Lithium Stocks: Buying the Battery Buzz
Lithium stocks are getting a lot of buzz among investors. It’s a key element in rechargeable batteries, like the ones used to power the iPhone, iPad, and Mac laptops. Pharma companies even use it as an active ingredient in some medications!
However, the driving force behind the lithium market is the rapidly-expanding electric vehicle industry. Lithium is used to make batteries for electric cars, and the macro trend towards EV adoption is fueling a lot of interest in lithium producer stocks. Most major automakers are planning new electric vehicle lines to help capitalize on the trend, creating strong long-term demand for lithium resources.
The global lithium-ion battery market is expected to reach $77.42B by 2024, at a CAGR of 11.6% throughout the forecast period (2016- 2024), according to Transparency Market Research.
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Top Lithium Mining Stocks
This international conglomerate operates its business in three segments: FMC Agricultural Solutions, FMC Health & Nutrition, and FMC Lithium.
After years of speculation, FMC separated its Lithium business from the main conglomerate in a 2018 public offering. Today, FMC Lithium trades as Livent Corp. (NYSE: LTHM). Livent offers lithium for use in batteries, polymers, greases, lubricants, glass ceramics, and other industrial products. The firm also supplies lithium for pharmaceutical use.
Livent has a billion-dollar market cap and a PE ratio of only 7.97 per share. As a result, it’s undervalued from a PE perspective.
Albemarle Corporation (NYSE: ALB)
Headquartered in Charlotte, Albermarle develops, manufactures, and markets specialty chemicals internationally. The company also produces lithium compounds; including lithium carbonate, lithium hydroxide, lithium chloride, lithium specialties, reagents for applications in lithium batteries.
It has a multi-billion dollar market cap and is a member of the S&P 500. It pays investors an annual dividend of $1.47 per share, another reason to consider making an investment.
Sociedad Química y Minera de Chile S.A. (NYSE: SQM)
This Chilean company produces and distributes specialty plant nutrients, industrial chemicals, iodine and derivatives, lithium and derivatives, potassium, and other products and services.
SQM is the world’s largest producer of lithium. It produces and sells both lithium carbonate and lithium hydroxide.
The corporation has a multi-billion dollar market cap and pays investors an annual dividend of $1.96.
SQM is confident about the long-term outlook for lithium. In May of 2019, CEO Ricardo Ramos said, “Lithium carbonate and lithium hydroxide demand is expected to continue to grow at double-digit rates in the future,” adding that, “significantly more supply of both products will be needed.”
Ganfeng Lithium (OTC Pink: GNENF)
Chinese lithium producer Gangfeng Lithium is an up-and-coming player that made a lot of moves in the past few months. Gangfeng made significant investments in expanding its lithium assets this quarter. The firm dropped $160 million in Lithium Americas’ (NYSE: LAC) Cauchari Olaroz site in Argentina. The investment raised Gangfeng’s stake in the project to an even 50% split.
Just a few weeks later, Gangfenf signed a long-term supply deal with the world’s largest automaker, Volkswagon (OTC: VLKAF). Finally, the company made one more deal in May. It spent 14.4 million British Sterling on a strategic investment in Baconora Lithium’s (LSE: BCN) Sonora lithium project in Mexico.
Lithium Market Outlook
2019 has been a tough year for lithium producers. SQM reported a 30% decline in earnings during the quarter due to lower margins in the firm’s lithium operations. Livent reported weakening demand for its lithium hydroxide in the first quarter, and Albemarle sales fell in the first quarter as a result of heavy rains.
Despite the dreary state of the market, most producers agree that the long-term outlook for lithium is bullish. If the market fulfills their expectations, these lithium battery stocks could be great bargains at these prices. But what has to happen before the market goes up?
Is The Lithium Market Bottoming?
Maybe. For now, battery metal experts believe investors should “keep an eye on things from a directional perspective”. However, industry insiders are starting to see some bright spots in space. Exploding demand helped fuel a rapid industry expansion that resulted in eventual over-supply. The market took a dive in late 2017 but Vivian Wu, President of Tianqi Lithium Corp., thinks prices are stabilizing after explosive demand fueled an over-supply of the market in late 2017.
During a statement to reporters in June, Wu said, “In 2015, an explosive demand for EVs happened and that caused almost a supply shock. A lot of new projects have now come into the industry and that adjustment has- to most extent – already happened.” (Bloomberg) Wu thinks the hysteria is over and now is the time for well-managed producers of high-quality lithium to take the lead. “Prices will not go back to the highest, crazy peak of the last few years,” she said, “New supply will come, but only good-quality and lower-cost production will survive.”
Joe Lowry of Global Lithium says investors need to rethink their outlook on lithium prices. “I think 2019 is still a year of a bit of confusion. The oversupply myth has really hurt the lithium chemical sector,” Lowry added, “At best, it [the market] is at [a] balance, but not in a huge oversupply.” Lowry says recent M&A activity in the space is encouraging because the market needs more big players. “I think it was great because we need another big player in the market,” he explained.
Lithium Mining M&A: More to Come?
The lithium industry was rife with acquisition activity in the second quarter, as companies looked to ease margin pressures and make their supply chains more efficient. Australian conglomerate Wesfarmers (OTC: WFAFF) dropped AU$776 million to takeover Kidman Resources (OTC: KDDRF), an Australia lithium developer.
Some experts believe this deal part of a macro shift towards consolidation in this space. The western powers want to challenge China’s dominance in the battery market, and that isn’t a small order. To slay the dragon, more western companies may consider partnerships or mergers in order to maximize operational efficiency. It’s a safe bet that this isn’t the last merger we will hear about in this space.
Wanted: Domestic Lithium Supply Chain
Trade war concerns are compelling many countries to hastily secure their domestic supply of lithium. Batteries have become an integral part of daily life, so keeping an intact domestic supply of battery components, like lithium and cobalt, is becoming a priority for many of the world’s leading consumers. Supply chain development was a major trend in the lithium space during the second quarter. Many countries are seeking to protect their domestic supply of lithium against the deteriorating state of negotiations between East and West. Australia, the U.S., Europe, and Chile are developing lithium supply-chain assets to lessen their reliance on Chinese producers, which supply most of the market.
The western powers need to develop well-managed, efficient supply chains if they want to compete with China. Experts expect supply chain development to be an ongoing issue in the lithium market for the foreseeable future.
How To Own The Best Lithium Stocks
ETFs are probably the quickest and easiest way to buy the best lithium stocks because the Global X Lithium & Battery Tech ETF (NYSE: LIT) invests in the entire lithium market. Its goal is to track the performance of the Selective Global Lithium Index, therefore it’s a good way to invest in the macro-scale growth of the industry.
Some of its top holdings include FMC Corp; Albemarle Corp; Quimica y Minera Chile; LG Chemical Ltd; Panasonic Corp and Tesla. Therefore, investors looking for international exposure should look at LIT. LIT is listed on the New York Stock Exchange.
Speculative Lithium Mining Stocks
Junior miners are probably the most speculative lithium play because they are exploratory companies who search for lithium deposits. They produce little to no lithium because they focus on owning and leasing property rights.
In the lithium industry, most junior miners rely on outside financing during the exploration phase. As a result, they frequently use secondary offerings to raise funds. Hence, dilution can negatively impact a shareholder value; especially if the company has high levels of debt.
Many of these companies trade on the OTC markets and are also popular among day traders. Consequently, these stocks can be extremely volatile assets. Research each company’s management to know if they have a track record for success.
What The Best Lithium Stocks Have In Common
- A positive return on assets
- A positive return on equity
- Gross margins in the mid-30s
- Dividend yield over 1.5%
As demand for electric vehicles continues to rise, lithium mining stocks could be a big beneficiary of expansion. Also, many companies like Apple and Samsung need lithium-ion batteries to power their smartphones and other mobile devices.
The quickest and easiest way to get in this sector is to go the ETF route. However, if you are searching for speculative opportunities, lithium junior mining stocks have good profit potential. They’re also extremely volatile so it’s best to take a conservative approach.
Above all, Lithium stocks are riding on two macro-scale trends: renewable energy and electric vehicles. Batteries are becoming the favored solution for storing renewable energy, like solar or wind-generated power, and rising demand for EVs puts lithium batteries at the center of a large global shift towards sustainable energy. Continued demand for personal electronics, like smartphones and tablets, ensures that there will be lithium demand for the foreseeable future. As these industries grow, so will the demand for lithium. If that translates to an increase in prices, lithium stocks could become much more valuable.
As always, do your own due diligence and don’t follow the hype.
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