The Lithium Squeeze: 3 Stocks Set to Surge on Supply Gaps

Stocks to buy

Lithium stocks have been depressed for an extended period on the back of a plunge in lithium prices. Since markets tend to overreact, I see some of the best lithium stocks trading at a deep valuation gap. It’s difficult to time the markets, but this is the best opportunity to consider exposure to the lithium theme. For investors who can buy and hold with patience, multibagger returns are in the offering.

An important point to note is that as demand for lithium increases, the supply gap is likely to widen. By the end of 2025, it’s estimated that there will be a “modest deficit” of around 40,000 to 60,000 tonnes of lithium carbonate equivalent. However, the deficit is expected to increase to 768,000 tonnes by the end of 2030.

Beyond the current decade, the lithium supply gap is expected to be acute by 2035 at “1.1 million metric tons, or 24% less than demand.” Given these estimates, I expect lithium to trend higher after some consolidation. Once sentiments reverse, some of the best stocks in the industry will skyrocket.

Lithium Americas (LAC)

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Lithium Americas (NYSE:LAC) is among the most undervalued lithium stocks to buy and hold. Year-to-date, LAC stock has corrected by 51%. Depressed lithium prices and the recent equity dilution are the key reasons for the plunge.

It’s worth noting that Lithium Americas owns the Thacker Pass project. The asset has an after-tax net present value of $5.7 billion and a mine life of 40 years. Further, once both phases of the asset are commercialized, the annual EBITDA is estimated at $2 billion. Considering the long-term asset potential, a market valuation of $673 million indicates that LAC stock trades at a deep discount to fair value.

From a financing perspective, Lithium Americas received a conditional commitment for a $2.26 billion loan from the U.S. Department of Energy. Further, the equity offering of $275 million and cash infusion from General Motors (NYSE:GM) will ensure the funding gap is closed. The focus will, therefore, be on the construction of the game-changing asset.

Albemarle (ALB)

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Albemarle (NYSE:ALB) is a high-quality lithium stock from a fundamental perspective. After a correction of 45% in the last 12 months, ALB stock is worth accumulating.

With the decline in lithium price, Albemarle has shifted focus towards cost-cutting. For the year, the company is targeting $280 million in productivity benefits. For Q1 2024, Albemarle reported revenue of $1.4 billion, which was lower by 47.3% on a year-on-year basis. However, it’s worth noting that a steeper decline in revenue was prevented on the back of energy storage volume growth.

Another important point to note is that Albemarle ended Q1 with a liquidity buffer of $3.7 billion. Further, a net-debt-to-adjusted EBITDA of 0.9 provides high financial flexibility.

Once lithium prices recover, Albemarle will be positioned to pursue aggressive investments. The company has maintained its guidance of lithium sales volume growth at a CAGR of 20% through 2027. Overall, Albemarle will emerge from challenging times with strong fundamentals and will be positioned to accelerate growth.

Piedmont Lithium (PLL)

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Piedmont Lithium (NASDAQ:PLL) stock has witnessed a complete meltdown with a downside of 80% in the last 12 months. However, considering the asset potential, PLL stock is a steal, with the current market valuation at $243 million.

To put things into perspective, the lithium miner’s Quebec asset has an after-tax net present value of $1 billion. However, Piedmont has a 25% stake in the asset, which would imply an after-tax NPV of $250 million. Therefore, the valuation of one asset is higher than the current market valuation of the company.

Further, Piedmont has 50% ownership in the Ghana asset with an after-tax NPV of $650 million. However, the prized assets are Carolina and Tennessee, where Piedmont has 100% ownership. Both these assets have a combined after-tax NPV of $4.5 billion. Clearly, PLL stock is massively undervalued with multi-fold returns potential.

Besides lower lithium prices, the headwind Piedmont faces is financing. Once the miner secures funding for the big assets, PLL stock will likely go ballistic.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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