Most of the world's lithium is produced in South America by just three companies: Albemarle, FMC Corp, and Sociedad Quimica y Minera (NYSE:SQM). They've been largely unable to keep pace with growing demand in recent years, which has seen prices (and profits) soar. That's been great for shareholders of the "big three," and each member of the trio has been encouraged by record selling prices to invest in new production -- but they're also being forced to make room for several well-funded newcomers.

The latest example: Lithium Americas (NYSE:LAC), which became the first new lithium stock on the American market in years after listing on the New York Stock Exchange in January 2018. While it doesn't have any assets in production today, it's on track to begin operations from a new lithium site in South America in 2020. Even better, the project is part of a joint venture with SQM, which adds legitimacy and technical know-how.

The under-the-radar lithium stock is so new it may not even be on your investing radar. Is Lithium Americas a buy on its long-term potential alone?

A businessman staring at question marks drawn on the wall in front of him.

Image source: Getty Images.

The big picture for Lithium Americas

Despite the fact that close to 80% of global lithium production originates in South America, the continent saw selling prices for lithium carbonate soar from $10,000 per metric ton (MT) at the start of 2017 to over $14,500 per MT at the beginning of this year. Then again, that's far better than the going rates in China, which have topped $20,000 per MT in recent years. That pretty much sums up the mismatch between supply and demand for the commodity.

It also helps to explain how newcomers such as Lithium Americas have found it so easy to secure financing for new production projects. The company has received $80 million in total equity investments from China's Ganfeng Lithium and Thai energy leader Bangchak, who've also provided a combined $205 million in credit to the upstart lithium producer.

The influx of cash has been used to fund Lithium Americas' portion of a 50/50 joint venture with SQM called Minera Exar, which is developing a production asset in Cauchari, Argentina. The lithium project will pump underground salty water called brine to the surface, where it will evaporate in pools and leave behind a concentrate that will be processed into several mineral products, including lithium carbonate. It's slated to come online in 2020, one year later than the initial forecast.

Piles of salts from a lithium brine site.

Piles of mineral salts ready for processing in South America. Image source: Getty Images.

The Cauchari project is expected to cost $425 million total and to produce 25,000 MT per year of lithium carbonate initially, with future expansions possible. Ganfeng Lithium has agreed to purchase 80% of the output from the first stage of the project, while Bangchak will purchase the remaining 20% of production, both at market prices. It could be a lucrative arrangement for Minera Exar.

At full tilt, the lithium brine asset could generate $300 million in annual revenue at selling prices of $12,000 per MT. The companies expect operating costs of just $2,500 per MT, which should allow the project to be comfortably profitable even if selling prices drop dramatically (more on that below), and for adjusted EBITDA of $233 million per year.

If that level of profitability could be achieved once the Cauchari asset is fully ramped up sometime in 2021, then there's a pretty good chance Lithium Americas would be worth more than its current $450 million market cap. The company would only own half of the profits (a little less, actually, as the local government has an 8.5% stake in the "50/50" JV), but there would be plenty left over.

Therefore investors need to determine whether or not the simple assumptions of the project's profitability are realistic. And that's where things get complicated.

A battery with the charge level represented by a stack of coins.

Image source: Getty Images.

A bold bet on an uncertain lithium market

Lithium prices have seemed to only go in one direction in the last several years: up. Unbelievable selling prices and the inherently low operating costs of lithium brine production have combined to deliver healthy margins for lithium producers. Case in point: Albemarle turned 30% of its lithium sales into net income in 2017.

That said, it's probably unrealistic for investors to expect selling prices to hold near current levels forever. While there's an incredible amount of demand expected to emerge in the coming years from an onslaught of electric vehicle production, there's still plenty of uncertainty when it comes to the details.

The primary indicator analysts use to predict where lithium markets will end up is the percentage of the world's passenger vehicle fleet comprised of electric vehicles. Estimates are all over the map, from 5% to 12% in 2025. Some analysts are beginning to think that the market is getting too far ahead of itself, and have predicted that electric vehicle penetration will be slower than expected and cause lithium prices to crash. That simple prediction has actually been the main culprit behind falling prices of lithium stocks in 2018.

As far as investors are concerned, while there's no great way to predict what will happen come 2025, there are a few data points to consider. First, lithium is incredibly abundant, so market prices are an indication of the scarcity of commercial production, not of the metal itself. Second, quite a few new projects are coming online in China, Australia, and South America -- all of which should provide some relief for lithium buyers.

Third, even the slightest delay in electric vehicle adoption could crush the lithium market. That's especially true considering most lithium is produced from brine, which takes months from the time it's pumped to above-ground pools to the time it reaches the market. In other words, producers don't have much flexibility to respond to market conditions, which would make any future supply glut linger for considerably longer than what may be expected for other commodities.

A businesswoman in a thinking pose while standing in front of a chalk board with many question marks drawn on it.

Image source: Getty Images.

A risky lithium stock

Lithium Americas is a purely speculative investment right now. It has no production assets at the moment, and won't bring in its first significant product revenue until 2020 at the earliest. While the Cauchari project is expected to generate healthy margins for the company, there's no way for investors to predict where lithium selling prices will be in two or three years.

That means Lithium Americas stock is a binary bet on the future of lithium. If prices remain near current levels, then the newcomer should easily earn a higher market valuation than its current $450 million level. If prices drop, however, then the company may have much less cash to go around after repaying the debt it took on to build the project in the first place. That makes this one risky lithium stock. Considering the uncertainty regarding the timeline for electric vehicle adoption, and that investors still need to wait two years for first production, I think investors aren't missing out by passing on shares right now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.