By now, everyone has heard how the shortage of semiconductors has constrained production from automakers. Well, move over semiconductors, now the lack of lithium supply threatens to hold back the entire electric vehicle (EV) revolution. And just months ago lithium carbonate prices high all-time highs.
Some prices for the key metals used in batteries for electric vehicles—which make up about 40% of the cost of a battery cell and a sizable portion of the overall cost of an EV—have fallen recently in the general selloff in commodities.
But lithium, not so much. It is still a hot commodity.
According to the Benchmark Minerals lithium price index, which covers over 90% of lithium transactions globally, lithium prices are up in excess of 120% this year to date and more than 350% year over year.
The price of lithium carbonate hit an all-time high in April, and it is still eight times what it was at the start of last year!
Importantly, lithium supplies look likely to remain tight. Mines in Australia and elsewhere shut down when the market was weak a few years ago and have been slow to respond to the rebound in demand. Production may not ramp up until next year or even later.
That’s why sourcing lithium has become a major priority in the EV competition among automakers. They are all trying to get long-term deals with lithium miners in Australia, China, Argentina, and Chile, which together account for more than 90% of the world’s lithium mining.
Automakers’ Lithium Woes
As demand threatens to overwhelm supply, vehicle makers will likely battle for the rest of the decade to secure the lithium they need.
Kent Masters is the CEO of Albemarle (ALB), the largest publicly traded lithium producer. During the latest earnings presentation, he said the market for lithium will remain tight despite efforts to unlock more of the metal. “It’s systemic for a pretty long period of time,” he said of the challenge facing the industry. “For seven to eight years, it stays pretty tight.”
As usual for commodities, when it comes to Wall Street, most analysts are pessimistic. With the prospect of higher lithium prices, Wall Street expects technological advances will yield more supply within a couple of years.
Please don’t believe that fairy tale, told by people with little understanding of commodities.
Eric Norris, the president of lithium at Albemarle, said hopes for a rush of supply overestimates the ability of lithium producers to match demand from automakers that has become “broader, deeper and more certain.”
Here’s the reality: lithium companies have historically delivered as much as 25% less production than expected in a given year because of chronic delays and technical mishaps.
Lithium mining projects typically take between six and 19 years from an initial feasibility study to actual production. That is the longest of any of the materials involved in electric batteries, according to a report last month from the International Energy Agency (IEA).
The IEA added that the world needs another 60 lithium mines by 2030 to meet all the decarbonization and electric vehicle plans of national governments.
Scott Yarham of S&P Global Commodity Insights summed up the situation perfectly, saying: “There’s a lot of investment in battery cell manufacturing in Europe and the U.S., but not sufficient enough in the raw materials. There’s going to be a big disconnect.”
Morningstar’s view of the lithium market is also optimistic. Analysts there recently said: “…our current view [is] that the lithium market will remain under-supplied throughout the rest of the decade, supporting prices well above the marginal cost of production…As electric vehicle penetration increases, we expect high-double-digit annual growth for global lithium demand, one of the best growth profiles among commodities.”
This will translate to the lithium mining companies making a lot of money for a very long time.
Here’s the company that has been my favorite for years—and it’s one that pays a decent dividend.
SQM: Lithium Powerhouse
Sociedad Química y Minera de Chile (SQM) is located in Chile.
Here’s what Morningstar said about SQM: “Through its access to high-quality mineral deposits, Sociedad Química y Minera de Chile is a large, low-cost producer of lithium, iodine, and nitrates used in specialty fertilizers. SQM’s crown jewels are its geologically advantaged lithium and caliche ore assets. SQM’s low-cost lithium deposit in the Salar de Atacama”—the lowest-cost lithium deposit in the world, in fact—“boasts the highest concentration of lithium globally and benefits from high evaporation rates in the Chilean desert.”
SQM is a major supplier in the lithium carbonate market. Long term, the company plans to expand its
carbonate capacity to at least 250,000 metric tons from just 70,000 tons in 2019.
As far as its other businesses go, SQM is a market leader in potassium nitrate, a specialty fertilizer used in high-value crops, including fruits and vegetables. And SQM is also the world’s largest producer of iodine, used in X-ray contrast media, pharmaceuticals, and LCD films.
However, lithium remains the big moneymaker. SQM’s lithium business generated 75% of company-wide gross profits during the first quarter, a number that should continue to grow as volumes rise. The company’s average realized lithium price was nearly $38,000 per metric ton during the first quarter, above most other producers globally.
I believe SQM has the best approach to lithium prices among all producers. The company sells 80% of lithium volumes via either short-term contracts or spot prices. By selling the majority of its lithium under short-term contracts, the company can fully take advantage of rising prices, which should result in a higher average realized price and higher profits over the years.
SQM has some outstanding financial characteristics, as well. It boasts an extremely healthy net margin figure of 20.45, cash and cash equivalents of $2.3 billion on the balance sheet, and extremely healthy cashflow pouring in off the back of a surge in demand for its lithium products.
SQM also pays a respectable dividend—its current annual yield is 2.7%. The company normally pays a quarterly dividend and an occasional special dividend. While the dividends may be variable, its 4-year average dividend yield is nearly 84% higher than the sector average.
The stock itself is up 127% over the past year and 120 % year-to-date, as the price of lithium has soared. Expect more price gains for both lithium and the stock. It’s a buy anywhere up to $120 per share.
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