The lithium carbonate price last week touched a low of just under US$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.
For some novice investors, what appears to be a significant problem could also offer a considerable opportunity. 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 start 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.
Stocks to watch
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.
Here are three lithium stocks that AI identifies as trading below their intrinsic value:
Albemarle Corporation: 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: 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.
Sociedad Quimica y Minr de Chile SA: A leading global producer of lithium and other specialty chemicals, 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.
Latin Resources Ltd (ASX:LRS, OTC:LRSRF) released the preliminary economic assessment (PEA) last month for its Colina Lithium Project in Brazil - a technical and financial study showcasing strong economic viability for the project, which is on track to become one the world’s largest spodumene mines with very low operational costs.
The PEA, led by independent consultants SGS, demonstrates a low-capital, two-phase operation that delivers environmentally sustainable production of high-quality 5.5% lithium oxide spodumene concentrate (SC5.5) and a lower 3% lithium oxide (SC3) spodumene tails concentrate product.
The project’s after-tax net present value (NPV8%) came in at A$3.6 billion for an internal rate of return (IRR) of 132% for the two phases combined.
Over an 11-year mine life — with first production expected in 2026 — the PEA estimates total revenues of A$12.6 billion, with free cash flow of A$6.8 billion. This would see average annual production over the mine life of 405,000 tonnes of high-quality SC5.5.
Ioneer Ltd (ASX:INR, OTC:GSCCF, NASDAQ:IONR) is highly encouraged by its latest leach tests that indicate the Rhyolite Ridge Project has the potential to boost the US domestic supply of lithium, a crucial element for electric vehicle batteries.
Latest leach tests indicate that up to 79% of the project’s 360 million tonnes mineral resource can be effectively processed.
This positions Ioneer to quadruple US lithium production by 2026 and to substantially increase supply over time as well as to help rebalance the global production of boric acid.
Last month, Lithium Energy Ltd (ASX:LEL) intersected its highest lithium grade to date in the upper aquifer at its flagship Solaroz Lithium Brine Project in Argentina, with assay results returning 483 mg/L lithium from a depth of 233 to 257 metres.
Drilling at SOZDD007 in the upper aquifer of the newly drilled Payo 1 concession has confirmed a continuous 110-metre intersection of lithium-rich brines from 185 metres.
Encouraged by the results, the company has increased the target depth to 750 metres from the current 600 metres as drilling transitions from halite to the deep sand unit in the lower aquifer.
SOZDD007 is a step-out drill hole from the resource area that defined Solaroz’s maiden mineral resource estimate of 3.3 million tonnes of lithium carbonate equivalent.
Within the resource, there is a high-grade core of 1.34 milllion tonnes of LCE with an average concentration of 405 mg/l lithium, at a cut-off grade of 350 mg/l lithium, notably below the latest brine grade.
Azure Minerals Ltd (ASX:AZS, OTC:AZRMF) continues to intersect broad zones of high-grade lithium mineralisation at the Andover Project in Western Australia’s West Pilbara region, a joint venture between Azure (60%) and Creasy Group (40%).
The Andover pegmatite swarm extends over an area of nine kilometres (east-west) and up to five kilometres (north-south) and comprises hundreds of outcropping pegmatites with many containing high lithium grades identified from extensive surface sampling.
Assays from recent drilling of target area 1, which hosts the AP0011 pegmatite, include the intersection of the highest grade mineralisation over more than 100 metres at the project to date — 104.7 metres grading 1.61% lithium oxide.
Anson Resources Ltd (ASX:ASN) has ramped up lithium carbonate production at its sample demonstration plant to meet demand from potential offtake partners, while continuously producing lithium carbonate from brines from its Paradox Lithium Project in south-eastern Utah.
Anson’s sample demonstration plant at its Lithium Innovation Centre in Florida is producing battery-grade lithium carbonate, using the flowsheet designed by the company’s direct lithium extraction (DLE) partner, Sunresin.
The company has initially focused on replicating the DLE process developed by Sunresin, which is proposed for use in its lithium production plant at the Paradox Project. The solution would then be purified to electric vehicle battery-grade.
The production rate is steadily increasing and Anson is targeting one tonne per annum by the end of 2023, which will meet the Stage 1 and 2 supply qualification requirements of potential off-take partners.