As expensive as they currently are, electric cars are here to stay. And that means we’re going to need an awful lot of lithium for the batteries they run on. Fortunately, there’s a FTSE 100 stock that could prove to be a great way of riding this commodity boom.
And it’s currently looking dirt cheap to buy.
Big player
Rio Tinto (LSE: RIO) isn’t just one of the biggest listed companies in the UK. Operating in 35 countries, it’s one of the largest miners in the world too.
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For it’s part, the £80bn cap hopes to meet some of the double-digit growth in demand for lithium expected over the next decade via two projects.
The Rincon project in Argentina is a “long-life, scalable resource” that the company believes should begin producing battery-grade lithium at the end of 2024.
The $2.4bn Jadar project in Serbia is another potential moneyspinner. Once developed, it could cover almost all of Europe’s current lithium needs, giving Rio a dominant position in the market.
Perhaps most importantly, the licence for this project was just reinstated by the Serbian government after being revoked in 2022 due to environmental concerns.
Rubbish year
Notwithstanding the massive potential of the projects mentioned above, the company isn’t having a great time in 2024.
As I type, the shares are down 16% on the back of reduced demand for metals (especially from major customers like China) and poorly received production updates. There’s always a chance this performance could continue for a while yet.
Fortunately, my long-term focus means I can afford to look beyond these temporary issues and take advantage of the market’s pessimism.
At less than nine times forecast earnings, I can’t help but think a lot of negativity is now priced in.
Monster yield
Meanwhile, the shares offer a dividend yield of nearly 7%. This makes Rio one of the biggest payers in the UK’s top tier index.
Will that passive income actually arrive though? Admittedly, the company doesn’t have the most consistent record when it comes to throwing cash back at its shareholders. The total dividend has bounced up and down in recent years.
On a positive note, analysts currently expect this year’s payout to be covered 1.7 times by expected profit. That feels like a sufficient buffer so, I don’t believe existing owners should be too worried.
Managing risk
Rio Tinto is far from the only option for getting exposure to lithium. Investing in a junior miner or two could prove (far) more lucrative if all goes to plan.
That last bit is key. This is complicated and dangerous work, prone to delays and disappointment. Many promising projects never get off the ground (or under it) and investors often lose all of their money.
Rio is a different proposition entirely, at least in my view. Even if it still has no control over their prices, the huge range of products it mines — including copper, iron ore and aluminium — gives it a risk/reward trade-off more to my liking.
With the shares looking this cheap, I’m running out of excuses not to buy, especially if I’m a believer in the outlook for lithium.
Time to dig down the back of the sofa for some spare cash.
