Uses for lithium are expanding, particularly in electric and hybrid cars, and this Canadian penny stock aims to profit from that trend. The shares of the company jumped this year, largely on speculation that a lithium shortage is imminent.

Nemaska Lithium faces a number of challenges, including the introduction of a new process to extract lithium and the need to raise the money to complete its mine. And it is also possible that an oversupply of lithium could serve to drive down prices.

NEMASKA LITHIUM (symbol NMX on Toronto; www.nemaskalithium.com) aims to start up its Whabouchi lithium project in Quebec.

Lithium is used in household batteries, glass and ceramics, lubricants, refrigeration, pharmaceuticals, polymers and aluminum production. But the metal mostly goes into lithium-ion and lithium-metal batteries for electric and hybrid-electric cars.

The Whabouchi mine site holds a deposit of spodumene, a hard rock that was once the most important lithium source. But most of today’s lithium comes from brine solutions drawn from salt lakes, such as the Chabyer in Tibet and the Salar de Atacama in Chile. This is cheaper than producing lithium from spodumene, and the recovered metal is suitable for most uses.

However, when manufacturers need the purest lithium, they prefer spodumene because the final product has fewer contaminants.

Nemaska plans to ship ore from the mine to a processing facility it will build in Shawinigan, Quebec. This plant will transform spodumene concentrate into high-purity lithium compounds using a method the company has licensed. That approach makes use of membrane electrolysis—a filtering process requiring a strong electrical current. The facility’s location would allow Nemaska to take advantage of Quebec’s lower-cost electricity. It also eliminates the need for the expensive soda ash that is traditionally used to extract lithium.

Penny Stocks: $549 million needed to build a mine

The company completed a positive feasibility study on the Whabouchi project in 2014. The plan calls for a $549 million mine with a 26-year lifespan. The study was updated in early April 2016.

Nemaska must first build a pilot plant to test the effectiveness of its new method of processing spodumene concentrate. Whether the technology will work is uncertain, and that adds a lot of risk.

The company’s shares are up 181% this year, rising on speculation that a lithium shortage is coming, and reaching a high of $1.75 in May. However, they have fallen back to around $1.25. Longer term, lithium could also fall victim to the oversupply issues that so often plague commodities when its producers rush to catch up with rising orders. Lithium deposits that previously were deemed uneconomic to mine could be accelerated into production and that would bring prices back down.

As well, to build a mine, Nemaska will need to raise $549 million. But arranging that funding could be difficult. The company might be forced to make share issues that dilute the interest of current investors. It may also be forced to sell a big stake in the Whabouchi project. Moreover, as mentioned, Nemaska’s plan to use a new process to extract lithium adds further risk.

TSI Network recommendation: We don’t recommend the shares of Nemaska Lithium.

For our views on how to invest wisely in junior mining stocks, read Penny mines: The speculation factor and how to invest in these stocks.

For our recent report on a Canadian energy penny stock we rate as a buy for some investors, read Bright rebound in prospect for this penny stock.