To Investors,
Around 2022, Stan Druckenmiller bought NVIDIA stock because he saw how big the whole AI space was going to be.
The takeaway for me was that he realised that the space was/is still in its initial stages, and the clear winners aren’t yet evident.
Since then, NVIDIA stock has gone up over 200% and Stan has made stellar returns.
From that I learned that unless you’re building a company that will completely disrupt the market, as an investor it’s best to buy the market supplier - just like how NVIDIA supplies an estimated 80-95% of chips used in AI computing.
Similarly, I’ve been intrigued by the accelerating global electrification trend. My base assumption is that all vehicles on the road will eventually be electric.
In the run up to that scenario, who will be the category winner in the EV market? Will it be Tesla, will it be BYD, or will it be BMW?
Looking at the following chart, and using Tesla as a case study, it’s clear that no matter who the winner ends up being, the fact is that all EV manufacturers will require large supplies of rare earth minerals, lithium, nickel, and cobalt, among other metals.
So, in this case it’s best to buy the market suppliers as well.
In a recent note I wrote about MP Materials, a U.S based rare earth minerals producer that is the only significant producer of rare earths in the western hemisphere.
Rare earth minerals neodymium and praseodymium are critical components in the manufacturing of permanent magnets, which play a key role in enabling electric motors to function - used by all electric vehicle producers.
Currently the world’s largest supplier of rare earths and permanent magnets are Chinese companies, supplying 90% of the market for permanent magnets.
With the global preference to diversify supply chains away from China, MP Materials (which has already broken ground on a U.S based permanent magnet manufacturing plant, in partnership with General Motors) will emerge as a huge beneficiary of that new interest.
On that note, if I wanted to double down on my bet on electrification, I’m looking at the lithium, nickel, and cobalt producers as well.
Lithium, nickel, and cobalt are essential components of lithium ion, nickel-cobalt-aluminium (NCA), and nickel-cobalt-manganese (NCM) battery chemistries - again essential for all EV producers.
According to the EV Metal Index, which tracks the value of battery metals in newly registered passenger EVs globally, the value of lithium, nickel, and cobalt ballooned to $26.9 billion in 2022, an increase of 232% compared to the previous year.
With that in mind, a couple of companies that are interesting are the Albemarle Corporation, the largest lithium producer in the world; and Norilsk Nickel, Vale, and Glencore - three of the largest nickel producers in the world.
So, to participate in the electrification trend at this stage you can supply the market by either buying into one of these large operations or investing in a smaller operation with predetermined customers.
Either way, given the fact that there were only 26 million passenger light-duty electric vehicles on the road in 2022 out of an estimated 62 million worldwide passenger cars produced in 2022, it's still early and the game is long.
Respectfully,
-Mansa
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Disclaimer: this note is not financial advice and is for informational and entertainment purposes only. We may or may not hold positions in the companies discussed. Do your own research.