There has been much talk about the impending growth for electric vehicles (EVs) in the next decade. It’s expected that EV sales will be nearly 30% of vehicle sales by fiscal year 2030. Given this growth outlook, it’s inevitable that demand for lithium will increase. Lithium stocks have surged in the last few quarters on this demand outlook. However, even after the big rally, there are undervalued lithium stocks worth considering at current levels.
Before discussing the stocks, let me elaborate on the industry tailwinds. It’s expected that global lithium demand will double by FY2024, with EVs being the key demand growth trigger. Another estimate suggests that demand for lithium will grow at a CAGR (compound annual growth rate) of 19.7% over the next decade.
This positions lithium stocks for a multi-year rally. Let’s discuss three undervalued lithium stocks that are worth considering for the next few years:
Undervalued Lithium Stocks: Piedmont Lithium (PLL)
As growth in the EV market triggers demand for lithium, PLL stock has surged by 627% in the last six months. Even after the big upside, the stock seems attractive. As I write, B. Riley Securities has initiated a buy rating on the stock with a price target of $66.
It’s worth noting that PLL stock currently trades at a market capitalization of $715 million. However, the company’s lithium assets have an after-tax net present value (NPV) of $1.1 billion. This is one reason to believe that the stock is still undervalued.
From a revenue perspective, the company already has a binding sales agreement with Tesla (NASDAQ:TSLA). The agreement is for an initial period of five years with first shipments in fiscal year 2022. This agreement provides revenue and cash-flow visibility.
In a recent development, the company has announced a strategic investment in Quebec hard-rock lithium developer, Sayona Mining. With a clear demand visibility for lithium, I expect the company to pursue aggressive asset diversification.
With growth in resources and reserves, PLL stock is likely to trend higher. Lithium prices have also started trending higher from multi-year lows. This is another stock upside trigger. High prices would translate into higher asset NPV and robust cash flows.
Lithium Americas (LAC)
LAC stock, which has surged by almost 220% in the last six months, is another undervalued name among lithium stocks. It’s likely that the stock corrects after the big surge. However, the company’s reserves and resources indicate potential undervaluation.
The company’s Cauchari-Olaroz project in Argentina has the potential to deliver 40,000 tpa mineral resources for 40 years. The technical report indicates a NPV of $1.5 billion at a discount rate of 10%. Further, the company’s Thacker Pass project is expected to deliver 60,000 tpa of battery-grade lithium carbonate. As a matter of fact, Thacker Pass is the largest-known lithium resource in the United States. This project has an after-tax NPV of $2.6 billion at $12,000/t lithium carbonate.
Therefore, the two projects have a combined NPV of $4.1 billion. LAC stock currently trades at a market capitalization of $2.46 billion. It’s important to note that as lithium carbonate prices trend higher in the coming years, the asset value will increase significantly. Considering the future EBITDA (earnings before interest, taxes, depreciation and amortization) and cash-flow potential, Lithium Americas stock is undervalued.
From a financial perspective, the company has $500 million in cash and $202 million in available credit facilities. This provides the company with ample financial flexibility to invest in the two game-changing projects.
American Lithium (LIACF)
Among the smaller names in the industry, LIACF stock is attractive. The stock currently trades around $1.50 with a market capitalization of $175 million. Even after an upside of 739% in the last year, the stock is undervalued.
As an overview, the company has a 6,000-acre property, where the company claims to have lithium mineralization up to 80 meters thick. The asset has measured and indicated resources of 5.37 million tonnes of lithium carbonate. Further, inferred resources are at 1.76 million tonnes. American Lithium also expects lithium recovery of over 90%.
If these estimates hold, the stock is significantly undervalued. It’s worth noting that the company’s asset is located near Tesla’s Gigafactory. Once the company commences extraction, an offtake agreement would not be a big challenge.
Overall, LIACF stock is a high-risk stock with potential for multifold returns. A big plunge in the stock is not advisable. However, some exposure can be considered at current levels.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.