Seth Goldstein: In looking across our coverage for undervalued names that operate with an economic moat, we highlight lithium producers SQM and Albemarle. Lithium producer stocks have traded lower year to date given the market's concerns that supply growing faster than demand will cause lithium prices to fall. Although we see limited upside for near-term prices, we forecast that lithium prices will stay flat around $12,000 per metric ton in 2018 real terms.
We assign a narrow moat rating to all three lithium producers under our coverage. Each company has a cost advantage and produces lithium carbonate on the lowest quartile of the global lithium cost curve.
Based on our outlook, electric vehicles will increase from 1% of new light vehicle sales in 2017 to 15% by 2028. In turn, this will drive lithium demand growth at a 19% annual rate over the same time period. To meet higher demand, higher cost lithium supply will be needed, which will support our long-term lithium price forecast of $12,000 per metric ton.
SQM operates the lowest cost lithium carbonate operation globally at the Salar de Atacama in Chile. For SQM, lithium will increase from over 60% to 80% by the next decade. The stock currently trades in 4-star territory, well below our $65 per share fair value estimate.
Albemarle operates the second-lowest cost lithium carbonate operation, also in the Salar de Atacama. For Albemarle, lithium will increase from 45% to over 80% of profits during the next decade. The stock currently trades in 4-star territory, well below our $135 per share fair value estimate.
Livent was recently spun off from FMC and now represents a lithium pure play. The company operates low cost lithium carbonate production at the Salar del Hombre Muerto in Argentina. Although we view Livent as undervalued, the stock trades closer to our $18 per share fair value estimate than SQM or Albemarle and is currently in 3-star territory.