Up to date on November twenty fifth, 2022 by Bob Ciura
Lithium, additionally referred to as “white petroleum” is without doubt one of the flashier metals you’ll encounter.
Electrical autos have gotten the true drivers of demand, as an electrical automotive requires 5,000 to 10,000 instances as a lot lithium as a cell phone. Additional, demand for electrical autos is skyrocketing as increasingly legacy producers make investments billions of {dollars} within the area.
This has prompted curiosity in investing in lithium shares to surge.
Due to this, now we have created an inventory of lithium shares (together with vital monetary metrics resembling price-to-earnings ratios and dividend yields) that may be downloaded utilizing the hyperlink under:
This information provides an summary of the lithium trade and an in depth evaluation of lithium shares.
Desk of Contents
Lithium Business Overview
Whereas Lithium is white or grey in typical type, when it’s thrown into a fireplace, it turns vivid pink. The lithium mineral was documented within the 1790s, however it wasn’t till 1855 that the ingredient was separated and recognized.
Lithium (atomic image Li) has many distinctive traits. It’s mild and tender – tender sufficient to be minimize with a butter knife and light-weight sufficient to drift on water.
Additional, the steel has a comparatively low melting level however a excessive boiling level. Its makes use of range dramatically, from manufacturing plane and batteries to psychological well being drugs.
In 1991 Sony popularized the lithium-ion battery, which has change into an important a part of practically each digital machine. Naturally, the usage of electronics has taken off, with cellphones main the way in which within the final decade.
In 2009, the lithium-ion battery made up roughly 21% of all lithium consumption.
In 2021, about 74% of lithium produced went to battery manufacturing – greater than tripling its share (in a rising market) in simply over a decade. Given the extreme demand for electrical autos globally, we count on this can proceed to surge.
Extracting Lithium
There are two most important methods of extracting lithium: mining and brine water.
Curiously, about two-thirds of lithium is extracted through brine water. The very best concentrations of those lakes are present in Chile and Argentina.
Lithium is obtained through evaporation within the type of lithium carbonate, the uncooked materials utilized in lithium-ion batteries. This course of additionally leaves behind magnesium, calcium, sodium, and potassium.
Whereas brine mining is a prolonged endeavor – normally taking eight months to three years – it’s nonetheless normally extra accessible and cheaper than arduous rock mining.
The remaining quantity of lithium is present in conventional mining operations.
The lithium focus is extra vital in arduous rock mines, however the price to function these mines and the environmental and geological influence is way better. Nonetheless, a tough rock mine in operation may be aggressive with an upstart brine mine.
Whereas there are 145 minerals containing lithium, simply 5 are utilized in lithium extraction.
Furthermore, of those 5, spodumene makes up the lion’s share (~90%) of mineral-derived lithium. The mineral is heated, cooled, and blended with sulfuric acid to create lithium carbonate.
Lastly, a minimal quantity of lithium is being recycled from electronics. This methodology doesn’t present pure sufficient lithium to make new batteries, however it’s appropriate for different makes use of, resembling glass and ceramics.
Provide
Complete lithium manufacturing in 2021 amounted to 100,000 MT (metric tons), which we count on to proceed rising, given the seemingly insatiable demand.
Listed here are the highest lithium-producing international locations in 2019:
1. Australia = 51,000 MT (60% of worldwide manufacturing)
2. Chile = 16,000 MT (19%)
3. China = 8,000 MT (8%)
4. Argentina = 6,200 MT (7.3%)
5. Zimbabwe = 1,600 MT (1.9%)
As you possibly can see, lithium manufacturing is very concentrated, with considerably all of it being produced by simply 5 international locations and Australia being a majority by itself.
Certainly, Australia and Chile alone account for nearly 80% of the manufacturing market. The US is a tiny participant on this market, with a fraction of a % of the market share.
Complete worldwide lithium reserves are estimated to be 20 million metric tons.
Lengthy-term mining exercise will possible proceed to be pushed by Chile, China, Australia, and Argentina.
Demand
The demand for lithium presently has three most important drivers: Continued cell machine adoption, vitality storage for electrical grids / renewable vitality, and electrical autos.
As famous above, brief and intermediate-term demand for lithium will possible rely on the dynamics of the electrical automobile market.
Cellular machine adoption will proceed to be a driver, however electrical autos require 1000’s of instances as a lot lithium and therefore have a way more vital affect.
Batteries for storage for renewable vitality may very well be a necessary driver down the road, however that’s considered as extra of a long-term demand driver.
International electrical automobile gross sales are anticipated to exceed 14 million by 2025 and can possible develop over the following a number of many years as electrical battery prices change into cheaper than inner combustion engines. As well as, legal guidelines towards inner combustion engines have popped up in varied developed international locations in Europe and the US, that means governments are driving customers over the long run towards electrical autos.
Supply: IEA, International electrical automotive inventory, 2010-2021, IEA, Paris
Moreover, whereas demand forecasts range extensively, it’s primarily anticipated that electrical automobile manufacturing will check provide within the years and many years to come back. We are able to see that electrical automobile registrations are mushrooming increased as producers create extra provide annually to satiate shopper demand.
Certainly, some consider that electrical automobile adoption shall be stymied by the provision (or lack thereof) of essential elements like lithium, because the current ramp-up in demand strikes a lot sooner than the power to ascertain new mines, which frequently takes years.
Nonetheless, regardless of super expectations, it needs to be famous that whereas lithium is a necessary a part of electrical autos, it’s not essentially a elementary value driver.
Extra vital value drivers may embrace nickel and cobalt, making up ~73% and ~14% of a typical battery, in comparison with ~11% for lithium. Tesla’s Elon Musk calls lithium “the salt on the salad,” noting the comparatively low expense of the fabric in comparison with the automobile’s general value.
Whereas ample lithium reserves can be found, the demand has picked up tremendously, resulting in supply-side constraints. Consequently, pricing may be unstable. Battery-grade lithium costs, nonetheless, have stabilized considerably previously couple of years.
Investing In Lithium
There’s a solution to immediately and broadly spend money on the lithium trade: The International X Lithium & Battery Tech ETF (LIT).
The ETF “invests within the full lithium cycle, from mining and refining the steel, by way of battery manufacturing.” The fund goals to “present funding outcomes that correspond to the worth and yield efficiency, earlier than charges and bills, of the Solactive International Lithium Index.”
The “earlier than charges” portion is important, as administration charges stand at 0.75% yearly. Furthermore, the present dividend yield is negligible.
The fund was began on July twenty second, 2010. It has generated respectable returns previously 5 years, rising about 70% in complete versus the S&P 500’s rise of 55% in the identical interval.
Whereas the ETF’s efficiency has been good over time, the ETF has vastly underperformed extra not too long ago. The S&P 500 has fallen about 14% previously 12 months, whereas LIT’s decline is double that quantity. As well as, previously 12 months, belongings have fallen from about $6 billion to only beneath $4 billion, a lot of which was because of the poor efficiency of the ETF up to now in 2022.
The fund holds 46 securities, however the high 10 positions make up 58% of the ETF’s complete belongings:
1. Albemarle (ALB): 15.1% of belongings
2. Sociedad Quimica Y Minera De Chile SA ADR (SQM): 6.2%
3. Samsung SDI Co Ltd: 5.4%
4. Eve Power Co: 5.3%
5. TDK Corp.: 5.1%
We don’t discover this ETF enticing – the administration price and previous report to this point have confirmed to be unimpressive – however it does supply a possibility to debate the main gamers within the trade.
Lithium Mining Shares
For a very long time, the lithium mining trade was managed by the “huge three:” Albemarle (ALB), Sociedad Quimica Y Minera de Chile (SQM), and FMC (FMC).
Rockwood Holdings was additionally a major participant, however Albemarle acquired it a number of years in the past. These three companies accounted for 85% of the world’s lithium market share.
Nonetheless, extra not too long ago, China has entered the market in an enormous manner. As an illustration, Australia’s largest mine, the Greenbushes, is 51% managed by China’s Tianqi Lithium and 49% owned by Albemarle.
Immediately, the “huge three” market share has dropped to 53%, whereas Chinese language corporations management about 40% of the world’s lithium market share.
Listed here are the 5 largest lithium-mining companies:
1. Albemarle
2. SQM
3. Tianqi Lithium
4. Jiangxi Ganfeng Lithium
5. Mineral Sources Ltd.
Whereas the 2 Chinese language shares can’t be invested in simply, the opposite three lithium-mining companies do supply publicly traded shares within the US:
Lithium Mining Inventory: Albemarle (ALB)
Albemarle is the most important producer of lithium and the second-largest producer of bromine globally. The 2 merchandise account for practically two–thirds of annual gross sales. Albemarle produces lithium from its salt brine deposits within the U.S. and Chile.
The corporate has two joint ventures in Australia that additionally produce lithium. Albemarle’s Chile belongings supply a really low–value supply of lithium.
The corporate operates in practically 100 international locations and consists of 4 segments: Lithium & Superior Supplies (49% of gross sales), Bromine Specialties (21% of gross sales), Catalysts (21% of gross sales), and Different (9% of gross sales).
Albemarle produces annual gross sales of $7.3 billion.
Albemarle has elevated its dividend for over 25 consecutive years. Consequently, it’s on the unique Dividend Aristocrats record.
Click on right here to obtain our most up-to-date Certain Evaluation report on Albemarle (preview of web page 1 of three proven under):
Lithium Mining Inventory: Sociedad Quimica Y Minera de Chile (SQM)
Sociedad Quimica Y Minera de Chile ADR, extra succinctly often known as SQM, is a Chilean commodities producer specializing in lithium, potassium fertilizers, iodine, and photo voltaic salts. The corporate ought to produce simply over $10 billion in income this 12 months.
On a per-share foundation, shares commerce fingers round $99. The inventory has a ~6% present dividend yield.
SQM’s most spectacular belongings are the low-cost lithium deposits in Chile’s Salar de Atacama, which has each the very best focus of lithium globally and advantages from the excessive evaporation charges within the Chilean desert.
The corporate additionally has about half the market share in potassium nitrate and is the world’s largest producer of iodine. These three industries ought to profit from the continued traits towards electrical autos, elevated crop manufacturing, and healthcare spending.
The corporate has a long-term contract with Chile to extract 414,000 metric tons of lithium by way of 2030.
Lithium Mining Inventory: Mineral Sources Ltd. (MALRF)
Mineral Sources is a mining firm that’s primarily based in Australia. The corporate primarily operates in its house nation, China and Singapore. It operates a diversified mining enterprise comprising Mining Providers and Processes, Iron Ore, Lithium, Different Commodities, and Central segments. Via these segments, the corporate affords an unlimited array of mining providers, but additionally engineering and building providers, logistics, processing, ship loading, advertising, and extra. The corporate was based in 1993, generates over $4 billion in annual gross sales, and has virtually 4,000 staff worldwide.
To make sure, the corporate isn’t a pure play on lithium mining, however it has benefited massively from the ramp in lithium demand. Additionally, given it has belongings in probably the most lithium-rich international locations on the earth – Australia and China – we consider it is going to be an important participant for a few years to come back. Certainly, income needs to be near $5 billion subsequent 12 months.
The dividend is irregular and is paid solely semi-annually, however immediately the inventory yields about 1.2%. It’s, due to this fact, not a very sturdy earnings inventory, particularly given the unpredictable nature of funds to shareholders.
Lithium Battery Shares
The producer aspect is comparatively concentrated, though not too long ago, China has been taking vital market share from the “Massive 3.” On the appliance aspect, there are all kinds of battery makers, and the market share continues to be considerably up for grabs.
Right here’s a sampling of the highest 10 lithium-ion battery producers on the earth:
1. Up to date Amperex Know-how
2. BYD
3. CALB-CALB Co., Ltd.
4. LG Chem
5. Panasonic
6. Samsung SDI
7. SK Innovation Co Ltd
8. Shenzhen Grepow Battery Co., Ltd.
9. Toshiba Company
10. A123 Methods LLC
So far as investable fairness positions for U.S. buyers go, the entire above are headquartered outdoors of the U.S. / listed on a international trade. That is indicative of the place lithium deposits are on the earth and the truth that the US has no considerable market place because of this.
Nonetheless, two of the above have US-listed ADRs, which suggests US buyers can simply spend money on these corporations’ futures: LG Chemical, Panasonic, and Toshiba.
Lithium Battery Inventory: Panasonic (PCRFY)
Panasonic supplies EV batteries for the world’s automakers, with Tesla (TSLA) as its most notable buyer. Nonetheless, this is just one portion of the Japanese enterprise. Panasonic’s working segments embrace Automotive & Industrial Methods, Eco Options, Related Options, Home equipment, and Others.
As a common theme, earnings have been unstable. Panasonic is a diversified enterprise, going properly past the lithium battery market, with arms in digital element mounting, home equipment, and residential constructing merchandise.
This advantages security (when one division does poorly, different divisions can typically make up the shortfall), however it could additionally dilute the expansion potential a “pure play” lithium battery maker might need.
Nonetheless, Panasonic is well-positioned within the trade.
Lithium Battery Inventory: Toshiba Company (TOSBF)
Toshiba supplies digital gadgets and battery storage options globally. The corporate has many companies outdoors of battery manufacturing, so like Panasonic, Toshiba isn’t a pure play on lithium or batteries. Nonetheless, Toshiba has scale and model recognition within the battery area, promoting varied digital gadgets with lithium-ion battery energy cells.
Toshiba’s income has waned lately, however the firm is beneath a sale course of presently. Earlier this 12 months, Toshiba submitted a proposal to separate itself into two publicly-traded, separate entities. That proposal was rejected, and a strategic evaluation was then undertaken. Toshiba obtained a number of affords for buyouts, and it seems it is going to be taken non-public between $16 and $19 billion, making it one of the vital vital non-public fairness offers ever in Japan.
The Greatest Lithium Shares
Whenever you look throughout the publicly traded lithium market, it’s arduous to discover a “pure play” lithium inventory. Even among the many lithium producers, every has separate and important operations in different areas.
Even an ETF targeted particularly on lithium casts a large web in varied industries.
On the mining aspect, you’ve gotten the “Massive 3” and a gaggle of Chinese language corporations working to take a major share.
Normally, the mining aspect seems considerably attention-grabbing from an financial standpoint because of the inelastic demand for uncooked supplies. Nonetheless, we notice that any sort of mining, together with lithium, is usually extremely cyclical resulting from inevitable pricing and demand swings.
As a result of lithium is important however not an enormous value driver in battery manufacturing, battery makers are unlikely to considerably scale back their consumption even within the face of upper lithium costs.
Whereas miners can not dictate increased costs alone, they’re more likely to profit from increased costs if they arrive about from provide shortages / sooner demand development.
In our view, SQM and Albemarle appear like probably the most thrilling lithium shares on the mining aspect resulting from their premium place in Chile – a place providing the deepest reserves coupled with excessive concentrations and an excellent setting.
On the battery aspect, discovering “pure play” lithium shares is much more difficult. There are many corporations out there, however from an funding standpoint, there may be nonetheless a whole lot of uncertainty.
Whereas there very properly may very well be many “winners” within the trade over the long run, present buyers will possible should take care of substantial earnings volatility and excessive expectations briefly to intermediate time period. That is additional difficult as a result of the battery enterprise is usually a small piece of a conglomerate firm.
Closing Ideas
Lithium is right here to remain. There’s a cause that it has gained reputation, particularly within the final decade. It’s a flexible steel that has considerably improved how we work, talk and get round.
Furthermore, future demand seems strong because the transfer in direction of cell gadgets, renewable vitality, and electrical autos seems to be on the upswing (with the potential for a really lengthy tail).
Nonetheless, buyers ought to recall this Ben Graham quote:
“Apparent prospects for bodily development in a enterprise don’t translate into apparent income for buyers.”
The takeaway is two-fold.
Choosing a development trade, normally, will not be notably troublesome. As an illustration, it’s conceivable that simply earlier than (and even throughout) the ramp-up of trains, cars, planes, and the Web, a possible investor may level to those areas as “development industries.”
And certainly, they might have been right. For instance, an investor pointing to the Web within the mid-1990, for instance, would nonetheless be seeing that development trade play out immediately.
But there are two issues.
First, choosing a development trade will not be exceptionally troublesome, however choosing “winners” can check one of the best analyst. Out of the car or Web, only a handful of “winners” emerged, whereas lots of or 1000’s have been solid apart – as soon as hyped, as soon as with nice expectations, however finally for naught.
The second consideration is valuation.
Even should you do occur to choose the “winners,” you continue to should be involved in regards to the value you pay. As a hypothetical, a safety buying and selling at, say, 40 instances earnings that develop by 10% yearly for a decade and later commerce at, say, 20 instances earnings would supply buyers with returns of simply 2.6% per 12 months.
The consideration isn’t just, “will an organization develop?” however, extra importantly, “will it develop quick sufficient to justify the present valuation?” Expressed in another way, will present buyers seize their “justifiable share” of funding outcomes? We notice that Albemarle has traded with extraordinarily wealthy valuations lately, and whereas the corporate sports activities a terrific development profile, one wonders how a lot that can truly profit shareholders immediately.
Moreover, whereas lithium seems poised to be in stable demand for the foreseeable future, you must also contemplate the opportunity of new applied sciences coming alongside. Demand alone is thrilling however may result in surprising outcomes if it creates sufficient new entrants.
General we’re upbeat on the steel and its prospects over the intermediate to long run, with the above caveats in thoughts.
Albemarle may very well be one of the best inventory for earnings buyers within the lithium trade. It derives a good portion of its income from lithium, it has stakes in vital reserve areas around the globe, the dividend payout ratio is modest, and the corporate raises its dividend annually. The alternatives are restricted, given that the majority lithium and/or battery-focused shares are headquartered and traded outdoors the US.
We contemplate many different lithium shares too dangerous, as there are various unknowns coupled with super expectations.
Different Dividend Lists
Worth investing is a beneficial course of to mix with dividend investing. The next lists include many extra high-quality dividend shares:
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