Lithium stocks are clobbering so far in 2023. It is not surprising. As is the case with all basic materials and mining companies, the price of the material — a key component in batteries for smartphones and electric vehicles (EVs) — is highly sensitive to even slight changes in supply and demand. Due to economic uncertainty in the year ahead, and lithium supply increasing and possibly outstripping demand, lithium prices have fallen nearly 60% from their all-time highs in recent months.
Shares of top lithium producers Albemarle (Alb -1.03%) And Chemical and Mining Society of Chile (SQM -0.61%) 37% and 35% below their all-time highs respectively. If you believe lithium demand will remain strong this decade with growing EV adoption, which of these stocks might be buy-the-dip candidates right now?
Albemarle: An emerging leader in the lithium business, but thin on dividends
Albemarle is a US-based leader in the lithium industry. Coming off a record 2022, with revenue doubling from 2021 to $7.3 billion and net income from a minimum of $2.7 billion, Albemarle has finally been busy. In late March, it announced a new lithium processing facility in South Carolina to supply battery-grade lithium for the EV industry. A few days later, it also offered to acquire a pre-revenue Australian lithium miner Liontown Resources for $3.4 billion.
Liontown Lithium has signed offtake agreements for spodumene, a crude form of lithium, which is needed by several companies, including Tesla. Albemarle looks to benefit from that future source of sales once Liontown goes into production in the next few years.
Liontown’s management isn’t playing ball, so Albemarle is trying to increase the pressure by appealing to its younger peer shareholders. Time will tell what happens.
In the meantime, investors can consider Albemarle’s standalone results. Things are going to get dicey in 2023, especially with lithium prices heading south — although Albemarle has signed long-term supply deals with established price floors that could help keep it out of the downside. Nevertheless, by 2027, management believes that lithium sales will increase by an average of 20% to 30% per year, although it will maintain high levels of profitability due to its low-cost operations, primarily in Western Australia and the United States, and a little from Chile.
Albemarle has a long history of paying a dividend and growing it. However, note that the current annual yield is only 0.8% per annum. The company has a modest balance sheet with $1.5 billion in cash and short-term investments and $3.2 billion in total debt through the end of 2022. EPS).
SQM: Lithium king and high-yield dividend stock, but ownership structure questions remain
Sociedad Química y Minera (SQM), based in Chile, is the world’s largest lithium producer. Skyrocketing lithium demand is also a big deal for SQM. Revenue in 2022 was $10.7 billion, down from just $2.86 billion in 2021. Net income was $3.9 billion, dramatically higher than the 2021 minimum.
SQM has a better-looking balance sheet than Albemarle, with $3.6 billion in cash and short-term investments through the end of 2022 and just $2.8 billion in debt. This puts SQM in a good position to capitalize on its expansion plans in the future year, mainly in Chile, but with a new venture in Western Australia, to meet the growing demand from the EV market. The dividend currently pays a whopping 10.5%, which has undoubtedly caught the attention of investors. As of this writing, shares trade at just 5.4 times trailing-12-month EPS.
There are a few potential pitfalls to keep in mind, though. First, SQM’s dividend is variable. If profits fall from recent highs, expect payouts to decrease. Indeed, falling lithium prices in 2023 could hurt SQM’s revenue and profitability this year. In addition, about a quarter of SQM is owned by Chinese lithium investment company Tianqi Lithium, and about a quarter is owned by various investment firms controlled by Julio Ponce Leroy, the longtime CEO who resigned in 2015 amid insider trading, tax evasion allegations. and bribery.
There is no single group that exercises sole control over SQM, but the company’s ownership structure is confusing enough. Various entities with stakes in SQM that do not have the same agenda as the average retail investor may one day seek to gain more control over this top lithium producer.
Past management issues are in the rearview mirror. However, the current ownership structure situation would make me a little nervous if I owned SQM. The company’s reliance on Chile could also be problematic, as the country grapples with questions arising from water use, as lithium mining is a water-intensive process and SQM’s mines are in the desert. There are other general concerns about environmental protection, as well as how Chile’s indigenous peoples can participate in the mining industry.
Winner…
The mining industry can be a tough place to invest. Company financial results can be highly cyclical and sensitive to the health of the global economy. There are also plenty of smaller pre-revenue outfits with big promises of production growth. The average investor, however, would probably be best served by focusing on large profitable lithium businesses like Albemarle or SQM.
Which one is better to buy now? If you’re looking for a stock with a stable price over the next year, none of these companies might be a good fit — at least for now. The lithium market is volatile, with increasing supply and the risk of weakening consumer demand for cars reducing the market price for lithium. This is also going to create quite a bit of volatility in lithium stock prices.
But given SQM’s complicated ownership structure, my short bet on lithium is Albemarle. It’s not a perfect company, but it has obliterated the S&P 500’s total return (stock price plus dividends) over the long term. It is well-positioned to benefit if demand for lithium continues to grow this decade, and it could be a value right now if it can execute on its expansion plans in the coming years.