Lithium Americas Is Poised for More Upside

Lithium Americas’ (NYSE:LAC) stock price declined around 10% year-to-date to $26.33 per share. At the same time, the Global X Lithium & Battery Tech ETF (NYSEARCA:LIT) lost 7% to $78.40 per share. While investors might be disappointed by these results from LAC stock at the beginning of the year, the shares of the lithium resource company grew almost 34% over the past year, outperforming its competitors, while the LIT proxy gained only 16%. And LAC looks ready for more.

Graphic of Lithium scientific symbol (Li) in the shape of a big white gear with construction equipment and mountain around it

Source: GrAl/ShutterStock.com

After all, the global lithium market is forecasted to grow robustly in the 2021-2028 period, expanding by a Compound Annual Growth Rate (CAGR) of 14.8% to a total value of $8.2 billion.

Lithium Markets Are Expected to Stay Tight in 2022

The lithium market tightened significantly in the past year, following high global demand from the electric vehicle battery sector and an increasing difficulty to secure supplies.

Lithium spot prices in China have soared 42.7% year-to-date to 377,500 yuan/ton as of Feb. 4.

The buoyancy of that market is unlikely to stop in 2022, amid rapid growth in electric vehicle sales. Indeed, “the global electric vehicle market size … is anticipated to grow … at a CAGR of 24.3% in the 2021-2028 period,” reaching a terminal value of $1,318.2 billion.

In this context, the lithium price strength is expected to continue to sustain companies that are exposed to alkali metal, providing tailwinds for their valuation and therefore explaining LAC’s trivial financials, but high valuation metrics.

LAC Stock Has No Revenues, But Risks are Limited

Lithium Americas is developing two world-class lithium projects: Caucharí-Olaroz in Argentina and Thacker Pass in Nevada, United States. The latter is in the exploration and evaluation stage, whereas the former is close to production.

With an initial capacity of 40,000 tonnes per year of lithium carbonate equivalent, the Caucharí-Olaroz mine is expected to start production by the middle of the year and should generate significant revenues at current market prices.

Yet, the early stage mining company faces limited risks. Mining is a highly capital-intensive business, and any delays in the development of the company’s lithium extraction process might hurt LAC’s stock price.

Until LAC starts extracting the precious alkali metal, it continues to burn cash. The company reported a loss of $17.2 million in Q3 2021 and a net loss of $46.4 million over the past nine months, according to the latest quarterly earnings report.

Besides, the Canadian-based resource company has mostly relied on equity and financing offerings to fund operations, implying that shareholders have been diluted more than once.

In January 2021, it raised approximately $400,000 through the underwritten public offering of 18,182 shares for $22 each, enabling the company to display a cash position of $482 million in the third quarter of 2021, compared to $148 million in Q3 2020.

Yet, LAC partnered with one of the world’s largest lithium producers, Ganfeng Lithium to reduce development and operating risks in Caucharí-Olaroz and has already funded 81% of the $641 million budgeted for the project.

Moreover, investors’ interest in the lithium complex has enabled LAC to secure operational spending at Caucharí-Olaroz, demonstrating strong investor conviction in the company’s prospects.

LAC Stock Could Reach Higher Grounds

LAC has not generated revenue yet, but it is expected to start lithium production and market it this year.

Speculative buying and investor interest have pushed LAC’s valuation to high ground. The company is currently exchanging at a massive 2022 expected price/book ratio of 13.1x and a colossal EV/EBITDA of 251x. Yet, these stretched figures are common for a company not delivering any revenues.

In the meantime, Albemarle Corporation (NYSE:ALB), a more diversified U.S. company exposed to the lithium complex, is trading much cheaper than that, with at 2022 P/B of 4.01x and EV/EBITDA of 22.7x, whereas Ganfeng Lithium, one of LAC’s best peers, is exchanging at 2022 expected P/B of 8.78x and at EV/EBITDA of 23.6x.

If the company’s extraction rate sticks to actual plans and if lithium prices stabilize at these levels, LAC might generate from its 44.8% stake in the Cauchari-Olaroz project a yearly profit in the $207 million-$311 million range, with a conservative net margin of 20%-30%. At this pace, investors will send LAC’s stock on should reach higher.

With that being said, the recent downturn in LAC’s stock is an opportunity for long-term investors. Therefore, I am bullish on LAC in the medium and long term. I am convinced that the company will benefit from the tightness of the lithium market and deliver on its projects on time.

On the date of publication, Cristian Docan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Cristian Docan, a contributor for InvestorPlace.com, has been writing stock market-related articles for Seeking Alpha, Stocknews, and Wealthpop since 2017. He takes a fundamental and technical approach in evaluating stocks for readers, focusing on momentum investing and macro-driven strategies. 


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