Top 5 Lithium Producers And Other Growing Producers To Consider

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Includes: ALB, ALTAF, AMVMF, BMWYY, FMC, GALXF, LGCLF, LTHM, OROCF, PILBF, RDRUY, RRSSF, SQM, TLSA, TWNAF
by: Matt Bohlsen
Summary

An update on lithium demand and supply.

Top five lithium producers - A brief review and update.

Seven growing lithium producers listed.

This article was first published on December 14, 2018; therefore all data is as of that date.

2018 has been harsh for lithium stocks as all things related to China have been heavily sold off. Given the trade war issues are still unresolved with talks ongoing towards the end of February 2019 investors can use this opportunity to buy into the top tier lithium producers at excellent valuations.

Lithium demand and supply update

I am expecting lithium demand to continue to surprise on the upside rising 5.7 fold from end 2017 to end 2025. This should mean all the producers can do very well. You can view my demand v supply model here:

The UBS forecast for lithium demand is telling a similar story.

Orocobre's latest lithium demand v supply chart showing supply to struggle to keep up with demand

Source

The lithium cost curve is now suggesting spodumene can be as cost competitive as brine

Lithium producers by market share

The two images below show only Chinese Ganfeng Lithium has been successful at increasing lithium production market share significantly. The other key takeaway is that new lithium producers (others) have successfully gained significant market share. Based on the 2018 CRU forecast it looks like the ranking for 2018 will be Albemarle (ALB), Ganfeng [SHE: 2460] [HK:1772], SQM (SQM), Tianqi [SHE:002466], FMC (now Livent Corp.(LTHM)), and others (Orocobre [ASX:ORE] (OTCPK:OROCF), Mineral Resources [ASX:MIN], Galaxy Resources [ASX:GXY] (OTCPK:GALXF), and some new entrants Pilbara Minerals [ASX:PLS] (OTCPK:PILBF), Altura Mining [ASX:AJM] (OTCPK:ALTAF), Alliance [SP:AMS]/Tawana [ASX:TAW], and AMG [NA:AMG] [GR:ADG] (OTCPK:AMVMF)).

Current market share of lithium production by miner - 2018 forecast

Source: Bloomberg and courtesy CRU

Current market share of lithium production by miner - 2016 actual

Top 5 Lithium Producers - A brief review and update

Below I discuss the top five global lithium producers of which two are US companies (Albemarle & Livent), two are Chinese (Ganfeng & Tianqi), and one is Chilean [SQM].

1) Albemarle (NYSE:ALB) - Price = USD 87.94

Albemarle is ranked the global number 1 lithium producer with 18% global market share. As of Q1 2018 Albemarle received 36.3% of their revenue and 52.7% of adjusted EBITDA from lithium. Albemarle's other revenues come from their bromine specialties and catalysts divisions, which make specialty chemicals used in fire extinguishers and refineries.

Albemarle has lithium projects at Atacama Chile (JV with SQM), at Greenbushes Western Australia (JV with Tianqi), some salar tenements in Argentina, and recently at Wodgina Western Australia (50/50 JV with Mineral Resources) (assuming the deal finalizes).

2018 Recent news

  • August 8 - Reuters reported: "Albemarle triples quarterly profit on rising lithium sales."
  • November 7 - Albemarle delivers revenue growth for the 11th consecutive quarter. Luke Kissam, Albemarle's CEO: "Pricing in lithium continued as expected with prices up versus prior year. We also continue to make meaningful progress on extending our long-term lithium supply agreements."
  • November 8, Reuters reported: "Albemarle freezes Chile expansion plans in wake of lithium tech scrutiny".
  • November 9, Argus Media reported: "Albermarle has received environmental approval for the development of a lithium hydroxide plant near Bunbury in the southwest of Western Australia."
  • November 21 - Albemarle signs exclusivity agreement with Mineral Resources Limited for 50/50 fully integrated lithium joint venture in (Wodinga) Western Australia. The purchase price for Albemarle's 50% interest in the JV would be US$1.15 billion, which Albemarle expects to fund with available cash and new credit facilities. It is expected that the transaction will be accretive to Albemarle's earnings....The JV is expected to produce up to 750Ktpa of 6% spodumene concentrate from Wodgina which is planned to be used as feedstock to the future (JV) lithium hydroxide plant."
  • December 5 - 4-traders reported: "Albemarle pushes Chile to reverse lithium quota decision - filings."

Current market cap is 9.43b, with an end 2018 debt estimate of US$1.1b. 2019 PE is 14.5 and 2020 PE is 13.2, with a 2019 estimated 1.58% dividend yield. 2019 net profit margin is forecast at 18.16%.

Current consensus analyst price target is USD 123.31, representing 39% upside.

Albemarle is a must have lithium stock due to their No 1 global lithium producer status, their high quality lithium assets, and their production expansion potential. Valuation is very attractive, especially given their large growth potential. The recent Wodinga deal ensures Albemarle will remain a top 5 lithium producer for the foreseeable future, with renewed emphasis on the spodumene sector to feed the rapidly growing lithium hydroxide market for EVs. Some risks due to dealing with a difficult government in Chile, regarding Atacama.

Albemarle's financial summary

Source: 4-traders

The Wodinga spodumene mine in Western Australia

Source

2) Jiangxi Ganfeng Lithium [SHE: 2460] [HK:1772] - CNY 24.90, HKD 15.00

Ganfeng Lithium is ranked the global number 2 lithium producer with 17% global market share. Ganfeng is one of the most vertically integrated lithium producers, also with some lithium metal battery technologies.

Ganfeng has several lithium raw material off-takes and equity partners at the following lithium mines/projects - Mt Marion, Pilgangoora, Cauchari-Olaroz, and several projects via International Lithium. Ganfeng is well positioned with customers to sell to (LG Chem (OTCPK:LGCLF), BMW (OTCPK:BMWYY), Tesla (TLSA)), not to mention the Chinese battery and car manufacturers. Ganfeng has therefore positioned itself nicely to profit at several steps in the lithium supply chain.

2018 Recent news

  • October 11 - Ganfeng Lithium in dreadful Hong Kong debut. The IPO price was at HK$16.50 per share with six cornerstone investors including Samsung SDI Co. and LG Chem Ltd.
  • September 20 Yicai Global reported: "Ganfeng Lithium to near double supply to LG Chem. Ganfeng Lithium, one of the world’s biggest makers of lithium products, is set to almost double its supply of rechargeable battery ingredients to South Korea’s LG Chem, just a month after their first contact."
  • September 21, 2018 Investing News reported: "Ganfeng said it will supply lithium hydroxide products for Tesla’s batteries from 2018 to 2020. The deal could be extended by an additional three years."
  • October 16 Investing News reported: "During September, the Company (Ganfeng) also announced a deal with BMW to supply as much lithium as the German automaker might require for 5 years, as electric car makers continue to look for ways to lock in long-term supply of the metal."

Current market cap [SHE:2460] is CNY 31b, with no debt. 2019 PE is 16.6 and 2020 PE is 14.0, with a 2019 estimated 1.31% dividend yield. 2019 net profit margin is forecast at 26.49%.

Note: The Hong Kong listing trades on a 2018 PE of 9.8.

Current consensus analyst price target for the Shenzhen listing is CNY 41.54, representing 62% upside.

Ganfeng Lithium is a top tier (pure-play) vertically integrated lithium producer based in China with global strategic lithium investments and partnerships. Valuation is very attractive, especially given their massive growth potential. I rank them the best lithium buy at this time.

Ganfeng Lithium's financial summary

Source: 4-traders

3) Sociedad Quimica y Minera S.A. (NYSE:SQM) - Price =USD 43.34

SQM is ranked the global number 3 lithium producer with 14% global market share. As of Q1 2018 SQM received 31.7% of their revenue and 61% of consolidated gross profit from lithium. SQM's other revenues come from potash (used in specialty fertilizers) and iodine.

SQM has lithium projects at Atacama Chile (JV with Albemarle), and a 50/50 JV with Kidman Resources [ASX:KDR] at the Mt Holland lithium spodumene project in Western Australia [WA] as well as a planned processing plant at Kwinana, WA.

2018 Recent news

  • January - "SQM to expand lithium production after reaching deal with Corfo."
  • May - Kidman Resources announced: "Kidman enters binding lithium hydroxide offtake agreement with Tesla."

  • November - SQM reported Q3 net income of US$83.5 million (US$0.32 per ADR) compared to US$112.9 million (US$0.43 per ADR) for the third quarter of 2017. SQM explained the weaker Q3 (as above) was in part due to a "ramp-up delay" of their Antofagasta plant. And that "lithium sales volumes this year should be around 45,000 MT.”
  • December 10 - The AFR reported: "Kidman's peace deal clears way for SQM lithium project payments.....The joint venture partners have selected a site at Kwinana, south of Perth, for a 45,000 tonne-a-year lithium hydroxide plant that would be only a short distance from one already under construction by China's Tianqi at a cost of $700 million."

Current market cap is USD 9.43b, with a 2018 debt estimate of US$533m. 2018 PE is 24.

Current consensus analyst price target is USD 58.71, representing 34% upside.

SQM is another solid lithium producer with high quality assets and expansion potential. Some Chile risk, and not as well valued as others.

SQM's financial summary

Source: 4-traders

4) (Chengdu) Tianqi Lithium Industries Inc. [SHE:002466] - Price = CNY 33.19

Tianqi Lithium is ranked the global number 4 lithium producer with 12% global market share. Tainqi state: "Our businesses include mining and producing of lithium concentrate and manufacturing of lithium compounds. We have established mineral operations, manufacturing plants and subsidiaries in China (Sichuan, Chongqing, Jiangsu) and Australia, allowing the company to serve customers across the globe."

Tianqi's flagship lithium mine is their 51% share of Greenbushes in Western Australia with partner Albemarle (49%). Tianqi's other projects include a 100% equity interests in the Yajiang Cuola Lithium Mine, and a 20% equity interest in Tibet Shigatse Zhabuye (the owner of the exploration rights of the Zhabuye Salt Lake. The Zhabuye Salt Lake is well-known for its high-quality lithium resources). Construction is ongoing at their Kwinana lithium hydroxide plant in Western Australia, and is expected to be finished in soon. This will be fed by their Greenbushes expansion plan.

2018 Recent news

  • July 25 - Mining.com reported: "Tianqi goes ahead with $382-million Greenbushes lithium mine expansion. Work will begin in the first quarter of 2019 with commissioning of the new lithium concentrate plant to start in the fourth quarter of 2020."
  • December 3 - Nasdaq reported: "Tianqi buys stake in lithium miner SQM from Nutrien for $4.1 bln. China's Tianqi Lithium Corp has purchased a 23.77 percent share in Chilean lithium miner SQM from Canadian fertilizer giant Nutrien.

Current market cap is CNY 38b, with no debt. 2019 PE is 15.2 and 2020 PE is 12.1, with a 2019 estimated 0.83% dividend yield. 2019 net profit margin is forecast at 33.12%.

Current consensus analyst price target for the Shenzhen listing is CNY 51.00, representing 53% upside.

Tianqi Lithium is a top tier (pure-play) lithium producer based in China with a focus on their flagship high grade Greenbushes lithium mine in Australia. Valuation is very attractive, especially given their Greenbushes expansion plans. Another excellent buy at this time.

Tianqi Lithium's financial summary

Source: 4-traders

Tianqi/Albemarle Greenbushes lithium mine in Western Australia

Source

5) Livent Corp. (LTHM)[GR:8LV] - Price =USD 16.04

Livent is arguably clinging to the number 5 lithium producer spot with 5% global market share. A key advantage now since their recent FMC Corp. (FMC) spin off is they are now a pure play lithium producer. Previously within FMC only 8.5% of FMC's revenue was attributable to lithium.

The Company state: "Livent has extracted lithium brine at its operations at the Salar del Hombre Muerto (Cauchari-Olaroz salar) in Argentina for more than 20 years and has been producing lithium compounds for more than 60 years."

2018 Recent news

  • October 16 - IPO and first day of trading on the NYSE at US$17.
  • November 5 - Livent announced: "Third Quarter 2018 results above prior guidance and reaffirms full year guidance for 2018. Revenue of $112 million, and net income of $30 million. Pro Forma EBITDA up 25 percent versus Q3 '17."

Current market cap is USD 2.37b. 2018 PE is 17.9. Current consensus analyst price target is USD 20.17.

Livent's focus is their flagship Argentina lithium brine mine and their production facilities for both carbonate and hydroxide. Valuation looks about fair.

An additional note on the top 5

By end 2019, I would expect Pilbara Minerals may move into the top 5 replacing Livent. Also Ganfeng Lithium may have moved up to be number 1.

7 growing lithium producers listed

I may do my next lithium article on the above seven giving an update.

Risks

  • Lithium prices falling. For now lithium supply is managing to keep up with surging demand noting electric vehicles are growing at 68% pa in 2018.
  • Mining risks - Exploration risks, funding risks, permitting risks, production risks, project delays.
  • Management and currency risks.
  • Sovereign risk - Chile is a bit concerning right now (both Albemarle and SQM have had dramas in the Atacama in 2018). Argentina seems better for now. Australia and Canada are low risk.
  • Stock market risks - Dilution, lack of liquidity (best to buy on local exchange), market sentiment (the trade war has negatively impacted most all metal markets in 2018).

Further reading

Conclusion

Provided the EV and ES booms continues at a strong rate of growth (~50%+ pa) then lithium demand should continue to surge. My model suggests a 5.7 fold increase in total lithium demand from end 2017 levels of ~230ktpa to end 2025 levels of 1.32mtpa. Supply will most likely find a way to keep up with demand therefore prices should mostly remain fairly steady between USD 10,000 to USD 16,000/t LCE, with a slight premium for lithium hydroxide.

For conservative investors wanting to hold the top 5 lithium producers in order to receive a lower risk/solid return then it would simply be a mater of buying Albemarle, Ganfeng Lithium, SQM, Tianqi, and Livent. The top 5 are forecast to produce 66% of 2018 lithium production, and hence reap most of the near term profits. The main risks lie around lithium pricing and sovereign risks in Chile and Argentina.

For more risk tolerant investors you could look to expand to the next 7 growing lithium producers Orocobre, Mineral Resources, Galaxy Resources, Pilbara Minerals, Altura Mining, Neometals, Alliance/Tawana. This group offers the benefit of reasonably low risk yet quite high reward based on rising production volumes. Risk lies with lithium pricing and upon production execution and expansion.

Finally it is always best to buy the highest quality miners (low debt, high cash flow, strong off-take partners, low costs of production) as mining is cyclical and hence risky. Currently most of the lithium producers are well valued due to the 2018 rout, so it should be a good time to accumulate some quality names.

As usual all comments are welcome.

Disclosure: I am/we are long NYSE:ALB, GANFENG LITHIUM [SHE: 2460], GANFENG LITHIUM [HK: 1772], SQM, ASX:ORE, ASX:GXY, ASX:PLS, ASX:AJM, TSX:LAC, TSXV:NLC, ASX:AVZ, ASX:NMT, ASX:SYA., TSXV:AIS, ASX:CXO, TSXV:PLU, TSXV:CYP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information in this article is general in nature and should not be relied upon as personal financial advice.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.