A Turtle Pond Holds The Key To The Future Of Electric Cars

At the bottom of a 150-foot-deep turtle pond near Charlotte, North Carolina lies the possible savior of the American electric-vehicle industry.

This rain-filled former quarry once produced massive quantities of lithium used in the Manhattan Project — the secret government program that built the first atomic bomb.

Shuttered since the 1980s, an American company (which I’ll talk about in a bit) is now trying to get it up and running again. Once they cut through the environmental red tape, they could create the U.S.’s first complete supply chain for electric vehicle batteries.

There is certainly a need for one. General Motors is building four lithium-battery plants in the United States. Ford is spending $11 billion on three battery factories. Volkswagen is looking at setting up a battery cell factory in this country. And Panasonic, which supplies batteries to Tesla, is building a factory in Kansas.

But none of them will be able to make a single battery without lithium. There’s no substitute.

Right now, the only lithium mine in the United States is a tiny operation in Nevada. China makes 79% of the world’s lithium-ion batteries. The U.S. makes just 5.5%.

Bottom line: If our country can’t secure a domestic supply of lithium for batteries, we will be left behind in the electric vehicle revolution.

It’s a pressing problem. Tesla says that the #1 factor limiting electric vehicle production is an unreliable supply chain of batteries.

Meanwhile, car buyers are clamoring for EVs after the passage of the Inflation Reduction Act, which lets them take $7,500 off their taxes. If EV demand lives up to projections, the U.S. will need 5x more lithium by the end of the decade.

The company that wants to revive this rich North Carolina lithium mine is the critical first step to a domestic EV battery supply. And it should succeed.

What’s even better is that this company isn’t some small start-up looking to get its feet wet in the lithium space. It is already one of the top lithium producers in the world. Oh, and it pays a dividend…

But before we get to the company, we need to understand an important aspect of investing in lithium. It’s a volatile bugger.

Lithium’s Boom-and-Bust Cycle

If you haven't been keeping tabs on this commodity that’s okay. All you need to know is it goes through boom-and-bust cycles. Right now, lithium prices are in bust mode. Take a look:

As you can see, since peaking in 2022, it’s been nothing but downhill. Falling lithium prices aren't completely surprising (for reasons I'll explain in a moment). What is surprising is just how fast it happened.

But just know that I’ve seen this exact story play out time and time again. The last time this happened (2019) I made over 100% in just one year.

I have no idea if we will make that sort of money again, but I do know that one of the world’s top lithium producers is trading for incredibly cheap and offers a nice risk/reward setup.

The Demand for Lithium

The demand for lithium really picked up steam in 2016. That's when Tesla (Nasdaq: TSLA) unveiled its Model 3. The excitement was huge. One week after the unveiling, reservations for the electric car totaled 325,000. By comparison, in 2015, Tesla produced less than 50,000 vehicles.

More importantly, it kicked off a massive shift toward electric vehicles, or "EVs." Today, every car manufacturer has an electric vehicle. And last year, Tesla sold over 1.3 million EVs.

This has kicked the demand for lithium into overdrive. For example, in 2015, the biggest user of lithium was the glass and ceramics industry, scooping up 35% of the lithium supply. Lithium batteries were growing in popularity by this time, but mostly in portable electronic devices, tools, and grid storage, which claimed 31% of lithium.

Today just 7% of lithium goes towards glass and ceramics. And 80% of lithium goes to batteries.

In 2015, worldwide lithium consumption was 32,500 tons. Last year, that figure was roughly 134,000 tons.

And barring a breakthrough in battery chemistry or the sudden embrace of public transit in the U.S., the transition away from fossil fuels will require lots of lithium-ion batteries. With the EV revolution well underway, demand for lithium-ion batteries is already exceeding supply, and experts predict shortages will continue for the next few years.

By 2030, BloombergNEF estimates 40% of cars sold globally will be EVs. And lithium supplies simply can't keep up with demand. In fact, according to Benchmark Mineral Intelligence, by 2030, there could be a lithium deficit of nearly 160,000 tonnes.

Why Are Lithium Prices Falling?

If the demand is so strong and expected to outpace supply, Econ 101 tells us that prices must rise to meet that demand. You know, something about equilibrium, elasticity, and some other words I barely remember from college.

Does lithium fall outside of the law of supply and demand?

No. After two years of high prices, the demand for lithium has cooled. Remember, supply rises as price increases (because those mining lithium make more money), but eventually demand declines (consumers aren't willing to pay higher prices). We reached that tipping point, and demand is declining... at least for now.

A big reason is that the demand for electric vehicles has slowed, particularly in China. The market for many consumer electronics has cooled as well. But there's a lot of interest in lithium. For example, General Motors (NYSE: GM) recently invested $650 million into the startup Lithium Americas Corp. (NYSE: LAC) for the right to obtain material from a planned mine in Nevada.

Piedmont Lithium (Nasdaq: PLL) — a Tesla supplier — has been fighting tooth and nail to get a lithium mine up and running in North Carolina (locals have been pushing back).

The U.S. government is pouring money into the sector to support domestic production, making billions of dollars of loans and grants available to suppliers to incentivize them to build production plants in the U.S. And last year's climate legislation offered new tax credits for electric cars tied to their domestic content.

There are a handful of ways to invest in lithium — like with the startup Lithium Americas (LAC) and Piedmont Lithium (PLL), both mentioned above. But both are unproven. Neither has collected a dollar in revenue, and they bleed cash.

Their hopes hinge on regulatory approvals to begin mining and building facilities. Analysts project that both companies are slated to begin generating revenue this year. But they are far from a sure bet, and if lithium prices remain low, they will have a hard time paying their debts back.

Sociedad Quimica y Minera de Chile (NYSE: SQM) is a major lithium producer that's trading for cheap. However, rumblings out of Chile that the government will nationalize its lithium make this a riskier investment.

Instead, I'm going with a well-established American company. Not only is the company well-managed and proven to be shareholder friendly. It's also the only company with a lithium mine in the United States.

The Leader In Lithium

Headquartered in Charlotte, North Carolina, Albemarle (NYSE: ALB) is a specialty chemicals company. It has leading positions in lithium, bromine, and refining catalysts. But its bread-and-butter is lithium, which accounted for 68% of revenue last year.

Bromine is its second-largest business segment. It was responsible for 19% of sales last year, and its catalysts business made up the rest.

Here are some the quick financial facts about the company:

•  This is a $13.4 billion company.

•  Recent share price of $108.

•  In 2022 it generated $7.3 billion in sales and 2023 it’s expected to do over $9.4 billion.

• Profits of around $2.5 billion.

• Cash from operations runs north of $1.5 billion.

• Pays $1.60 per share dividend, for a yield of 1.5%.

The company will report fourth-quarter and full-year (2023) results on February 14. So, mark your calendars.

Management will also give us some insight into what to expect for 2024. But here’s what analysts expect...

Revenue is expected to fall to $7.3 billion. Remember, revenue is highly correlated to the spot price of lithium. Lithium prices are down.

Profits are also expected to fall to just over $1 billion.

One bright spot is that cash from operations is expected to grow from around $1.5 billion to $1.9 billion.

The balance sheet is also strong, as the company had over $1.6 billion in cash on hand at the end of the third quarter 2023. Total debts amounted to over $3.8 billion, with only $200 million of that being short-term debts and liabilities.

Okay, that’s the quick-and-dirty on the Albermarle’s financials. So, what’s it worth?

Trading At A Silly Valuation

First, some perspective. Let’s go back to 2019 when I first jumped on this investment.

Back then the company was trading for 13 times profits (that’s the P/E multiple for those wondering). It’s forward P/E was 10x. I don’t put a lot of faith in the forward P/E as it’s just based on what analysts expect and it gets adjusted all the time. But nonetheless, people use it and like it.

Finally, it was trading at an EV/EBITDA multiple of 9.7x.

As a quick reminder, "EV" is enterprise value, which represents the total stakeholder value. This includes a company's market cap as well as net debt (debt minus cash). "EBITDA" stands for earnings before interest, taxes, depreciation, and amortization. This figure paints a better picture of operating profitability.

Back in 2019, it was the cheapest the stock had been in over five years. In other words, it was a great deal. I invested, and it worked out...

I don’t show you that to brag. It doesn’t always work out that well. And I have no idea if it will make money this time around. What I do know is that lithium is important for EVs and EVs aren’t going anywhere.

In fact, there are 130 new vehicle launches planned for the next 2 years. And a whopping 50%-plus of those launches are dedicated to electric vehicles. Thank you, Car Dealership Guy on X (still mainly called Twitter) for that nugget.  

Sorry, I digress...

What’s Albermarle trading at today, and what’s it’s worth?

Here are some key valuation metrics today:

• P/E of 4.1x

• Forward P/E 13.4x

• EV/EBITDA 6.2x 

The company is trading for even cheaper than when I first invested in 2019 (and it was cheap then). It seems investors are too busy chasing AI companies and have left this lithium producer for dead.

The stock is down a whopping 66% since its peak at the end of 2022. I told you this was a boom-and-bust industry. You just have to get off before the bust.

Even crazier is that over the last 10 years, this stock has only traded for an EV/EBITDA ratio below 10 just twice. The last time was in 2019 (when I bought it). Before that, it was in 2014 when it traded at an EV/EBITDA multiple of 7.3. Remember, it’s trading for 6.2x today.

Take a look at what its stock did both times (please note that I'm showing trough to peak in the chart below. We won't catch the exact bottom or sell at the exact top. That's unrealistic. Our goal is to capture the bulk of the returns):

I want to point out that these returns didn't happen overnight. Both times the stock fell further before going on this tremendous run. We could very well be early on this investment. So, it will require patience. Something that can be difficult when investing.

But it's too hard to pass up on a wonderful company trading for this cheap.

Oh, and one final thing... the company remains committed to its shareholders. Management is focused on paying a dividend — they are expecting their 29th year of dividend growth. The stock's yield of 1.5% isn't anything to write home about, but it's always nice when a company has its shareholders in mind.

To Wrap Up...

According to the Alliance for Automotive Innovation, EVs accounted for 10% of U.S. vehicle sales in December, up from 2.3% in 2020. In 2022, 10.5 million EVs were sold worldwide, up nearly 60% from the previous year, according to research firm Rho Motion, which expects global sales to jump nearly 40% this year.

In short, the EV market is here. And it's here to stay. That's driving demand for lithium-ion batteries. According to Benchmark, investments in battery gigafactories totaled nearly $130 billion by the end of last year.

That means lithium remains (and is forecasted to remain) in high demand.

Sure, prices have tumbled along with the miners. But that just opens a door of opportunity, in my opinion. And here we have the best-of-breed lithium miner trading for cheap. And the only miner with an operating lithium mine in the United States.

Despite some near-term headwinds, the lithium-ion battery market is expected to exceed more than $300 billion by 2032. That's a compounded annual growth rate of 18.3%.

What’s more, Albemarle has shown that it can turn a profit even when lithium prices are low. But with the expected demand for lithium, I don't expect prices to remain depressed forever.

Albemarle also has a penchant for returning wealth to shareholders and trades at historically cheap valuations. That typically is a recipe for market-beating returns.

Good investing,

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