Profit From the Lithium Boom With These Stocks
The rise of electric vehicles has had a profound impact on a number of industries. The switch from internal combustion to EVs means that demand for oil and gas will decline over time, as will demand for some of the parts of internal combustion vehicles that are no longer needed with EVs, such as the engine, drivetrain, and emissions systems.
In addition to reducing demand in certain areas, the burgeoning electric vehicle industry is seeing demand for previously niche products — such as lithium — soar to previously unseen levels. The gradual decline of internal combustion, and the commensurate rise of electric-powered vehicles, is producing demand for lithium and other materials that is enriching the companies that mine those raw materials.
Let’s take a look at three lithium mining stocks that are positioned well for future lithium demand, but also pay regular dividends to shareholders.
Lithium Mining Globally
Lithium is a natural resource that is found in only a few places in the world. The mineral is a critical component of battery production, and given that battery demand is soaring globally due to the rise of EVs, lithium has come into sharp focus in recent years.
Lithium can be mined in three ways, but only two are currently commercially viable. First, lithium can be mined from brine deposits in groundwater. This method is mostly limited to South America, as it is not prevalent in other parts of the world. Second, lithium can be mined from hard rock, which is formed when magma from lava flows cool and harden. This method is more common. Third, lithium is present in clays in certain parts of the world, but this method has not been found to be commercially viable yet.
The mining process of lithium is important because that means only certain areas of the world even have access to lithium, let alone the ability to mine it in large quantities. That helps explain why mining production is quite concentrated, as are global reserves. Commodities like oil or gold tend to have large supply in a variety of places around the world, with many companies sourcing those commodities. Lithium is highly concentrated, which means certain companies have outsized influence, and therefore, importance to investors.
Australia contains more than half of the world’s known reserves of lithium, and is the second largest producer of lithium annually, behind Chile. That country has the second-largest lithium reserve total, about half the level of Australia. Because of this, just 11 mines across the world account for nearly 100% of total lithium production.
Your Chemical Romance?
Our first stock is Albemarle Corp. (ALB) , a company that develops, manufactures, and markets specialty chemicals worldwide. The company operates three segments: Lithium, Bromine, and Catalysts. The Lithium segment offers various lithium-based products for use in battery production, which is the reason Albemarle is a stock we think can profit from the lithium boom. Albemarle has other businesses as well, so it’s not a pure-play on lithium. However, lithium has seen Albemarle’s revenue explode higher, as 2023 should produce about triple the revenue that Albemarle had in 2021.
The company was founded in 1887, should generate about $7.2 billion in revenue this year, and has a market cap of $33 billion. That makes Albemarle the largest lithium company in the world by market cap.
We think Albemarle, despite its already impressive growth, can continue to grow earnings at 7.5% annually for the foreseeable future. Revenue should soar into 2023, but we note that the company will hit a ceiling in terms of production, and therefore, revenue. In addition, costs continue to rise, and the initial surge in lithium pricing cannot be expected to be repeated.
The company has a very attractive 27-year dividend increase streak, and it raises the payout at a strong rate, generally. That means Albemarle is a robust dividend growth stock, but we note the yield is very small at just 0.6%. While this yield is unattractive, the company does have a strong dividend growth outlook moving forward.
A South American Lithium Play
Our next stock is Sociedad Quimica y Minera de Chile S.A. (SQM) , a company that produces and distributes specialty plant nutrients, iodine and its derivatives, lithium and its derivatives, as well as other chemicals and related products. Like Albemarle, Sociedad Quimica is a diversified company, and therefore, not a pure-play on lithium. However, Sociedad Quimica has benefited all the same from the lithium boom, and we expect that to continue.
The company was founded in 1968, and is based in Chile, which contains the world’s second-largest lithium reserve. Revenue of almost $11 billion this year is more than four times what it was in 2021 due to the lithium boom.
We don’t expect that sort of growth to continue, obviously, but the company’s revenue base should remain quite elevated near $11 billion for the foreseeable future.
Sociedad Quimica doesn’t have a dividend increase streak to speak of, but that’s because it pays a variable dividend based upon that years earnings and cash flows. For 2022, for instance, the total dividends declared for US ADRs is $7.64 per share. That’s good for a nearly 8% yield on the current share price. While future dividends depend on earnings, we believe Sociedad Quimica is likely to be a high-yielder for the foreseeable future.
Go Down Under for Lithium and Dividends
Our third stock is Mineral Resources Ltd. (MALRF) , a company that operates a diversified mining and mining services business based in Australia. The company has many lines of business that are outside of lithium, but like the others in this list, the company’s business these days is dominated by the battery component.
The company was founded in 1993, should produce about $4.3 billion in revenue this year, nearly double 2021’s level. We expect revenue to grow strongly again next year before plateauing, similarly to Sociedad Quimica.
Also like Sociedad Quimica, Mineral Resources pays a variable dividend. Last year’s total dividends totaled $2.04 per share, while this year’s dividend was just $0.68. It is impossible to predict what the company will pay from year to year, but we expect the dividend to remain for the foreseeable future given the growth prospects the company possesses, particularly if lithium pricing remains strong.
The rise of EVs has created tremendous demand quite suddenly for certain compounds, with lithium being right at the top of the list. Given the concentration of lithium mining operations, there aren’t many companies that stand to benefit from the EV boom’s demand of lithium.
We see Albemarle, Sociedad Quimica, and Mineral Resources as three stocks that not only have massive size and scale, but good growth prospects, and the willingness and ability to return capital to shareholders via dividends.