Lithium prices have fallen significantly in recent months. Over the past year, the price is down 75%. Despite this, some are expecting a rally in the soft metal. When looking at lithium stocks that could benefit from this potentially positive move, I think I’ve spotted one FTSE share that could be a smart value pick.
What’s going on?
Before we get to the stock, let’s consider lithium. One of its main uses is in batteries, a key component for electric vehicles (EV’s). Despite higher demand for EV’s, there’s an oversupply in the lithium market.
There’s been a large increase in production, particularly in places such as Australia and China. Naturally, it makes sense to get into the market due to the long-term demand. But in the short term, the price has taken a sharp knock.
Looking forward, I think the price will rally. EV’s accounted for 18% of total car sales last year, up from 14% in 2022. The market’s expected to continue growing in coming years, especially as governments continue to push people to go green.
If China’s economy recovers in the coming year, this huge market should push lithium prices higher almost by itself.
A stock that could benefit
Based on my view, stocks related to lithium could outperform in the coming years. One example on my radar is Savannah Resources (LSE:SAV). The penny stock is a leading conventional lithium development company.
The stock’s down 24% over the past year. This is in part due to the weakness in the lithium price. Also contributing to the stock’s fall is investors treading water regarding its main Barroso lithium project in Iberia. Until this comes online and starts generating revenue, it’s currently just a costly expense.
Yet because the stock has a small market cap of just £69m, it has the potential to rocket with only a relatively small amount of buying activity. If the lithium price increases, then the monetary value of the Barroso project increases. This would help to boost the share price.
Construction is due to start next year, with first production in 2026. This isn’t that far away from yielding cash for the business. Even though the firm generated an operating loss of £3.5m last year, it had £9.7m of cash on hand at year end, so I don’t see a huge problem here.
A risk is that Savannah might have problems with the project before production in 2026. With this type of project, there are numerous things that can go wrong, even at the last minute. Until production actually begins, there’s always uncertainty.
Lithium’s the future
Based on my view on lithium being crucial going forward, I want to get exposure. If my forecast on the price is correct, Savannah Resources could gain in value, even before production comes online. Therefore, I’m thinking about adding the stock to my portfolio shortly.
This post was originally published on Motley Fool
