Investors looking for exposure to the electric vehicle (EV) space may be interested in a new stock on the block- Lithium Royalty Corp (LIRC. Toronto). This royalty company, which offers a way to access the lithium used in batteries for EVs, recently launched on the Toronto Stock Exchange in early March. The stock has caught the attention of analysts from the investment banking giant Citi, who has given it a ‘Buy’ rating and a price target of CA$19.
Lithium Royalty Corp. is a Canadian public company that sources a diversified range of lithium-bearing projects to develop a portfolio of royalties and streams worldwide. It raised money in an initial public offering and the shares trade in Toronto. Rather than investing directly in miners, which can be associated with risks like start-up miners, royalty companies offer dividends while helping to minimize risk with diversification.
The big driver for Lithium Royalty is the prevalence of EVs and their need for lithium-ion batteries. In fact, market analyst Patrick Cunningham from Citi estimates demand for lithium will grow fourfold between 2022 and 2030. Consequently, shares of Lithium Royalty have had plenty of growth potential since their IPO.
Franco-Nevada is a successful example of this royalty model, having grown its market capitalization to almost $30 billion. By comparison, Lithium Royalty shares closed at C$16.15 Monday, putting the stock down around 5% from its IPO price. Cunningham predicts that the company will have positive free cash flow of around $9 million in 2023 and $60 million by the end of the decade.
Considering that Franco Nevada trades typically at two times the net asset value (NAV), Citi analyst Patrick Cunningham sees plenty of upside potential for Lithium Royalty. Currently, it trades at around 1.4 times NAV. Comparing the free cash flow yield of both companies, Cunningham estimates around 6% for Lithium Royalty whilst Franco Nevada stands at 2.7%.
Lithium royalty also hasn’t started paying dividends yet, so investors should continue to value the stock on its NAV until cash flows start to pick up. Nevertheless, these dividends will be one of the major catalysts for the stock when it does begin distributing them, in line with its successful industry peers.
Overall, Lithium Royalty Corp is an interesting option for investors looking to access the potential growth in the electric vehicle market. Although it hasn’t started paying dividends yet, investors should be mindful of the significant upside potential from such a stock given the projected growth of lithium demand, strong management track record in accretive deals and 7-country diversified portfolio.