This Canadian Stock is Over 60% Undervalued

We disagree with a broader market view that the lithium market will move into a supply surplus in 2024 and 2025, instead we could see a supply deficit in 2024. 

Ruth Saldanha 7 November, 2023 | 8:35AM
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Key Morningstar Metrics for Lithium Americas Stock

Ruth Saldanha: 2023 has arguably been the year of tech, and within tech, the eye-watering returns that investors are seeing have been driven by the so-called Magnificent 7 – Apple AAPL, Microsoft MSFT, Alphabet GOOGL, Amazon.com AMZN, Nvidia NVDA, Tesla TSLA, and Meta Platforms META. A lot of the buzz around these stocks has been driven by their explorations into artificial intelligence, and in tesla’s case, electric vehicles. And one of the beneficiaries of this boom has been lithium. Which brings us to our mystery stock of the week – which is trading at a 66% discount to our fair value estimate – Lithium Americas. 

Lithium Americas Will Benefit from Double Digit Demand Growth in Lithium

Vancouver based Lithium Americas – Ticker LAC - aims to become a pure-play lithium producer, and according to Morningstar Analyst Seth Goldstien, rising EV adoption and the increasing buildout of energy storage systems will keep lithium demand growing well into 2030.

He disagrees with a broader market view that the lithium market will move into a supply surplus in 2024 and 2025, instead, he continues to forecast a price rebound as strong demand growth outpaces supply leading to a supply deficit in 2024. This is mainly because much of the new supply will come from greenfield projects, which have historically faced delays in nearly all resource extraction industries.

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.

The stock offers a rare opportunity for investors, as it is trading well below Goldstein’s $27 per share fair value estimate. For Morningstar, I’m Ruth Saldanha.

bulls Lithium Americas Stock Bulls Say

  • As a lithium pure play, Lithium Americas is well positioned to increase profits from EV growth through lithium batteries.
  • The McDermitt caldera is one of the largest lithium resources in the world, which will allow Thacker Pass to greatly expand long-term volumes above management's initial annual capacity target of 80,000 metric tons.
  • Lithium prices will remain well above the marginal cost of production through at least the remainder of the decade, leading to excess profits and return on invested capital for Lithium Americas.

bears Lithium Americas Stock Bears Say

  • Thacker Pass is a new greenfield lithium project that will likely face delays and cost overruns, similar to other greenfield projects in the industry.
  • Lithium prices will fall as new supply comes online faster than demand, which will weigh on profitability. Lithium Americas' project will prove value-destructive in the wake of lower prices.
  • As Thacker Pass will be the first clay-based lithium resource in the world, it will likely have higher operating costs than management forecasts, leading to a materially higher position on the global cost curve.

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Lithium Americas Corp6.48 CAD1.09Rating
Lithium Americas Corp4.73 USD1.50Rating

About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

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