What happened

Shares of lithium production company Livent Corporation (LTHM) tumbled in Tuesday trading to close down 7.8% from Friday's close.

You can blame Goldman Sachs for that.

Lithium salt evaporation ponds.

Image source: Getty Images.

So what

A 2019 spinoff from chemicals company FMC, Livent isn't the world's biggest lithium producer, but it's a sizable "tier 2" kind of a company that did $420 million in sales last year -- but just barely broke even. As lithium prices have surged in 2022, however, Livent's profitability has grown by leaps and bounds, passing $53 million in the year's first quarter -- more than the company earned annually in four of the past five years, according to data from S&P Global Market Intelligence.

But these good times may not last.

In a note out from Goldman Sachs this morning, the banker warned that lithium prices that recently reached $60,000 a ton are due to relapse by about 10% later this year -- then plunge 73% in 2023, averaging just $16,000 a ton next year.  

Now what

That's not an attractive prospect for lithium investors, but should it necessarily spark total panic? I don't think so.

Consider: While producing $16,000-lithium won't be nearly as lucrative for Livent as producing $60,000-lithium, prices in the $15,000 to $16,000-a-ton range were good enough to keep Livent (then still a subsidiary of FMC) solidly profitable in 2018. Indeed, 2018 was Livent's most profitable year in recent memory, with profits surpassing $126 million on revenues of $442 million -- not that much more than what Livent did last year.

In short, there's every reason to believe that Livent will earn a profit even if Goldman Sachs is right about prices plunging in 2023, so long as the company keeps its costs in check. And later on, Goldman Sachs believes that continually rising demand for lithium will perk prices back up in 2024 and beyond.

Granted, there's a risk that investors in Livent have bid the stock up beyond what it's worth, in reliance on high lithium prices that may not remain high forever. That risk kind of comes with the territory when investing in cyclical stocks, and it could cause the stock to fall in the short term. But as long as Livent management is able to keep its costs under control in times of low lithium prices, and max out its profits when lithium is priced richly, over the long term, this stock still has the potential to be a rewarding investment.