Smartphones, autonomous vehicles, and clean energy are expected to see tremendous growth in the years ahead. Investors who want to gain exposure to all of these markets will need to find the one common denominator that's shared by all of them. One such common link is that they all use lithium-ion batteries, and lithium is the core component of these rechargeable batteries that are playing a key role in the global pivot to cleaner environment.
As a result, the market for lithium -- the so-called "white petroleum" -- is booming and is expected to continue to grow. The bulk of its growth is projected to come from the rapid expansion of the electric vehicles market.
"We expect sales of electric and hybrid vehicles to push lithium demand growth 16% annually over the next decade, faster than almost any major commodity over the past century, from about 175,000 metric tons in 2015 to about 775,000 by 2025," Morningstar analyst David Wang wrote in a report last fall.
Another report, from Navigant Research, forecasts sales of lithium-ion batteries for passenger vehicles alone to generate a staggering US$221 billion in revenue between 2015 and 2024.
The e-mobility and battery storage trends are changing demand fundamentals for lithium significantly. Leading lithium producers are well-positioned to benefit from these emerging trends. Considering that demand for lithium will outpace supply far into the future, these companies have a long runway of growth and profitability, and are too good to ignore, according to a Morningstar equity research.
| Albemarle Corp. | ||
| Ticker | ALB | |
| Current yield | 1.15% | |
| Forward P/E | 19.6 | |
| Price | US$107.83 | |
| Fair value | US$130 | |
| Data as of June 20, 2017 | ||
Albemarle (ALB) is a specialty chemicals company with operations in lithium (used in batteries), bromine (used in flame retardants) and oil refining catalysts that are used by a variety of industries. The world's largest lithium producer, the company controls 35% of the lithium carbonate market.
"While declining bromine prices have weighed on Albemarle's profits over the past few years, strong lithium battery demand growth should reverse this trend, aided by robust cash flows from the firm's catalyst business," says a Morningstar report. "As electric vehicle penetration increases, we expect mid-double-digit annual growth for global lithium demand, one of the best growth profiles among commodities."
Morningstar equity analyst Seth Goldstein says the company's Chilean and Australian assets will be able to fulfill a sizable portion of the growing demand for lithium. "Albemarle has a cost advantage in lithium production due to its lucrative brine assets in the Salar de Atacama in Chile, which make up approximately 80% of its lithium profits," he says.
Albemarle has a long-term contract through 2030 with the Chilean government to extract large quantities of lithium. Goldstein says the contract will likely be extended with new terms that would allow Albemarle to extract 70,000 tons of lithium annually over 27 years.
The company reported a blowout first quarter with both earnings and revenue toping estimates and a 10% jump in quarterly sales. The stock is up 30% year-to-date, but is still trading well below Goldstein's fair value estimate of US$130.
| FMC Corp. | ||
| Ticker | FMC | |
| Current yield | 0.87% | |
| Forward P/E | 17.8 | |
| Price | US$75.76 | |
| Fair value | US$78 | |
| Data as of June 20, 2017 | ||
A diversified company, FMC Corp. (FMC) produces crop chemicals, health and nutrition products, as well as lithium derivatives. The firm has concentrated exposure to Latin America, with a large presence in Brazil.
"Although lithium makes up a small portion of its profits, FMC is a major player in the lithium industry with high market share in lithium derivatives," says a Morningstar report. FMC is fast ramping up its global lithium hydroxide production capacity to serve the growing electric vehicle market.
"We partner closely with leading manufacturers of lithium ion batteries and electric vehicles to ensure our production meets their current and future demand," says Tom Schneberger, vice president at FMC Lithium in a note to investors. "Our manufacturing network is highly flexible, which allows us to increase capacity or accelerate expansion plans as customer needs warrant."
The firm announced strong performances for both its agricultural and lithium businesses in the first quarter of 2017. While its agriculture segment grew 1% year over year, its lithium segment jumped 45% from the year before.
FMC has restructured its portfolio over the past few years from a collection of chemical businesses to one focused primarily on crop protection chemicals. "[This] should see strong growth prospects, as yield gains are needed to support rising food consumption from emerging markets," says Goldstein, who puts the stock's fair value at US$78, incorporating a 10% average cost of capital, and free cash flows generated beyond the 10-year forecast period, at a multiple of roughly 9 times earnings before interest, tax, depreciation and amortization (EBITDA).
Like its lithium-producing peers, FMC stands to directly benefit from the growth in electric vehicle sales and the resultant growth in lithium demand.
| Sociedad Quimica Y Minera De Chile SA ADR | ||
| Ticker | SQM | |
| Current yield | 1.75% | |
| Forward P/E | 22.2 | |
| Price | US$33.55 | |
| Fair value | US$40 | |
| Data as of June 20, 2017 | ||
Chilean commodities producer SQM (SQM) has significant operations in lithium (for electric vehicle batteries), iodine (for x-ray contrast media) and specialty potassium fertilizers. The company extracts these materials through its high-quality caliche ore and salt brine deposits.
The company recently announced it was planning to expand its lithium production, critical component of rechargeable batteries, the market for which is seeing exponential growth, according to a Reuters report.
"So far in 2017, we have seen stronger lithium demand growth than we previously expected, and now estimate that demand growth should reach approximately 14% this year," says Patricio de Solminihac, SQM's chief executive officer, in his first-quarter earnings report. "To meet this growing demand, and to take advantage of strong prices in the lithium market, we have decided to expand our lithium carbonate capacity in Chile from 48,000 to 63,000 MT/year."
The US$50 million expansion, he adds, will be completed during the second half of 2018. 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 a Morningstar equity report. "SQM's crown jewels are its low-cost lithium deposits in the Salar de Atacama, which boasts the highest concentration of lithium globally and benefits from high evaporation rates in the Chilean desert," the report notes.
SQM also enjoys a leadership position in the fertilizers market. It holds nearly half of the market share in potassium nitrate, a specialty fertilizer used in high-value crops, including fruits and vegetables. "Specialty potash demand should benefit from the shift in emerging market diets to higher-value foods," says Goldstein, whose US$40 estimate of the stock's fair value incorporates a 10% average cost of capital and an EBITDA of 9 times.
