Back in 2014, the electric car and battery energy storage were also driving another sector of the Australian market.

As we wrote in June 2014, Lamboo Resources Ltd (ASX: LMB) had risen 731% over the past 12 months, Triton Minerals Ltd (ASX: TON) was up 509%, Syrah Resources Ltd (ASX: SYR) up 128% and Kibaran Resources Ltd (ASX: KNL) was up 87% over the same period.

Demand for graphite and graphene was expected to be huge, with flake graphite the largest component of lithium-ion batteries, and demand for flake graphite expected to take off as a number of giant rechargeable battery ‘megafactories’ began production. Tesla’s so-called Giga-factory was expected to consume around 93,000 tonnes of flake graphite each year alone.

But 2015 saw low demand coupled with high levels of supply push graphite prices down, although 2016 is expected to see demand soar thanks in part to the megafactories. But again, offsetting that demand is increased supply from the likes of Syrah Resources.

Lessons from the graphite sector

Unfortunately for some shareholders in the graphite companies mentioned above, they won’t play any further part in the industry, while others have seen the value of their holdings crash.

Triton Minerals fell into voluntary administration in March this year (2 days after management issued an upbeat announcement too) and shareholders are unlikely to receive any value for their shares.

Lamboo Resources changed its name to Hexagon Resources Ltd (ASX: HXG) in November 2015, while its share price is down 90% since June 2014.

The Kibaran Resources share price spiked up to 50 cents in July 2014, but it’s been downhill from there and the share price is now languishing at 18 cents. Since June 2014, the share price is up 16%.

Only Syrah Resources’ shareholders would be happy – with the share price up 31% since June 2014.

Unfortunately, the lithium sector could be headed down the same route.

The problem for investors is choosing a lithium explorer/developer that can not only survive but prosper. Factors to consider include debt and cash levels, capital costs to develop their assets, how close they are to production and relative attractiveness of their assets.

Foolish takeaway

However, investors should be aware that until they make a profit, all lithium explorers/producers are speculative investments. Speculative means there’s a high risk of the complete loss of your capital – and given the example of Triton above – you’ll see that it can happen.

It may make sense for investors looking for lithium exposure to head for the largest companies in the sector – Orocobre Limited (ASX: ORE), Pilbara Minerals Ltd (ASX: PLS) and Galaxy Resources Limited (ASX: GXY), rather than those at the bottom of the spectrum like Latin Resources Ltd (ASX: LRS), Metalicity Ltd (ASX: MCT) and Ardiden Ltd (ASX: ADV).

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.