Blue Planet Studio
This article first appeared on Trend Investing on August 16, 2022; but has been updated for this article.
August 12, 2022 was a landmark day for climate change in the USA with the U.S. Senate approving the largest climate change support package in USA history. As part of the US$700b Inflation Reduction Act, climate change will receive the majority at US$369b.
The Inflation Reduction Act, which the Senate passed last week, revamps the electric vehicle Federal tax credit of $7,500 (earlier post). Among the changes are an extension of the tax credit through 2032, the removal of the unit-sales cap of 200,000 per OEM, and a new mandate for qualified cars being assembled in North America.
Further, the bill as currently written mandates escalating levels of critical minerals to be sourced from the US or a country with a free-trade agreement with the US.
Specifically, the bill requires (Part 4, Sec. 13401. subsection [E](1)[A]) that the “percentage of the value” of the applicable battery critical minerals (as defined later in the bill) extracted or processed in the US or a US free-trade partner or recycled in North America, be:
40% for a vehicle placed in service before 1 January 2024;
50% for a vehicle placed in the service during calendar year 2024;
60% for a vehicle placed in service during calendar year 2025;
70% for a vehicle placed in service during calendar year 2026; and
80% for a vehicle placed in service after 31 December 2026.
The bill places similar restrictions on the percentage of value of the components, but leading up to a 100% requirement for vehicles placed in service after 31 December 2028.
The bill then goes on to exclude specifically any vehicle placed in service after 31 December 2024, with respect to which any of the applicable critical minerals contained in the battery of the vehicle (as described in sub-section [E](1)[A] were extracted, processed, or recycled by a “foreign entity of concern”.
The common theme of the package is supporting green products made (or assembled) in ‘North America’ that help reduce emissions and boost renewable energy, as well as encouraging the rapid build-up of a North American supply chain. The supply chain rules are to be phased in each year strongly encouraging auto OEMs to build up USA or ally (free-trade agreement with USA) components and raw materials supply chains.
This should be a huge boost especially towards North American auto and battery manufacturers as well as North American EV metal miners. It should also benefit countries that have a free trade agreement with the USA that can fill the supply gaps for components and raw materials.
While only some of Tesla’s electric cars may qualify for the new EV subsidies (US$55K price maximum for e-cars or US$80K for e-pickups), EV adoption in the USA should get a strong increase. Tesla has multiple reasons to dominate USA EV sales this decade:
Tesla’s cheapest car Model 3 RWD sells at US$46,990 so should qualify based on being under US$55K. Tesla’s cheapest Model Y in the USA is currently the long range version at US$65,990, so that would not qualify. I expect Tesla may look to make available the Tesla Model Y RWD at about US$54,990 or less, to come in under the US$55K cap. I would also expect most versions of the Tesla Cybertruck to come in under the $80K limit. Past prices (no longer relevant) were Single motor RWD version US$39,900, Dual motor US$49,900, Tri motor US$69,900. The single motor model was pulled and a Quad motor version added. Tesla is currently reviewing Cybertruck pricing prior to the production launch in H1 2023.
Tesla U.S website
Source: Tesla U.S. website
Source: Tesla U.S. website
Tesla’s cars can meet the North American manufacturing requirement. As for the sourcing of raw materials rules requirements we will see from 2024, but Tesla looks to be in a good position. Tesla’s USA battery supplier Japanese company Panasonic [TYO:652] (OTCPK:PCRFY) would probably be ok, given their JV USA battery factory, even if technically Japan does not have a full free trade agreement with USA. Tesla does have a lithium supply deal with Albemarle (ALB) who has a JV ownership of the Greenbushes spodumene mine in Australia. They also have an agreement with U.S. company Livent (LTHM). For future supply Tesla has deals with Core Lithium [ASX:CXO] (OTCPK:CXOXF) and their Australian lithium project set to start producing late 2022. They also have deals with Wesfarmers [ASX:WSF] (OTCPK:WFAFY)/SQM (SQM)(Mt Holland Project, Australia, ~2024) and Liontown Resources [ASX:LTR] (OTCPK:LINRF) with their Australian Kathleen Valley Project (from ~2024). For nickel they have a deal with Australia’s BHP Group (BHP) (Nickel West mine in Western Australia) and a deal with Vale (VALE) with their nickel mines at Sudbury in Ontario, Canada. For spherical graphite (active anode material) Tesla recently signed a binding off-take deal with Australia’s Syrah Resources [ASX:SYR] (OTCPK:SYAAF) who are building a spherical graphite plant in the USA.
Note: It looks like half the subsidy may apply to the manufacturing (or assembling) location and half to the sourcing of materials location rules.
Finally Tesla should also be a winner as a USA solar energy and energy storage provider. Tesla makes and installs their own solar panels and inverter, as well as their own solar roof. These are currently smaller areas <13% of Tesla’s revenues (as of Q1, 2022). 87% of Tesla’s revenues come from electric car sales (primarily Model 3 and Y) plus some regulatory credits.
Tesla trades on a 2023 PE of 58 and a 2024 PE of 45.
Analyst’s consensus is ‘outperform’ with a price target of US$308, representing 1.5% upside.
We currently view Tesla as an accumulate due to their high growth rate (as discussed in the article linked below).
The incentives for USA solar manufacturers (solar manufacturing credits etc.) will give First Solar a significant boost this decade as should the increased adoption of solar energy in the USA.
First Solar is a leading U.S. company in terms of solar panel manufacturing with a total production in 2021 of 7.9GW and with record bookings/orders of 17.5GW. As of March 1, 2022 First Solar had 26.2GW of bookings (includes remaining shipment volumes as of Dec 31, 2021). First Solar sell their solar panels in the USA as well as globally to Japan, France, Canada, India, Australia, and elsewhere. First Solar’s major market is focused mostly on the commercial/industrial market.
Enertuition reports that First Solar is “now sold out for 2024…..has 12GW of planned deliveries in 2025 and 2.6GW of planned deliveries in 2026 and beyond…..the Company’s planned production capacity is woefully short of demand.”
First Solar state: “As of Q4 2022, 6 manufacturing facilities across Ohio, Malaysia and Vietnam with a combined nameplate capacity of ~9 GW. U.S. and India expansion and fleet optimization expected to double nameplate capacity to 16 GW in 2024; growth expected to drive contribution margin expansion given operating expenses are 80% to 90% fixed.”
As discussed above First Solar needs to rapidly expand to meet booming demand and an overflowing order book. This is usually great for pricing. As of end 2021 First Solar had $1.6b in net cash.
First Solar trades on a 2023 PE of 56 and a 2024 PE of 20.
Analyst’s consensus is ‘outperform’ with a price target of US$135.00, representing 2% upside.
We currently view First Solar as an accumulate on dips as the stock has surged higher the past month.
The number 1 and 3 holdings in the fund are solar inverter companies Enphase Holdings (ENPH) (13.68%) and SolarEdge Technologies Inc (SEDG) (9.0%). These should still do well despite some new competition from Tesla. The number 2 largest holding is First Solar at 9.98%.
We won’t cover the TAN ETF in detail here as you can read the recent article linked below, when TAN was at US$66.72.
TAN trades on a PE of 25.35.
We view the TAN ETF as a must hold ETF this decade. We view the TAN ETF as an accumulate.
NextEra Energy (“NEE”) is the world’s largest ‘producer’ of wind and solar energy and a world leader in battery storage. This means that NEE will be a significant beneficiary of the US$369b climate change package.
NextEra Energy owns Florida Power & Light Company (the largest vertically integrated rate-regulated electric utility in the USA) and NextEra Energy Resources. You can read about the company at their website here
Investors should buy NEE if they are looking for a steady but not spectacular performer each year, with growing earnings and dividends.
NEE trades on a 2023 PE of 29 and a 2024 PE of 27.
Analyst’s consensus is ‘outperform’ with a price target of US$96.14, representing 12% upside.
We currently view NEE as an accumulate.
Source: NextEra Energy website
Note: For those wanting a diversified renewable energy ‘producer’ ETF then consider Global X Renewable Energy Producers ETF (RNRG). It has an Americas allocation of 40.8%, Greater Europe of 37%, and greater Asia of 22%. The ETF trades on a weighted average PE of 22.67 and a dividend yield of 1.08%pa.
Lithium Americas (“LAC”) is potentially the largest pure play future U.S. lithium producer.
LAC 100% owns the Thacker Pass lithium clay Project in Nevada, USA. LAC also owns 49% of the JV company Minera Exar S.A. (Ganfeng Lithium owns 51%), which owns 91.5% interest and is entitled to 100% of the production from the Cauchari-Olaroz Project in Argentina. Production is set to start in late 2022 and ramp to 40ktpa. LAC also owns Pastos Grandes lithium project in Argentina and a ~17% equity holding in Arena Minerals [TSXV:AN]. Finally LAC made a US$10m strategic investment into Green Technology Metals [ASX:GT1] who has lithium spodumene projects in Ontario, Canada.
LAC state Thacker Pass has the “largest known resource in the US”. Thacker Pass is a large, good grade, clay resource. The M&I Resource has 13.699M t of contained LCE @ 2,231ppm and Inferred 4.401 M t of contained LCE @ 2,112ppm. Thacker Pass had a positive record of decision received in January 2021, but has since had some problems leading to a Federal appeal set to be complete August 11, 2022, with a final decision expected shortly thereafter. The Company has all permits to commence construction and is working with the U.S. DOE regarding a loan for Thacker Pass upfront CapEx. The Reno Pilot Plant commissioning has recently occurred successfully and has produce battery grade lithium carbonate. LAC’s Feasibility Study is targeting 40 ktpa Li2CO3 capacity (Phase 1) and incorporating Phase 2 expansion scenario for total capacity of 80 ktpa Li2CO. Early construction works are on track to commence in 2022.
LAC is also an Argentina JV lithium brine near term producer with Ganfeng, ramping up their new project in 2023-24. Possible lithium clay producer from Thacker Pass Nevada in ~2025 (full ramp by 2027) all going well. Some additional risks with the Thacker Pass appeal result and also being the first lithium ‘clay’ producer. Also the very large start-up CapEx at Thacker Pass.
LAC’s current market cap is C$5.41b (US$4.09b).
Analyst’s consensus is a buy with a price target of C$48.69, representing 21% upside.
We rate the stock an accumulate and like the massive lithium production growth potential ahead this decade. Risk with the not yet announced Thacker Pass appeal result.
Note: Strong alternatives to LAC include Albemarle (ALB), Livent (LTHM), Sigma Lithium [TSXV:SGMA] (SGML), Piedmont Lithium [ASX:PLL] (PLL), and Sayona Mining [ASX:SYA] (OTCQB:SYAXF).
Source: LAC website
Source: LAC company presentation – July 2022
Canada Is Building A New Lithium-Ion Battery Supply Chain With Strong Corporate And Government Support
Exclusive: Our Model For Total EV Metals Demand 2020-2037. What Metals Are Most Impacted?
Bloomberg courtesy IEA
Source: Bloomberg courtesy IEA
The U.S. Inflation Reduction Act (includes the US$369b climate change funds over the next 10 years) will give a huge boost to the green energy related stocks this decade, particularly those with projects/production in North America. Countries that have a free trade agreement with the USA can also benefit by supplying components and raw materials.
None of the stocks in this article are cheap, but they are all potentially key winners from the climate change package. This means investors should look to accumulate over time and on dips.
Our top 5 stocks/ETFs to benefit from the climate change victory are: Tesla, First Solar, Invesco Solar ETF, NextEra Energy Or Global X Renewable Energy Producers ETF and Lithium Americas.
A great number 6 would be U.S. based rare earths producer MP Materials Corp. (MP) as their products will be needed in permanent magnet motors for EVs and wind turbines.
Risks revolve mostly around the fact that most of these stocks/ETFs have rallied hard the past month and may fall back slightly in the short term, hence safer to accumulate in stages. Longer term the prospects look very good. Please read the risks section.
As usual all comments are welcome.
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This article was written by
Disclosure: I/we have a beneficial long position in the shares of INVESCO SOLAR ETF (TAN), GLOBAL X RENEWABLE ENERGY PRODUCERS ETF (RNRG), TESLA INC. (TSLA), ALBEMARLE (NYSE:ALB), LIVENT (LTHM), LITHIUM AMERICAS [TSX:LAC], SIGMA LITHIUM [TSXV:SGMA], SAYONA MINING [ASX:SYA] , PIEDMONT LITHIUM [ASX:PLL] , GREEN TECHNOLOGY METALS [ASX:GT1], ARENA MINERALS [TSXV:AN], LIONTOWN RESOURCES [ASX:LTR], CORE LITHIUM [ASX:CXO], BHP GROUP (BHP), VALE, SYRAH RESOURCES [ASX:SYR], MP MATERIALS CORP. (MP) either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.