3 Ways to Make Bank on the Surging Lithium Market

S&P Global Commodity Insights reported in December that the gap between lithium supply and demand could widen in 2023 due to the accelerated global adoption of electric vehicles. As a result, lithium prices are expected to remain high. That makes lithium stocks attractive to thematic investors.

 If you’re in the market for lithium stocks, one of the best sources of inspiration is the Global X Lithium & Battery Tech ETF (NYSEARCA:LIT). It invests in lithium-related companies, from mining and refining the metal to producing lithium batteries. It tracks the performance of the Solactive Global Lithium Index, a collection of 20-40 companies ranked by their free-float market capitalization.

To make the index, a company must have a free float market cap of $50 million and an average daily traded value of $200,000 over the past 90 days if they’re not already in the index, and $25 million in free float market cap and $100,000 average daily traded value if they are. Lastly, their shares must be tradable by foreign investors without restrictions.

LIT currently has 40 holdings. Its top 10 holdings account for 54% of the $3.8 billion in net assets. 

Here are three holdings from LIT to bank on in 2023. All of them are traded on a U.S. stock exchange. 

Sociedad Quimica y Minera de Chile (SQM)

Any opportunity I get to recommend a Latin American company, especially a quality one like Sociedad Quimica y Minera de Chile (NYSE:SQM), I’m going to take it. 

The Chilean miner’s history dates back to 1926 when the Guggenheim family opened the Maria Elena nitrate office. In 1968, Corporación de Ventas de Salitre y Yodo, Compañía Salitrera Anglo Lautaro, Compañía Victoria and the Chilean government merged their operations into SQM. From 1971 to 1983, it was 100% owned by CORFO, the Chilean government’s economic development agency. It was privatized between 1983 and 1988. SQM American Depositary Receipts (ADRs) were listed on the NYSE in 1995. But enough with the history lesson. 

SQM is the seventh-largest holding of LIT, weighted at 4.4%. In the latest 12 months (LTM) ended Sept. 30, its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $4.7 billion on revenue of $8.7 billion, for a very high EBITDA margin of 54%.   

Its lithium and derivatives business accounted for the vast majority of its LTM gross profits (73%), followed by specialty plants nutrition (10%), iodine and derivatives (8%), potassium (7%) and industrial chemicals (1%). Record prices in the first four areas produced strong results in the LTM. Moreover, S&P Global Commodity Insights’ December report suggests the good times will continue for several years. 

The best part about SQM is its balance sheet. At the end of September, it had net cash of $1.18 billion. The LTM’s free cash flow was $2.54 billion. Based on a $27.4 billion market cap, its free cash flow yield is 9.3%. I consider anything over 8% to be in value territory. 

Berkshire Hathaway (BRK.B)

Berkshire Hathaway (NYSE:BRK-B) is the conservative investor’s way of playing lithium stocks. Warren Buffett’s holding company owns 12.9% of the Chinese automotive giant BYD (OTCMKTS:BYDDY), or roughly 141.6 million shares valued at more than $4.4 billion. BYD is the third-largest holding in LIT at 5.8%.

While Berkshire recently reduced its stake in BYD, it is still the holding company’s ninth-largest equity position. More importantly, if you are a Berkshire shareholder, the $300 million or more worth of shares sold in January are more than enough to cover its original $232 million investment in BYD in 2008. 

In addition to being the largest electric vehicle maker in the world, BYD is the world’s fourth-largest EV battery manufacturer with a 2021 market share of 6.9%. Ironically, BYD even supplies competitor Tesla (NASDAQ:TSLA) with its Blade batteries for Model Y’s built in Germany.  

To become more profitable, BYD wants to control as many aspects of the electric vehicle production cycle as it can. In June, it announced plans to acquire six lithium mines in Africa. The mines will be able to provide the company with enough lithium for its EVs for the next 10 years. 

Interestingly, given Berkshire’s insurance focus, BYD is also considering buying Yi’an Property Insurance Co., a Chinese property and casualty insurer. Chinese regulators seized the insurance firm two years ago as part of their regulatory crackdown. BYD would use the insurer to build up the EV insurance market in China. 

BYD said on Jan. 30 that it expects its 2022 net profits to be at least $2.37 billion, more than five times higher than in 2021.  

Tesla (TSLA)

Tesla’s (NASDAQ:TSLA) biggest weapon in the EV wars has been its vehicle profitability relative to the world’s largest auto manufacturers. For example, in the third quarter of 2022, Tesla, the 11th largest holding in LIT at 3.8%, had a gross profit per vehicle 0f $15,653. That was more than five times what Ford (NYSE:F) makes on a vehicle, four times what Toyota Motor (NYSE:TM) makes, and twice as much as Volkswagen (OTCMKTS:VWAGY) makes.

While its gross profit per vehicle is industry-leading, its net profit per vehicle is even more impressive. In Q3 2022, it was $9,574. The next closest automaker was General Motors (NYSE:GM) at $2,150 per vehicle. That’s a huge advantage for Tesla in its effort to gain market share through lower prices. 

“‘Tesla has taken the nuclear option to bully the weaker, thin margin players off the table’ in China, said Bill Russo of Automobility, an industry consultancy in Shanghai. ‘Big pie, fewer slices, more to eat for those that remain,’” Reuters reported.

As for Tesla’s long-awaited Cybertruck, it now looks as though it won’t hit mass production until 2024. However, Tesla CEO Elon Musk did say in the company’s fourth-quarter earnings call that some Cybertrucks could roll off the Austin assembly line this summer. Either way, the final version won’t sell for the $40,000 price tag promised by the billionaire four years ago.  

Tesla earned $13.7 billion from its operations in 2022 on $71.5 billion in automotive revenue and $81.5 billion in total revenue. That’s a net margin of 16.8%, 470 basis points higher than in 2021. 

Musk’s behavior might be erratic, but he continues to operate one of the world’s most successful businesses. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.