Investing in Lithium

Lithium is oftentimes called the energy of the future. As the world is moving away from fossil fuels, lithium has found its place as an irreplaceable component for electric vehicle (EV) batteries and various power portable devices already well-known in the market, such as smartphones and tablets.

Summary:

As the demand for lithium has been growing exponentially, its price has appreciated 1322% since mid-2020.
The demand for lithium is expected to grow to 11.2 million tons annually by 2050 providing outstanding growth opportunities to companies operating in the lithium business.
Lithium market has relatively high barriers to entry providing an advantage to companies already in the industry.
Companies worth monitoring for potential investment opportunities: Albemarle Corp, Livent Corp., Sociedad Quimica y Minera de Chile SA, Lithium Americas Corp.

Lithium price review

As the demand for lithium products has been growing within the past years, the price for this commodity has reflected its growing popularity. The price for Lithium Carbonate has appreciated 128% in one year and a whopping 1322% since its lowest price of 39,000 CNY per ton in mid-2020. Lithium Carbonate reached its all-time high of 597,500 CNY per ton on 14 November and has been retracting since then amid talks that the Chinese government won’t extend its subsidies to EV buyers in 2023.

Source: Tradingeconomics.com

The future of lithium

Despite the possible slowdown in EV sales in China, it is clear that overall sales growth in China and globally will remain positive. The European Union has announced that it aims to sell zero fossil fuel vehicles by 2050, while China is aiming for the same by 2060. While this would push lithium demand for EV batteries to increase dramatically, according to Benchmark Mineral Intelligence EV batteries would account only for 33% of the total lithium usage. According to the Benchmark, two-thirds of the lithium battery demand will come from stationary energy storages by 2050.

In 2022, there are 40 lithium mines in operation around the world. By 2050, the Benchmark forecasts a need for additional 234 lithium mines to be able to cover the demand for 11.2 million tons of lithium annually.

Source: Benchmark Lithium Forecast

If you still have doubts about lithium necessity and limited supply, consider that a few months ago Tesla Inc. announced its plans to build its own lithium refinery near Corpus Christi in Texas. Elon Musk said that lithium prices are extremely high and encouraged entrepreneurs to start lithium refining businesses as a way to ease the current bottleneck of supply.

Investing in lithium

While there are lithium futures available in the market, they have relatively low volumes and high volatility as they are not as popular as other commodity futures. Another option could be to invest in companies that produce and process lithium. Investing in “lithium stocks” may also allow you to maneuver between well-established and profitable companies that offer lower growth opportunities and junior miners that only start to develop their mines, therefore could be riskier but with higher growth opportunities if their exploration is successful. Additionally, each company comes with its own management style, exposure to debt and higher interest rates, permit delays, and other idiosyncratic risks that investors should certainly keep an eye on.

While the lithium refining market is far from saturated and we will be able to see numerous new players entering this business, it also could have relatively high barriers to entry, such as capital intensity, a long time to become profitable (that is – if your exploration turns out to be successful) and oftentimes resistance from locals and stringent regulations related to environment preservation. Below is a list of companies involved in lithium production and/or processing and posed to benefit from lithium demand increase already in the near future.

Albemarle Corp (MT5: Albemarle)

Albemarle is among the largest lithium producers in the world and among the few lithium producers in the US. As the US is trying to boost its lithium production in competition with China, companies like Albemarle are receiving support from Washington. Recently Albemarle received a close to 150 million USD grant from the US Department of Energy for a new lithium concentration facility.
In addition to being among the most vertically integrated lithium companies in the world (with mining, extraction as well as purification operations), Albemarle is not solely concentrated on lithium – around 25% of its net sales are generated from bromine and 15% - from catalysts. This leads to less volatility and dependence on lithium prices.
The company has strong earnings: the current net income margin of 27.77% is the highest among its peer companies, and net income is expected to increase by 39.49% (CAGR) within the next 3 years. Albemarle is expected to finish FY2022 with an EPS of 20.99 (approximately 5 times higher than the year before) and FY2023 with an EPS of 27.91.
While dividends paid out by Albemarle are relatively small (0.65% at current valuation), they are reliable (28 years of consecutive dividend increase) and with a healthy dividend payout ratio (11.02%).
Analysts expect an average price to target 305.52 providing a 30% upside.
On the downside, the company is relatively leveraged – its total debt-to-equity ratio is 0.985 and its long-term debt grew 55.23% YoY by the end of Q32022. A higher debt level diminishes the company’s financial flexibility and makes it more sensitive to rising interest rates.

Livent Corp. (MT5: Livent)

Livent is an American company that owns mines in Argentina and recently became a partial owner of a company Nemaska Lithium, which owns and operates a large mine in Canada. It has been in operation for nearly 80 years (previously as part of FMC Corporation).
Livent produces lithium batteries for EVs and other devices as well as non-rechargeable batteries and even pharmaceutical products.
In addition to being Tesla’s main supplier of lithium, the company recently signed an agreement with General Motors to become its long-term supplier of lithium starting from 2025. Meanwhile, Tesla’s plans to start its own lithium mining will most likely adversely affect Livent’s earnings.
Company’s beta of 1.67 indicates heightened volatility which will adversely affect its stock price in case of a recession.
Nearly 96% of the company’s stocks are owned by institutions. Generally, institutional ownership has a positive impact on the company and its stock price.
Total debt-to-equity ratio of 0.48 indicates healthy leverage.
Analysts forecast the stock price to target 29.94 USD giving a 41.4% upside in the close future.
Livent is active in various initiatives for a cleaner and healthier world, including the company’s commitment to the Ten Principles of the United Nations Global Compact on human rights, environment, and anti-corruption.
On the downside, the TTM P/E of 23.28 is twice as high as the sector median and higher than S&P500 indicating that the stock may be overvalued at the current price. A Forward P/E of 15.85 demonstrates an improvement in the close future.

Sociedad Quimica y Minera de Chile SA (MT5: Quimica)

Quimica is a Chilean chemical company established in the late 1960s. It is one of the largest lithium producers in the world as it benefits from the largest lithium reserves in the world to be found in its home country. In addition to lithium, the company also produces potassium nitrate and iodine.
Quimica reported a 277.92% YoY increase for the twelve-month revenue ending on September 30, 2022. Q3 2022 EPS was 3.85, a 935.22% YoY increase. Meanwhile, quarterly EPS forecasts for 2023 are below 3.00.
The company reported a TTM net income margin of 35.52%, which is nearly four times more than the sector median.
Amid favorable lithium price movements and increased revenues, the company has successfully managed to decrease its long-term debt while increasing the shareholder’s equity, which now stands at 0.47.
Company is currently paying outstanding dividends with a dividend yield of 10.77%, although they are rather unpredictable.
Since the beginning of 2022, Quimica stock has appreciated 80% up to date in comparison to a -20% decrease in S&P500.
Analysts forecast a price target of 101.67 for the stock, offering a 21.2% return.
As the company is based in Chile, it will be affected by the expected contraction of its economy due to weakening economic momentum, tighter monetary policy, and the government’s policy agenda related to dampening investment. According to FocusEconomics panelists, Chilean GDP is expected to contract by 0.7% in 2023.
Looking at the price chart, the stock is expected to retreat to a lower level. We believe that there will be better opportunities to invest in this company in the close future.

Lithium Americas Corp. (MT5: LithAmerica)

Lithium Americas, based in Canada, owns projects in the US and Argentina, where it has partnered with Ganfeng Lithium, one of the largest lithium companies in the world.
The company is not yet in the production stage – its project in Argentina is close to commencing its operation and its property in the US, which is the largest known lithium source in the US, is planned to produce the first carbon-neutral lithium products in the industry. Although, the company has been facing opposition from the locals. This aspect puts the company in a riskier investment group with higher potential gain once the company initiates production.
As the company is still in the early stage of operations, its EPS is negative and is estimated to become slightly positive in the 2Q2023 and increase to 0.37 in the 3Q2023. The company has a history of missing earnings estimates.
On the plus side, the company has a healthy total debt-to-equity ratio of 0.32 indicating that the company is likely to endure the preparation period before the earnings start to flow in.
Lithium Americas receives completely different ratings from “Strong Buy” by Wall Street analysts to “Sell” by Seeking Alpha Quant Rating. The average price target for the stock is 38.55 providing an 84% upside potential.

Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd. (Conotoxia investment service)

Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement, or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.

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