Lithium Stocks: White Gold for the EV Revolution

Lithium, a soft, silvery-white metal, has been used since the beginning of the 20^th century. Its historic applications have ranged from psychiatric drugs to aluminum-smelting processes. With the development of lithium-ion batteries in the 2000s, previously stably-week demand for the metal was spurred. Today, lithium is found in almost all devices surrounding us. The world’s lightest metal can be found in the power-storage components of common household items such as flashlights, toys, and electric toothbrushes; it is used in cell phones, tablets, and laptops. Lithium batteries are used in medical devices, security systems, and numerous other systems.

Lithium is powering various means of transportation, from hoverboards and scooters to electric cars. White metal is an indispensable component of humanity’s reach for sustainable power sources, as the success of renewable energy advancement is fully dependent on effective power storage solutions. Thus, lithium is critical to clean-energy progress as it is used in solar- and wind-power backup storage, in addition to the EV expansion. Because of lithium’s importance for clean-energy development, it is often referred to as “White Gold.”

Soaring Demand for Lithium

In the worldwide effort to achieve net zero, energy storage and renewables are two of the most significant industries, and lithium demand is soaring in accordance with the intensification of the climate-change fighting efforts. Lithium is the essence of the Electric Vehicle revolution, a chemical without which no EV battery could be produced. Demand for lithium batteries equaled nearly 80% of all lithium use in 2022.

The global lithium market surged from $1.6 billion in 2015 to $52 billion at the end of 2022; it is expected to reach $194 billion in 2030. According to the latest research, global lithium carbonate equivalent (LCE) production will exceed 3 million metric tons in 2030, compared to 0.54 million in 2021. In recent years, the global market has been significantly fueled by the EV sector, driven by the demand for all sorts of vehicles, from two-wheelers to heavy commercial vehicles. Automakers around the world, from China to Europe to the U.S., are stepping up their electrification processes; the largest U.S. carmakers, General Motors (GM) and Ford (F) have vowed to shift their vehicle production to battery-powered or zero-emissions vehicles by 2035.

Recognizing the critical importance of lithium, governments around the world are introducing numerous subsidies and incentives to promote the extraction and production of the metal. Besides, Western governments are trying to prevent overdependence on Chinese supplies of lithium and other materials that are vital to technological development. In 2021, the U.S. Department of Energy (DOE) unveiled a new set of federal funding initiatives for the local manufacturing of battery technology components.

Lithium Batteries: “The New Oil”

According to Elon Musk, lithium-ion batteries are “the new oil.” As with oil, there is no shortage of lithium deposits in the world, but the production of battery-grade metal may lag behind the speed of usage expansion. Notably, due to increasing government efforts to electrify their economies, as well as to the surging consumer demand for battery-powered electronic appliances of all sorts, the demand for the lightest metal on earth is rising faster than supply. With the world going green, it needs as much lithium as possible – but there might be a supply problem.

According to S&P Global’s (SPGI) latest research, the world’s lithium demand is expected to outpace lithium production until at least 2027. Even more worrying is the outlook of Carlos Tavares, the CEO of Stellantis (STLA) – the company that is behind the production of Jeep, Alfa Romeo, Chrysler, Dodge, Fiat, Peugeot, and other vehicles – who said that it’s not certain whether there will be enough lithium extracted in the world to power the EV revolution.

According to Bloomberg NEF, EVs are expected to make up around 50% of all vehicles sold in the U.S., which means that the demand for lithium batteries will grow to ten times higher than at the end of 2022. Battery manufacturers, automakers, governments, and private investors are combining their efforts to scale up battery production.

However, EV makers are increasingly worried about the impending shortage of the metal, brought on by the fact that commercial-scale battery technologies currently rely on lithium and are expected to be dependent on it in the near future. That would mean that Tesla (TSLA) battery gigafactories, as well as gigafactories built by other companies and governments, may soon experience a lithium supply shortfall.

Acknowledging the forecasted shortages and the consequent surge in prices of lithium, leading automakers have been scrambling to lock in long-term supplies. Some are signing long-term supply contracts with several lithium producers at once; others are making forays into the mining and refining industries. Thus, General Motors is bidding for a stake in Vale SA’s (VALE) base metals unit, while Tesla is considering a takeover of battery-metals miner Sigma Lithium (SGML).

Lithium prices surged in 2021-2022 on the back of post-Covid supply-chain disruptions. As the supply chains healed, the prices fell strongly from their previous extreme highs but began to crawl back up this spring as demand from EVs and stationary energy storage continues to boom. In the past month alone, lithium prices surged by over 50%.

Lithium-Powered Stocks: Albemarle vs. Pilbara

Obviously, numerous companies are benefiting from the surging demand for lithium batteries, from miners of the metal through refiners to countless affiliated industries. Let’s have a look at two major beneficiaries and compare their outlook.

Albemarle: What is the Outlook for the Stock?

Albemarle Corp. (ALB) is a global leader in the production various of chemicals for consumer electronics, petroleum refining, utilities, and many more. Albemarle is the world’s largest producer of bromine and one of the major producers of oil refining catalysts. Despite the company’s product diversification, it is best known as the world’s largest lithium producer.

Albemarle Corporation is a large-cap company with a $25.9B market cap, founded in 1887. Albemarle has been included in the FORTUNE 500 list this year, as the company continues to capitalize on the surging demand for lithium, growing its market share and revenues. ALB is working to expand its own lithium mining and extracting operations in Nevada, Chile, and Australia. In addition, it grows capacity by taking over lithium producers around the world. The company also refines the material into compounds that are used in battery production, which allows the company to control larger parts of the battery-metal production than just mining. ALB  has long-term supply agreements with Tesla (TSLA) and other prominent EV makers; it has recently closed a five-year deal with Ford (F). 

Albemarle’s financial health is as good as perfect. It has a low debt-to-equity ratio of 33%, which has been falling in the past five years, with short-term assets covering well both its short- and long-term liabilities. ALB’s debt is well-covered by operating cash flow, while EBIT covers interest payments many times over.

One of the most outstanding features of Albemarle is its profitability. ALB’s Return on Equity (ROE) of 48.9% is considered outstanding, especially compared to the industry’s average of 11.4%. The company’s Return on Assets (ROA) of 21.5% is almost three times that of its industry average; Return on Capital Employed (ROCE) of 24% points to very efficient use of capital resources.

The lithium craze has been paying off for the company, as seen in ALB’s financial results. In the first quarter of 2023, the company reported a 130% year-on-year increase in net sales and a 334% jump in EPS. The triple-digit growth in earnings per share has been evident in ALB’s reports in the last five quarters in a row. The company has surpassed analysts’ earnings expectations in each quarter since Q1 2020. In the next five years, the average annual EPS growth is forecasted to be 35%.

Albemarle’s stock has brought its long-term holders over 146% in the past five years and has surged 197% in the past three years. However, in the shorter period, ALB’s stock performance was less spectacular: in the past 12 months, ALB gained 6.7%; year-to-date, it has risen 7%. ALB’s weak performance since the highs of 2022 has coincided with lithium prices’ decline in the same period; its strong rebound in the past month was also spurred by a jump in the metal’s price. As a result of the previous declines in the stock, ALB now trades with a significant discount to its sector: Albemarle’s TTM P/E is 7.1 and Forward P/E is 9.0.

ALB carries an “Outperform” Smart Score of 9/10 on TipRanks with a “Moderate Buy” recommendation:

Analysts’ average upside forecasted for the stock is 17.25% in the next 12 months, with notable differences in price targets between TipRanks’ highest-rated analysts. For instance, while Deutsche Bank and Berenberg forecast a decline for the stock, the majority of analysts, including those from Jefferies, Citi, and UBS, forecast share price appreciation over the next year.

Pilbara: What is the Outlook for the Stock?

The second-biggest lithium producer in the world is Sociedad Química y Minera de Chile S.A. (SQM), while the third- and fourth-largest are Chinese firms. However, as we focus on the West’s efforts to localize essential elements’ production, we’d like to compare Albemarle to another Western company. Therefore, we shall talk about Pilbara Minerals Limited (AU:PLS).

Pilbara Minerals Ltd. explores for, develops, and operates mineral resources in Australia. The company primarily holds a 100% interest in the Pilgangoora lithium-tantalum project located in the Pilbara region of Western Australia. The Pilgangoora ore body is one of the largest hard rock lithium deposits in the world and is considered strategically important within the global lithium supply chain.

Pilbara Minerals has become a major player in the rapidly growing lithium supply chain, underpinned by increasing demand for clean energy technologies such as electric vehicles and energy storage as the world pursues a sustainable energy future. The company was incorporated in 2005 and is based in West Perth, Australia.

Pilbara is trading on the Australian Securities Exchange (ASX) since 2007 and on U.S. OTC markets since 2016 under the ticker PILBF. With a market cap of $9.45B, it is a mid-cap company, bordering on large. The company belongs to the Materials Sector (Industry: Metals and Mining).

Pilbara’s financial health is no less than outstanding. It has more cash than its total debt, with the debt-to-equity ratio having been reduced from 46% to under 9% over the past 5 years. PLS’s short-term assets exceed both its short- and long-term liabilities; interest payments on its debt are covered by EBIT thousands of times over.

Pilbara’s asset growth reached almost 200% in the past 12 months. The miner is delivering plenty of free cash flow from its operations. Return on Equity (ROE) of 98% is outstanding even for the most profitable companies in the world; so is its Return on Assets (ROA) of 45%. Coupled with the Return on Capital Employed (ROCE) of 82%, these indicators are pointing to an exceptional level of profitability and capital efficiency.

On the flip side, Pilbara’s fortunes are tied to the price of lithium, as currently, the company is strictly a mining play. To wit, the company has begun turning in positive half-year EPS and Operating Income numbers only in H2 2021. Even as lithium prices boomed from June 2021 to October 2022 and PLS’ earnings surged by hundreds of percent, the company missed analysts’ EPS estimates in both H1 and H2 2022. On the other hand, given surging optimism regarding lithium demand and prices, these estimates may have been overblown.

Current analysts’ forecasts concerning Pilbara’s financial performance are quite negative, with projected average annual declines in both top- and bottom-line numbers in the next three years. In the short term, PLS could be negatively affected by the agreement about to be signed between the EU, the biggest source of demand for EV batteries, and Chile, with the aim to develop value-added lithium projects in the country. The outcome of the agreement could be a negative factor for both supply to countries outside of Europe, and the demand from producers outside of Chile.

Longer-term prospects look brighter, though, both for Pilbara and for other Australian producers of lithium and other essential minerals. Australia mines over half of the world’s lithium, and virtually all of it is currently shipped to China for processing, as the Asian giant has over 50% of the global lithium refining capacity. As a part of the Western effort to break the dependence on China, the Australian government is exploring ways to help local companies bring all parts of the battery-making process closer to home. The Australian government has already penciled in hundreds of millions of dollars toward supporting the lithium refining industry in the country.

Australia’s largest independent lithium miner, Pilbara, is at the apex of these efforts. The company is currently exploring the possibility of adding a refining process to its operations through cooperation with local technology firms. If it materializes, the addition of the refining business will also allow Pilbara to tap into the U.S. financing projects aimed at reducing China’s green energy dominance through U.S. companies or firms located in countries with which the United States has free trade agreements. Australia’s control of lithium mining increases its chances to assert influence further down the supply chain.

Although localizing the lithium-battery supply chain is a costly business, which would certainly increase the prices of the end product, geopolitical considerations may well prevail over cost considerations. Besides, with the projections of possible battery-grade lithium scarcity in the next years, EV producers will probably be happy to purchase their inputs even at higher costs.

Pilbara’s stock has surged 462% in the past five years and has risen 119% in the last 12 months. Year-to-date, PLS is up 28.7%. Despite that, the stock is trading below the averages for Australia’s mining industry, at a TTM P/E of 8.8 and a Forward P/E of 7.4.

Pilbara carries an “Outperform” Smart Score of “Perfect Ten” on TipRanks with a “Moderate Buy” recommendation:

Analysts’ average upside forecasted for the stock is 6.89% in the next 12 months; however, analysts carry conflicting opinions that vary considerably from one another. For instance, while Goldman Sachs projects an upside of 7.3%, J.P. Morgan sees a decline of the same magnitude.

Conclusion: PLS for Stock Trading, ALB for Long-Term Investing

To sum it all up, both Albemarle and Pilbara are potentially very profitable lithium plays; both are very profitable companies with great finances. I believe that for long-term or volatility-sensitive investors, ALB would be the better choice as it is a more diversified, large-cap company with a much more stable share price performance. Meanwhile, Pilbara’s prospects hinge on its ability to expand and diversify operations; its stock is much more volatile – but can also deliver much higher short-term returns on the back of the renewed lithium price increases. However, PLS’s strong run-up in the recent period leaves it with less room for upside than that of ALB.