Proactive Investors - The lithium carbonate price last week touched a low of just under $23,000 per tonne and has since languished at the bottom of the curve. This marks a 50% decline in value since June, while the cost of the silvery alkali metal used in electric vehicle (EV) batteries has plummeted 72% over the past 12 months.
The primary culprit is China, where demand has waned amid a challenging economic landscape. An expected resurgence, fuelled by the electric car sector, has yet to materialise, leading analysts and investors to ponder: What's next?
Indeed, the repercussions extend far beyond the sector itself. For those who have invested in lithium stocks or exchange-traded funds (ETFs) since the beginning of the year, it has been a harsh lesson in market volatility. The table below narrates its own tale.
For some novice investors, what appears to be a significant problem could also offer a considerable opportunity for those who view the aforementioned stocks and ETFs as undervalued. Thus, we enlisted AI to address two questions:
Are the market fundamentals still robust (in other words, does the long-term bullish narrative still hold)?
If the answer to the first question is affirmative, which lithium stocks would esteemed value investor Warren Buffett likely purchase today?
The Bull Case for Lithium Stocks
Despite recent market softness, a compelling case exists for investing in lithium stocks. Demand for lithium is projected to surge in the coming years, propelled by the growing adoption of EVs and other renewable energy technologies. According to a report by Benchmark Mineral Intelligence, global lithium demand is anticipated to rise from 700,000 metric tonnes in 2022 to 3.2 million metric tonnes by 2030, representing a compound annual growth rate (CAGR) of 26%.
Several factors are driving this growth in lithium demand:
- Increasing adoption of EVs: EVs represent the fastest-growing segment of the automotive market. In 2022, global EV sales soared by 108% year-over-year, reaching over 6.6 million units. The International Energy Agency (IEA) projects EV sales to hit 33 million units by 2030.
- Expansion of the renewable energy market: Lithium-ion batteries find applications in various renewable energy storage solutions, such as solar and wind energy. The IEA anticipates rapid growth in the renewable energy market as nations transition to cleaner energy sources.
However, it's prudent to consider the risks associated with investing in lithium—chief among them being market volatility. Prices can experience significant fluctuations based on market conditions, as evidenced by the recent downturn.
Another concern is the potential for lithium oversupply. Several new lithium mines are slated to commence operations in the coming years, potentially leading to market saturation. This could exert downward pressure on lithium prices, thereby affecting miner profitability.
Buffettology in Action
Warren Buffett, the Sage of Omaha, is a value investor and a disciple of Benjamin Graham. He seeks companies trading below their intrinsic value with a robust competitive edge. Unlike Graham, Buffett also values companies with strong management teams and those poised to capitalise on long-term trends.
If Buffett were to assess the current lithium market, he would likely target companies undervalued relative to their intrinsic worth and possessing a strong competitive advantage. He would also consider companies with proficient management teams and those well-positioned to benefit from the long-term uptrend in lithium demand.
Here are some specific criteria Buffett would likely evaluate:
- Valuation: Buffett would seek lithium companies trading at a discount to their intrinsic value, calculated based on underlying assets, future cash flows, and competitive advantage.
- Competitive Advantage: Companies with low production costs, access to high-quality lithium reserves, or proprietary technology would attract Buffett's attention.
- Management Team: Companies with a proven track record and management aligned with shareholder interests would be on Buffett's radar.
- Long-term Trends: Buffett would favour companies well-positioned to benefit from the long-term growth in lithium demand, considering factors like the expansion of the EV market and the transition to a low-carbon economy.
It's crucial to note that Buffett is a long-term investor, willing to hold stocks for an extended period. He believes that the optimal strategy for superior returns is to invest in high-quality companies at reasonable prices and hold them for the long term.
Investors contemplating lithium stocks should carefully assess their investment objectives and risk tolerance. Lithium stocks are inherently volatile and may not be suitable for all investors.
Stock Recommendations
Here are three lithium stocks that AI identifies as trading below their intrinsic value:
- Albemarle Corporation (NYSE:ALB): A leading global producer of lithium and other specialty chemicals, Albemarle boasts a strong history of profitability and growth. Currently trading at a P/E ratio of 23.6, it is below its historical average.
- Livent Corp (NYSE:LTHM): A prominent producer of lithium products like lithium hydroxide and lithium carbonate, Livent has a strong innovation track record. Currently trading at a P/E ratio of 20.8, it is below its historical average.
- SQM (NYSE:SQM): A leading global producer of lithium and other specialty chemicals, SQM (NYSE:SQM) has a strong history of profitability and growth. Currently trading at a P/E ratio of 19.3, it is below its historical average.
These are mainstream large-cap picks that anyone with a cursory knowledge of the lithium sector might identify. Below are five more that require deeper research to unearth.
- Lithium Americas Corp (TSX:TSX:LAC, NYSE:LAC): Located in Nevada, the Thacker Pass lithium project is one of the largest known lithium resources in the US. The company also has a stake in a major lithium resource in Argentina.
- Sigma Lithium Corp (TSX-V:SGML, NASDAQ:SGML): The exploration and development company’s lithium properties are located in the State of Minas Gerais, Brazil, where it holds interests in the Grota do Cirilo, Sao Jose, Santa Clara, and Genipapo projects.
- ACME Lithium Inc. (CSE:ACME, OTCQB:ACLHF): The exploration company has two projects located in a highly prospective region for lithium development and production in the Clayton Valley region of Esmeralda County, Nevada. The company has acquired, or under option to acquire, a 100% interest in 122 claims encompassing approximately 2,440 acres.
- Hertz Lithium Inc (CSE:HZ, OTCQB:HZLIF): Hertz holds the Lucky Mica property in Arizona, covering 2,314 acres along the Arizona Pegmatite Belt. Additionally, they have properties in Quebec's James Bay region (AC/DC & LaFleur) and Brazil's Minas Gerais (Virgen De Lapa) with proximity to economically significant lithium deposits.
- Tantalex Lithium Resources (CSE:TTX, OTC:TTLXF): the Canadian junior is focused on developing lithium projects in Africa, producing Lithium, Tantalum and Tin.
- AJN Resources Inc (CSE:AJN): AJN recently signed a binding term sheet with Future Mining Company SARL to acquire a potential 70% indirect interest in a highly prospective exploration property on the Manono Trend in the Democratic Republic of Congo (DRC).
- United Lithium Corp (CSE:ULTH, OTC:ULTHF): The company is actively exploring lithium-rich regions such as Sweden, Finland, the US, and Canada
- Nevada Lithium Resources Inc (CSE:NVLH, OTCQB:NVLHF): the firm’s efforts are focused on the Bonnie Claire project in Nye County, Nevada, where it holds full ownership. The project boasts a substantial inferred mineral resource of approximately 18.372 million tonnes of contained lithium carbonate equivalent (LCE), with a favorable Net Present Value (8%) of $1.5 billion US at $13,400 per tonne LCE
- Argentina Lithium & Energy Corp (TSX-V:LIT, OTCQB:PNXLF): Argentina Lithium & Energy acquires top-tier lithium projects in Argentina and drives them towards production to fulfill the increasing demand from the battery industry, having just recently signed a US$90M offtake and investment deal with automaker Stellantis.