Take advantage of the lithium boom with these stocks

The rise of electric vehicles has had a profound impact on a number of industries. The transition from internal combustion to electric vehicles means that the demand for oil and gas will decrease over time, as will the demand for some of the internal combustion vehicle parts that are no longer needed with electric vehicles, such as the engine, transmission and emissions systems.

In addition to reducing demand in some areas, the burgeoning electric vehicle industry is seeing demand for niche products, such as lithium, rise to unprecedented levels. The gradual decline of internal combustion and the commensurate rise of electric vehicles is producing a demand for lithium and other materials that is enriching the companies that mine those raw materials.

Let’s look at three lithium mining stocks that are well positioned for future lithium demand, but also pay regular dividends to shareholders.

Lithium mining globally

Lithium is a natural resource found in only a few places in the world. The mineral is a critical component of battery manufacturing, and as demand for batteries is on the rise globally due to the rise of electric vehicles, lithium has received a great deal of attention in recent years.

Lithium can be extracted in three ways, but only two are currently commercially viable. First, lithium can be extracted from brine deposits in groundwater. This method is mostly limited to South America, as it is not widespread in other parts of the world. Second, lithium can be mined from hard rock, which forms when magma from lava flows cools and hardens. This method is more common. Thirdly, lithium is present in clays in some parts of the world, but this method is not yet commercially viable.

The lithium mining process is important because it means that only certain areas of the world have access to lithium, let alone the ability to mine it in large quantities. This helps explain why mineral production is quite concentrated, as are global reserves. Commodities such as oil or gold tend to be in large supply in a variety of places around the world, with many companies sourcing those commodities. Lithium is highly concentrated, which means that certain companies have enormous influence and, therefore, importance to investors.

Australia contains more than half of the world’s known reserves of lithium and is the second largest producer of lithium annually, after Chile. That country has the second largest total lithium reserves, about half the level of Australia. For this reason, just 11 mines worldwide account for nearly 100% of total lithium production.

Your chemical novel?

Our first stock is Albemarle Corp. (ALB), a company that develops, manufactures and markets specialty chemicals worldwide. The company operates in three segments: lithium, bromine and catalysts. The lithium segment offers various lithium-based products for use in battery manufacturing, which is why Albemarle is a stock we believe could profit from the lithium boom. Albemarle also has other businesses, so it’s not a pure lithium game. However, lithium has seen Albemarle’s revenue explode higher, as 2023 is expected to produce about three times the revenue Albemarle had in 2021.

The company was founded in 1887, is expected to generate approximately $7.2 billion in revenue this year, and has a market capitalization of $33 billion. This makes Albemarle the largest lithium company in the world by market capitalization.

We believe Albemarle, despite its already impressive growth, can continue to grow earnings at 7.5% annually for the foreseeable future. Revenue is expected to rise in 2023, but we note that the company will hit a ceiling in terms of production and, therefore, revenue. Additionally, costs continue to rise and the initial surge in lithium prices cannot be expected to repeat itself.

The company has a very attractive 27-year dividend hike streak and, in general, is increasing payout at a strong rate. This means that Albemarle is a solid stock with dividend growth, but we note that the yield is very low, just 0.6%. While this yield is unattractive, the company has a strong outlook for dividend growth going forward.

A South American lithium game

Our next stock is Sociedad Quimica y Minera de Chile SA (SQM), a company that manufactures and distributes specialty plant nutrients, iodine and its derivatives, lithium and its derivatives, as well as other chemicals and related products. Like Albemarle, Sociedad Quimica is a diversified company and, therefore, not a pure lithium play. However, Sociedad Quimica has still benefited from the lithium boom and we expect it to continue.

The company was founded in 1968 and is headquartered in Chile, which contains the second largest lithium reserve in the world. Revenues of nearly $11 billion this year are more than four times those of 2021 due to the lithium boom.

We don’t expect that kind of growth to continue, of course, but the company’s revenue base is expected to remain quite large near $11 billion for the foreseeable future.

Sociedad Quimica doesn’t have a string of dividend hikes to speak of, but that’s because it pays a variable dividend based on that year’s earnings and cash flows. For 2022, for example, total dividends reported for US ADRs are $7.64 per share. That’s good for a nearly 8% return on the current share price. While future dividends depend on earnings, we believe Sociedad Quimica is likely to be a high-yield company for the foreseeable future.

Going to Australia for Lithium and Dividends

Our third stock is Mineral Resources Ltd. (MALRF), a diversified mining and mining services company based in Australia. The company has many lines of business outside of lithium, but like the others on this list, the company’s business these days is dominated by the battery component.

The company was founded in 1993 and is expected to produce approximately $4.3 billion in revenue this year, nearly double the 2021 level. We expect revenue to grow strongly again next year before leveling off, similarly to Sociedad chemistry.

Also, like Sociedad Quimica, Mineral Resources pays a variable dividend. Total dividends last year were $2.04 per share, while this year’s dividend was just $0.68. It’s impossible to predict how much the company will pay year-over-year, but we expect the dividend to remain for the foreseeable future given the growth prospects the company has, particularly if the lithium price remains strong.

Final thoughts

The rise of electric vehicles has suddenly created huge demand for some compounds, with lithium topping the list. Given the concentration of lithium mining operations, not many companies will benefit from the lithium demand of the EV boom.

We see Albemarle, Sociedad Quimica and Mineral Resources as three stocks that not only have tremendous size and scale, but good growth prospects and the willingness and ability to return capital to shareholders through dividends.

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