losing 17 percent last year, according to another document. The fund had gained 22 percent in 2016.

Lithium Production

The King Valley mine in Nevada is one of the largest lithium mines in the United States. Nevada happens to be home of Tesla's new Gigafactory, soon to be the world's largest battery production facility.

However, much of the world's lithium currently comes from Chile, in South America. The country has abundant salar brines, which can be best described as underground reservoirs that contain high concentrations of dissolved salts, such as lithium, potassium, and sodium. These are generally found below the surface of dried lake beds, known as salars. The largest being the Atacama Salt Flat.

To extract lithium from brines, the salt-rich waters are pumped to the surface into a series of evaporation ponds where solar evaporation occurs over a number of months, leaving the dissolved salts behind.  Salar brines naturally occur at higher altitudes and in areas of little rainfall, so solar evaporation is an ideal and cost-effective method for precipitating lithium salts.

chile.jpg

An aerial view of the brine pools and processing areas of a lithium mine on the Atacama salt flat in Chile

Growing Demand for Raw Materials

Automotive companies, including Toyota, are scrambling to secure supplies of resources for electric car batteries, making miners of commodities such as copper, nickel, lithium and cobalt an appealing target for hedge funds. The end users include Tesla, which is jointly developing the world's biggest lithium-ion battery project.

While these batteries are used in many popular electronic devices, it's the growing popularity of electric vehicles (EVs) that has greatly increased the demand. Tesla's increasing production of its more affordable Model 3, which it began manufacturing in mid-2017, will add to this demand for lithium. The Model 3 has over 500,000 reservation holders waiting for the new electric car.

Westbeck's Electric Metals Fund might be promising opportunity for investors. Many commodity prices are in a slump, However, lithium stocks, mainly lithium mining stocks, have soared along with the price of the metal since early 2016 due to rising demand for rechargeable lithium-ion batteries to supply the electric car market.

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