Credit: Image source: Getty Images.
Image source: Getty Images.
Lithium stocks, particularly lithium mining stocks, have soared along with the price of the metal over the past year due to rising demand for rechargeable lithium-ion batteries.
While these batteries are used in smartphones and other popular electronic devices, it's the growing popularity of electric vehicles that has greatly revved up demand. Tesla Motors ' more affordable Model 3, with deliveries scheduled to begin in late 2017, should put the pedal to the metal for lithium demand, as it has the potential to speed up the adoption of EVs.
So which are the best lithium mining stocks?
The 3 best lithium mining stocks
Data source: YCharts and Finviz.com. Data to Oct. 12.
The three largest players -- Albemarle Corporation, Sociedad Quimica y Minera de Chile (SQM), and FMC Corp. -- are the best way for most investors to invest in the lithium market, which is estimated to be worth about $1.4 billion with strong growth predicted for many years to come. There are a good number of smaller lithium miners that are more speculative and unprofitable, and countless tiny and extremely speculative ones, many of which haven't yet even generated any revenue.
Albemarle: The largest lithium stock and supplier
Salar at Silver Peak, Nevada. A "salar" is a dried lakebed with an underground reservoir of mineral-containing brine that is pumped above ground into natural evaporation ponds. Some companies also use proprietary extraction techniques that fast-track lithium production. Image source: Albemarle.
Albemarle is a global specialty chemical company with leading positions in lithium, bromine, and refining catalysts. The Charlotte, North Carolina-based company became the world's largest supplier of lithium when it acquired Rockwood Holdings in January 2015. Bloomberg estimates Albemarle's share of the world's lithium market at about 35%, SQM's at 22%, China's Tianqi Lithium's at 16%, and FMC's at 13%.
Albemarle's lithium product sales increased 21.9% to $294.3 million in the first half of 2016, accounting for 22.2% of its total sales of $1.33 billion. Its lithium business EBITDA (earnings before interest, taxes, depreciation, and amortization) for this period rose 22.8% to $128 million, or 30.2% of the total EBITDA for its operating units. EBITDA was adversely impacted by potash (a byproduct of lithium production) pricing headwinds, which the company said appear to be subsiding.
Albemarle obtains its lithium from three independent primary sources: Salar de Atacama, Chile; Silver Peak, Nevada; and its 49% share in Talison Lithium (Tianqi Lithium owns the 51% stake). At the Chile and Nevada locations, lithium chloride is extracted from brine, while the Talison operation in Greenbushes, Western Australia, involves open-pit mining of ore containing the lithium-bearing mineral spodumene.
In September, Albemarle announced that it had entered into an agreement with Bolland Minera S.A. for the exclusive exploration and acquisition rights to a lithium resource in Antofalla, within the Catamarca Province of Argentina. The company said that it believes that this lithium resource will be certified as the largest lithium resource in Argentina.
Analysts expect Albemarle's year-over-year earnings per share to increase 17.1% in 2016 and at an average annual rate of 9.3% over the next five years. It's delivered positive trailing-12-month free cash flow (FCF) for every period going back to 1998 -- a better record than SQM and FMC. Moreover, its FCF for the current trailing 12 months is $264.6 million, which is significantly greater than its reported net income of $153 million. This means that the stock's valuation based on FCF (34.6) is considerably more attractive than its valuation based upon trailing earnings (58.8) suggests.
SQM: A promising lithium stock, but mired in scandal
Brine evaporation pool at Salar de Atacama, Chile. Image source: SQM.
Sociedad Quimica y Minera de Chile, also known as SQM, has a strong global presence in a wide variety of industries through its five business lines: specialty plant nutrition, iodine and derivatives, lithium and derivatives, industrial chemicals, and potassium.
Revenue from SQM's lithium and derivatives business increased 92.1% to $192.8 million during the first six months of 2016. This business accounted for 22.1% of its total revenue of $871.8 million during this period and an outsize 47% of its consolidated gross profit. As with Albemarle, lithium revenue growth was due to an increase in sales volume combined with a strong rise in price. Average prices for products within this business increased nearly 30% compared to the first quarter of 2015.
Like Albemarle, SQM extracts lithium chloride (and other minerals) from underground brine at the Atacama Salt Desert in Chile, where it has nine plants that produce lithium carbonate (along with potassium chloride, potassium sulphate, boric acid, and magnesium chloride).
The Chilean company has been mired in scandals in recent years, which makes it a suitable investment only for those not averse to risk. Last year, SQM was embroiled in a political campaign finance scandal, which revealed that in the process it had allegedly evaded income taxes on a portion of income. This led to three board members representing Canada's Potash Corp .(NYSE: POT) , which owns a 32% stake in SQM, resigning in protest, and to SQM firing its CEO. In 2014, SQM Chairman Julio Ponce, a former son-in-law of late dictator Augusto Pinochet, who essentially controls SQM through a series of holding companies, was fined for insider trading. He was forced to resign last year due to these scandals.
Analysts expect SQM's year-over-year EPS to decline 10% in 2016, but to grow at an average annual rate of 14.3% over the next five years. This is the highest projected growth rate of the big three lithium players, but the company's scandalous recent past means investors should tread carefully.
FMC Corp.: Highest-purity lithium producer, but very diversified
Brine evaporation ponds at FMC's Salar del Hombre Muerto in Argentina. Image source: FMC Corp.
FMC Corp. serves the global agricultural, industrial, and consumer markets. It operates in three segments: agricultural solutions, health and nutrition, and lithium.
Compared to Albemarle and SQM, FMC's lithium business accounts for a considerably smaller portion of its total business with respect to revenue and profit. The Philadelphia-based company's lithium business revenue increased 11.5% to $123.6 million in the first half of 2016, accounting for 7.7% of its total sales of $1.61 billion. Its lithium business operating profit for this period soared 211% to $31.4 million, or 10.3% of total segment operating profit of $306.3 million. The company attributed the outsize profit growth to its strategy of converting lithium carbonate into higher-value downstream specialty products.
FMC touts that it's the most vertically integrated company in the lithium industry. It owns its lithium source, the Salar del Hombre Muerto in Argentina, and processing and production facilities, where the lithium carbonate that is produced from lithium chloride is further refined into such products as lithium metals and lithium hydroxide, bromide, and hypochloride. The company also claims its proprietary brine extraction technique yields the highest-purity (99.5%) lithium in the industry.
FMC Corp. has been reorganizing, which has negatively impacted its revenue, GAAP earnings, and free cash flow. GAAP earnings and FCF are both currently negative. While analysts expect its year-over-year EPS to decline 164% in 2016, they project that it will rise at an average annual rate of 10.4% over the next five years.
Tread carefully
Lithium stock prices have risen significantly over the last year, as investors (and speculators) have rushed in in a gold-rush-like frenzy. So the group may be in for further pullbacks, though the long-term outlook remains bright for select higher-quality players.
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Beth McKenna has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Tesla Motors. The Motley Fool owns shares of Albemarle. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
