Let’s talk about electric vehicles (EVs) and their batteries. The high price of gasoline – still up about $2 since President Biden took office – has boosted interest in EVs. Greater customer curiosity will lead naturally to higher demand, and now we get to batteries, and lithium.
Lithium is a metallic element essential in the construction of high-voltage battery systems, and every EV built needs an average of 8 kilos of the metal. Industry experts are saying that lithium demand will far outstrip supply for the foreseeable future, until at least 2030. The predictable consequence is rising prices. Since January of this year, lithium has doubled in cost, and it is up some 500% or more in the past 12 months.
In an important point, lithium is not rare. Lodes are well-known, and the key bottleneck, according to Tesla CEO Elon Musk, is processing the ores into forms usable in industry. Musk sees this point as a potential entry for entrepreneurs, noting that the field offers high margins and profits.
“I would really like to encourage, once again, entrepreneurs to enter the lithium refining business. You can't lose,” Musk said. He has added, in a similar context, that “lithium batteries are the new oil.”
Against this backdrop, we’ve used the TipRanks database to locate two Buy-rated stocks that are heavily involved in the production and refining of lithium, and are well-positioned to benefit from a continued boom in lithium demand. Let's take a closer look.
Piedmont Lithium (PLL)
The first stock we’re looking at is Piedmont Lithium, a company focused on increasing the US share of the world lithium market. As the company points out, the US can claim some 17% of the world’s proven lithium reserves, yet produces only 2% of the lithium on the world market. Piedmont has mining assets in North Carolina, at the proven Carolina Tin Spodumene belt less than an hour’s drive from the city of Charlotte. Piedmont is working to develop these assets into a sustainable source of battery-grade lithium hydroxide, building on its advantageous location.
Piedmont currently holds more than 1,100 acres in the Tin-Spodumene Belt (TSB) region, and is working to increase its holdings. The TSB was, from the 1950s to the 1980s, the major source of lithium for Western economies, and given its strategic location near a rapidly growing US tech center, Piedmont believes it can become that important once again. The company is targeting eventual lithium production of 160,000 tons per year, with capacity to refine that into 22,700 tons of lithium hydroxide annually.
In addition to the North Carolina assets, Piedmont is actively seeking additional North American lithium sources. In May and June, the company announced its partnership with Sayona Quebec to the restart the North American Lithium (NAL) project at Val d’Or, Quebec. The restart will entail costs near $80 million, but the company estimates that the project can reach 168,000 tons annually of 6% spodumene concentrate, with a projected lifespan for the mine of 27 years. Piedmont aims to have the NAL in production during 1H23.
Piedmont also has a partnership with Atlantic Lithium, for development of the Ewoyaa project in Ghana. This mining project has potential to exploit some 30.1 million tons of Li2O at 1.26% concentration – an industrially viable lithium mine. While Piedmont’s largest reserves are in North Carolina, it is important to note that the Quebec and Ghana projects are moving forward on a faster timeline.
Of interest to investors, Piedmont in July of this year became a member of the Russell 2000 stock index.
In coverage for Cowen, analyst David Deckelbaum notes all of this, especially the company’s upcoming catalysts and the long-term nature of its Carolina assets. He writes: “Piedmont is an under-appreciated vertical integration lithium story that has significant potential to grow a presence in the U.S. as a leading battery grade hydroxide converter, fed through advantaged spodumene contracts. PLL is catalyst rich in 2H22, including announcements around its LHP-2 conversion facility and first spodumene sales in Quebec in 1H23, among the earliest of non-producing names…"
“Carolina Lithium will indeed present an attractive growth opportunity beyond 2025 as the mine and plant go through necessary permitting, but in the meantime, we expect shares to begin to reflect value from more near term spodumene production at the Abitibi Hub in Quebec and Ewoyaa in Ghana," the analyst added.
Deckelbaum’s comments support his Outperform (i.e. Buy) rating on the shares, and his price target, at $90, suggests an upside of 67% in the coming months. (To watch Deckelbaum’s track record, click here)
Piedmont has attracted positive attention from Wall Street, and its 3 positive recent analyst reviews add up to a Strong Buy analyst consensus rating. The $89 average price target implies a one-year gain of 65% from the current trading price of $53.73. (See Piedmont stock forecast on TipRanks)
Albemarle Corporation (ALB)
Sticking with the North Carolina industrial sector, we’ll turn to Albemarle, a specialty chemical company focuses on lithium and bromine refining. Albemarle is currently the world’s largest provider of battery-grade lithium products for the EV market. The Charlotte-based company boasts a global network, and three major international sources for its lithium: two salt-lake brine sources, one in Chile and one in Nevada, and a 49% share in Australia’s Talison spodumene mine.
Rising prices and increasing demand in the lithium markets have been benefiting Albemarle, as a quick glance at the company’s revenues and earnings makes clear. Albemarle has seen steady gains in both over the past six quarters, and the recent 2Q22 financial report showed continued huge gains. The top line came in at $1.48 billion, up 91% year-over-year, while adjusted EPS was reported at $3.45, an amazing 288% higher than the year-ago result.
Of these results, an impressive $891.5 million in total revenues came from the lithium segment of Albemarle’s business. This was a 178% increase year-over-year.
Looking forward, Albemarle has guided toward full-year results for 2022 of $7.1 billion to $7.5 billion, more than double the 2021 actual revenue, and expects full-year adjusted earnings of $3.2 billion to $3.5 billion, more than three times last year’s total. Along with this impressive guidance, Albemarle also expects that its business will turn cash-flow positive this year.
5-star analyst Colin Rusch, from Oppenheimer, holds the #3 rating overall among Wall Street analysts, and he is unabashedly upbeat on Albemarle.
“ALB posted another impressive beat and raise quarter as it continues to transition lithium contracts to index pricing... We are encouraged to see delivery of initial volumes from Kemberton as we believe the company will effectively optimize its production from here. We highlight ALB's meaningfully higher cash generation supporting capex for its expansion with existing assets as well a potential for incremental M&A. We continue to believe investors are underestimating the resilience of Lithium pricing given substantial demand and the reliance of newer battery chemistries on lithium quality. We remain bullish on ALB shares,” Rusch wrote.
Acknowledging the company’s potential growth, Rusch rates ALB shares an Outperform (i.e. Buy), and his $440 price target suggests an upside of ~70% for the year ahead. (To watch Rusch’s track record, click here)
What does the rest of the Street think? Looking at the consensus breakdown, opinions from other analysts are more spread out. 9 Buys, 4 Holds and 2 Sells add up to a Moderate Buy consensus. In addition, the $282.43 average price target indicates ~9% upside potential. (See Albemarle stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.