With the electric vehicle industry positioned for sustained growth, there is a big investment opportunity in EV batteries. Estimates indicate that batteries typically account for 30% to 40% of the value of an electric vehicle. It also goes without saying that the demand for batteries would also translate into robust demand for battery metals. With some weakness in EV stocks, it’s a good time to look at some of the best battery metal stocks to buy.
Further elaborating on the potential demand, McKinsey estimates that the market for battery cells will reach $360 billion by 2030. In an optimistic scenario, the market can potentially hit $410 billion.
While various industrial commodities will witness a surge in demand, the biggest beneficiary is likely to be lithium. By 2030, batteries will account for 95% of the lithium demand. Further, lithium capacity needs to grow at 25% to 26% annual to cater to this incremental demand. Therefore, my focus in this column is on three battery metals stocks to buy from the lithium production segment.
Let’s discuss the reasons that make these lithium stocks attractive.
Albemarle (ALB) Source: IgorGolovniov/Shutterstock.com
Considering the impending growth in the lithium segment, Albemarle (NYSE:ALB) is among the best battery metal stocks to buy. ALB stock also trades at an attractive forward price-earnings ratio of 11.2. A meaningful rally from current levels seems likely.
Albemarle is among the largest lithium producers in the world, with the segment accounting for 60% of net sales. With lithium having surged recently, the company’s EBITDA margin has expanded, which has translated into healthy cash flows.
For Q2 2022, lithium segment sales and adjusted EBITDA expanded by 178.3% and 352.5%, respectively, on a year-on-year basis. For the full year, the company has guided for adjusted EBITDA growth in the range of 500% to 550%.
Albemarle also has ambitious growth plans through 2025. The company expects to more than double its lithium conversion capacity to 200,000mt/year. Therefore, robust growth will likely sustain and translate into the stock’s upside and dividend growth.
Lithium Americas (LAC) Source: tunasalmon / Shutterstock
Lithium Americas (NYSE:LAC) is involved in the exploration of lithium deposits and seems undervalued after a correction of 28% for year-to-date 2022. Currently, Lithium Americas does not have any producing assets. However, with some high-quality assets nearing production, the outlook is positive.
As an overview, the company is targeting the production of 80,000tpa of lithium carbonate from Thacker Pass. Further, output from the Caucharí-Olaroz project is estimated at 40,000tpa. With $500 million in total liquidity, the company has the buffer to advance these development-stage projects.
It’s worth noting that the company expects to complete phase one construction at Caucharí-Olaroz in 2023. Construction at Thacker Pass is also scheduled to commence in 2023. Therefore, there are potential catalysts for LAC stock upside.
Another essential point to note is that Thacker Pass has a mine life of 46 years. Further, Caucharí-Olaroz has a mine life of 40 years. These projects, therefore, provide clear cash flow visibility. If the price of lithium trends higher in the coming years, the cash flow visibility will also increase.
Rio Tinto (RIO) Source: TTstudio / Shutterstock
Rio Tinto (NYSE:RIO) is a diversified player in the industrial commodity segment. RIO stock currently trades at an attractive forward price-earnings ratio of 5.8. Additionally, the company offers a dividend yield of 12.7%.
It’s worth noting that the iron ore segment remains the cash cow for the company. However, copper and lithium are emerging segments as Rio positions itself to benefit from the EV revolution.
In July 2022, Rio and Ford (NYSE:F) announced a joint venture agreement to “develop more sustainable and secure supply chains for battery and low-carbon materials.” The JV will likely be a value creator with Ford’s ambitious EV plans.
The company’s Jadar lithium-borates project in Serbia is one of the largest greenfield lithium projects in development. Once the project is commercialized, Rio expects to be the largest source of lithium supply in Europe for the next 15 years.
Rio Tinto reported a free cash flow of $7.1 billion for the first half of 2022. With strong financial flexibility, the company is positioned to benefit from significant investments in the battery metal space.
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.