Growing environmental awareness and a regulatory push for clean energy continue to accelerate adoption of electric vehicles (EVs) and alternative sources of energy. As a result, the market for battery storage has seen exponential growth in recent years. One of the direct consequences of the rechargeable battery trend is the demand spurt for lithium. A key component of rechargeable batteries, lithium is crucial for the production and proliferation of EVs, smartphone batteries, and battery storage packs that both supplement and substitute conventional grid-connected energy.
The global lithium-ion battery market is poised to top US$70 billion by 2025, growing 15% annually. Much of the demand is fueled by what appears to be just the beginning of the EV revolution. As battery-powered cars, longer-lasting smartphones batteries, and stationary storage gain traction, demand for lithium is expected to continue to grow steadily.
Leading lithium producers are well-positioned to reap a windfall of growth and profitability from these trends. At their current valuations, far below their fair value, it’s hard to ignore their upside potential and their attractiveness as long-term investment bets, according to Morningstar equity research.
| Sociedad Quimica Y Minera De Chile SA ADR | ||
| Ticker: | SQM | |
| Current yield: | 3.20% | |
| Forward P/E: | 15.46 | |
| Price: | US$38.47 | |
| Fair value: | $65 | |
| Value: | 41% Discount | |
| Data as of Dec. 20, 2018 | ||
The world’s largest producer of Lithium, Chilean commodities producer, Sociedad Quimica Y Minera De Chile (SQM), has been ramping up production to meet demand from electric car makers. It also has operations in specialty potassium fertilizers, iodine, and solar salts.
“SQM’s crown jewels are its geologically advantaged lithium and caliche ore assets,” says a Morningstar equity report, noting that the firm’s “low-cost lithium deposits in the Salar de Atacama boasts the highest concentration of lithium globally and benefits from high evaporation rates in the Chilean desert.” This high concentration makes the company one of the lowest-cost lithium producers, a cost advantage that underpins SQM’s competitiveness.
As the EV market grows, global lithium demand could drive mid-double-digit annual growth creating a strong tailwind for the Chilean commodity giant. “SQM is a major supplier in the lithium carbonate market and should benefit from the higher capacity that it has built up in recent years,” says Morningstar equity analyst, Seth Goldstein, who pegs the stock’s fair value at US$65.
Apart from dominating the lithium market, SQM holds just under half of the market share in potassium nitrate, a specialty fertilizer used in high-value crops. The company is also the world’s largest producer of iodine, used in X-ray contrast media, pharmaceuticals, and LCD films.
| FMC Corp. | ||
| Ticker: | FMC | |
| Current yield: | 2.22% | |
| Forward P/E: | 12.44 | |
| Price: | US$72.11 | |
| Fair value: | $91 | |
| Value: | 21% Discount | |
| Data as of Dec. 20, 2018 | ||
Primarily a pesticide maker, U.S.-based FMC Corp (FMC) also produces lithium derivatives through its majority equity ownership stake in Livent, which makes it one of the world’s three biggest lithium producers. The firm’s operations are concentrated in Latin America, mainly in Brazil.
Despite the bullish outlook for lithium, the firm’s strategy of focusing on hydroxide capacity expansions and purchasing carbonate has attracted skepticism. “Lithium hydroxide is a higher-grade and higher-priced product, often produced as a derivative of lithium carbonate,” argues Goldstein. “While management believes that a focus on the production of hydroxide will shield the company from volatility in carbonate pricing, we contend that hydroxide pricing premiums will normalize to the cost of conversion as competitors enter the market.”
Instead, Livent’s plans to expand low-cost carbonate production in Argentina could prove more profitable, “since those cost advantages appear sustainable in the long run,” asserts Goldstein, who appraises the stock’s fair value to be US$91, and forecasts lithium carbonate prices to rise back to US$12,000 per metric ton by the end of 2022, after dropping to US$10,000 in 2020.
| Albemarle Corp | ||
| Ticker: | ALB | |
| Current yield: | 1.76% | |
| Forward P/E: | 12.38 | |
| Price: | US$76.16 | |
| Fair value: | $130 | |
| Value: | 41% Discount | |
| Data as of Dec. 20, 2018 | ||
Albemarle (ALB) produces lithium from its salt brine deposits in Chile and the U.S., and its hard rock joint-venture mines in Australia. The firm’s Chilean assets are among the world’s lowest-cost sources of lithium and make up approximately 80% of its lithium profits.
As EV adoption gathers momentum, the global lithium demand is primed for a steep uptick. Albemarle will be able to fulfill a sizable portion of this demand through major capacity ramp. The company “plans to expand its lithium production from roughly 65,000 metric tons in 2017 to 225,000 metric tons over the next decade,” says a Morningstar report. Further, a joint venture with Australian mining group Mineral Resources “will build two 50,000 metric ton lithium hydroxide plants in Australia [bringing] Albemarle’s capacity to 275,000 metric tons including its half of the JV,” the report says.
Albemarle also owns a 49% joint-venture interest in Talison’s mine in Western Australia, which produces spodumene, a mineral that is converted into a lithium product. This allows Albemarle to be one of the lowest-cost lithium hydroxide producers globally.
“Although lithium hydroxide has traditionally made up a small portion of total lithium demand, electric vehicle batteries will increasingly use lithium hydroxide [which] allows electric vehicles to have a greater range than lithium carbonate,” says Goldstein who puts the stock’s fair value at US$130. “A combination of higher lithium prices and [additional] volumes will help Albemarle increase EBITDA by double-digits annually for the next decade.
Goldstein cautions, though, lithium producers aren’t immune from market risks such as a slump in lithium prices due to overproduction, or weaker EV demand, or if a newer technology replaces lithium as the main power source.
