The world's largest lithium miner, Albemarle, produces the soft white metal, a crucial metal used in rechargeable batteries, from salt brine lakes in Chile – among the cheapest sources – and two joint ventures in Australian mines, Talison and Wodgina.

The price of Chilean lithium carbonate has fallen from 2018 highs of about US$13,000 a metric tonne, to about US$12,000 a tonne – which Morningstar expects will be the median price for 2019.

Lithium is produced from either the evaporation of brine, or by mining spodumene minerals.

Several new spodumene mines were opened in Western Australia on the back of elevated lithium prices in 2017 and 2018. Morningstar equity analyst Seth Goldstein and sector director Andrew Lane say this glut of spodumene will cause prices to fall.

They expect this will cause a drop in prices for what they call "non-integrated producers" – which purchase and convert spodumene into the lithium carbonate required for manufacturing electric vehicle batteries.

"However, this oversupply will be short-lived. By the early 2020s, demand will outpace supply, moving the marginal cost of production back to lower-quality spodumene conversion," say Goldstein and Lane.

"We expect lithium demand to grow at a 19 per cent annual rate from around 220,000 metric tonnes in 2017 to 1.5 million metric tonnes through 2028."

Both Livent (NYSE: LTHM) and Albemarle (NYSE: ALB) are now rated as five-star stocks by Morningstar, hold narrow moats, and are trading at discounts of up to 60 per cent.

Albemarle is currently priced at US$73.60, a 43 per cent discount to Morningstar's US$130 fair value estimate.

Investors hoping for a rapid pay-off from lithium-linked stocks, in the hope electric vehicle use grows exponentially in the shorter-term, are likely to be disappointed.

High double-digit annual growth

But Morningstar expects high double-digit annual growth in global lithium demand, and believes Albemarle is well-placed to fulfil a sizeable proportion of this demand.

The company plans to expand its lithium production capacity to about 225,000 metric tonnes over the next decade, from 65,000 metric tonnes in 2018.

This includes purchasing a 50 per cent interest in the West Australian Wodgina spodumene operation, alongside Australian-listed Mineral Resources (ASX: MIN) – which is itself trading slightly below Morningstar's fair value estimate.

Livent is priced at US$6.62 – a 61 per cent discount to Morningstar's US$17 fair value estimate.

Morningstar is slightly less upbeat on Livent, because of its strategy of focusing on lithium hydroxide from its brine resources.

Lithium hydroxide is a higher-grade and higher-priced product, often produced as a derivative of lithium carbonate.

Morningstar's Goldstein and Lane believe that the entry of more competitors to the market will reduce the cost advantage Livent currently holds.

"Further, as more hydroxide is produced from spodumene, we forecast that Livent's position on the lithium hydroxide cost curve will rise to a middle-cost position, albeit safely below marginal-cost producers."

However, Morningstar likes the company's plans to expand its carbonate production in Argentina, where it believes Livent holds a sustainable cost advantage.

Its uncertainty rating is very high; Albemarle's is high.

Bulls say

  • Lithium price growth to US$14,500 a tonne as electric vehicle adoption takes off stronger than many expect
  • The cost difference between lithium hydroxide and lithium carbonate remains well above production costs, further boosting profit
  • Fair value estimate for Livent and Albemarle rises to US$27 and US$169, respectively

Bears say

  • Long-term lithium carbonate prices fall to US$8,000 a tonne as production overtakes battery demand
  • Albemarle's secondary flame retardants business suffers as bromine substitutes grow in popularity
  • Livent's lithium carbonate capacity expansions are delayed, requiring the purchase of more third-party carbonate at market prices, reducing margins
  • The spread between hydroxide and carbonate reduces amid market oversupply of lower-cost spodumene
  • Rising export tax in Argentina
  • Albemarle's fair value estimate slips to US$56 a share, and Livent's falls to US$7