Lithium stocks, particularly lithium mining stocks, were red-hot in 2016.These stocks were propelled higher by the rising price of lithium, which was driven by several factors, most notably by increasing demand for rechargeable lithium-ion batteries for electric vehicles.
Tesla Motors'(NASDAQ: TSLA) Model 3, the company's mass-market EV that's scheduled to begin being delivered in late 2017, should further rev up demand for the world's lightest metal that possesses excellent energy storage properties. Tesla's push into the home energy storage market also has the potential to fuel demand for lithium-ion batteries for many years to come.
The bulk -- estimated at about two-thirds -- of the world's lithium supply is found in underground salt lakes in the "Lithium Triangle," which includes portions of Argentina, Chile, and Bolivia. Image source: Getty Images.
Largest lithium stocks traded on U.S. stock exchanges by 2016 return
Here are some basic stats for the three largest lithium players that are traded on U.S. stock exchanges -- none are pure plays -- and a lithium exchange-traded fund, or ETF.
Data source: Yahoo! Finance (market caps) and YCharts (other data). Data to Jan. 12, except for 2016 total return. TTM = trailing 12 month.
Before we look more closely at the three lithium players in the preceding chart, investors should understand the big picture.
Lithium market by market share
The global lithium market has evolved in recent years from being largely controlled by three players -- the "big three" -- to five players, as Chinese companies have been gaining market share. Our focus is on the three big ones, listed above. Shares of the other two Chinese companies among the top five players-- Sichuan Tianqi Lithium Industries and Jiangxi Ganfeng Lithium -- are not traded on U.S. stock exchanges.
Market share estimates vary depending upon source, but I'll provide some numbers for context. The best estimate, in my opinion, comes from lithium expert Joe Lowry, who runs Global Lithium LLC. Lowry provides these numbers for 2014:
- Albemarle: 22%
- SQM: 21%
- Ganfeng: 12%
- FMC: 10%
- Tianqi: 10%
- Other: 25%
In this estimate, the big three combined control about 53% of the market, while Chinese companies have a combined 40%-plus market share.
For our purposes, the main takeaway here is that Albemarle is the world's largest lithium supplier, while SQM and FMC are the second and third largest players, respectively, among the big three.
Most lithium stock investors should avoid smaller players
Most lithium investors should focus on the big three, even though none are pure plays on the silvery metal. Junior miners are risky and speculative and are best left for experienced traders comfortable with high-risk investments. Larger juniors include such companies as Galaxy Resources,Orocobe,and Nemaska Lithium.Many juniors are listed on the Toronto exchange but trade over the counter (OTC) in the U.S.
Investors need to tread carefully in this space, as there are tiny companies pouring into the lithium space in a gold-rush-like frenzy that are much riskier than the larger juniors.Most haven't yet generated any revenue, let alone earnings.
Big three: 2016 lithium sales and income
Data sources: Companies' Q3 2016 earnings reports. *Gross profit; approximate dollar value provided since number obtained from working backwards from the "approx. 53% of consolidated gross profit" that SQM provides. **Adjusted EBITDA (earnings before interest, taxes, and depreciation). ***Income before taxes.
Not surprisingly, there is a direct correlation between how well the above companies' stocks performed in 2016 and the contribution of their lithium businesses to their total income. This relationship won't always hold true, of course, because the performance of these companies' stocks depends not only on the performance of their lithium businesses, but also their other businesses.
Albemarle Corporation is a global specialty chemical company with leading positions in lithium, bromine, and refining catalysts. TheNorth Carolina-based companyobtains its lithium from three independent main sources: Salar de Atacama, Chile; Silver Peak, Nevada; and its 49% share in Talison Lithium (Tianqi Lithium owns the remaining stake). The Chile and Nevada lithium sources are brine, while the Talison source is hard rock, specifically spodumene, in Western Australia.
SQM has five business segments: lithium and derivatives,specialty plant nutrition, iodine and derivatives, industrial chemicals, and potassium. The Chile-based company obtains its lithium fromunderground brine at the Atacama Salt Desert in Chile. SQM hasbeen mired in scandals in recent years, which makes it a suitable investment only for those with higher risk tolerances.
FMC Corp. operates in three segments: agricultural solutions, health and nutrition, and lithium.The Philadelphia-based companyowns its lithium source, the Salar del Hombre Muerto in Argentina, where it obtains lithium from brine. (A "salar" is a dried lakebed with an undergroundreservoir of brine containing lithiumand other minerals.)
All three companies, to varying degrees, process their mined lithium into downstream products.
There are positives associated with each of these three big players. For instance, SQM is closer to a pure play on lithium than the other two companies, with its lithium business accounting for about 53% of its consolidated gross profit in the first nine months of 2016. FMC touts that its proprietary brine extraction technique yields the highest-purity (99.5%) lithium in the industry. Albermarle has the best free cash flow history of the three.
Investors who want a more pure-play exposure to lithium can also invest in the Global X Lithium ETF.
The big three and the LIT ETF are off to great starts in 2017, with Albemarle leading the way with an 8.9% total return though January 12, versus the broader market's 1.5% return.
Data by YCharts.
I believe the large lithium stocks as a group have solid long-term growth potential -- largely because I believe EV sales will grow faster than most market-watchers predict.
That said,investors need to tread carefully. These stocks have had tremendous run-ups recently and could be due for significant pullbacks once the next "hot" group emerges and momentum investors move their short-term money accordingly.
Moreover, investors should remember that none of the big three are pure plays on lithium, so the stock prices of these companies will also be significantly affected by their other businesses.
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