Lithium, also called “white petroleum,” is one of the flashier metals you will encounter.

Electric vehicles are becoming the true drivers of demand, as an electric car requires 5,000 to 10,000 times as much lithium as a mobile phone. Further, demand for electric vehicles is skyrocketing as more and more legacy manufacturers invest billions of dollars in the space.

This has caused interest in investing in lithium stocks to surge.

This guide gives an overview of the lithium industry and a detailed analysis of lithium stocks.

 

Lithium Industry Overview

While Lithium is white or gray in typical form, when it is thrown into a fire, it turns bright red. The lithium mineral was documented in the 1790s, but it wasn’t until 1855 that the element was separated and identified.

Lithium (atomic symbol Li) has many unique characteristics. It’s light and soft – soft enough to be cut with a butter knife and light enough to float on water.

Further, the metal has a relatively low melting point but a high boiling point. Its uses vary dramatically, from manufacturing aircraft and batteries to mental health medicine.

In 1991 Sony popularized the lithium-ion battery, which has become a vital part of nearly every electronic device. Naturally, the use of electronics has taken off, with mobile phones leading the way in the last decade.

In 2009, the lithium-ion battery made up roughly 21% of all lithium consumption.

In 2021, about 74% of lithium produced went to battery production – more than tripling its share (in a growing market) in just over a decade. Given the intense demand for electric vehicles globally, we expect this will continue to surge.

Extracting Lithium

There are two main ways of extracting lithium: mining and brine water.

Interestingly, about two-thirds of lithium is extracted via brine water. The highest concentrations of these lakes are found in Chile and Argentina.

Lithium is obtained via evaporation in the form of lithium carbonate, the raw material used in lithium-ion batteries. This process also leaves behind magnesium, calcium, sodium, and potassium.

While brine mining is a lengthy endeavor – usually taking eight months to 3 years – it is still usually more accessible and cheaper than hard rock mining.

The remaining amount of lithium is found in traditional mining operations.

The lithium concentration is more significant in hard rock mines, but the cost to operate these mines and the environmental and geological impact is much greater. Still, a hard rock mine in operation can be competitive with an upstart brine mine.

While there are 145 minerals containing lithium, just five are used in lithium extraction.

Moreover, of these five, spodumene makes up the lion’s share (~90%) of mineral-derived lithium. The mineral is heated, cooled, and mixed with sulfuric acid to create lithium carbonate.

Finally, a minimal amount of lithium is being recycled from electronics. This method does not provide pure enough lithium to make new batteries, but it is suitable for other uses, such as glass and ceramics.

Supply

Total lithium production in 2021 amounted to 100,000 MT (metric tons), which we expect to continue growing, given the seemingly insatiable demand.

Here are the top lithium-producing countries in 2019:

1. Australia = 51,000 MT (60% of worldwide production)

2. Chile = 16,000 MT (19%)

3. China = 8,000 MT (8%)

4. Argentina = 6,200 MT (7.3%)

5. Zimbabwe = 1,600 MT (1.9%)

As you can see, lithium production is highly concentrated, with substantially all of it being produced by just five countries and Australia being a majority on its own.

Indeed, Australia and Chile alone account for almost 80% of the production market. The US is a tiny player in this market, with a fraction of a percent of the market share.

Total worldwide lithium reserves are estimated to be 20 million metric tons.

Long-term mining activity will likely continue to be driven by Chile, China, Australia, and Argentina.

Demand

The demand for lithium currently has three main drivers: Continued mobile device adoption, energy storage for electric grids / renewable energy, and electric vehicles.

As noted above, short and intermediate-term demand for lithium will likely depend on the dynamics of the electric vehicle market.

Mobile device adoption will continue to be a driver, but electric vehicles require thousands of times as much lithium and hence have a much more significant influence.

Batteries for storage for renewable energy could be an essential driver down the line, but that is viewed as more of a long-term demand driver.

Global electric vehicle sales are expected to exceed 14 million by 2025 and will likely grow over the next several decades as electric battery costs become cheaper than internal combustion engines. In addition, laws against internal combustion engines have popped up in various developed countries in Europe and the US, meaning governments are driving consumers over the long term toward electric vehicles.

Source: IEA, Global electric car stock, 2010-2021, IEA, Paris

Additionally, while demand forecasts vary widely, it is primarily expected that electric vehicle production will test supply in the years and decades to come. We can see that electric vehicle registrations are mushrooming higher as manufacturers create more supply each year to satiate consumer demand.

Indeed, some believe that electric vehicle adoption will be stymied by the availability (or lack thereof) of crucial components like lithium, as the recent ramp-up in demand moves much faster than the ability to establish new mines, which often takes years.

However, despite tremendous expectations, it should be noted that while lithium is an essential part of electric vehicles, it is not necessarily a fundamental cost driver.

More important cost drivers could include nickel and cobalt, making up ~73% and ~14% of a typical battery, compared to ~11% for lithium. Tesla’s Elon Musk calls lithium “the salt on the salad,” noting the relatively low expense of the material compared to the vehicle’s overall cost.

While ample lithium reserves are available, the demand has picked up tremendously, leading to supply-side constraints. As a result, pricing can be volatile. Battery-grade lithium prices, however, have stabilized somewhat in the past couple of years.

Investing In Lithium

There is a way to directly and broadly invest in the lithium industry: The Global X Lithium & Battery Tech ETF (LIT).

The ETF “invests in the full lithium cycle, from mining and refining the metal, through battery production.” The fund aims to “provide investment results that correspond to the price and yield performance, before fees and expenses, of the Solactive Global Lithium Index.”

The “before fees” portion is essential, as management fees stand at 0.75% annually. Moreover, the current dividend yield is negligible.

The fund was started on July 22nd, 2010. It has generated decent returns in the past five years, rising about 70% in total versus the S&P 500’s rise of 55% in the same period.

While the ETF’s performance has been good over time, the ETF has vastly underperformed more recently. The S&P 500 has fallen about 14% in the past year, while LIT’s decline is double that amount. In addition, in the past year, assets have fallen from about $6 billion to just under $4 billion, much of which was due to the poor performance of the ETF so far in 2022.

The fund holds 46 securities, but the top 10 positions make up 58% of the ETF’s total assets:

1. Albemarle (ALB): 15.1% of assets

2. Sociedad Quimica Y Minera De Chile SA ADR (SQM): 6.2%

3. Samsung SDI Co Ltd: 5.4%

4. Eve Energy Co: 5.3%

5. TDK Corp.: 5.1%

We do not find this ETF attractive – the management fee and past record thus far have proven to be unimpressive – but it does offer an opportunity to discuss the major players in the industry.
 

Lithium Mining Stocks

For a long time, the lithium mining industry was controlled by the “big three:” Albemarle (ALB), Sociedad Quimica Y Minera de Chile (SQM), and FMC (FMC).

Rockwood Holdings was also a significant player, but Albemarle acquired it several years ago. These three businesses accounted for 85% of the world’s lithium market share.

However, more recently, China has entered the market in a big way. For instance, Australia’s largest mine, the Greenbushes, is 51% controlled by China’s Tianqi Lithium and 49% owned by Albemarle.

Today, the “big three” market share has dropped to 53%, while Chinese companies control about 40% of the world’s lithium market share.

Here are the five largest lithium-mining businesses:

1. Albemarle

2. SQM

3. Tianqi Lithium

4. Jiangxi Ganfeng Lithium

5. Mineral Resources Ltd. (MALRF)

While the two Chinese stocks cannot be invested in easily, the other three lithium-mining businesses do offer publicly traded shares in the US:

Lithium Mining Stock: Albemarle (ALB)

Albemarle is the largest producer of lithium and the second-largest producer of bromine globally. The two products account for nearly two–thirds of annual sales. Albemarle produces lithium from its salt brine deposits in the U.S. and Chile.

The company has two joint ventures in Australia that also produce lithium. Albemarle’s Chile assets offer a very low–cost source of lithium.

The company operates in nearly 100 countries and is composed of four segments: Lithium & Advanced Materials (49% of sales), Bromine Specialties (21% of sales), Catalysts (21% of sales), and Other (9% of sales).

Albemarle produces annual sales of $7.3 billion.

Albemarle has increased its dividend for over 25 consecutive years. As a result, it is on the exclusive Dividend Aristocrats list.

 

 

Lithium Mining Stock: Sociedad Quimica Y Minera de Chile (SQM)

Sociedad Quimica Y Minera de Chile ADR, more succinctly known as SQM, is a Chilean commodities producer specializing in lithium, potassium fertilizers, iodine, and solar salts. The company should produce just over $10 billion in revenue this year.

On a per-share basis, shares trade hands around $99. The stock has a ~6% current dividend yield.

SQM’s most impressive assets are the low-cost lithium deposits in Chile’s Salar de Atacama, which has both the highest concentration of lithium globally and benefits from the high evaporation rates in the Chilean desert.

The company also has about half the market share in potassium nitrate and is the world’s largest producer of iodine. These three industries should benefit from the ongoing trends toward electric vehicles, increased crop production, and healthcare spending.

The company has a long-term contract with Chile to extract 414,000 metric tons of lithium through 2030.

Lithium Mining Stock: Mineral Resources Ltd. (MALRF)

Mineral Resources is a mining company that is based in Australia. The company primarily operates in its home country, China and Singapore. It operates a diversified mining business comprising Mining Services and Processes, Iron Ore, Lithium, Other Commodities, and Central segments. Through these segments, the company offers a vast array of mining services, but also engineering and construction services, logistics, processing, ship loading, marketing, and more. The company was founded in 1993, generates over $4 billion in annual sales, and has almost 4,000 employees worldwide.

To be sure, the company is not a pure play on lithium mining, but it has benefited massively from the ramp in lithium demand. Also, given it has assets in the most lithium-rich countries in the world – Australia and China – we believe it will be a vital player for many years to come. Indeed, revenue should be close to $5 billion next year.

The dividend is irregular and is paid only semi-annually, but today the stock yields about 1.2%. It’s, therefore, not a particularly strong income stock, especially given the unpredictable nature of payments to shareholders.

 

Lithium Battery Stocks

The producer side is relatively concentrated, although recently, China has been taking significant market share from the “Big 3.” On the application side, there are a wide variety of battery makers, and the market share is still somewhat up for grabs.

Here’s a sampling of the top 10 lithium-ion battery manufacturers in the world:

1. Contemporary Amperex Technology

2. BYD

3. CALB-CALB Co., Ltd.

4. LG Chem

5. Panasonic

6. Samsung SDI

7. SK Innovation Co Ltd

8. Shenzhen Grepow Battery Co., Ltd.

9. Toshiba Corporation

10. A123 Systems LLC

As far as investable equity positions for U.S. investors go, all of the above are headquartered outside of the U.S. / listed on a foreign exchange. This is indicative of where lithium deposits are in the world and the fact that the US has no appreciable market position as a result.

However, two of the above have US-listed ADRs, which means US investors can easily invest in these companies’ futures: LG Chemical, Panasonic, and Toshiba.

Lithium Battery Stock: Panasonic (PCRFY)

Panasonic provides EV batteries for the world’s automakers, with Tesla (TSLA) as its most notable customer. However, this is only one portion of the Japanese business. Panasonic’s operating segments include Automotive & Industrial Systems, Eco Solutions, Connected Solutions, Appliances, and Others.

As a general theme, earnings have been volatile. Panasonic is a diversified business, going well beyond the lithium battery market, with arms in electronic component mounting, appliances, and home building products.

This benefits safety (when one division does poorly, other divisions can often make up the shortfall), but it can also dilute the growth potential a “pure play” lithium battery maker might have.

Still, Panasonic is well-positioned in the industry.

Lithium Battery Stock: Toshiba Corporation (TOSBF)

Toshiba provides electronic devices and battery storage solutions globally. The company has many businesses outside of battery production, so like Panasonic, Toshiba is not a pure play on lithium or batteries. However, Toshiba has scale and brand recognition in the battery space, selling various electronic devices with lithium-ion battery power cells.

Toshiba’s revenue has waned in recent years, but the company is under a sale process currently.  Earlier this year, Toshiba submitted a proposal to split itself into two publicly-traded, separate entities. That proposal was rejected, and a strategic review was then undertaken. Toshiba received several offers for buyouts, and it appears it will be taken private between $16 and $19 billion, making it one of the most significant private equity deals ever in Japan.

 

The Best Lithium Stocks

When you look across the publicly traded lithium market, it’s hard to find a “pure play” lithium stock. Even among the lithium producers, each has separate and essential operations in other areas.

Even an ETF focused specifically on lithium casts a wide net in various industries.

On the mining side, you have the “Big 3” and a group of Chinese companies working to take a significant share.

In general, the mining side looks somewhat interesting from an economic standpoint due to the inelastic demand for raw materials. However, we note that any kind of mining, including lithium, is generally highly cyclical due to inevitable pricing and demand swings.

Because lithium is essential but not a huge cost driver in battery production, battery makers are unlikely to significantly reduce their consumption even in the face of higher lithium prices.

While miners cannot dictate higher prices alone, they are likely to benefit from higher prices if they come about from supply shortages / faster demand growth.

In our view, SQM and Albemarle look like the most exciting lithium stocks on the mining side due to their premium position in Chile – a position offering the deepest reserves coupled with high concentrations and an ideal environment.

On the battery side, finding “pure play” lithium stocks is even more challenging. There are plenty of companies in the market, but from an investment standpoint, there is still a lot of uncertainty.

While there very well could be many “winners” in the industry over the long term, current investors will likely have to deal with substantial earnings volatility and high expectations in short to intermediate term. This is further complicated because the battery business is generally a small piece of a conglomerate company.
 

Final Thoughts

Lithium is here to stay. There’s a reason that it has gained popularity, especially in the last decade. It’s a versatile metal that has significantly improved how we work, communicate and get around.

Moreover, future demand appears robust as the move towards mobile devices, renewable energy, and electric vehicles appears to be on the upswing (with the potential for a very long tail).

However, investors should recall this Ben Graham quote:

“Obvious prospects for physical growth in a business do not translate into obvious profits for investors.”

The takeaway is two-fold.

Picking a growth industry, in general, may not be particularly difficult. For instance, it’s conceivable that just before (or even during) the ramp-up of trains, automobiles, planes, and the Internet, a potential investor could point to these areas as “growth industries.”

And indeed, they would have been correct. For example, an investor pointing to the Internet in the mid-1990, for example, would still be seeing that growth industry play out today.

Yet there are two problems.

First, picking a growth industry may not be exceptionally difficult, but picking “winners” can test the best analyst. Out of the automobile or Internet, just a handful of “winners” emerged, while hundreds or thousands were cast aside – once hyped, once with great expectations, but eventually for naught.

The second consideration is valuation.

Even if you do happen to pick the “winners,” you still have to be concerned about the price you pay. As a hypothetical, a security trading at, say, 40 times earnings that grow by 10% annually for a decade and later trade at, say, 20 times earnings would provide investors with returns of just 2.6% per year.

The consideration is not just, “will a company grow?” but, more importantly, “will it grow fast enough to justify the current valuation?” Expressed differently, will current investors capture their “fair share” of investment results? We note that Albemarle has traded with extremely rich valuations in recent years, and while the company sports a terrific growth profile, one wonders how much that will actually benefit shareholders today.

Additionally, while lithium appears poised to be in solid demand for the foreseeable future, you should also consider the possibility of new technologies coming along. Demand alone is exciting but could lead to unexpected results if it creates enough new entrants.

Overall we are upbeat on the metal and its prospects over the intermediate to long term, with the above caveats in mind.

Albemarle could be the best stock for income investors interested in the lithium industry. It derives a significant portion of its profits from lithium, it has stakes in important reserve areas around the world, the dividend payout ratio is modest, and the company raises its dividend each year. The choices are limited, given that most lithium and/or battery-focused stocks are headquartered and traded outside the US.

We consider many other lithium stocks too risky, as there are many unknowns coupled with tremendous expectations.

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