An undervalued lithium stock to buy and hold
This cheap lithium stock has 50%-plus upside, and offers long-term investors a way to play one of today’s top growth trends.
Mentioned: Lithium Americas (Argentina) Corp (LAAC)
Lithium Americas (LAC) stock has struggled in 2023 as lithium prices have pulled back, but Morningstar expects strong demand growth ahead for the metal, driven by increasing electric vehicle sales.
At its current price, we think Lithium Americas is one of the best stocks to buy now in the EV supply chain.
Lithium Americas aims to become a low-cost pure-play lithium producer. The company doesn’t have any lithium sales volume currently, but it is developing three resources that should eventually enter production, with the first project set to begin selling lithium in the second half of 2023. Cauchari-Olaroz and Pastos Grandes are brine resources located in northwestern Argentina. Thacker Pass is the company’s clay resource in Nevada.
As electric vehicle adoption increases, we expect lithium demand to grow by the double digits annually.
Lithium Americas should benefit, as there should be more than enough demand for its three resources to enter production and expand capacity over time.
Read more for ways to get exposure to the electric vehicle revolution.
Key Morningstar metrics for Lithium Americas
- Fair Value Estimate: $50
- Star Rating: 5 Stars
- Economic Moat Rating: None
- Moat Trend Rating: Stable
Economic moat rating
Lithium Americas currently does not have any projects in production and is not generating revenue. Therefore, we believe it has no economic moat. However, we think the company’s three lithium production resources—Cauchari-Olaroz, Pastos Grandes, and Thacker Pass—have the potential to generate excess returns on invested capital once they ramp up production, if they can keep costs relatively low.
Fair value estimate for Lithium Americas
Our valuation will include all of Lithium Americas’ assets until the separation of the US and Argentina businesses is finalised; this is currently planned for the second half of 2023.
We also include the equity investment from General Motors in two tranches for a 20% equity ownership of Lithium Americas (the final ownership stake may change depending on share count after the separation occurs).
Our valuation assumes a roughly 11% weighted average cost of capital and includes a 1% equity risk premium related to the company’s lithium operations in Argentina, which could be subject to increased royalties. We value free cash flows generated beyond our 10-year explicit forecast horizon at a multiple of 11 times midcycle EBITDA.
Risk and uncertainty
Project execution is the biggest risk facing Lithium Americas. This includes finishing construction on time and on budget, ramping up volume, and producing battery-quality product. Once the projects enter production, volatility in lithium prices is another large risk. Lithium prices could decline if electric vehicle demand grows more slowly than expected.
In addition, we think all lithium producers face the risk of higher royalties in Argentina. The largest environmental, social, and governance risk comes from the possibility that the Thacker Pass project will not receive permitting because of opposition from environmental groups.
Lithium Americas bulls say
- Through the ownership of three large lithium resources, Lithium Americas should be able to enter the lithium industry and become a major producer globally with one of the lowest-cost lithium carbonate resources and one of the largest rock-based resources globally.
- As a lithium pure play, Lithium Americas is well positioned to increase profits from EV growth through lithium batteries.
- Lithium prices will remain well above the marginal cost of production through at least the remainder of the decade, leading to excess profits and returns on invested capital for Lithium Americas.
Lithium Americas bears say
- The Thacker Pass operation will continue to face delays as activists fight to stop the project.
- Lithium prices will fall as new supply comes online faster than demand, which will weigh on profitability. Lithium Americas’ plans to develop three resources will prove value-destructive in the wake of lower prices.
- Lithium Americas plans to produce lithium in Argentina, which exposes the company to the risk of increased taxes and royalties that will weigh on profits.