Global demand for lithium has greatly increased in recent years thanks to the sustained growth in the sales of mobile phones and electric vehicles. Even better, electric vehicles are in the very early phases of their growth trajectory. Global sales of electric vehicles grew 160% in the first half of 2021, to 2.6 million units, and represented 26% of total vehicle sales.

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Automakers have an annual target of sales of 40 million electric vehicles by 2030. This huge growth will materialize thanks to the declining cost of electric batteries, which will become cheaper than internal combustion engines in the upcoming years.

As electric vehicles require 5,000 to 10,000 times as much lithium as mobile phones, the growth prospects for lithium producers are certainly exciting. In this article, we will analyze the prospects of three major lithium stocks.

Albemarle (ALB)

Albemarle is the largest producer of lithium and the second-largest producer of bromine in the world. The two products generate approximately two-thirds of total annual sales. Albemarle produces lithium from its salt brine deposits in the U.S. and Chile. The company also has two joint ventures in Australia, which produce lithium. The assets in Chile offer an exceptionally low-cost source of lithium. Albemarle is present in nearly 100 countries and operates in four segments: Lithium & Advanced Materials (49% of sales), Bromine Specialties (21% of sales), Catalysts (21% of sales) and Others (9% of sales).

Albemarle has begun to recover from the pandemic. In the third quarter, its revenue grew 11% over last year’s quarter thanks to 35% revenue growth of lithium and 17% revenue growth of bromine specialties. Adjusted earnings per share slipped 4%, from $1.09 to $1.05, but exceeded the analysts’ consensus by $0.28. Thanks to improved business momentum, management raised its guidance for the annual earnings per share from $3.60-$4.00 to $3.85-$4.15.

As a commodity producer, Albemarle has exhibited a volatile performance record over the last decade. Moreover, due to the pandemic, its earnings per share are currently lower than they were a decade ago. However, the company has exciting growth prospects ahead thanks to the growth prospects of electric vehicles. Lithium is essential but not a huge cost driver in battery production. As a result, battery producers are not likely to reduce their demand for lithium even if lithium prices rally from their current levels. To cut a long story short, Albemarle has exciting growth potential thanks to the increasing demand for lithium, which is driven by the booming sales of electric vehicles.

It is also worth noting that Albemarle is a Dividend Aristocrat, with 27 consecutive years of dividend growth. As the materials sector is highly cyclical, very few companies in this sector can maintain multi-year dividend growth streaks. Albemarle is a bright exception, partly thanks to its low-cost, high-quality mines and its immense scale. However, the other reason behind the exceptional dividend record of Albemarle is its low payout ratio, which secures a wide margin of safety for the dividend. As the current payout ratio is only 24%, the stock is now offering a dividend yield of only 0.6%. Therefore, investors should consider Albemarle for its growth potential; not for its dividend.

Sociedad Quimica y Minera de Chile (SQM)

Sociedad Quimica y Minera de Chile is involved in the production and sale of five categories of products: lithium & derivatives, specialty plant nutrition, iodine & derivatives, potassium and industrial chemicals. The company has a 48% market share in specialty plant nutrition and a 28% market share in iodine while it has a market share of only 19% in lithium. However, the latter is the most important segment of the company, as it generates about half of the company’s gross profit in normal years (excluding the last two years due to the pandemic) and has the most promising growth prospects.

The key competitive advantage of SQM is its low-cost deposits in Salar de Atacama in Chile. The Chilean dessert has the highest concentration of lithium in the world and benefits from the high evaporation rates evidenced in this area, which facilitate the production of lithium.

SQM is ideally positioned to benefit from the booming sales of electric vehicles. The three major lithium producers, Albemarle, SQM and FMC Corporation, have an aggregate market share of 85%. As a result, they all have a strong position in this industry and hence they are likely to enjoy high lithium prices in the upcoming years thanks to the fast-growing global demand for this metal.

Moreover, SWM is a low-cost producer of MOP, the most common potassium-based fertilizer. It is also a low-cost producer of industrial chemicals as well as iodine and its derivatives. It is also worth noting that SQM has an exceptionally strong balance sheet, with a negligible amount of debt. Its net debt is only $228 million, which is only 1% of the market capitalization of the stock and less than the annual earnings of the company. All these are significant competitive advantages in the highly cyclical materials sector.

FMC Corporation (FMC)

FMC Corporation is headquartered in Philadelphia and operates as a diversified agricultural sciences company. FMC develops and sells crop protection chemicals, such as insecticides, herbicides and fungicides, which are widely used in agriculture to enhance crop yield and quality.

FMC used to be a major producer of lithium but it spun off its lithium business in 2019. The stand-alone lithium business of FMC, which is now called Livent Corporation (LTHM), is a better candidate for the investors who seek to gain exposure to the growth trajectory of the lithium industry.

Final Thoughts

Lithium producers have immense growth potential ahead thanks to the secular growth of electric vehicles, whose batteries require 5,000 to 10,000 times as much lithium as mobile phones. Lithium is an essential component of the batteries of electric vehicles but not a major cost component of them. As a result, the price of lithium is likely to rise in the upcoming years without affecting the growth pace of electric vehicles.

Albemarle and SQM are ideally positioned to benefit from this trend thanks to their premium assets in Chile, which are characterized by low cost, high concentration of lithium and ideal production conditions. Nevertheless, as the market has already priced a significant portion of future growth in these stocks, investors should probably wait for a more opportune entry point while they should also have a multi-year investing horizon.