Elon Musk touched on many themes during Tesla’s recent earnings call, one of which was the lack of lithium refining options. Since lithium is an essential component of EV batteries, there is an unmet need for refined lithium in the EV industry.
During the call, Musk said, “Can other people do this job? That would be great. We implore you. We don’t want to do that. Can someone please? Instead of building an image sharing app, try lithium mining and refining, heavy industry, come on.
In short, Musk was trying to draw attention to the opportunity at stake for lithium producers.
Covering this industry for Deutsche Bank, analyst Corinne Blanchard agrees and has an idea of which companies could also represent an opportunity for investors.
“Our fundamental view of lithium has not changed over the medium to long term, as we believe that supply will remain below demand. We expect the market to tighten over the next few years, followed by a growing deficit by the continued,” Blanchard wrote. “We have a preference for more established lithium producers, as we believe they can offer better execution with a lower risk profile, and are well positioned to increase volumes in key jurisdictions.”
In this context, we opened the TipRanks database and extracted the details of two of Blanchard’s recommendations. Both are buy-rated stocks, with double-digit upside potential for the year ahead. Let’s take a closer look.
Lithium Americas (LAKE)
We’ll start with Lithium Americas, a lithium mining and refining company with big growth potential. Although still a pre-revenue issue, LAC fully owns the Thacker Pass mine in Northern Nevada and is its biggest asset given that it has the largest reserves of lithium in the United States. This makes the mine a valuable resource for the developing domestic electric vehicle industry, which needs top-notch Li-ion batteries. In addition, LAC also holds full ownership and joint venture agreements for high purity lithium mines in Argentina.
Although Thacker Pass is an exciting project, production is still a long way off and scheduled for 2026. The company announced the start of construction activities in early March.
However, during the recent fourth quarter earnings call, the company announced that construction of the Argentinian Cauchari-Olaroz mine was “substantially complete”, with production expected to start before the end of the first half of 2023. To achieve production and a positive cash flow, the company said it needed less than $50 million in additional capital costs. LAC expects to reach the maximum production rate of 40,000 tpa (tons per annum) of lithium carbonate by the first quarter of next year.
In assessing the company’s prospects, it is the long-term potential of the Thacker Pass mine that is central to Blanchard’s positive thesis.
“We remain rated Buy on LAC,” the Deutsche Bank analyst said, “given its portfolio of assets and its strategic geographic exposure to Argentina and the United States… We are positive on management’s ability to develop Thacker Pass, although we recognize the challenges inherent in the asset being a clay-based deposit. That being said, Thacker Pass is an approximately 80 ktpa hydroxide project, at United States, which should be very valuable for the American lithium market.
This buy rating is backed by a price target of $26 and, if achieved, will represent a 36% year-on-year appreciation in the stock. (To see Blanchard’s track record, click here)
Blanchard isn’t alone in having a positive view of this potential lithium producer. LAC has garnered 5 analyst reviews over the past 3 months, and all of them are positive, which naturally makes the consensus here a strong buy. Over the coming year, analysts see the stock jumping 73.5%, considering the average target stands at $32.85. (See LAC stock forecast)
Chemical and Mining Society of Chile (M²)
Now let’s move on to Chile, a country with the largest lithium reserves in the world and the world’s second largest producer. As such, the Sociedad Quimica Y Minera de Chile is one of the world’s largest producers of lithium, iodine and potassium nitrate. The company produces lithium hydroxide and lithium carbonate from brine from Chile’s largest salt flat, the Salar de Atacama.
The positive pricing environment seen in 2022 helped the company achieve strong results in its last reported quarter – for 4Q22. Revenue rose 189.8% from the same period a year ago to $3.13 billion, while beating the consensus estimate of $110 million. Gross profit reached $1.64 billion, well above the $542.8 million generated in 4Q21. This helped the company deliver an EPADR (earnings per American certificate of deposit) of $4.03, a strong increase from the $1.13 delivered in the prior year quarter and well ahead of guidance. of $3.77.
However, more recently last Friday the shares took a heavy hit, crashing 18.5% after Chilean President Gabriel Boric unveiled plans to nationalize the national lithium industry and create a state-owned company. who will be involved in lithium exploration.
Before their contracts expire, state-controlled Codelco is expected to negotiate a deal with SQM (and its counterpart Albemarle) to buy a stake in their operations.
As SQM’s contract to mine lithium in Chile’s Atacama salt flats expires in 2030, Deutsche Bank’s Blanchard notes that while he believes there will be no major changes to the contracts given the current renewal process, SQM could be affected.
Whether the Chilean government’s plan actually materializes remains to be seen, and in the meantime, Blanchard stresses SQM’s value proposition and opportunity for investors.
“As we are increasingly positive on medium-term market fundamentals, we welcome the upcoming expansion of SQM volumes, focusing in Chile on existing operations, but also the next 20 kt capacity. hydroxide in China and Mt Holland in Australia,” the analyst wrote. “We like SQM’s shareholder returns with a dividend yield of around 12% expected this year, based on our numbers.”
All in all, despite the actions of the Chilean government, there is no change in Blanchard’s buy rating on SQM or in the price target, which remains at $90 and is expected to generate returns of around 42%. over the next few months.
Looking at the consensus breakdown, with a total of 6 Buy to 1 Hold and Sell, each, the analyst consensus rates this stock as a Moderate Buy. At $103.63, the average target is more bullish than Blanchard allows and could see investors pocket gains of 63% within a year. (See M² stock forecast)
To find great ideas for lithium stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that brings together all of TipRanks’ stock information.
Disclaimer: The views expressed in this article are solely those of the analysts featured. The Content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.