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There’s just one factor standing between Tesla and world domination—the worldwide provide of lithium. And that’s excellent news for lithium producers.
When Tesla (ticker: TSLA) held its battery day on Sept. 22, CEO Elon Musk laid out plans to construct large quantities of Tesla-owned battery capability—sufficient to make about 30 million electrical automobiles by the top of the last decade, up from roughly 500,000 in 2020.
Such an unlimited enhance relies upon upon mass acceptance of electric vehicles over conventional combustion-engine ones and the creation of the infrastructure essential to gas that many EVs. However it is going to additionally require an enormous quantity of lithium to make the batteries these automobiles will run on—an enormous problem in its personal proper.
Proper now, the world mines roughly 400,000 tons of lithium a 12 months, sufficient to energy 2 million to three million electrical automobiles, although solely a 3rd of that goes to EVs proper now. That quantity should enhance maybe as a lot as tenfold to fulfill Musk’s purpose, and that doesn’t take note of other auto makers.
Tesla took one step to make sure a part of its lithium wants by signing a sales agreement with
Piedmont Lithium
(PLL) this previous week. Piedmont inventory greater than doubled after information of the gross sales settlement with Tesla broke—as properly it ought to have. The deal ensures Tesla will purchase about one-third of the startup’s manufacturing for as much as 10 years. Although Piedmont’s mine isn’t operational but, it expects to ship product to Tesla by 2022 or 2023.
Miners like
Albemarle
(ALB),
SQM
(SQM), and
Livent
(LTHM) needs to be thought-about among the many potential winners of the approaching EV growth.
Mining lithium isn’t simple—or simple to know. The provision chain is difficult. Lithium producers, for essentially the most half, don’t ship pure metallic. As an alternative, they promote merchandise resembling lithium carbonate and lithium hydroxide to battery and battery-cathode makers like
LG Chem
(051910.Korea).
Miners get the fundamental lithium from salt brines left over from historical seas in locations like Chile’s Atacama Desert, the driest place on Earth, and in arduous rock minerals resembling spodumene, present in Australia and elsewhere. Tesla’s current take care of Piedmont will present it with 60,000 tons of concentrated spodumene. That will probably be transformed into lithium hydroxide and was a battery cathode, which will probably be put right into a battery cell as a part of a Mannequin 3 battery pack.
That 60,000 tons is sufficient for roughly 150,000 to 200,000 batteries, far wanting the quantity wanted if Tesla will get wherever close to its goal. Clearly, there may be loads of progress for current lithium gamers.
One wild card for producers is lithium product costs. Business pricing is a tightly guarded secret, and pricing indexes aren’t used for transactions. Costs peaked round 2018 and traded, at some factors, for greater than $25,000 a ton. They later fell as new capability got here on line—capability doubled from 2016 to 2019—and because the economic system slipped into recession. Pricing has flattened out over the previous 12 months at about $7,000 a ton.
“The route of pricing needs to be up,” Piedmont CEO Keith Philips tells Barron’s. “How excessive they go within the subsequent cycle peak is anybody’s guess.”
Increased demand and better pricing are good tailwinds for lithium shares. So which one ought to buyers purchase? Albermarle is the protected play. It isn’t only a lithium inventory—it also makes bromine merchandise, utilized in flame retardants, and catalysts utilized by refineries. It’s anticipated to extend gross sales at a ten% clip, off a base of about $3 billion, over the subsequent three years. Buying and selling at simply 13 instances 2023 estimated earnings of $6.88 a share, it’s the most affordable lithium inventory, largely as a result of it isn’t only a lithium inventory.
SQM, which extracts lithium in Chile from salt brines, additionally makes fertilizer for agricultural markets. It’s anticipated to extend gross sales at an 18% annual clip over the subsequent three years off a base of $1.8 billion, leaving it with earnings of about $1.70 a share. At that stage, shares in SQM, which traded lately at $32.51, are buying and selling at about 19 instances estimated 2023 earnings. Shares are up about 22% in 2020.
We’re most excited by Livent, which operates property around the globe and extracts its major lithium in Argentina. Wall Road expects the corporate to develop gross sales at about 15% a 12 months on common between 2020 and 2023, from a base of $284 million. A lot of the progress comes from increased volumes. Earnings per share are anticipated to develop from six cents in 2020 to 34 cents in 2023—a 78% common annual progress price. The inventory lately traded at about $9, or 28 instances the 2023 earnings determine. The inventory is dearer than friends, however has extra to achieve from a rising tide within the lithium trade.
It’s tempting to choose the most affordable inventory, but when lithium costs begin to run, Livent appears like the most effective guess.
Write to Al Root at allen.root@dowjones.com
