There has been a significant correction in lithium prices in the last few quarters. This has translated into a deep correction for some of the best lithium stocks.
I am of the view that this correction is a once in a lifetime opportunity to accumulate lithium names for the long term. There will be a few 10-baggers from the industry before the end of the decade.
An important point to note is that with the correction in lithium, big companies have already reduced their capital investment targets. There are analysts who believe that a global lithium shortage is likely as soon as 2025.
Further, a Boston Consulting Group report suggests that a lithium shortage is likely to be acute by 2035. By that year, the supply-gap is estimated at 1.1 million metric tons. Clearly, the long-term outlook for lithium is positive. Rewards will be multi-fold for investors willing to buy and hold lithium stocks with patience.
With this overview, let’s talk about three lithium stocks to buy for 10-bagger returns.
Lithium Americas (LAC)
Lithium Americas (NYSE:LAC) is among the massively undervalued lithium stocks that can be a 10-bagger in the next five years. The company’s Thacker Pass project in north Nevada is a potential game-changer in terms of revenue and cash flows.
Thacker Pass feasibility study shows total production potential of 80,000tpa of lithium carbonate equivalent. With a mine life of 40-years and an IRR of 21.4%, the asset will create immense value.
To put things into perspective, the company is expecting an average annual EBITDA of $1.1 billion through the life of the asset. Further, the after-tax net present value of the asset is $5.7 billion. Comparing these numbers to the current market valuation of $740 million shows just how undervalued this stock is.
Of course, there is a significant financing requirement with phase one capital cost of $2.3 billion. I however don’t see it as a concern with General Motors (NYSE:GM) already committed to invest $650 million in two tranches. GM also has an offtake agreement for 100% of phase one production for 10-years.
Albemarle Corporation (ALB)
Albemarle Corporation (NYSE:ALB) stock has corrected by almost 60% in the last 12 months. The reason is a big plunge in lithium prices. I, however, believe that ALB stock will bottom out around current levels. Investors can consider gradual accumulation with an investment horizon of five years.
It’s worth noting that for 2023, Albemarle reported 31% year-on-year revenue growth to $9.6 billion. However, with lower lithium price, adjusted EBITDA declined by 20% to $2.8 billion.
An important point to note is that between 2022 and 2027, Albemarle continues to guide for volumetric growth at a CAGR of 20%. Once lithium prices start trending higher, Albemarle will have the potential to deliver stellar cash flow growth.
I don’t see any credit stress with Albemarle ending last year with a liquidity buffer of $1.8 billion. The company has also announced capital expenditure reduction and cost control. These measures are likely to unlock more than $750 million in cash flows in the near term.
Standard Lithium (SLI)
Standard Lithium (NYSE:SLI) stock has also witnessed a massive sell-off in the last 12 months. The company currently trades at a market valuation of $226 million.
However, considering the asset potential and if lithium trends higher, SLI stock can deliver 10x or 20x returns in the next five years.
In terms of assets, the company’s South West Arkansas project has an after-tax net present value of $4.5 billion. Further, the Lanxess project has a NPV of $722 million. SLI is grossly undervalued when we compare it to the market valuation.
Besides the plunge in lithium prices, there is another reason for the valuation gap. Standard Lithium needs to find the right partners for financing the project construction. Once that happens, I expect SLI stock to skyrocket.
The company has selected Ausenco Engineering Canada for Definitive Feasibility Study and Front-End Engineering and Design services for the South West Arkansas project. While production is still a few years away, Standard Lithium seems to be moving in the right direction.
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.
