Lithium is a key component in rechargeable batteries used in mobile phones and laptops, but it is also an essential componet in a market that is set to explode in the coming decades: electric vehicle batteries. As the world is shifting towards EVs with rising climate concerns and higher gas prices, EV penetration is expected to reach 15% by 2025 and 35% by 2030, according to a Fastmarkets study.
The most common EV batteries include lithium-ion batteries (LIBs), nickel-cobalt-aluminum (NCA) and nickel-manganese-cobalt (NMC). They contain three main materials: lithium (Li), cobalt (Co) and nickel (Ni).
Cobalt allows increased energy density in batteries, which enables the longer range. However, there is a push in the industry towards reducing cobalt in batteries due to its high cost, pollutants and ethical supply chain issues (the world's most powerful countries have a bad habit of enslaving local populations to mine for rare minerals like cobalt). Even Tesla (TSLA, Financial), the world's leading EV company, has broken ground with new batteries that use a lithium-iron-phosphate (LFP) chemistry rather than the nickel-cobalt-aluminum type, though Tesla still plans to only use these in its lower-end models.
Thus, whether it's traditional EV batteries or the cheaper LFP type, lithium still is a key component in EV batteries. According to one study by Fastmarkets, a supply crunch for lithium is predicted by 2025 onwards, as new supply sources must come online to meet the increased demand.
Source: Fastmarkets
"When there is a gold rush, sell shovels." This is one of my favorite phrases coined from the California gold rush, where most of the people who made money were those selling the shovels and pickaxes.
In this case, there is strong demand for EVs, thus I believe lithium mining companies are a great bet on raw materials. With oil prices surpassing $120 per barrel, we could even see the transition to EVs further accelerated.
Here are my top three favorite lithium stocks and ETFs to take advantage of the expected future lithium demand.
Albemarle Corporation
Albemarle Corporation (ALB, Financial) was the largest provider of lithium for EV batteries in 2020. As a chemical manufacturing company, the firm operates in three divisions: lithium (40% of sales), bromine (35% of sales) and catalysts (25% of sales). From the sales breakdown, it’s clear Albemarle is a major lithium supplier with 60% of the company's sales coming from energy storage solutions such as EV batteries, grid storage, etc.
The firm’s financials are looking strong, with sales reaching $894 million in the fourth quarter of 2021, $2.65 million higher than expected. Ebitda is expected to grow from $1.2 billion to $1.6 billion in 2022.
Free cash flow is negative as the company invests in new projects, but the gap is expected to close from a cash flow loss of $930 million to a loss of $160 million by 2023. Assuming $2.8 billion in net debt and Ebitda expectations of $1.6 billion, I get an enterprise value of $25.6 billion, which is a 16 times Ebitda. This is not exactly cheap, but not too expensive either looking at the company's historic metrics. However, the company is expensive on a pure enterprise-value-to-Ebitda ratio basis.
Lithium Americas
Lithium Americas (LAC, Financial) focuses on the development of lithium projects in places such as Argentina (Cauchari-Olaroz lithium brine project) and Nevada (Thacker Pass project). The firm’s Nevada site is strategically located just three hours from Tesla’s Nevada Gigafactory and thus synergies seem likely when the sites come online in 2023.
In addition, deglobalization of certain supply chains back to local as shortages abound could make U.S.-based EV companies more likely to go with a U.S.-based source of lithium.
The risk with this stock is that it is a speculative play, as the miner doesn’t generate any revenue right now. The valuation is based on future projections and investment analysis.
Lithium & Battery Tech ETF
The Lithium & Battery Tech ETF (LIT, Financial) is a great way of investing into a diversified basket of stocks across the whole lithium industry. This offers a “set it and forget” approach to investing, but it does come at a fairly high expense ratio of 0.75%.
Diving into a breakdown of the top holdings, we see Albemarle makes up 10% of the fund, followed by Tesla with close to 6%. The fund also offers exposure to major EV battery suppliers such as BYD Co (HKSE:01211, Financial) and Ganfeng Lithium Co (SZSE:002460, Financial), the world's largest producer of battery-grade lithium.
