Lithium is an elemental metal enjoying strong demand in recent years, stoked by its use to manufacture batteries for electric vehicles, or EVs. Lithium prices soared by a stellar 1000% between 2021 and 2022.
While lithium prices have cooled off in 2023, the demand for EVs and energy storage solutions is expected to remain robust in the next two decades. In addition, the U.S. and several other countries have allocated trillions of dollars to accelerate the shift towards clean energy solutions, which should act as a tailwind for lithium prices.
How can you invest in lithium?
Investors can gain exposure to lithium by buying shares of companies that mine the metal. But it’s imperative to understand the risks associated with investing in mining companies. First, the sector is highly cyclical, and the prices primarily depend on demand and supply elasticities. Second, the profits of mining stocks are closely tied to the costs of the commodity they mine and sell, generally taking investors on a roller-coaster ride.
Further, you need to account for the regulatory and environmental impacts of mining, which may influence future projects. For instance, Chile, the second largest country for lithium reserves, recently announced it would nationalize this industry, making investors nervous. Mining is also a capital-intensive industry resulting in significant interest costs over time.
Despite macroeconomic challenges, lithium stocks have generated solid returns in the last five years due to rising prices. So, here are two top lithium stocks you can consider investing in right now.
Albemarle stock
Shares of Albemarle (NYSE: ALB) have more than doubled in the last five years, easily outpacing broader market indices. In Q1 2023, Albemarle increased revenue by 129% to $2.6 billion and adjusted earnings by 334% to $10.32 per share. The company attributed the strong demand for lithium products to its outsized numbers in the quarter.
Albemarle reported an operating cash flow of $721 million in Q1, an increase of 250% year over year. It ended the quarter with $1.6 billion in cash and over $3 billion in long-term debt.
Priced at nine times forward earnings, ALBE stock is cheap. It also pays investors an annual dividend of $1.60 per share, translating to a yield of 0.82%.
Lithium Royalty stock
Lithium Royalty (TSX: LIRC) is a pure-play battery royalty company offering lithium investors multiple underlying benefits. Royalty companies are asset-light and not engaged in the mining of commodities. Instead, they own properties leased out to mining companies in return for a share of the profits.
So, Lithium Royalty provides attractive leverage to commodity price and volume without exposing you to capital costs. These companies also benefit from high margins and focus on cash flows to build investor wealth.
Lithium Royalty currently owns 32 properties with an average LOM (life of mine) of 19 years. The lithium royalty acquired five properties in 2023 and is optimistic about long-term inorganic growth. The company estimates demand for lithium to grow 42 times between 2020 and 2040, acting as a massive secular tailwind in the future.
Lithium Royalty reported its first quarter of revenue in Q1 with sales of just $708,000. But analysts forecast the top line to surpass $45 million annually by the end of 2024.
