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Morningstar | Lithium Stocks Remain Undervalued as We Forecast Higher Long-Term Prices; SQM Is Our Top Pick

Lithium stocks have fallen out of favor in 2018 due to fears that new supply from Australia and South America will weigh on prices and limit profitability. We contend an oversupplied lithium market will be short-lived, and maintain a bullish long-term outlook. Our long-term lithium price forecast of $12,000 per metric ton sits well above the market's price-implied expectations. Due to our above-consensus electric vehicle outlook, we forecast 19% annual demand growth for lithium over the next decade, which will ultimately require that higher-cost lithium supply come online to meet demand.

To guide investors, we analyzed costs and risks for the lithium producers we cover to provide a consistent methodology independent of stock prices. SQM is our top pick, followed by Albemarle, then Livent.

SQM operates the world's lowest cost lithium carbonate operation due to unique geology. SQM will expand its lithium capacity through the conversion of existing assets, which will be very cost-efficient. We note there is political risk in Chile associated the company's largest shareholder, Julio Ponce, who is the former son-in-law of the late dictator Augusto Pinochet. However, after Ponce ceded control of the company last year, the risks have largely subsided.

Albemarle operates the lowest cost lithium hydroxide operation globally, also due to geological advantages. By focusing on the expansion of its low-cost hydroxide production, the company will maximize return on invested capital for shareholders. However, we note the operational risk associated with Albemarle as the company has recently struggled to bring ramp up production of its new capacity.

Livent, a pure-play lithium company that was spun off from FMC, is a low-cost carbonate producer. Although we are in favor of carbonate expansions, we are skeptical of the company's plan to convert carbonate into hydroxide as it carries additional pricing risk. We also note the risk that Argentina may impose additional taxes.

For more information on our lithium outlook, please see our Nov. 30 report, "Put the Pedal to the Metal for Lithium Stocks: SQM and Albemarle offer attractive upside given our above-consensus electric vehicle adoption forecast." For more information on our electric vehicle forecast, please see our Sept. 24 Observer, "Electric Vehicle Sales in China and Europe Will Leave U.S. in the Dust, Driving Above-Consensus Global Adoption Rates."