As electric vehicle (EV) adoption soars, demand for lithium has followed suit. The element is a key ingredient in the making of lithium-ion batteries, which have been riding around in our pockets for years (in the form of smartphone batteries), but are increasingly powering our very movement.
Top lithium producer Albemarle (ALB 1.65%) was an early mover, catching on to the coming wave of EV adoption and pivoting toward the battery energy storage market years ago. After a more than 150% run in the stock over the last five years, Albemarle is now a large business with a market cap of over $28 billion.
There are other ways to play the lithium demand run, though. Let's take a look at far smaller operation Livent (LTHM), which was spun off from chemical manufacturer FMC in 2019. Livent is now readying to merge with lithium miner Allkem (OROCF). Once combined, could this leader in lithium mining and refining offer similar upside potential to Albemarle?
Two small powerhouses combine to get even stronger
Let's assume the merger between Livent and Allkem is now complete and take a look at how this business would look today. Even when combined, Livent and Allkem's revenue from the last reported 12-month stretch would be $1.7 billion (the below chart shows Allkem's revenue in Australian dollars, and the current exchange rate is 1 Aussie dollar equals $0.69). That's less than one-quarter of what Albemarle has hauled in. Additionally, combined net income would be about $640 million (a very healthy net profit margin of about 40%), also a fraction of the nearly $3.7 billion in net income Albemarle has made in the last year.
Data by YCharts.
The Livent-Allkem combination will be an all-stock merger, meaning no cash is being exchanged between these two companies. As of this writing, Livent and Allkem's combined market cap would be just over $12 billion, again far smaller than Albemarle's. These two small lithium powerhouses could indeed combine to make for a superior investment in the EV market.
The merits of merger
Besides adding together two highly profitable lithium companies, Livent's and Allkem's operations are complementary. Livent bills itself as a "fully integrated lithium producer," sourcing most of its raw material from its mine in Argentina, and purchasing raw lithium products from third parties as necessary. It also owns a 50% stake in development company Nemaska Lithium, which could also be a future source of significant raw material supply.
Livent uses this lithium to fill its lithium refining and chemicals manufacturing facilities located in Argentina, North America, England, and China -- which go on to supply EV automakers and their battery suppliers, as well as niche applications for lithium in other areas of industrial manufacturing, aerospace, and pharmaceuticals.
By contrast, Australian-based Allkem is primarily a lithium mining operation, with one location in Argentina and another in western Australia. Once combined, Allkem's properties will act as a strong funnel of material for Livent's half-dozen manufacturing facilities spread across four continents.
This fully integrated business model -- from mining to chemicals production -- is a strategy that Albemarle has begun pursuing in earnest as well. Developing and producing high-quality and novel lithium products could be a powerful growth driver for lithium companies as their automotive and battery maker partners are in a relentless drive to increase the power efficiency and range of EVs, as well as other renewable energy projects.
Is Livent stock a buy?
Of course, just like Albemarle, Livent stock has come under pressure this year as lithium prices have fallen from record highs in 2022. Wild swings in commodity prices are inevitable when investing in mining companies. The upshot here, though, is it appears lithium prices have stabilized and are rallying again.
However, despite the ups and downs with investing in Livent (as well as Allkem and Albemarle), the real story here is overall lithium supply growth over the next decade as global EV adoption is expected to soar. The world simply needs a lot more batteries, which puts leading companies that are turning a profit, like Livent, in prime position to benefit. Some estimates point toward global lithium supply needing to average 20%-per-year growth or more through the rest of this decade to keep up with EV and battery demand.
As of this writing, Livent and Allkem would combine to trade for about 19 times trailing-12-month net income. The new company (which has yet to select a name) will also be well funded with current combined cash and short-term investments of nearly $1 billion offset by debt of just $582 million.
I own shares of Albemarle, and think it is attractively priced right now at under 8 times trailing-12-month earnings. But Livent stock is certainly worthy of attention right now, too, and could have substantial long-term upside potential from here with the pending tie-up with Allkem. Livent stock is on my watch list.
