Lithium has been among the hottest commodities as we transition to a post-pandemic world. The price for a metric ton of lithium (2205lb.) was worth ~$6,000 back in August 2020, which climbed well north of $93,000 at its peak in November 2021 if you adjust for currency changes.
China’s lockdown did nothing to lower those prices, as they were one of the world’s top lithium producers. Many lithium stocks began surging in anticipation of high demand, boosted by electric vehicles and low supplies. However, as China opens up and EV demand starts to slow down, the price of lithium has started to drop substantially to currently be around $31,600 per metric ton.
This fall in prices has spooked many investors in lithium businesses. The long-term trends will inevitably drive down lithium prices, but many of these companies are yet to fully digest and capitalize on the boost they’ve gotten in the past two years. Most are rapidly expanding their lithium production and acquiring mines, meaning that they will continue to churn out a healthy top line despite the decline.
With that in mind, I believe these three are among the most undervalued lithium stocks:
Lithium Americas (LAC)
Despite the near-term correction, Lithium Americas (NYSE:LAC) seems well-positioned to benefit from the long-term tailwinds from the electric vehicle industry. As the developer of Thacker Pass, North America’s largest known lithium source, LAC is one of the most undervalued lithium stocks, in my opinion.
The company is working on many projects to boost its growth and lithium production, most being (as the name suggests) in the Americas. That’s good news, as the U.S. has been trying to distance itself from foreign lithium sources and fossil fuels. With increasing investments in clean energy, the electric-vehicle boom will significantly propel the demand for lithium in the next few years. Lithium Americas could arguably be the biggest beneficiary among lithium stocks.
The downside is that the company has yet to fully capitalize on its lithium ventures. There is quite a lot of speculation at play here since the Thacker Pass project has just started construction, and the Cauchari-Olaroz mine will start production later this year.
Nonetheless, if both mines meet expectations, the valuation is certainly compelling. As my colleague Faisal Humayun pointed out, “the Thacker Pass project has an after-tax net present value of $4.95 billion. With a mine life of 40 years.” Meanwhile, the Argentine asset could deliver an average annual earnings before interest, taxes, depreciation and amortization of $308 million.
Rio Tinto (RIO)
Rio Tinto (NYSE:RIO) isn’t a high-flying stock, even with rising lithium prices. The stock peaked 55% above its pre-pandemic close, a far cry from most other lithium businesses. That’s because the company also produces iron ore, copper, aluminum, diamonds, and other metals and minerals.
The market seems to be underestimating its impressive cash-generating ability. It reported a remarkable $9 billion of free cash flow last year, allowing the company to pay out $8 billion in dividends. Still, RIO stock changes hands at a meager forward price-to-earnings ratio of just 9.07x, well below the industry average of 13.7x.
In addition, The stock also offers a substantial dividend yield of 7.32%, almost three times the industrial average of 2.68%.
Nonetheless, you may notice that FCF has been trending down in the last two years. It’s not a bad thing, in my opinion. It is among the biggest reasons why I think RIO is among the most undervalued lithium stocks. As many of my colleagues have pointed out, the company intends to invest $25 billion over the next two years to expand its production capacity and diversify its portfolio. These investments could significantly boost the company’s growth and add a premium to the stock in the long run.
For instance, it plans to develop the Oyu Tolgoi copper-gold project in Mongolia, the Rincon Lithium Project in Argentina, and the Simandou project in Guinea. Even with lithium prices decreasing, these projects will still yield a lot of revenue.
Accordingly, analysts have a solid $97 price target for the stock with a 44.6% upside potential by next year.
Standard Lithium (SLI)
The selloffs may have gone overboard with Standard Lithium (NYSE:SLI), as it is currently changing hands at a bargain of $3.52. The company has assets in Arkansas that it can leverage to become one of America’s largest lithium producers. The Lanxess Project and the South West Arkansas Project have extensive lithium deposits. But again, both of these assets currently do not produce any revenue, and there is little data on how much lithium these projects can generate in the long run. According to NS Energy, “The PEA forecasts up to 20.900 tonnes per annum (tpa) of battery-quality lithium carbonate production over a project life of 25 years, with an estimated capital expenditure of £334m ($437m)” for the Arkansas Smackover project.
I believe there is a high possibility for substantial returns with SLI, but those returns may come with a lot of patience and risk.
On the date of publication, Omor Ibne Ehsan 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.