Investors who have dived into the lithium industry know that FMC Corp., Albemarle, and Sociedad Quimica y Minera (SQM) are among the best lithium stocks you can buy. They own commanding global market share totaling an estimated 70%, are investing heavily in production capacity expansion to keep pace with rising demand and have seen their stocks climb higher at an incredible rate.
Yet while the three largest producers may be the best lithium stocks to buy for 2018, they'll soon have some serious competition from relative newcomers entering the market. Investors may not know them well today, but under-the-radar lithium stocks Orocobre (NASDAQOTH:OROCF), Lithium Americas (NASDAQOTH:LACDF), and Veolia Environnement (NASDAQOTH:VEOEY) all should be added to your watch list in 2018 -- and may even be worth considering buying now.
The new kid on the block
The Lithium Triangle of South America is a high-altitude region encompassing parts of Chile, Argentina, and Bolivia where 80% of the world's lithium production originates. There's over 10 million tons of lithium equivalent held in deposits there in the form of super-salty underground water called brine. While the region has long been dominated by the world's leading producers, nearly insatiable demand for lithium in recent years assured others would arrive eventually.
Enter Orocobre, which has the distinction of being the first new lithium brine producer in 20 years. The $1.5 billion Australian miner couldn't muscle its way into the region and bring production online all alone, so it teamed up with Japan's prized industrial conglomerate Toyota Tsusho. The pair are developing a promising lithium asset as part of a joint venture that is 73% owned by the tiny newcomer and 27% owned by the deep-pocketed partner.
Output from its first producing asset in Olaroz has steadily risen from 7,000 metric tons (MT) of lithium carbonate equivalent in fiscal 2016, the first year of production, to an expected 14,000 MT in fiscal 2018. By comparison, SQM of Chile will boost lithium carbonate production to 63,000 MT this year and add another 13,500 MT of the higher-value battery-grade material lithium hydroxide to boot.
What Orocobre lacks in production volumes, it makes up for in growth potential. In the first half of 2018, investment decisions will be made on a potential expansion that would double annual lithium carbonate production to 35,000 MT.
With or without the expansion, Olaroz came online at just the right time. Steadily increasing selling prices have allowed Orocobre to generate healthy cash flow relative to its output. That's not too surprising, considering the asset boasts a gross margin of 62%. Even after doubling output, the "mine" will have over 20 years of life -- and potentially decades more if preliminary resource estimates prove correct.
That's not all. Orocobre is part of a consortium of lithium producers developing a brine deposit in Cauchari, just south of Olaroz. Preliminary drilling tests hint that the asset could boast significant concentrations of lithium. Moreover, its proximity to Olaroz will allow it to easily tap into existing transportation and processing infrastructure, meaning it has the potential to become a very competitive asset.
Multiple shots on goal
The Cauchari asset that caught the attention of Orocobre has also attracted Lithium Americas, which formed a 50/50 joint venture with SQM to help bring the project into production by the second half of 2019. Although it's expected to require $425 million in capital expenditures to get off the ground, the mine is expected to produce 25,000 metric tons per year of lithium carbonate equivalent for up to 40 years.
The good news is that having four companies teaming up on Cauchari significantly de-risks the asset's development. The better news is that Lithium Americas wants to leave no room for doubt in its ability to not only contribute but also become a leading lithium company.
Last year it raised $285 million from two leading mining and chemical processing companies -- Ganfeng Lithium of China and Bangchak of Thailand. The company also has its hands all over a development stage lithium asset in Nevada. A pre-feasibility study on the potential to produce high-grade lithium hydroxide from solid ore is expected to be completed and released by the end of the second quarter of 2018.
While there's no official word on how large the Nevada project could be or what cost profile it may boast, Lithium Americas owns 100% of the asset right now. Perhaps equally important, it's right down the road from a certain lithium-ion battery production facility in Sparks, Nev.
Lithium Americas is well capitalized to cash in on its production and growth potential in the next few years. It ended the third quarter of 2017 with $73 million in cash and $205 million in available credit to draw upon. Throw in corporate partners that are heavily invested in the company's future (as their own way to buy in to the Lithium Triangle), and it's easy to conclude there's a comfortable safety net in place. That said, this won't be an under-the-radar lithium stock for long: It's expected to begin trading on the NYSE any day now.
A sneaky supplier to the global lithium industry
French industrial conglomerate Veolia Environnement may not be synonymous with lithium, but it will play a critical behind-the-scenes role for global production volume growth in the years ahead. Why?
Consider South America's infamous Lithium Triangle. Producers pump liquid held in large underground reservoirs to pools on the surface. Next step: wait -- for months at a time. That's how long it takes the sun to evaporate most of the water in the brine, leaving behind a layer of concentrated minerals that is scooped up and sent to processing facilities. Lithium salts are then separated from other materials, including potash, calcium salts, and magnesium salts.
The solar evaporation process isn't exactly the poster child of efficiency, but it's accompanied by relatively low production costs. And since global lithium demand is expected to rise for the foreseeable future, the giant lag time from production to sales isn't as risky as it would be in a more balanced market.
You can probably see where this is going. Any process that requires shuffling around large volumes of water and slurry presents a ripe opportunity for water specialist Veolia Environnement -- and it's positioning itself to become the go-to technology provider in the Lithium Triangle.
The company's HDP Evaporation and Crystallization Technologies (where there are salts, there is crystallization) is already deployed by leading lithium producers in the region. It allows miners to concentrate, purify, and separate all the minerals -- including battery-grade lithium hydroxide and lithium carbonate -- that can be monetized from a salt brine while removing impurities. More importantly, it allows them to do so quickly and economically.
Simply put, Veolia Environnement's financial flexibility, global footprint, and process technology expertise will allow it to piggyback on the growth of the lithium industry. Indeed, the stock enjoyed a 50% gain in 2017, which is more befitting a leading lithium stock than a boring old industrial conglomerate.
What does it mean for investors?
Most investors who have taken the time to dig into the lithium industry are aware of FMC Corp., Albemarle, and SQM, but they won't be the only lithium stocks garnering Wall Street's attention in 2018. The atmosphere is ripe for up-and-coming growth companies Orocobre and Lithium Americas to burst into the conversation and into investors' psyches. After all, both stocks mimicked the returns of their better-known peers last year, posting gains of 56% and 179%, respectively.
Even if Orocobre and Lithium Americas are too risky for your portfolio right now, then there's always the under-the-radar option of Veolia Environnement, which provides most of the process technology needed for the industry. On the surface it may seem silly to consider the French industrial conglomerate as a lithium stock, but it delivered lithium-esque returns of 50% in 2017 -- better than Albemarle.
Long story short, lithium is poised to remain an ultra-high-demand resource for decades to come. If investors do their homework, then they're bound to find above-average investment opportunities to consider buying now.