LTHM - Is The Senate Climate Deal Good For Lithium Battery Stocks? Sort-Of

• Manchin and Schumer recently reached a tax and climate deal that sent battery, lithium, EV, and hydrogen shares soaring.
• The actual implications of the bill are slightly less clear but it includes billions in new incentives for clean energy.
• In this article, we dig into the details of the 725 page package to help you understand how your investments may be impacted.

After the announcement Wednesday that Senators Joe Manchin and Chuck Schumer had reached a deal on a climate and tax package, battery and battery supply chain stocks including lithium miners skyrocketed. However, on closer inspection, the bill is a bit more complex and has varying implications that are important for investors to understand.

Tax Credits and Loans for Battery Production

The bill ( full draft text here ) contains an "advanced manufacturing production credit" under Section 5 for "Investment in Clean Energy Manufacturing And Energy Security" that will provide a tax credit for the production of batteries themselves as well as "electrode active materials" such as lithium carbonate or cobalt.

For the purposes of this article, I'm not going to dive into the exact math for the tax credits (which includes such fun numbers as $35 times the kilowatt-hour capacity of a cell) since this is so far a draft and may face further changes; looking at the bigger picture is more important. However, for those interested, see page 417 .

This funding could be beneficial for companies looking to manufacture batteries in the United States as well as for lithium companies building refining capacity .

There aren't many great plays here for American battery manufacturing, which is part of why the bill seeks to spur the industry. Microvast ( MVST ), Solid Power ( SLDP ), QuantumScape ( QS ), and Romeo Power ( RMO ) are all largely still speculative bets on varying technologies.

The definition of "qualified advanced energy projects" was also expanded to include charging infrastructure, potentially great news for Blink Charging ( BLNK ) and ChargePoint ( CHPT ).

More Complicated EV/Storage Incentives

For electric vehicle manufacturers; such as Tesla ( TSLA ), General Motors ( GM ), Ford ( F ), Stellantis ( STLA ), Rivian ( RIVN ), and Lucid ( LCID ); this bill is a clear win with a lot of new money available to build production facilities in the United States and a removal of the 200,000 credits per manufacturer cap.

The main benefit for lithium producers and battery manufacturers of the new EV credit regime will be under the increase in demand this bill might spur as the other incentives are slightly muddier.

The bill, in its current form, would increase the allowance for a clean energy/energy efficiency tax credit (for homes and businesses) that includes the purchase of battery storage. The more noted portion of the bill is the tax credit for EVs that now accounts for the manufacturing origin of the battery and the materials origin of the critical minerals inside (including lithium, nickel, and aluminum).

In order for a vehicle to qualify for the credit, it has to meet requirements on battery components and critical minerals, each requirement worth 50% of the $7,500 tax credit. And, of course, also have its final assembly in North America (not the US, mind you, #USMCA #NAFTA).

For the battery component section, the battery components must be manufactured in North America. And the percentage value of the battery's components that must be manufactured in North America accelerates from a base 50% ("whenever the secretary says so") and accelerated after 2024 and 2025 when it is 60% before climbing 10% per year until 2028.

For the critical minerals (largely lithium), they have to be sourced from a country with which the US has a free trade agreement or recycled in North America; they must represent 40% of the value of the minerals contained in the battery as of 2024, with that percentage increasing every year thereafter by 20% until capping at 80% after December 32, 2026.

For the recycling portion of that, there are two companies that stand to benefit: Li-Cycle ( LICY ) and American Battery Technology Company ( ABML ). Of the two of them, Li-Cycle is much more attractive and better positioned to benefit with a distributed network of recycling centers and offtake agreements in place for manufacturing waste.

As for the critical minerals portion (and let's be honest, we're all here to talk about lithium, sorry nickel), that only has to be sourced from a "free trade" country, not North America.

The United States has the following free trade agreements with 20 countries (USMCA covering Canada and Mexico, listed separately as well):

• Australia
• Bahrain
• Canada
• Chile
• Colombia
• Costa Rica
• Dominican Republic
• El Salvador
• Guatemala
• Honduras
• Israel
• Jordan
• Korea
• Mexico
• Morocco
• Nicaragua
• Oman
• Panama
• Peru
• Singapore
• USMCA

For those with a keen eye and a mind for lithium, you might notice this list includes Chile and Australia. Which are by far the world's largest producers of lithium. Now, this may shake up some in the coming decade, but a large reason this bill was written to include free trade countries is likely because of the lack of US supply.

As far as the benefit to any particular companies, this bill may serve to incentivize purchasing from qualified production sites in order to have US-manufactured vehicles eligible for the full tax credit.

There are several companies investing in domestic lithium who will benefit to various extents:

• Lithium Americas Corp. ( LAC ) in Thacker pass has the largest US mine slated to come online in the next few years (though it also has an Argentine project that won't benefit from this % requirement).
• Piedmont Lithium ( PLL ) will benefit even if its main project in North Carolina falls through and it relies upon foreign mines for spodumene, because the bill cares about the final chemical's place of origin and Piedmont plans to produce lithium hydroxide in the US.
• Berkshire Hathaway's ( BRK.A )( BRK.B ) Salton Sea project could receive some more grant money potentially but given the company's cash load, it doesn't really need it and its project remains speculative.
• Albemarle ( ALB ) has the only currently-producing US mine and also substantial assets in Chile and Australia.
• Livent ( LTHM ) has production globally but will benefit some under the tax credit and continues to expand in Canada and the US (though its Chinese and Argentine investments will be left out)

Foreign miners also stand to benefit if their production is primarily in one of the aforementioned countries:

• Sociedad Química y Minera de Chile S.A. ( SQM ) is (as the name implies) Chilean and a huge producer of lithium.
• Pilbara Minerals ( PILBF ) is Australian and is working on a 43k/year lithium hydroxide plant in South Korea through a JV that will also benefit from its free trade status.
• Electra Battery Materials ( ELBM ) is a Canadian cobalt producer with a potential US nickel mine was well.

All in all, don't expect some magical appearance of an American domestic supply chain for lithium after this bill passes. There are still many barriers that are facing the industry and that is a large part of the reason behind the "free trade" phrasing. This section is largely about moving away from reliance on China.

These new incentives will hopefully drive faster adoption of electric vehicles and battery storage for homes and corporate buildings, which in turn drives lithium demand. It may also help qualifying lithium producers earn a slight premium, but I wouldn't count on it. Companies like Sigma Lithium ( SGML ), producing in Brazil outside of this bill's effects, haven't had a difficult time signing offtake agreements before.

Fuel Cells Get a Tax Credit Now Too

One other notable amendment this bill proposes is to change the phrase "qualified plug-in electric motor" to "clean" under the definition of clean vehicles eligible for the aforementioned tax credits.

This is significant for companies focused on hydrogen fuel cell cars as they are now eligible for the same grants, loans, and tax incentives as EV companies. This could be big for companies such as Ballard Power Systems ( BLDP ), Plug Power ( PLUG ), FuelCell Energy ( FCEL ), and Bloom Energy ( BE ).

Uncertainty Remains

As with all pending legislation, there is always a high degree of uncertainty as to what its final form. Though this was the result of long-lasting negotiations between Schumer and Manchin, the bill still has to be debated on the floor of the Senate this week and then go to the House where it could be again amended. Senator Kyrsten Sinema is also expected to be a key vote on the bill and may request changes.

Takeaway

This climate bill is a significant piece of legislation with many different ramifications for the US battery and EV industries. The incentives contained within could benefit projects in the prescribed free trade zone, but given how much lithium production lies within those countries already, I do not expect a significant shift in investment. For hydrogen fuel cell companies, their inclusion in new incentives could be a game changer for those struggling as they burn through cash. Overall, the takeaway is that if this passes before Congress' recess, we can likely expect a further rally in related names on a perceptual basis even if the effects are slightly more complicated.

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