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If I had to talk about some of the best investment themes for 2023, lithium would be among the best. In fact, lithium is likely to be an attractive investment theme throughout the decade. So I would look at some of the top lithium stock picks for 2023 in this column.
Governments around the world have set an ambitious goal for the adoption of electric vehicles. Research indicates, however, that the targets are impossible no change in the lithium pipeline. To put things into perspective, the lithium supply shortfall is projected to be acute by 2035. Supply will be at least 1.1 million tonnes, 24% below demand.
Given this scenario, there are two important conclusions. First and foremost, lithium companies will benefit and investment in new mines is expected to remain strong. Moreover, the price of lithium should remain in a long-term uptrend. This will translate into strong cash flow for lithium companies.
With that overview, let’s discuss the top lithium stock picks for 2023.
Albemarle Corporation (ALB)
Albemarle Society (NYSE:ALB), which is also a quality dividend growth stock, is the top name among lithium’s stock picks for 2023. After remaining largely sideways for the past 12 months, the stock looks attractive with a forward price/earnings ratio of 12.1.
Albemarle however published robust figures supported by the lithium segment. For the third quarter of 2022, the company recorded revenue and EBITDA growth of 152% and 447%, respectively, on an annual basis. In addition, the company guided during EBITDA growth of 280% to 300% for the year.
It should also be noted that Albemarle ended 2021 with a lithium conversion capacity of 85 ktpa. The company plans to increase its capacity to 200ktpa by the end of the year. This will result in healthy growth in 2023. Albemarle has also guided lithium conversion capacity of 450-500 ktpa by 2030. With continued capacity growth, the company is well positioned to generate additional cash flow .
Lithium Americas (LAC)
With a likelihood of commercial production from lithium assets in 2023, Lithium Americas (NYSE:LAKE) the stock is attractive. CLA inventory has declined by 33% over the past 12 months. However, the correction seems overdone and a reversal rally is expected.
One of the reasons to love Lithium Americas is its high quality assets. The company expects an average Annual EBITDA of $508 million of the asset in the United States The asset also has a lifespan of 46 years. Additionally, the company has a 44.8% stake in an Argentinian asset with an annual EBITDA potential of $308 million. Lithium Americas therefore has long-term visibility on cash flows. If the price of lithium continues to rise, the cash flow potential will increase further.
In another positive development last month, Lithium Americas announced the division of the company into two entities. Lithium Americas will focus on North American assets. Additionally, Lithium International will focus on investments in Argentina. I believe this split would unlock value for investors.
Rio Tinto (RIO)
Rio Tinto (NYSE:Rio) is a diversified industrial commodities company. I like RIO stocks for several reasons. First, the stock trades at a forward price-to-earnings ratio of 8.0. This indicates undervaluation even after the recent rally. Additionally, Rio Tinto offers a robust dividend yield of 9.5% and dividends are sustainable.
Specific to lithium, Rio Tinto has targeted expansion in the lithium segment to benefit from favorable industry winds. Last year, the company committed $2.4 billion to the Jadar lithium borates project in Serbia, which is one of the largest greenfield lithium projects in the world. It is estimated that Rio will be the greatest source of lithium supply in Europe for at least the next 15 years.
In March 2022, Rio Tinto also announced the finalization of the acquisition of the Rincon lithium project in Argentina for $825 million. An important point to note is that Rio has great financial flexibility. For the first half of 2022, the company reported free cash flow of $7.1 billion. It is likely that Rio Tinto will continue to acquire lithium assets to benefit from strong price realization.
As of the date of publication, Faisal Humayun does not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.