What are the prospects for lithium stocks in 2024? These have benefited from the high demand for the metal in electric vehicle batteries, but a 2023 slump in the price of the commodity amid oversupply has clouded the outlook.
Analyst Seth Goldstein has looked at the prospects of two Morningstar picks in the sector, both of whose shares have fallen sharply in 2024 and are rated as 5-star stocks:
• Albermarle (ALB)
• Lithium Americas (Argentina) (LAAC)
Other undervalued lithium stocks covered by Morningstar include:
• Lithium Americas
• Arcadium Lithium
• Ganfeng Lithium
• SQM (Chile)
Key Morningstar Metrics for Albemarle Stock
• Fair Value Estimate: $275
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High
Shares in one of the world’s largest lithium producers, Albermarle, crashed on 17% on March 5 after it revealed a $2 billion equity issue, which investors assume will be dilutive to holders of common stock. But the stock rallied on March 6 after the terms of the issue became clearer.
Our analyst has updated the fair value estimate for the stock to $275 from $300. He argues that while the issuance will be highly dilutive to common equity shareholders, the shares remain significantly undervalued.
"At current prices, we view Albemarle shares as materially undervalued, with the stock trading in 5-star territory and less than 45% of our updated fair value estimate," he says.
"Accordingly, we see strong upside to the current share price. With the share issuance now included in the market valuation, we see rising lithium prices as a strong catalyst for shares going forward. Accordingly, Albemarle remains one of our top lithium picks for investors."
(The terms of the issuance are explained by Goldstein: we assume the preferred shares convert at the maximum conversion price in March 2027. The shares will convert into between 7.618 and 9.14 common equity shares in March 2027. For every $1,000 in preferred shares, this results in 7.618 shares of common stock. Each depository share will be equal to 1/20 of a preferred share. The preferred shares will carry a 7.25% annual dividend.)
Key Metrics for Lithium Americas (Argentina) Stock
• Fair Value Estimate: $25/CA$33
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High
Lithium Americas (Argentina) is a smaller challenger to Albermarle with less of a track record, having been spun out from Lithium Americas (LAC). But Goldstein says the stock remains the most undervalued lithium producer under our coverage. The company will be under new leadership on March 18 when Sam Pigott will become the president and chief executive (Morningstar left the stock’s fair value estimate of $25/$CA33 after the announcement). Currently the shares trade at below $5 in New York, having fallen 25% in 2024 so far.
“We view Pigott as a good choice to lead Lithium Argentina. He brings roughly 20 years of experience in mining, lithium, and finance. Pigott spent the past six years at Ganfeng, Lithium Argentina's joint venture partner at the Cauchari-Olaroz project, where he led the company's international business development group,” Goldstein says.
He continues: “Our bullish view comes from two key factors. First, we think market sentiment is extremely negative on the direction of lithium prices. We forecast prices will rise in 2024 and average around $25,000 per metric ton from 2024 through 2030. Second, we think the market is not giving Lithium Argentina credit for long-term volume growth at Cauchari-Olaroz or successful project development at Pastos Grandes.”
As a new entrant, Lithium Argentina does carry a higher risk, Goldstein says. But he argues that Cauchari-Olaroz is poised to become one of the cheapest lithium extraction projects in the world.
The newly formed Lithium Argentina made money for the first time in the fourth quarter of 2023, producing 6,000 tonnes of lithium, according to annual production figures announced by Lithium Argentina in early January. That was more than the 5,000 tonnes the group's board had previously expected to produce.
But there is political risk here. The Argentine government, under new president Javier Milei, could raise export tariffs.
What's the Long and Short Term Outlook for Lithium?
Long-term demand is expected to be strong, according to the International Energy Agency (IEA), especially as the world moves towards 2050 net zero targets. Electric vehicles form part of the drive towards net zero for transport emissions, but here the demand picture is not as clearcut as was expected a few years ago. Fewer people are buying EVs because of the high cost, despite widespread adoption in some European countries. Chinese demand for EVs has faltered as the economy has struggled.
Even if sales of EVs pick up again, lithium's central role in this revolution is not secure. After all it's a scarce resource like nickel and cobalt, which are also used in EV batteries. Many countries and manufacturers are trying to diversity away from rare metals in the production process. In the future, rechargeable batteries will be developed that no longer require lithium, some industry experts predict.
But Goldstein is optimistic about worldwide EV sales, especially as more charging stations come on stream. He argues that a network effect will start to kick in for EVs; as more people buy them and use them, their functionality and affordability will improve and more infrastructure will be developed to support them. And that backs the case for increasing lithium demand in the coming years. After all, the IEA forecasts that the price of lithium could be more than 600% higher than its current level by 2050.
This article was compiled with articles from Morningstar Netherlands on lithium stocks and worldwide lithium demand by Rentsje de Gruyter (in Dutch).
