When Tesla (ticker: TSLA) held its battery day on Sept. 22, CEO Elon Musk laid out plans to build massive amounts of Tesla-owned battery capacity—enough to make about 30 million electric vehicles by the end of the decade, up from roughly 500,000 in 2020.
Such an enormous increase depends upon mass acceptance of electric vehicles over traditional combustion-engine ones and the creation of the infrastructure necessary to fuel that many EVs. But it will also require a massive amount of lithium to make the batteries those cars will run on—a massive challenge in its own right.
Right now, the world mines roughly 400,000 tons of lithium a year, enough to power 2 million to 3 million electric vehicles, though only a third of that goes to EVs right now. That number will have to increase perhaps as much as tenfold to meet Musk’s goal, and that doesn’t take into account other auto makers.
Tesla took one step to ensure part of its lithium needs by signing a sales agreement with
(PLL) this past week. Piedmont stock more than doubled after news of the sales agreement with Tesla broke—as well it should have. The deal guarantees Tesla will buy about one-third of the startup’s production for up to 10 years. Though Piedmont’s mine isn’t operational yet, it expects to deliver product to Tesla by 2022 or 2023.
Mining lithium isn’t easy—or easy to grasp. The supply chain is complicated. Lithium producers, for the most part, don’t ship pure metal. Instead, they sell products such as lithium carbonate and lithium hydroxide to battery and battery-cathode makers like
Miners get the elemental lithium from salt brines left over from ancient seas in places like Chile’s Atacama Desert, the driest place on Earth, and in hard rock minerals such as spodumene, found in Australia and elsewhere. Tesla’s recent deal with Piedmont will provide it with 60,000 tons of concentrated spodumene. That will be converted into lithium hydroxide and turned into a battery cathode, which will be put into a battery cell as part of a Model 3 battery pack.
That 60,000 tons is enough for roughly 150,000 to 200,000 batteries, far short of the amount needed if Tesla gets anywhere near its target. Clearly, there is plenty of growth for existing lithium players.
One wild card for producers is lithium product prices. Industry pricing is a tightly guarded secret, and pricing indexes aren’t used for transactions. Prices peaked around 2018 and traded, at some points, for more than $25,000 a ton. They later fell as new capacity came on line—capacity doubled from 2016 to 2019—and as the economy slipped into recession. Pricing has flattened out over the past year at about $7,000 a ton.
“The direction of pricing should be up,” Piedmont CEO Keith Philips tells Barron’s. “How high they go in the next cycle peak is anyone’s guess.”
Higher demand and higher pricing are good tailwinds for lithium stocks. So which one should investors buy? Albermarle is the safe play. It isn’t just a lithium stock—it also makes bromine products, used in flame retardants, and catalysts used by refineries. It is expected to increase sales at a 10% clip, off a base of about $3 billion, over the next three years. Trading at just 13 times 2023 estimated earnings of $6.88 a share, it’s the cheapest lithium stock, largely because it isn’t just a lithium stock.
SQM, which extracts lithium in Chile from salt brines, also makes fertilizer for agricultural markets. It is expected to increase sales at an 18% annual clip over the next three years off a base of $1.8 billion, leaving it with earnings of about $1.70 a share. At that level, shares in SQM, which traded recently at $32.51, are trading at about 19 times estimated 2023 earnings. Shares are up about 22% in 2020.
We’re most excited by Livent, which operates assets around the world and extracts its primary lithium in Argentina. Wall Street expects the company to grow sales at about 15% a year on average between 2020 and 2023, from a base of $284 million. Most of the growth comes from higher volumes. Earnings per share are expected to grow from six cents in 2020 to 34 cents in 2023—a 78% average annual growth rate. The stock recently traded at about $9, or 28 times the 2023 earnings figure. The stock is more expensive than peers, but has more to gain from a rising tide in the lithium industry.
It’s tempting to pick the cheapest stock, but if lithium prices start to run, Livent looks like the best bet.
Write to Al Root at [email protected]