Shares in lithium producers rose on news of the US Senate’s passage of the Inflation Reduction Act late Friday 12 August.
"The bill provides subsidies for electric vehicles and plug-in hybrids, as long as a minimum proportion of critical minerals, including lithium, comes from the US or its free trade partners," says Morningstar equity strategist Seth Goldstein in a note today Monday.
Those free trade partners include Australia.
As expected, the House of Representatives passed the bill on Saturday, August 13, cementing the positive policy-supported outlook for lithium producers.
Which Aussie Producers Look Attractive Now?
Australia is by far the world’s largest lithium producer, having quadrupled its output since 2017, according the US Geological Service, and Mineral Resources (ASX:MIN) is by far the largest lithium producer in Australia, with a market cap of $11 billion as of Friday 12 August.
The company’s lithium business now comprises more than 60% of our fiscal 2023 revenue forecast, up from just under 20% of total in fiscal 2022, according to Morningstar senior equity analyst Mark Taylor in a note on 28-July. Mineral Resources has no Economic Moat, however, and its Moat Trend is Negative.
Taylor adds that "current supply/demand imbalances can be expected to normalise eventually. Volatile energy prices, further heated by Russia’s invasion of Ukraine, have strengthened the appeal to transition away from fossil fuels, adding to demand for electric vehicles and hence lithium. Covid-19 lockdowns in China have also exacerbated supply concerns."
MIN traded at $59.35 as of Friday’s close, a 26% discount to Morningstar’s $80.00 fair value estimate. It’s a 4-star stock, meaning we think it is undervalued.
Goldstein adds: "We think the Act will benefit all lithium producers from increased demand, which should keep the market undersupplied for longer. This aligns, however, with our current view that the lithium market will remain undersupplied throughout the rest of the decade, supporting prices well above the marginal cost of production."
Bargains to be Had Beyond Australia
Goldstein’s top pick among lithium producers under our coverage is 5-star, No-Moat Lithium Americas (TSE:LAC). It is trading at just 48% of our US$65 (CAD 83) per share fair value estimate. We also see the most direct benefit to Lithium Americas from the act as the company is developing the largest lithium resource in North America: the Thacker Pass project.
US Miner Albemarle is Building New Capacity
"For investors who are uncomfortable with the larger company-specific risk, we recommend Narrow-Moat Albemarle (NYSE:ALB), which is the world's largest lithium producer," Goldstein adds.
"It is also the only lithium producer that currently has a resource extraction operation in the US, though it produces just around 5,000 metric tons per year. The company is, however, developing two other resources in the US and is building a fully integrated lithium production operation in Australia, which would qualify for the tax credit under the US Inflation Reduction Act.
"The stock currently trades at nearly a 30% discount to our US$350 per share fair value estimate."