2 top lithium stocks with eyebrow-lifting potential

Jon Smith outlines two small-cap ideas that could offer him huge returns if the projects the top lithium stocks are involved in pay off.

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Demand for lithium has been increasing in recent years. It’s a key material for batteries, both in conventional items such as smartphones and also for the growing electric vehicle space. However, as a commodity, lithium stocks do carry risk given the volatile price movements. Yet there’s also large potential in this sector. Here are two top lithium stocks that I like right now.

A project in the heart of Europe

The first company that excites me is European Metal Holdings (LSE:EMH). It’s a small-cap stock with a market value of £84.4m.

The business is a mineral exploration and development company, with a focus on lithium. To this end, hope is being pinned on the Cinovec project in the Czech Republic. Progress is ongoing, with Covid-19 providing delays last year. In the latest update, the company was positive about the outlook to make it commercially successful.

I think there’s large upside here due to the location of the project. It’s in Europe, with easy distribution networks available to ship resources. This could be to major car manufacturers in Germany or electronic companies based in Eastern Europe.

The share price has halved in value over the past year. I put some of this down to a retracement from the middle of 2020 when the price soared on rumours around the project. With the net present value of the project estimated to be $1.94bn but the European Metal Holdings shares valued at a fraction of that, the potential here is large.

One risk here is the unknown. Even though things look promising, until lithium is successfully on the way to end users, there’s always the fear that the project never materialises.

A top lithium stock with upside

The second stock I’m thinking about buying now is Trident Royalties (LSE:TRR). The business is a streaming and royalty firm in the commodity space. It’s not solely focused on lithium, but does have an interest in it via the Thacker Pass project.

The Thacker Pass is operated by an American company. But Trident has a 1.75% gross revenue royalty from any lithium proceeds, as well as a 60% interest in the project. The Thacker Pass is one of the largest known lithium resources in North America. Trident has recorded the stage of the project as advanced.

Clearly, even with what seems to be a small percentage of the revenue, this could offer significant benefits given the size of the project. It has an estimated 3.1m tonnes of lithium carbonate equivalent, with the average price of carbonate last year being $17,000. The potential revenue output here is in the billions!

The share price is up 28% over the past year, with gains in July due to a positive trading update.

My concern here remains the same as European Metal Holdings, in that production hasn’t started. However, I have to accept that in order to potentially have serious returns, I do need to accept that there will be a higher level of risk involved.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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