Investors have been chatting up Piedmont Lithium (NASDAQ:PLL), an Australian-based company that’s developing a lithium project right in North Carolina. With no revenues, the company recently managed to sell 2.3 million American depositary shares (ADSs) of Piedmont Lithium stock for $57.5 million in gross proceeds.
About the only thing I can remember from high school science class was the periodic table. No, I couldn’t remember all of the symbols; I just thought the colors and symbols on the chart were cool.
The symbol for lithium is Li. Its atomic number is 3. Its atomic weight is 6.94, and it’s classified as an alkali metal. Its most common use is for lithium batteries, which account for approximately 27% of the metal’s overall use. Lithium is also used to manufacture glass and ceramics, lubricating greases, high-performance aircraft materials, and even anti-depression drugs.
For those who aren’t speculative by nature, PLL is probably not your best bet. Here’s why.
Electric Vehicles Have Put a Charge in Piedmont Lithium Stock
Clearly, electric vehicle manufacturers are all the rage with investors these days, and so too are lithium batteries, and by extension, lithium. Piedmont’s lithium project has the potential to produce 489,000 metric tons over the course of its estimated 25-year lifespan.
How much is that worth?
The Oct. 22 price of lithium hydroxide was $9 a kilogram. One metric ton equals 1,000 kilograms. So, a metric ton of lithium equals $9,000, and 489,000 metric tons equals $4.4 billion.
However, my InvestorPlace colleague, Ian Bezek, recently said that the company values its lithium at $7.3 billion in revenue, $3.6 billion in EBITDA, and $2.4 billion in free cash flow. So, let’s go with the higher amount of $7.3 billion.
“Piedmont plans on recovering its initial invested funds in three-and-a-half years, and says that at an 8% discount rate, the project’s present value is $714 million,” Bezek wrote on Oct. 22.
Based on 13.9 million ADSs after its secondary offering and an Oct. 26 share price of $23.40 per ADS, Piedmont has a $324.2 million market capitalization. Assuming the net present value estimate of $714 million is correct, Piedmont’s stock is 55% undervalued.
So, then it’s a buy? Not necessarily.
A Long Way to Production
As Bezek points out, the project still needs a boatload of funding to come to fruition. And while it helps that Tesla (NASDAQ:TSLA) has agreed to buy five years of lithium raw materials from it for its battery production, the status of the relationship could change in a hurry if Piedmont fails to deliver the materials on time.
“Sometimes Tesla completes things ahead of schedule, such as the Shanghai Gigafactory. But on many occasions, there are delays before Tesla ends up making something happen,” my colleague stated.
“With Piedmont Lithium, where you aren’t likely to have commercial production until at least 2023 anyway. And if Tesla’s priorities end up elsewhere in the interim, Piedmont could sag for an extended period until operations really get rolling.”
My colleague argues that there are too many variables still up in the air to make PLL a smart buy at current prices — up 212% in 2020 through Oct. 23 — he feels the passing of time will provide investors with more information to make an educated and informed choice.
I totally agree with his opinion.
In fact, I would go one step further, suggesting that if you are going to make a bet on suppliers benefiting from the EV movement, Piedmont isn’t your best bet. Far from it.
The Bottom Line
Until things become clearer, you could invest in Tesla. You could also invest in one of the chip makers such as Nvidia (NASDAQ:NVDA) or perhaps an auto parts supplier involved in autonomous driving such as Aptiv (NYSE:APTV). You could also put some money into Albemarle (NYSE:ALB), a leading provider of lithium.
Or, better yet, you could invest in an ETF such as the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (NASDAQ:GRID), which holds TSLA, NVDA, and APTV in its 64 holdings with Aptiv at number one with a weighting of 8.6%.
The point is, you have much safer options.
Whenever I write this kind of article portending danger, I feel like I’m some party pooper whose only purpose in life is to rain on other people’s parades. I assure you, that’s not my intention.
If you’re speculative by nature, I don’t see a problem throwing a few bucks down on Piedmont. For the rest of you, I’d consider a safer play like one of the suggestions above.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.