Investing in Lithium Stocks

Lithium, the elemental metal, is a hot commodity these days. Since it's used in the manufacture of batteries, increasing electric vehicle (EV) sales have many investors feeling optimistic about companies that produce the basic element. Although lithium is a common substance, prices for the material skyrocketed some 400% in 2021 and have continued to rise so far in 2022 -- easily exceeding previous all-time highs reached in 2017.

As a result of soaring battery demand from EVs, as well as energy storage (saving power for later distribution to the electric grid), some estimates point to lithium demand doubling in the next few years. In the U.S., the Infrastructure Investment and Jobs Act set aside $5 billion in federal funding for EV charging stations to support President Biden's goal of getting EVs to account for 50 percent of new auto sales by 2030. With automakers on board, there will be ample demand for lithium in the years ahead. Here's what you need to know before investing in this basic material used in battery development.

Investing in lithium stocks

Like investing in any basic materials and metals, investing in lithium isn't for the faint of heart. Soaring demand for a material used in the manufacture of a product doesn't automatically equate to higher sales and profits for a company. Supply also plays a hand in the market price of the basic material, so when supply outpaces demand, prices fall -- and the material producer's sales can fall, too, even if overall demand is expanding. As with all mining operations, getting new lithium projects up and running can be a costly endeavor.

Nevertheless, over the past five years, lithium stocks have fared well and prices have risen. Here are five leading lithium producers in this growing market.  

1. Albemarle

Mining and chemical producer Albemarle is leading the charge in global lithium output. Among the company's biggest customers is Panasonic (OTC:PCRFY), which manufactures lithium batteries for everything from small consumer electronics to EVs.

Although lithium prices can be volatile, Albemarle has proven itself over the years to be a durable mining operation. It has minimal long-term debt and plenty of cash to fund new projects, and it generates consistent operating profit margins in the low to midteens. If you're looking for individual stocks with which to bet on long-term lithium usage, Albemarle is a great place to start your search.

2. Ganfeng Lithium

On the other side of the Pacific, Ganfeng Lithium dominates as China's largest producer of base materials for lithium battery manufacturing. Given the sheer size of China's population (1.4 billion) and the rapid rise in EV sales, Ganfeng is well positioned as a top supplier to EV manufacturers based in China as well as to U.S. EV manufacturers such as Tesla (NASDAQ:TSLA).  

The company is well-capitalized with cash and manageable indebtedness, and it has generated healthy profit margins.

3. Sociedad Quimica y Minera de Chile

One of South America's top basic materials and chemical companies, Sociedad Quimica y Minera (SQM) is one of the world's largest producers of lithium used in batteries and other energy storage technologies. Like some of the other diversified and well-established mining operations such as Albemarle and Ganfeng, SQM generates healthy double-digit operating profit margins, has plenty of cash to fund expansion, and carries minimal debt.

SQM predicts demand for lithium will outpace supply in 2022, so it has been investing to increase its production capacity. With recent improvements now complete, the company expects to be able to increase its market share in supplying lithium, mainly for EV batteries.

4. Livent

In 2019, chemical manufacturing firm FMC (NYSE:FMC) spun off its lithium production segment. The new company, Livent, had a limited history operating as an independent company before the pandemic struck. Resulting global supply chain issues have been affecting the firm ever since. However, sales are rebounding with lithium pricing and demand on the rise.  

FMC still has an equity interest in Livent, so investors can also get a little lithium market exposure via the farming chemical supply stock as well. But for a focused bet, Livent is one of the largest lithium pure plays around. Operating profit margins have risen into the midteens, which is helping the company invest in expansion of its production. Livent also has plenty of cash and equivalents on hand, as well as minimal debt.

5. Lithium Americas 

Legacy automakers have big plans to electrify their vehicle lineups in the coming years, which means millions of new EVs could be sold. The potential trend has led to a big jump in smaller, more speculative lithium stocks such as Canada-based Lithium Americas.

Lithium Americas currently doesn't generate any revenue. It is constructing lithium extraction sites in Argentina with its partner Ganfeng Lithium and conducting a feasibility study on another site in northern Nevada. That makes Lithium Americas a highly speculative stock. Other names in a similar situation that have attracted lots of investor interest are small exploration and development firms such as Standard Lithium (NYSEMKT:SLI) and Piedmont Lithium (NASDAQ:PLL). Tread lightly with these speculative bets.

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Stay diversified with lithium battery stocks

Investing in mining companies that produce base materials and chemicals can be a wild ride for investors. Stock prices can be volatile and susceptible to sharp fluctuations based on the market price of the material being mined and sold. Although global demand for batteries bodes well for lithium battery producers, expect plenty of volatility along the way.

To help lessen wild swings in value, consider buying a lithium ETF such as the Global X Lithium & Battery Tech ETF (NYSEMKT:LIT) or invest in a basket of lithium stocks such as the ones listed above. Given the ups and downs in lithium production, keep any investment in this niche of the mining and chemicals industry small.