Vivid Capital Management Inc., a small Canadian hedge fund, has returned 39% this year through November with bets on the lithium sector.
Toronto-based Vivid, a relatively young firm that manages less than C$50 million ($36.5 million), runs a single fund with a primary focus on energy-transition investments.
“We saw the lithium industry this year was still not very well understood,” President James Bradford said in an interview. “Investors were buying these companies with really poor assets because they had a slick management team. It seemed to us like people weren’t valuing the high-quality projects properly.”
The Vivid Energy Fund is short companies that focus on direct lithium extraction, such as Vancouver-based Standard Lithium Ltd., which has plunged 61% this year. Standard was the subject of a short-selling report in February by Hindenberg Research that expressed skepticism about its technology.
Direct lithium extraction is a method used to accelerate the lithium production process, one of the technologies that dozens of companies are pursuing to lower costs. It sounds “amazing on paper” but in reality has lots of problems, including impurities, Bradford said.
By contrast, Bradford sees value in lithium companies with projects based on high-quality conventional brine reservoirs, such as Australia’s Lithium Power International Ltd.. The fund also has positions in small hard-rock lithium developers, such as Frontier Lithium Inc. and Grid Metals Corp., he said.
The world needs lithium supplies to grow fivefold by the end of the decade to meet projected demand as the electric-vehicle revolution gets into full swing, according to BloombergNEF. A potential shortage of the white silvery metal has led miners to engage in bidding wars for assets in countries such as Argentina.
Vivid is also focusing on other ways to invest in battery inputs and technologies. Even if the energy density of batteries triples over the next few decades, “we’re still going to need 15 times more battery materials,” Bradford said, based on the projected shift away from fossil fuels. “We feel that battery metals or critical elements are more durable than a typical economically-sensitive sector such as zinc and iron ore, given the robustness of the growth and political will and support.”
The fund has also owned the Sprott Physical Uranium Trust, a play on potential growth in nuclear power as governments turn to it as a way to reduce emissions.
Vivid has gained more than 300% over the last three years, in part because it had a huge year in 2020, returning 116%. Bradford took a large short position on cruise lines early in the pandemic — the fund gained 46% in March 2020, even as equity markets were melting down in panic over the spread of Covid-19.
However, returns have been volatile, and the fund lost more than 24% a year for three straight years from 2017 to 2019, according to figures posted on the Vivid’s website.
From inception in 2014 to Oct. 31 of this year, the fund gained 151%.
(By Layan Odeh)
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