Opportunities in Lithium Stocks Despite Delayed Supply
We have reduced our near-term outlook for lithium demand and maintain our current forecasts for three narrow-moat companies.
In the wake of recent auto plant shutdowns in the United States and European Union as a result of the coronavirus pandemic, we have reduced our near-term outlook for lithium demand. We now expect 2020 demand to be flat to slightly down depending on the length of plant shutdowns. However, lithium supply has been affected because of production shutdowns and delays. We have already modeled in lower production expectations for Albemarle (ALB), Livent (LTHM), and SQM (SQM )in 2020 and maintain our current forecasts for the three companies. Over the medium and long term, we expect little impact to lithium supply and demand.
Narrow-moat Albemarle, Livent, and SQM are trading in significantly undervalued territory, with all three at 5 stars, and we see current prices as a great entry point for long-term investors. Current lithium stock valuations imply an extended impact to lithium producer profits, worse than we model in our bear case. Our bear case for lithium assumes permanently lower lithium prices and indefinitely delayed capacity expansions, both of which lead to sharply lower long-term producer profits.
While all three producers trade at compelling valuations, Albemarle is our top pick because of its feedstock diversification. Albemarle has low-cost lithium feedstock assets in Chile and Western Australia, which should somewhat insulate the firm's production versus SQM and Livent, which operate from a single feedstock source, in Chile and Argentina, respectively.
Having multiple feedstock assets is important in the current environment, as governments can mandate plant shutdowns, which increases near-term risk for single-feedstock producers. Livent recently announced that its operations have been shut down in Argentina through the end of March. While Chile, where Albemarle and SQM operate, has not announced a shutdown, the impact of a shutdown would be greater for SQM, as Albemarle's Australian operations have been granted an exemption to remain in operation.
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Seth Goldstein does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.