My top UK lithium stock to consider buying now

Even though lithium prices plunged in late 2023, Muhammad Cheema still thinks Rio Tinto is a great stock to consider buying now.

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At the end of 2023, the price of lithium fell to its lowest level in over two years. And it’s failed to mount any meaningful recovery since. Nevertheless, my long-term view of the value that the commodity can provide to society remains the same. That’s what I want to discuss here along with highlighting a top stock to consider buying in the sector.

The noise around Lithium

Lithium is a very soft, silvery-white alkali metal that has seen its use escalate since the rapid growth of electric vehicles (EVs). Less is known about its other applications, such as its use in aircraft construction and mood stabilisers (as a treatment for bipolar disorder).

However, pessimism around the commodity has recently bubbled up after a global slowdown in EV demand, especially in China. This is important because China is the largest market for EVs, with 8.1m EV registrations out of the 13.9m global registrations in 2023.

This has temporarily caused the supply of lithium to surpass demand, pushing its price down. But this is only a short-term issue. Over time, governments will continue to try and make their economies greener. EVs will become more appealing as a result, driving its growth further. In fact, experts predict that they will account for two-thirds of all car sales by 2030. This should push the price of lithium back up over time, I feel.

My favourite UK lithium stock    

Over the last few years, Rio Tinto (LSE:RIO) has acquired lithium-rich mines in Europe and South America.

In 2022 it completed the acquisition of the Rincon lithium project based in Argentina for $825m. This came after the Serbian government revoked its license for the Jadar project due to environmental concerns.

However, in the last few days (June 16), news has emerged that the Serbian government is preparing to give the green light for the project to go ahead. This could be massive for the EV market in Europe with the mine expected to extract 58,000 tons of lithium per year. This is enough to power 1.1m EVs (17% of EV production in Europe).

Ultimately, these plans could propel the company to become one of the largest lithium producers in the world.

Now what?

There are risks in holding shares of Rio Tinto. If the Chinese economy continues to stutter, then the price of lithium may stay low for longer, making the company’s extraction of the metal less valuable.

However, what stands out to me about the company is that compared to other UK lithium producers it’s very well-diversified. A lot of the other players in the industry, such as Atlantic Lithium, are solely focused on one metal’s extraction.

Rio Tinto extracts all sorts of metals, including copper, iron ore, and other minerals. Therefore, it’s not so dependent on the price of lithium. It’s also very profitable, generating $10bn of profit last year.

Ultimately, I believe it’s a safer option than many other lithium stocks and therefore, if I had the spare cash, I’d buy some of its shares today.

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.

Muhammad Cheema 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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