Lithium is an elemental metal primarily used by electric vehicles, or EVs, to manufacture batteries. Given that EVs are expected to gain traction in several global markets, you can consider investing in lithium and benefit from the rising prices of this commodity.
Lithium prices surged 400% in 2021, and you can gain exposure to a rapidly expanding commodity market by purchasing shares of companies that mine the metal.
One such company that is involved in the lithium mining space is Lithium Royalty (TSX: LIRC), which also went public this week.
Lithium Royalty IPO: All you need to know
Lithium Royalty Corp. (LRC) went public on the TSX after it raised $150 million, which was the largest initial public offering (IPO) in Canada in almost a year, according to Bloomberg. The company sold 8.82 million shares at $17 per share and listed on the TSX yesterday (March 9). Lithium Royalty stock fell over 4% on its first day of trading, valuing it at a market cap of $870 million.
Lithium Royalty earns revenue on the back of royalties it generates from lithium projects located in Canada, the United States, and Australia. This business model provides Lithium Royalty with exposure to commodity prices and volumes without having to wrestle with capital expenditure investments and cost inflation related to operations.
The worldwide adoption of EVs and rising demand for energy storage technologies will act as a key tailwind for Lithium Royalty in the upcoming decade. Right now, the company aims to finance and partner with battery material companies and related projects, allowing it to earn regular income via royalties.
Last year, Lithium Royalty entered a partnership with Core Lithium. LRC paid A$8.125 million in exchange for 2.5% of gross revenue from the sale of products part of the Finnis Lithium Project.
Core Lithium recently announced Tesla as a future customer for the supply of lithium spodumene concentrate from the Finnis Lithium Project.
Is Lithium Royalty stock a buy?
According to its prospectus filed with the regulators, Lithium Royalty reported a profit before tax of $11.37 million in the first nine months of 2022 compared to the prior-year figure of $5.47 million.
So, if the company ends the year with $15 million in net profits, Lithium Royalty stock will be valued at 58 times trailing earnings, which is quite steep. However, Lithium Royalty is acquiring properties at a fast pace, which should drive royalties and earnings significantly higher in 2023 and beyond.
Moreover, its asset-light business model will allow the royalty company to benefit from high operating leverage, especially if demand for lithium continues to soar, resulting in consistent price hikes over time.
Investing in mining royalty companies provides investors with several advantages, such as diversification and high profit margins. You get exposure to a quality portfolio of lithium mines, which reduces overall risk.
On the flip side, Lithium Royalty and its peers will have to keep raising capital via debt or equity to enter partnerships and fund mining projects. This will either result in equity dilution for existing investors or increase balance sheet debt, resulting in rising interest expenses.
Lithium Royalty stock offers an enticing risk/reward profile for investors, as it is well poised to benefit from multiple secular tailwinds across industries and sectors.
