The Likely Winners in the Lithium Race

LONDON, August 9, 2017 /PRNewswire/ --

Lithium isn't even a 'commodity' in market terms, but still, it's the hottest commodity in the world. Welcome to the paradox. It's no wonder this game is causing even the savviest investors a great deal of confusion. 'Mr. Lithium', expert Joe Lowry, likens investors wanting to get in on this lucrative game to 'bambi in the headlights'.

It's hard when lithium doesn't even trade on the commodities or futures markets. Watching the industry very closely includes: Albemarle Corporation (NYSE: ALB), Sociedad Química y Minera de Chile S.A. (NYSE: SQM), Tesla, Inc. (NASDAQ: TSLA), Delphi Automotive PLC (NYSE: DLPH), Magna International Inc. (NYSE: MGA).

But what no one should question any longer is that this metal is hands down the hottest metal on the planet, and its growth is a given. As Lowry put it most recently, "Lithium demand growth is assumed; supply is the question mark." 

And if you disagree with him, well, he suggests you should instead be 'watching the proverbial cat video on YouTube', rather than reading his latest on lithium.

Why is lithium growth a given? That's easy:

For starters, EV sales are projected to hit 3 million units by 2021 in the U.S. alone, with sales set for around 4 percent of the total passenger car market. In Europe, they should capture 5 percent of the total market.

- Tesla's Model 3 went into production on 7 July, and just before that, in January, it opened the doors on its $5-billion battery giga-factory in Nevada. Elon Musk plans to use up most of our lithium supply all on his own. Tesla is also planning to build the world's largest lithium battery system in Australia. And they are not alone.

- In December, Chevrolet debuted its EV Bolt.

- To much market drama, Volvo boldly announced recently that beginning in 2019, every new car model it launches will be either an EV or a hybrid. If this isn't mainstream, we don't know what is.

- Incidentally, though few pay attention to the huge demand for lithium that will come from power storage solutions, Tesla is planning to build the world's largest lithium battery system in Australia. This is a 100-megawatt storage system that is slated to be built in only 100 days.

Right now, Tesla's biggest bogeyman is lithium supply. Meeting the supply needs of these projects simultaneously is tricky. And if Tesla is worried, then everyone who comes after will be doubly so. And this is where it gets great for lithium miners.

We've already seen how Tesla's share price is intricately tied to the supply of lithium. When the company had trouble supplying battery packs for its existing lines, it missed production goals of certain Model S and Model X cars in Q2, sending share prices down.

This is all lithium that we do not have. Remember when Albemarle said late last year that it was pretty much sold out of lithium?

If you think the price surge of Chinese spot prices for lithium in early 2017, from $7,000 per ton to nearly $20,000 per ton, was fantastic - it was just a taste of what's to come.

Here are our 5 top picks in this space right now:

1. Albemarle Corp. (NYSE: ALB)

Three companies currently control most of the entire world's supply of lithium, and Albemarle is the biggest play here. ALB gets 39 percent of its total revenue from lithium sales.

This is a great performing stock, and is fully expected to continue to outperform with a 12-month target price of $123. Overall, ALB has seen its share price jump 28 percent year-to-date, and this is a great add to any portfolio because the forward momentum looks tantalizingly promising.

According to Lowry, it's a matter of managing earnings growth to keep comparisons favorable and stock prices trending upward. The diversity of this company makes it hard to follow. The company expects earnings growth of 15.1 percent in 2018, with expected earnings per share growth rate of around 14.5 percent. This compares nicely to the industry average of 9.3 percent.

This nearly $13-billion-market-cap company is a major force in the special chemicals production sector, including globally. And lithium is really making it shine these days. This year has gotten off to an incredible start with Lithium and Bromine, and net sales are soaring. With lithium demand sure to outpace supply, Albemarle is placing a lot of emphasis on its lithium business, including with the expansion of its Talison JV in Australia, where it will double the lithium carbonate equivalent (LCE) capacity at its Greenbushes mine from 80,000 metric tons per year to more than 160,000 metric tons per year.

It's also recently acquired lithium assets from Jiangxi Jiangli New Materials Science and Technology Co. Ltd. Now it can supply high-grade lithium salts to more global customers.

Overall (and this is a big one), ALB is aiming to grab half of the growth in the lithium industry.

2. Southern Lithium Corp. (SNL.V)

This one is our biggest off-the-radar ideas of the month because this is where Mother Nature offers us the biggest potential bounty. In this case, it's the entire, untapped south side of the biggest 'lithium volcano' in the world. The same volcano that has already made a lot of people rich when one side of it was proved up way back when lithium prices were cheap.

Mother Nature, over millennia, gifted this formerly magma-spewing volcano to Argentina, turning into a lithium-rich salt flat in the Salta Province, where lithium mining hopefuls are gathering en masse to become the next suppliers of the world's most-sought-after metal.

But there's only one actual producer of lithium right now in the Salta Province, and they own the north side of the volcano, and that money-making ship has already sailed. The only lithium play here is with Southern Lithium Corp., which is sitting on the south side-and it's in the process of proving up the same lithium right now.

This could be the biggest risk/reward play on lithium in the world, and it's all going down in Argentina, which is part of the 'Lithium Triangle', and which already supplies one-third of all lithium produced globally.

We believe there's no better place to be: In the heart of lithium central, and on the side of a major lithium volcano that is in the process of being proved up.

On the north side of the volcano, prior to the increases in lithium prices over the past two years, ADY resources have proved up probable reserves of lithium worth around $1.3 billion on its Salar del Rincon property. They proved things up when lithium prices were super cheap. They watched them quadruple in the last 2 years which has bumped up ADY's probable reserves to a value over $5 Billion.

Southern Lithium's Cruz property in the same Pocitos Salar basin is on the south side, and covers a massive 22,000+ acres. It's only 11 kilometers to the south of ADY-the only producing lithium operation in the Salta Province and the Cruz property is believed to be within the same lithium rich basin.

And SNL (SNL.V) is moving forward with volcanic momentum here. They got their permit to drill on the 4th of July, and they had launched first-phase drilling 7 days later.

More importantly, not only are they already drilling, but they've got the cash to see it through. They're drilling 3 holes to prove it up, and so far, indications are that this is the exact same geology as ADY's side of the volcano.

If they do prove this up, the second ship on this lithium volcano will already have sailed, and the winds are moving it along quickly. Good report on Southern Lithium here.

3.Sociedad Quimica y Minera de Chile (NYSE: SQM)

SQM is the world's largest lithium producer, and it's a bit easier to follow than Albemarle. Right now, SQM is moving to accelerate its lithium production over the next five years, but this will also accelerate the depletion rate. Reserves could run out as early as 2022 (according to Chilean sources) in SQM's Atacama salt flat property. And Atacama is the largest reserve in the world. SQM operates 75 percent of this flat, while ALB operates 25 percent.

Some interesting catalysts for this company include the fact that GSR Capital, a Chinese private equity player is looking to buy up to 20 percent of SQM.

The Chilean giant also agreed in July to acquire a 50 percent interest in Kidman Resources' Mt. Holland lithium project in Australia, which contains an estimated 128 metric tons of resource.

The big picture here, though, is that SQM is keen to move full speed ahead with new lithium production.

4. Tesla Motors, Inc. (NASDAQ: TSLA)

What else is there to say about Tesla? Its market cap soared past GM's this year. It launched its battery giga-factory in January, and then started producing the Model 3 in early July. It's gunning for a huge energy storage outfit in Australia, and things are looking pretty grand. Everyone's surely wishing they had bought this stock before it hit the $340/share mark.

Obviously, it's not a lithium stock but its fate is certainly tied to lithium, so in many ways, this is exposure to lithium.

Tesla's got 500,000 preorders for the Model 3 to fill now. But still, the production of the first Model 3 didn't resound much with share prices, even falling a bit that same day, as traders mulled the prospects of the EV.

The general view is that this stock isn't going to see a ton of movement for the rest of the year. It would seem a great stock to own, for the long term, but it's risen so high lately that fears it can't go higher seem to prevail. Uncertainty remains over whether Tesla will be able to successfully accelerate production of the Model 3, and particularly if they will be able to speed up the upgrades. Right now, they are aiming for production of 5,000 units per week by the end of the year.

5.Global X Lithium ETF

LIT has been around for 7 years, but it's not a stunning stock story like Tesla. What it is, however, is a safer bet on lithium. There's not as much to lose here. Year-to-date, LIT is up over 25 percent, and they remain steady.

This fund has more than $262 million in assets, and it tracks the Solactive Global Lithium Index of companies that engage in lithium mining, refining and battery production. And it gives you exposure to Tesla, as well as to miners like FMC Corp.

Honorable Mentions:

Vivint Solar: Ok, so solar, why in this list, you ask? Because Vivint is riding high after announced a collaboration deal with Daimler to bring the Mercedes-Benz customizable home energy storage system to the U.S. solar market.

Delphi Automotive (NYSE: DLPH): Delphi is a world-class supplier of technologies for the automotive and commercial vehicle market. Currently, Delphi is investing in driverless car technology and has successfully tested driverless vehicles. We like Delphi as a mid-term to long-term play as it is at the core of this breakthrough technology.

Magna International, Inc. (NYSE: MGA): A division of this Ontario based company, Magna E Systems, produces innovative complete-vehicle solutions and integrates components and systems for electric and hybrid cars. As the electric car boom continues, it will be a company to watch.

By: Joao Piexe

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