How To Play The Surge In Lithium Demand?

After the market closed yesterday, EV maker Rivian (RIVN) released earnings that seemed to confuse the market more than anything. The stock dropped, then jumped, then dropped again as traders digested the news. The company is struggling with supply issues, as are so many companies right now but, when all is said and done, what is important is that Rivian has massive orders for both passenger and commercial vehicles. That, and the continuing push towards EVs from mainstream auto manufacturers, and continued sales growth by Tesla (TSLA), means that demand for lithium, which has already been growing, will surge even further.

That doesn't mean, however, that every company involved with the commodity is a buy. As Rivian themselves have found out over the last couple of quarters, demand is one thing, but fulfilling orders is something else entirely. For lithium suppliers, access to reserves and a proven ability to extract at a good clip are the keys to long-term potential, which narrows the field to a few established, already profitable names.

Stocks like Lithium America (LAC) are popular with some, but the fact that they haven't had a profitable quarter since 2019, during which time lithium demand has grown exponentially, puts me off, as does the fact that they still have negative cash flow.

A slightly better choice may be a stock that I have used as a proxy for the industry in the past, Livent Corporation (LTHM). They have been profitable for over a year now, which is a plus, but they have limited cash on hand and have shown negative free cash flow over the last year, even as they have made money in accounting terms. That may hamper their ability to meet rapidly rising demand, so they really don't suit where the market is right now. I have some long-term holdings of LTHM that I bought when the stock was below $10 that I will be holding on to, but I don't want to add to that position at these levels, given the current circumstances.

So, among the well-known lithium plays, that leaves us with Albemarle (ALB).

In the past, my issue with that stock was that it wasn't a pure lithium play, as the company mines and processes other minerals too. Diversification is usually positive, but not when you are looking to play growth in a specific market. In that case, weakness elsewhere can offset that growth, so a lithium specialist like LTHM had more appeal. However, as demand for lithium has increased and the price has bounced back, it has become more and more dominant in ALB's earnings and their focus on that part of their business has increased.

That makes it more attractive now than it was a year or so ago, and the financials make it the best play over the next year or so of expected increases in lithium demand. They remained profitable throughout the pandemic downturn and have close to a billion dollars of cash on hand. They have been ramping up their output for a while, having announced in January that they intended to double output at their important Nevada site as well as increasing production elsewhere, which has negatively impacted cash flow, but expect to be positive in that regard this year. The increasing awareness of the strategic importance of lithium in America adds significance to that increase in domestic production as well, so ALB now looks like the best way for investors to play lithium's demand surge over the next year or two.