The lithium rush is on. As a key element in the transition from fossil fuel dependence to renewable energy, the soft, silver-white metal is essential for batteries for electric vehicles and utility-scale renewable projects. As that demand accelerates, lithium miners stand to benefit – but only if they can gear up production fast enough to meet demand.
Lithium price outlook
Lithium prices rose strongly during 2021 – up anywhere from 250% to more than 400%, depending on the form of lithium, between the start of the year and mid-December.
Prior to the pandemic, lithium prices slumped amid a supply glut and slowing demand growth as China reduced its electric vehicle subsidies. The contraction in the global economy because of COVID-19 brought prices even lower. As demand reemerged, companies sold off excess lithium, keeping prices low. With the low prices, companies cut production and eventually began rebuilding their stocks, heping prices rebound as demand recovers from the pandemic.
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To satisfy industry's growing appetite for lithium, global supply will have to quadruple to 2 million metric tons by 2030, according to Fastmarkets. Current and expected projects should be able to meet demand until 2025, but after that, the world will need new sources.
Over the longer term, high prices will cure themselves by spurring miners to increase production. Higher prices will also encourage more lithium recycling, further boosting supply. Meanwhile, companies that buy lithium will look for cheaper alternatives.
With the Benchmark Minerals lithium index up 280% year over year, lithium stocks may be priced for perfection. While that may be true for the short term, they could see more gains beyond 2025 as the market may be in short supply.
What to look for in lithium developers
Lithium mining companies run the gamut from well-established producers to explorers and developers called "junior miners." While many junior miners fail, some can provide more share price growth than larger producers. When juniors hit certain milestones – like getting a permit or upgrading their resource estimates after further exploration – their shares can see outsized jumps compared to larger producers, which generally trade in line with the price of the commodities they extract from the land. Juniors can also offer investors a premium if they get acquired by a competitor.
Lithium Americas Corp. (LAC), a $3.8 billion pure-play lithium stock that is up 11% over the past year, offers perhaps the best example of what investors want to see in a miner that isn't yet in production.
Without cash flow from production, junior miners constantly have to raise money in other ways, and the ability to finance exploration and development is a key component investors should consider. Lithium Americas recently brought in nearly $260 million with a convertible senior note, and over the years, it's been able to amass a balance sheet with about $480 million in cash. Planned spending at its Argentina project is fully funded from available debt.
Another reason Lithium America's has been attractive for investors is that it is close to production, with its Argentina project scheduled to come online in the middle of this year. The company has partnered with one of the world's biggest producers, Ganfeng Lithium (GNEN.F 2.06%), on the project – another way strong junior miners decrease their risk.
While Lithium Americas is at the forefront of mine developers and explorers, it is far from alone. From 2015 to 2017, the number of lithium explorers rose from 23 to 125, according to the Congressional Research Service, meaning there are plenty of junior miners investors can put on their watch lists.
Considerations for investing in producers
As junior miners move toward production, major lithium producers are planning capacity expansions. While having more lithium to sell at higher prices generally means companies will earn more money, there are other considerations unique to producers that investors will want to think about.
For one, not all producers are pure lithium plays. In its most recent quarter, Albemarle Corp.'s (ALB -2.26%) lithium revenue was less than half of its total sales, alongside its bromine and catalysts business segments.
Investors will also want to look at a company's ability to ramp up lithium production, keeping in mind that producers can fund capacity expansions with cash flow from operations in a way that junior miners can't. Albemarle is in a decent position with nearly $600 million in cash on its balance sheet. It has reduced its long-term debt to just over $2 billion, meaning that it's net debt position isn't too precarious, although investors will still want to watch out for it. It has issued new shares, which isn't great news for existing investors, but it's also spent more than $650 million over a nine-month period as it nears completion of lithium expansion projects.That could end up being money well spent if lithium prices continue to rise sharply.
Other ways to invest in lithium
There are purer plays involved in more of the lithium supply chain than simply mining. Livent Corp. (LTHM), which is on track with its own near-term lithium expansion plans and has a decent cash-to-debt ratio, adds value to the lithium it mines by turning it into compounds for the electric vehicle market and other industries. Ganfeng Lithium – which is spending on a raft of new expansion projects that look like good investments at this point – takes its lithium products farther by making batteries.
To diversify investments in lithium producers and explorers, investors may want to consider lithium exchange-traded funds. These not only provide company-specific diversification but can also include battery and electric vehicle companies, which in theory should benefit when lithium prices decline, offering a cushion against falling producer shares.
The Global X Lithium & Battery Tech ETF (LIT -0.56%), ETF Securities Battery Tech & Lithium ETF (ACDC -1.45%), and Amplify Lithium & Battery Technology ETF (BATT -0.11%) are more diversified, while investors who want to hew closer to owning lithium miners can turn to the Horizons Global Lithium Producers Index ETF (HLIT -1.05%).
Over the past year, the producer-focused Horizons ETF has substantially outperformed the others, indicating the potential investors see in miners compared to the companies more on the battery side of the equation.
What investors should look for next
The more than 30% year-to-date gain in the Horizons ETF through Jan. 25 shows just how excited investors are about the potential for lithium prices to increase. Over the longer term, patient lithium stock investors who watch for potential entry points – such as price dips when new capacity expansions are announced – could stand to make money.
