Take advantage of the lithium boom with these stocks

The rise of electric vehicles has had a major impact on a number of industries. The move from internal combustion engine to electric cars means that the demand for oil and gas will decrease over time, as will the demand for some parts of internal combustion engine vehicles that are no longer needed in electric cars, such as the engine, powertrain and emission systems .

In addition to reducing demand in certain areas, the burgeoning electric vehicle industry is seeing demand for previously niche products – such as lithium – rise to previously unseen levels. The gradual decline of internal combustion and the commensurate rise of electrically powered vehicles is creating a demand for lithium and other materials that enriches the companies that mine these raw materials.

Let’s take a look at three lithium mining stocks that are well positioned for future demand for lithium, but also regularly pay dividends to shareholders.

Lithium mining worldwide

Lithium is a natural resource found only in a few places in the world. The mineral is an essential part of battery production and as demand for batteries is soaring worldwide due to the rise of EVs, lithium has come into sharp focus in recent years.

Lithium can be extracted in three ways, but currently only two are commercially viable. First, lithium can be extracted from brine deposits in groundwater. This method is usually limited to South America, as it is not found in other parts of the world. Second, lithium can be extracted from hard rock, which is formed when magma from lava flows cools and hardens. This method is more common. Third, lithium is present in clay in certain parts of the world, but this method has not yet proven commercially viable.

The lithium mining process is important because that means only certain parts of the world 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 such as oil or gold generally have a large supply in different parts of the world, and many companies buy these commodities. Lithium is highly concentrated, which means that certain companies have excessive clout and are therefore important to investors.

Australia contains more than half of the world’s known reserves of lithium and is the second largest annual producer of lithium after Chile. That country has the second largest total lithium reserve, about half the level of Australia. As a result, only 11 mines around the world account for almost 100% of total lithium production.

Your chemical romance?

Our first stock is Albemarle Corp. (ALB), a company that develops, produces and markets specialty chemicals worldwide. The company operates three segments: lithium, bromine and catalysts. The Lithium segment offers several lithium-based products for use in battery manufacturing, which is why Albemarle is a stock that we believe can benefit from the lithium boom. Albemarle has other companies as well, so it’s not a pure play on lithium. However, lithium has exploded Albemarle’s revenues, as by 2023 it should return about three times what Albemarle had in 2021.

Founded in 1887, the company is expected to 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 capitalization.

We believe that, despite its already impressive growth, Albemarle can grow earnings by 7.5% per annum for the foreseeable future. Sales should increase in 2023, but we note that the company will reach a ceiling in terms of production and therefore revenue. In addition, costs continue to rise and the initial increase in the price of lithium cannot be expected to repeat itself.

The company has a very attractive 27-year dividend rise and generally increases payout significantly. That means Albemarle is a robust dividend growth stock, but we note that the return is very small at only 0.6%. While this return is unattractive, the company has strong prospects for dividend growth going forward.

A South American lithium game

Our next stock is Sociedad Quimica y Minera de Chile SA (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. Nevertheless, Sociedad Quimica has benefited from the lithium boom and we expect it to continue.

The company was founded in 1968 and is based in Chile, which contains the second largest reserve of lithium in the world. Revenue of nearly $11 billion this year is more than four times what it will be in 2021 due to the lithium boom.

Of course, we don’t expect this kind of growth to continue, but the company’s revenue base should remain quite high for the foreseeable future, in the neighborhood of $11 billion.

Sociedad Quimica has no significant dividend increase, but that’s because it pays a variable dividend based on that year’s earnings and cash flows. For example, for 2022, the total declared dividend for US ADRs is $7.64 per share. That is good for a return of almost 8% on the current price of the share. While future dividends depend on earnings, we think Sociedad Quimica is likely to deliver high returns in the near future.

Go down for lithium and dividends

Our third share is Mineral Resources Ltd. (MALRF), a company that operates a diversified mining and mining services business in Australia. The company has many industries that fall outside of lithium, but like the others in this list, the company’s business today is dominated by the battery component.

Founded in 1993, the company is expected to generate about $4.3 billion in revenue this year, nearly double the 2021 level. We expect revenue to return to strong growth next year before leveling off, similar to Sociedad Quimica.

Like Sociedad Quimica, Mineral Resources pays a variable dividend. Last year, total dividends were $2.04 per share, while this year’s dividend was just $0.68. It’s impossible to predict what the company will pay from year to year, but we expect the dividend to continue for the foreseeable future given the growth prospects the company has, especially if the price of lithium remains high.

Final thoughts

The rise of electric cars has quite suddenly created a huge demand for certain compounds, with lithium at the very top of the list. Given the concentration of lithium mining activities, there are not many companies that can benefit from the demand for lithium from the EV boom.

We view Albemarle, Sociedad Quimica and Mineral Resources as three stocks that not only have tremendous size and scale, but also have good growth prospects and the willingness and ability to return capital to shareholders through dividends.

Receive an email alert every time I write an article for real money. Click “+Follow” next to my byline for this article.

Leave a Reply

Your email address will not be published. Required fields are marked *