Lithium has a number of use cases in the digital age. Its high electrochemical potential makes it a valuable component of high energy-density rechargeable lithium-ion batteries. These batteries power products, including personal computers, smartphones and tablets. Most importantly for today’s market, lithium is also a key ingredient for making lightweight, power-dense batteries essential for electric vehicles (EVs). As the demand for EVs grows, so does the demand for lithium. The substance must be extracted from chemical compounds, such as lithium carbonate and lithium hydroxide. The former is the most common and is found in both brine water reservoirs and lithium-containing spodumene minerals in certain hard rock formations. The latter compound comes through further refining spodumene minerals, resulting in higher sustainability but is more costly.
Although lithium carbonate prices have fallen from their peak in 2022, they have rebounded since May, driven by EV and lithium battery production. Electric vehicle sales have also exhibited impressive year-over-year growth, with global sales so far, up 40% from last year. That translates to sustained demand and opportunity for both lithium producers and public equity investors who want to profit from this trend. In this article, we will look at the three best lithium stocks, in my opinion, that have the potential to deliver strong returns for investors in 2023.
Albemarle (ALB)
This company has earned another spot on one of my lists. For readers unfamiliar, Albemarle (NYSE:ALB) is a specialty chemicals company operating three primary business segments: lithium, bromine and catalysts. Albemarle’s lithium business, which extracts and processes both lithium carbonate and lithium hydroxide, is what the specialty chemicals company is best known for. In 2022, the company primarily produced lithium at its brine operations in the Atacama salt flat in Chile and its hard rock mines in Australia. Albemarle made more than $7 billion last year due to elevated lithium prices, and two recent quarterly earnings beats could have the lithium producer achieving another record year.
As I wrote in a prior piece, Albemarle’s operations in Chile were scrutinized by market watchers when Chile’s government crafted plans to increase its involvement in the lithium mining sector. The reaction by the market was largely overblown and created a great opportunity for patient investors at the time. Similarly, last week, Albemarle released its Q2 earnings print and beat Wall Street’s estimates on an EPS basis, but revenue only came in line with estimates.
Since then, ALB shares have sold off slightly, mostly due to investors’ pessimistic sentiments about where lithium prices are headed. Still, Albemarle’s management decided to raise guidance and noted tailwinds in electric vehicle (EV) sales that should drive lithium prices upward. These factors, coupled with ALB trading at only 7.49x forward earnings, should keep investors interested.
Sigma Lithium (SGML)
Originally from Canada but headquartered in Sao Paulo, Brazil, Sigma Lithium (NASDAQ:SGML) wholly owns and operates the Grota do Cirilo project in Brazil, one of the largest hard-rock lithium deposits in the world. The project has an estimated resource of 54.8 million tons of spodumene ore at an average grade of 1.4% lithium oxide. Sigma Lithium’s project is located close to major ports and infrastructure in Brazil, giving it access to key markets in North America, Europe and Asia.
The company also has a long-term off-take agreement with Mitsui & Co., Ltd. (OTCPK:MITSY), a Japanese trading giant that previously provided Sigma Lithium with financing and logistics support. The company completed phase 1 of the project early this year and expected to generate cash flow from lithium production in Q2. Phase 1 annual free cash flow is expected to be approximately $455 million. Phases 2 and 3 await approval and, once completed, would jolt Sigma Lithium’s annual cash flows to $1.8 billion.
Sigma Lithium’s stock has soared 43% year-to-date (YTD), outperforming Albemarle’s shares as well as the S&P500 and the Russell 2000 by wide margins. Shares are currently trading at a valuation of 21.7x forward earnings, which is higher than established competitors like Albemarle but will make sense as Sigma’s lithium operations start production.
Pilbara Minerals (PILBF)
Pilbara Minerals (OTCPK:PILBF) is an Australian company that owns and operates the Pilgangoora project in Western Australia, one of the world’s largest hard-rock lithium-tantalum deposits. The company’s competitive advantage lies in its large-scale production at Pilgangoora, which produced 377,902 dry metric tons of spodumene concentrate in 2022 and is expected to double production in the coming years. Pilbara also sells tantalite concentrate, typically a byproduct of its lithium mining operations. Tantalite concentrate can be used to create tantalum capacitors which are needed in batteries and other electronic circuitry.
Though Pilbara Minerals’ business model is largely based on off-take contracts, the company also leverages an online auction system called Battery Material Exchange (BMX) to sell uncommitted spodumene directly to end-users. That allows the company to capture the market price for its products when there is no contract dictating pricing terms.
In Pilbara’s fiscal year 2022, which ended last June, the lithium producer generated $821 million in revenue and over 387 million in net income, representing a 47% net margin. With lithium production having ramped up, Pilbara Minerals is expected to have a record year, and market watchers have taken note. The company’s shares have surged more than 34% YTD, trouncing both competitors and the broader market. With a relatively cheap valuation at 7.7x forward earnings, investors should get on board.
On the date of publication, Tyrik Torres did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
