Lithium demand is growing like gangbusters, but that isn’t enough for everyone on Wall Street to recommend lithium stocks.
That is because it can be hard to reconcile fast growth and rocketing commodity prices with shareholder value.
J.P. Morgan analyst Jeffrey Zekauskas launched coverage on Monday of lithium producer Livent (ticker: LTHM) with a Hold rating and $28 price target. Zekauskas also covers the world’s largest lithium miner, Albemarle (ALB). He has rated those shares Hold since May 2021. His Albemarle price target is $270 a share.
“ Livent has a strong earnings trajectory,” Zekauskas wrote in his launch report. He forecasts Livent ’s per-share earnings will grow from 18 cents in 2021 to $1.50 in 2022 and $2.30 in 2023.
That is incredible growth in just two years. Most of those gains come from rises in lithium pricing instead of from capacity expansion. Benchmark lithium prices are up about 200% over the past 12 months and up roughly 12-fold compared with late 2020.
Electric vehicles are the reason for the increases—demand of lithium-ion batteries that power EVs has nearly tripled since 2020. Demand is expected to double again between 2022 and 2024.
Supply is scrambling to catch up will all that demand. Livent, for its part, is working to increase its capacity by about 170% between 2022 and the end of 2025.
The supply and demand change make calling long-term lithium prices difficult. Ultimately, commodities tend to move toward the marginal cost of production. Where on the globe that marginal—higher cost—lithium comes from, what the cost of production looks like, and when things normalize, however, is anyone’s guess.
Where things settle out has big implications for lithium-linked stocks. At a benchmark lithium price of $40,000 per metric ton, J.P. Morgan projects Livent and Albemarle stocks’ free cash flow yield in 2023 would come in at about 0.3%, or near break-even, and 5.2%, respectively. At prices of $70,000 a metric ton, however, yields would be dramatically higher, at almost 9% and 16%, respectively.
Benchmark prices are roughly $75,000 a metric ton today.
That wide range of free cash flow yields, depending on what prices do, is a reason Zekauskas is on the sidelines and says Livent stock is an above average risk.
The rest of Wall Street is a little more bullish. While only 47% of analysts covering Livent stock rate shares Buy, roughly 60% of analysts covering Albemarle stock and shares of lithium producer SQM ( SQM ), rate them Buy.
The average Buy-rating ratio for stocks in the S&P 500 is about 58%.
Livent was up 4.9% in midday trading. The S&P 500 and Dow Jones Industrial Average were up 2.2% and 1.8, respectively.
It is a green day for markets and EV stocks. Shares of EV leader Tesla (TSLA) were up 6.3%.