Lithium stocks: Albemarle, Allkem and Kodal Minerals boosted by supply gap

The price of lithium has skyrocketed 414% in the 52 weeks to 20 May as demand continues to outpace supply. This has helped lift the share price of key lithium producers like Albemarle, Allkem and Kodal Minerals.

There is no shortage of lithium, the battery-making element that exists across the world. But, as Elon Musk put it in a tweet in April, the “pace of extraction [and] refinement is slow”. As a result, prices for the mineral have surged.

The growing supply gap is a boon for lithium mining stocks. Here’s how the share prices of Albemarle [ALB], Allkem [AKE.ASX] and Kodal Minerals [KOD.L] have been fairing over the past few months and what’s been driving the stocks.

Demand sees Albemarle raise 2022 guidance

The Albemarle share price is trading flat year-to-date as of 23 May, but it’s up 23.2% since 4 May thanks to its promising first quarter 2022 earnings.

The miner had a blockbuster quarter, reporting net sales of $1.13bn for the three months to the end of March, up 36% from the $829m reported for Q1 2021. Adjusted EBITDA rose 88% to $431.9m.

“There is potential downside in the event of a material correction in lithium market pricing or potential volume shortfalls” - Albemarle in a post-earnings notice

The stellar results were boosted by the performance of its lithium business, which saw sales jump 97% to $550m and adjusted EBITDA soar 190% to $308.6m.

With prices rising and lithium projects under way in the US, China, Chile and Australia, the miner expects demand for the metal to be strong for the rest of the year. It has raised its 2022 adjusted EBITDA guidance to a growth rate of 200–225% year-over-year.

A word of warning, however. “There is potential downside in the event of a material correction in lithium market pricing or potential volume shortfalls,” noted the company after the results were announced.

Cash flow to drive Allkem’s growth strategy

The Australian lithium chemicals producer has seen its share price climb 24.8% since the start of the year through to 23 May, mainly thanks to a strategy presentation it delivered to investors on 5 April. The company laid out plans to triple production capacity by 2026 and achieve a 10% share of the global lithium market within the next decade.

The growth strategy will be supported by the company’s strong balance sheet and future cash flow projections. It expects capital expenditure between 2022 and 2026 to fall between $1.202bn and $1.277bn. At the end of 2021, net cash was $286m and available liquidity was $458m. In the near term, it expects significant cash flow from its Olaroz project in Argentina.

In April, Allkem upgraded its resource in the Olaroz basin from 6.4 million tonnes to 16.2 million tonnes and said that construction of the second stage of the project was progressing. “This material increase in resources confirms the world class status of the Olaroz basin,” said CEO Martin Perez.

An independent economic analysis has estimated it presents a value of $2.67bn and could deliver a 192% rate of return.

Mali project to help Kodal fill the supply deficit

The Kodal Minerals share price has had a rocky start to the year, but as of 23 May it was up 21.7% from a year-to-date low of 0.23p in early March. The stock has dropped 23.9% since 23 April due to an announcement earlier this month that the miner had raised £3m via an oversubscribed share placing.

The subscription originally placed 130.1 million shares, but ended up being oversubscribed by 941 million. As a result, shares priced at 28p, below the market price for that day. The stock was as high as 37.5p in April.

The funds raised will finance the construction of Kodal’s Bougouni lithium spodumene project in southern Mali. The company is aiming to become the first lithium miner in the country and was granted a mining licence last November.

CEO Bernard Aylward recently told Proactive Investors that production will start as soon as possible “to take advantage of this supply deficit and maximise value”.

The miner is currently reviewing a 2020 feasibility study and this is expected to be finalised in the coming weeks. Since carrying it out, the price of spodumene has risen from $680 per tonne to more than $3,000 per tonne.

“We see the lithium market continuing to grow and it’s really indicated through the take up of electric vehicles,” said Aylward.

Which is the best lithium mining stock?

Albemarle and Allkem are both held by the Global X Lithium and Battery Tech ETF [LIT]. The former is currently its top holding, with a weighting of more than 11%. The fund is down 14.3% year-to-date, but the two stocks’ inclusion means it benefits from wider exposure.

Kodal Minerals is an AIM-listed small cap, which means it’s likely to be more volatile given the market’s lower liquidity.