With strong growth in the electric vehicle industry, lithium stocks are in demand.
It’s estimated that the supply of lithium carbonate is likely to be 636,000 metric tons in 2022. However, the demand is expected to increase to 641,000 metric tons. Clearly, there is a demand-supply gap and this has boosted lithium prices.
It’s therefore not surprising that lithium stocks have been among the key investment themes.
It’s also worth noting that the EV industry has a multi-year tailwind. Estimates indicate that the supply-demand balance will remain tight through 2030. By the end of this decade, lithium demand is likely to increase to 1.8 million tons.
Therefore, lithium carbonate prices are likely to remain firm at current levels or trend higher. This would imply healthy revenue and cash flow for lithium miners.
On the flip side, the price of electric vehicles will increase on a relative basis as lithium price trends higher. However, the headwind is not significant enough to impact the demand. Additionally, with economies of scale, EV companies can make other cost reductions.
Overall, lithium stocks are positioned to benefit in the coming years. Here are four lithium stocks that can be medium- to long-term value creators.
- Lithium Americas (NYSE:LAC)
- Piedmont Lithium (NASDAQ:PLL)
- Albemarle Corporation (NYSE:ALB)
- Sociedad Química y Minera de Chile (NYSE:SQM)
Lithium Stocks to Buy: Lithium Americas (LAC)
LAC stock has witnessed a sharp rally in the last six months. During this period, the stock has trended higher by 108%. I believe that investors can consider correction to accumulate the stock for the long term.
Lithium Americas has exposure to some quality projects that are positioned to deliver healthy EBITDA and cash flows in the coming years.
The company has 44.8% ownership in the Cauchari-Olaroz project in Argentina. The project has an annual production capacity of 40,000 tons of lithium carbonate. Further, the project is likely to deliver an average annual EBITDA of $308 million with a project life of 40 years.
Lithium Americas also has 100% ownership stake in the Thacker Pass project. The project has a net present value (after-tax) of $2.6 billion. With a mine life of 46 years and an average annual EBITDA potential of $520 million, the project looks like a cash flow machine.
It’s therefore not surprising that LAC stock has been in an uptrend. From a financial perspective, the company reported cash and equivalents of $482 million. Additionally, the company has access to an undrawn facility of $134 million.
The liquidity is likely to suffice for near-term capital expenditure. Lithium Americas also has a low debt of $175 million. This provides scope for leveraging to fund the project investment.
Piedmont Lithium (PLL)
PLL stock has been in a downtrend in the last six months on valuation concerns. However, it seems that the selling is overdone and the stock is attractive at current levels.
The company has 100% ownership in the Carolina Lithium project. The project is likely to deliver an annual EBITDA of $460 million for the first 10 years. Further, the project has an after-tax net present value of $2 billion.
Additionally, Piedmont has 37% stake in the Quebec projects and 50% interest in the Atlantic Lithium project. The latter has a net present value of $789 million.
Currently, PLL stock trades at a market capitalization of $841 million. Considering the long-term EBITDA potential, the stock does not seem to be overvalued.
As of September 2021, the company reported $82 million in cash and equivalents. Equity dilution might be on the cards to raise funds for mining and exploration.
However, I don’t see that as a concern considering the long-term EBITDA potential of the project. Additionally, if lithium price trends higher on a tight demand-supply scenario, the net present value of the project will be revised upwards.
Albemarle Corporation (ALB)
ALB stock is among the bigger names that’s worth considering. The stock has been in an uptrend in the last six -months. I believe that the positive trend is likely to sustain as lithium remains an attractive investment theme.
For Q3 2021, Albemarle reported revenue of $831 million and an adjusted EBITDA margin of 26%. With a net-debt-to-adjusted-EBITDA ratio of 1.7, the company has ample financial flexibility to make aggressive investments.
Specific to the lithium business, the company reported revenue of $359 million and an adjusted EBITDA margin of 35%. As revenue contribution from the lithium segment continues to increase in the coming years, company-wide EBITDA margin is likely to expand.
In the recent past, Albemarle has announced agreements for strategic investments in China to build two lithium hydroxide conversion plants. Each plant is likely to have a capacity of 50,000 million metric tons per annum. In Q3 2021, the company also began the MARBL Lithium Joint Venture for restarting operations at the Wodgina Lithium Mine in Australia.
Overall, Albemarle has a total liquidity buffer of $1.5 billion. It’s likely that the company will continue to pursue organic expansion and acquisitions to make further inroads in the lithium market. While a forward price-earnings ratio of 57.9 might look expensive, robust growth is likely to support the valuation premium.
Lithium Stocks to Buy: Sociedad Química y Minera de Chile (SQM)
SQM stock has remained sideways over a 12 month period. A breakout on the upside seems imminent for the stock that also offers investors a dividend yield of 3.5%.
SQM is a diversified company with exposure to lithium, specialty plant nutrients, iodine, potassium and industrial chemicals. A key reason to consider the stock is the fact that SQM has a 19% market share in the lithium and derivatives business.
For the last 12 months, the company has reported revenue of $620 million from the lithium business. The segment has contributed to 30% of the company’s gross margin.
According to the company, the global lithium market demand is likely to be over 1 million metric tons by 2025. For 2021, the company expects sales volumes of over 100,000 tons.
With growth in volumes coupled with higher price, the company seems well positioned to benefit. To put things into perspective, the company has guided to invest $1.1 billion in lithium capacity expansion from 2021 to 2024.
Overall, SQM stock is also among the attractive dividend stocks to consider. With expansion plans, dividend growth is likely in the coming years.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.