NIO Stock Alert: Nio just made a big bet on lithium

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One of today’s big drivers in an otherwise bear market has been Nio (NYSE:NIO). The China-based electric vehicle (EV) maker initially climbed 4.3% in previous trading, before giving up much of those losses this afternoon. That said, NIO stock remains up around 1%, significantly outperforming the market today.

This decision comes as the company announcement a 12% stake in an Australian lithium miner, Greenwing Resources, this morning. This investment is expected to cost approximately $7.7 million (AUD 12 million). A big gamble, the deal appears to be aimed at allaying concerns about the company’s lithium supply, amid growing lithium demand. A key component of battery production, Nio appears to be strengthening its supply chain as demand for electric vehicles in China continues to remain hot.

This strategic funding deal is one that includes the option for Nio to be named to the board, given the company’s new ownership of over 10% of Greenwing. Whether or not that happens remains to be seen. However, it is a big investment outside of China that is getting attention right now.

Let’s see why investors are massively buying NIO shares today following this announcement.

Why is NIO stock rising today?

Nio’s growth was really limited by the company’s ability to produce vehicles. The supply of materials and parts remains a priority for the company, as Nio prepares for increased long-term demand.

Therefore, for Nio to achieve its lofty goals, lithium is one of the primary minerals the company needs to focus on. This agreement, which will allow Greenwing to accelerate its exploration program in a key Argentine mine, could be a win-win situation for both companies. Nio reserves the right to buy between 20% and 40% of the company that owns the rights to this project if more lithium is discovered. This could ensure that much of the lithium flows directly to Nio, and not into the hands of its competitors.

Many see the electric vehicle industry as one that is in a race for global market share. Therefore, this strategic move makes a lot of sense. While somewhat risky, given the nature of Greenwing’s exploration stage, it’s a move that offers strong risk-reward for investors. At least that’s how the market seems to be interpreting this deal today.

As of the date of publication, Chris MacDonald had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

Chris MacDonald’s love of investing has led him to pursue an MBA in finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative long-term investment outlook.

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