Through the years, the decline in lithium prices has been a concern. This correction in the metal is reflected in the poor performance of some of the best lithium stocks. However, I believe there is ample opportunity amidst this temporary headwind.
The demand for lithium will continue to increase beyond the decade and remain in a long-term uptrend. This will translate into strong numbers and cash flow for lithium companies. It’s, therefore, a good time to buy some of the best lithium stocks with an investment horizon of five years.
Coming to lithium fundamentals, it’s expected that the lithium supply shortage will continue to increase. By 2035, the lithium supply gap will likely be “at least 1.1 million metric tons, or 24% less than demand.” This puts into perspective the bullish case for lithium as an investment. Let’s talk about three lithium stocks to buy that have a quality management team coupled with a healthy balance sheet.
Lithium Americas (LAC)
Among emerging lithium stocks, Lithium Americas (NYSE:LAC) looks attractive, with immense growth potential through the decade. The company has lithium assets focusing on the United States and Canada.
Notably, Lithium Americas commands a market valuation of $1.2 billion. However, the company’s Thacker Pass project has a net present value of $5.7 billion. This is an indication of the level of undervaluation.
The company’s management and asset potential are from General Motors’ (NYSE:GM) investment of $650 million in the asset. General Motors also has an offtake agreement for 100% of Thacker Pass Phase 1 production for 10 years. This will provide clear revenue visibility.
GM’s backing also ensures that Lithium Americas does not need to leverage significantly to commercialize the asset. For now, the company has a debt-free balance sheet that provides high financial flexibility.
Overall, LAC stock looks like a clear winner for investors willing to hold with patience. Once commercial production starts in 2026, the asset will be a cash flow machine.
Albemarle Corporation (ALB)
Albemarle Corporation (NYSE:ALB) is among the established players in the industry. A strong balance sheet backs the company’s ambitious growth plans. With lithium trending lower, ALB stock has corrected by 40% for year-to-date. Valuations look attractive at a forward price-earnings ratio of 5.8. Further, the stock offers a dividend yield of 1.37%, and I expect healthy dividend growth in the coming years.
In terms of expansion, Albemarle expects to boost lithium conversion capacity to 600ktpa by 2027 from 200ktpa last year. The tripling of capacity will translate into healthy revenue and cash flow growth.
It’s worth noting that for 2023, Albemarle expects leverage from 1.2x to 1.3x. A solid balance sheet will allow Albemarle to make aggressive investments and pursue potential acquisitions.
In October, the company entered a joint venture with MARBL to own a 100% stake in the Kemerton lithium processing facility and a 50% stake in Wodgina spodumene mine in Australia. Further, Albemarle will retain full ownership of China’s Qinzhou and Meishan lithium processing facilities.
Standard Lithium (SLI)
Standard Lithium (NYSE:SLI) is a penny stock worth considering because of the asset base. It’s worth noting that even with the correction in lithium prices, SLI stock has remained sideways for year-to-date. This is an indication that the stock is oversold and undervalued. I expect the stock to deliver multibagger returns in the next five years.
It’s worth noting that Standard Lithium commands a market valuation of $450 million. In comparison, the company’s South West Arkansas project is estimated to have a net present value of $4.5 billion. This asset has one of the highest confirmed lithium-grade brines. At the same time, Standard Lithium has other projects that would add to the total asset valuation.
The company has a strong management team, and business developments have remained positive. Given the quality of assets, equity dilution for fundraising is an unlikely concern. As the company nears commercialization in the next few years, SLI stock will likely go ballistic.
On the date of publication, Faisal Humayun 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.
