The political climate is pushing the energy industry to become more “green.” This means that renewable energy sources and electric power are being pushed over fossil fuels. The irony is that some rare metals, which are important for a green energy economy, have become more important because of this. Lithium is kind of like the new coal.
This point was driven home this month when CATL, a Chinese company that makes batteries and is the world leader in the market for battery packs for electric vehicles, announced a change to how it prices its products. The short version is that the company will subsidize lithium to lower the price of its batteries. It will also take a hit to its margins and profits in order to get the biggest share of the market. The effects of this decision have been huge, and lithium miners have been among the first to feel them.
As a group, the shares of the biggest lithium mining companies went down because people were worried that CATL’s price manipulations could change demand and prices all along the lithium supply and production chains. But at least some Wall Street analysts say that now is the time to invest in lithium because they believe in the long-term strength of the industry and want to “buy the dip” in prices. We used the TipRanks database to find out more about two lithium miners that Wall Street has recently backed.
The first company is Sociedad Quimica Y Minera, which is based in Chile. This company makes a wide range of chemicals and minerals, from iodine and potassium to industrial chemicals and plant fertilizers. It also makes the most lithium of any company in the world. The EV market’s never-ending hunger for lithium-ion battery packs has led to a rise in demand for lithium. This has helped SQM, whose sales, earnings, and share prices have all gone up over the last year.
On the financial side, SQM won’t report its 4Q and full-year 2022 results until next week. However, the company’s bottom line for the nine months ending on September 30, 2022, was $2.75 billion, according to its 3Q22 results. This was almost 10 times more than the $263.9 million reported during the same time period in 2021, and it shows both that the global economy is starting to grow again after COVID and that there is more demand for lithium on the global markets. EPS for the nine-month period was $9.65, while it was only $0.92 for the same time period the year before. Top-line sales for the first nine months were $7.57 billion.
$5.62 billion of that total came from lithium and derivatives of lithium, which shows how important lithium is to SQM’s business. SQM’s lithium-related sales grew by 1,161% from the same time last year to $2.33 billion in 3Q22 alone.
With that kind of growth in sales and profits coming from the lithium sector, SQM should be able to weather any storm. Lucas Ferreira, an analyst at J.P. Morgan, would agree. He writes, “Looking at the changes in the lithium markets this week, “While noisy, we think this should not become an industry-wide practice, and lithium prices should ultimately be a function of Li SxD dynamics, which we still see in a deficit for the next three years….”
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The analyst added-
“We think CATL’s lithium subsidies should generate a battery price war, which is not healthy for the value chain. Nonetheless, the company cannot solve the lithium deficit by itself as this is a function of the unbalanced SxD JPM forecasts to remain in place for the next 3 years. That said, we believe CATL’s actions should have limited impact on pricing of other suppliers [like SQM] in the near term”
Ferreira provides support for his optimistic outlook by assigning SQM an Overweight rating (which translates to “Buy”) and setting a price target of $134. This reflects his conviction that the stock would appreciate by 53% by the end of the year. (To view Ferreira’s performance on track record, please click here.)
Now that we’ve established what J.P. Morgan thinks, let’s hear what the rest of Wall Street has to say: Two buy ratings and two hold ratings for SQM have combined to provide a moderate buy rating for the stock. Should the average price objective of $102.75 be reached within the next 12 months, there is the potential for a gain that is in the double digits – 17.43% to be exact.