Does the 2016 Lithium Boom Have More Battery Power?

Although the 2016 lithium boom has gone somewhat less detected than the infant formula boom did in 2015, the returns have been nothing short of spectacular.

Investors in the sector have recognised enormous gains since the beginning of the year thanks to lithium’s soaring price. Notably, lithium is used in batteries and renewable energy and demand is thus expected to continue to rise as electric cars become more prevalent in society, and as battery packs from companies such as Tesla start to power more homes around the world.

Just take a look at some of these returns since the beginning of the year, keeping in mind we’re not even at the end of July just yet:

Source: Google Finance

Source: Google Finance

Indeed, these are just some of the many companies to have benefited from the lithium boom so far, while many also enjoyed strong gains throughout 2015. Shares of General Mining Corp, for instance, have risen 14,200% since late January 2015.

Is there more to come?

According to a report from The Australian Financial Review, fund managers from Paragon were among those lucky enough to get involved in the sector in the early stages of the boom, prompted by a speech from US President Barack Obama regarding direct government funding towards innovation in electric cars.

What’s more, it doesn’t seem as though they’re ready to jump out just yet. In fact, the report suggests they think they’ll be in lithium stocks for several years, owning shares of businesses such as Orocobre Limited (ASX: ORE), Galaxy Resources and General Mining (the latter two of which will likely merge).

They are also of the belief that the market has “nowhere near” exhausted its capacity for mergers and acquisitions, which is encouraging for investors in the sector.

What are the risks?

As tempting as it may be to dip a toe into the sector (especially after seeing the meteoric gains posted by some of those businesses mentioned above), an investment in lithium miners is by no means without its own set of risks.

To begin with, shares across the sector are incredibly volatile, which is quite common in highly speculative corners of the market or where valuations are sky-high. As such, although it’s possible to achieve significant gains, it’s also possible to lose a lot in a very short space of time.

What’s more, if lithium prices do continue to rise, it’s likely that bigger, more cashed-up miners will try to make a push into the sector. Rio Tinto Limited (ASX: RIO) could already be about to join the lithium party, while there is a risk that others such as BHP Billiton Limited (ASX: BHP) or Vale could do the same further down the track.

Mining is an incredibly capital intensive sector to operate in and there is absolutely no guarantee of success. Any setbacks could see the shares sold off sharply, with the smaller miners even more at risk than the larger ones.

As such, if I were to make an investment in the sector, I would start by taking a look at the bigger players such as Orocobre which appears to be a safer bet than many of the smaller operators. Again, however, it’s important that investors do their own due diligence on the businesses themselves, rather than purely buying into the speculation regarding the future of lithium prices.

Of course, investing in highly speculative lithium stocks isn't the only way to grow rich on the share market...

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Tesla Motors. Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 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.

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