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  • Electric vehicle sales are expected to climb rapidly through 2030.
  • Lithium is a necessary component of electric batteries, and lithium supply is lagging behind demand.
  • Growing capacity and higher prices make this lithium company an attractive stock to buy.

It wasn’t too long ago that electric vehicles were a novelty. Remember, General Motors EV1? Probably not. They only made 1,100 of them. Since then, electric vehicles have become more common, and projections are that they’ll be mainstream within the next decade.

In 2021, automakers sold over 66 million vehicles, but only 6.6 million were electric. For perspective, electric vehicle sales only totaled 2.1 million units in 2019 prior to COVID and just 120,000 worldwide in 2012.

Sales have continued to accelerate this year. According to the IEA’s 2022 Global EV Outlook, first-quarter EV sales totaled 2 million units, up 75% from last year. By 2030, the IEA expects that 145 million electric vehicles will be on the road globally, up from 16.5 million.

This rapid growth is a boon to EV makers, but they aren’t the only ones benefiting. Surging EV sales are also increasing revenue and profit for suppliers, including companies producing lithium, a key component of EV batteries.

First, a little about lithium

Lithium is a light, soft metal that’s easy to cut, floats, and hard to melt. Lithium represents about 0.0007 percent of the Earth's crust, so it’s uncommon. For comparison, iron accounts for 5% of the earth’s crust.

Lithium was discovered in Sweden by Andralda e Silva in 1790 and isolated in 1855 by British chemist Augustus Matthiessen and German chemist Robert Bunsen. Its name derives from the Greek word for stone, “lithos.”

Lithium companies sell lithium carbonate and lithium hydroxide, mainly produced in underground brine pools and then, chemically processed. Lithium hydroxide is pricier, but because it decomposes at a lower temperature, it creates longer-lasting, more efficient batteries, so it’s in high demand.

Overall, every electric vehicle produced contains about 22 pounds of lithium.

A lithium stock to buy

Livent Corporation  (LTHM)  is a mid-cap lithium producer with supply contracts with large automakers. For example, General Motors agreed last week to prepay $198 million to Livent this year as part of a six-year delivery agreement beginning in 2025. Livent also supplies lithium carbonate and lithium hydroxide to BMW under a contract that kicked in this year.

To meet its growing demand, Livent is investing heavily in its business. However, increasing lithium capacity takes time, and it’s expensive. Fortunately, Livent has been better able to fund projects because tight supply and new EV models have caused lithium prices to soar. For example, prices were seven times higher in May than in early 2021. As a result, Livent is on sound financial footing.

In “This Lithium Manufacturer's Results Were Impressive: Here's How to Trade It,” Stephen Guilfoyle explains”:

“Livent ended the quarter with a net cash position of $49M, which is down significantly over the past six months. That said, the firm now has $421.3M worth of investments on the balance sheet. Not short-term investments, which I include in net cash, but long-term investments, which can not be included as a current asset. This $421.3M is up from $27.2M just six months ago.

Where were we? Oh, current assets... Receivables and inventories ($156.3M) were both higher over six months, leaving current assets at $386.3M, which is largely in-line with year's end 2021 despite having made large investments. Current liabilities amount to $148.8M. This puts LTHM's current ratio at a quite robust 2.60. Ex-inventories, the firm's quick ratio comes to 1.55. Still outstanding…This is a very strong balance sheet.”

In Q2, Livent’s production was flat, but because of increasing prices, its top and bottom line increased by 114% and 825%, respectively. The results prompted management to increase their revenue guidance.

Back to Guilfoyle:

“Livent has increased guidance for the full year 2022. The firm raised its revenue outlook to $800M to $860M from $755M to $835M. Most of Wall Street seems to have been between $800M and $820M on this metric. The firm also increased its outlook for adjusted EBITDA from $290M to $350M to $325M to $375M. At the midpoints, the new guidance would amount to revenue growth of 97% and adjusted EBITDA growth of 404% over the full year 2021.”

Currently, more than half of lithium, cobalt, and graphite processing and refining capacity is in China. China will remain a big source of lithium for Livent and others, but the company is expanding its capacity elsewhere. 

It expects 10,000 mt of lithium carbonate to come online in Argentina soon, with commercial production in Q1 2023. Another 10,000 mt in capacity in Argentina is expected online later next year. Also, 5,000 mt of lithium hydroxide capacity will be commercially available early next year. And, 15,000 mt of capacity is expected to be added in China by the end of 2023. Oh, and let’s not forget, 34,000 mt of battery-grade lithium hydroxide is planned to come online in Quebec in 2025 (likely, in support of its GM deal).

All that production should provide a nice tailwind supporting revenue and profit upside, even if lithium prices stabilize.

The Smart Play

If you believe EV’s will represent a much more significant share of future vehicle sales, then picking up shares in suppliers, like Livent, makes sense. 

The growth necessary for EV sales to reach a meaningful share of total units sold provides a substantial tailwind for lithium suppliers, so Livent shouldn’t struggle to find buyers for its future production. Moreover, since its production is rising, and demand is so high, volume growth should help offset some risk if lithium prices fall.

Currently, Livent's shares are trading just about on their 200-day moving average following a post-earnings sell-off on Wednesday. I suspect some short-term traders who were gaming the report are selling, providing longer-term investors an opportunity to buy at a discount. 

If you'd like to add Livent to your portfolio, consider buying a starter position for between $24 to $25. Then, you can buy more down to $20. Or, if it recovers its 200-day moving average, increase your position as long as it remains above that trendline.

  • Electric vehicle sales are expected to climb rapidly through 2030.
  • Lithium is a necessary component of electric batteries, and lithium supply is lagging behind demand.
  • Growing capacity and higher prices make this lithium company an attractive stock to buy.
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