As investors face volatile markets, high inflation rates and geopolitical tensions, an investment manager highlights his firm’s top stock pick this month.

The investment manager of a fund at Edinburgh-based  Baillie Gifford has chosen a US firm that mines lithium - a key component for electric batteries - as one of his top stock picks in December. The move by Ross Mathison, investment manager of the the company's Global Income Growth and Responsible Global Equity Income funds, is an example of how shifts in the global energy market influence such decisions.

“We manage a global equity income strategy with a growth mindset and a very long investment time horizon. So, as we sift through an ocean of information that is more noise than signal, we keep our eye firmly on the long term and invest in companies with the potential to grow both earnings and dividends sustainably at an attractive pace for at least the next decade,” Mathison told WealthBriefing.

“An excellent example of such long-term compounding is the American company Albemarle. They are one of the largest lithium miners in the world, with operations in Chile and Australia. Over the next decade-plus, lithium will play a crucial role in the energy transition,” he said. 

“Demand is expected to grow rapidly as vehicles are electrified, and electrification spreads across sectors. Electric vehicles – where penetration is still only around 10 per cent of global car production – combined with battery storage for renewable energy will drive demand for the metal. The lengthy process to open new mines means that lithium supply will be slow to ramp up,” he continued.

“While lithium is relatively abundant, producing it is a challenge. Albemarle has one of the lowest costs of extraction in the world, which puts them in an excellent competitive position. With strong cash flows generated from its existing operations and good visibility on future demand, Albemarle can afford to pay a dividend while reinvesting a large proportion of its cash flows to expand its operations across the globe, thus laying the foundations for the next decade of earnings and dividend growth,” Mathison said.

“As a mining company operating in very arid regions, Albemarle faces material sustainability risks relating to water management. When we first invested in the company, its approach to sustainability was in its infancy, as were its communications around what it was doing, leading to ESG data providers rating it poorly,” he added. 

“Adopting a more forward-looking view in our internal analysis, we disagreed with their scorings, focusing instead on the crucial importance of lithium for the energy transition. We also believed that Albemarle’s customers would increasingly be seeking a responsible source of lithium for their batteries, and so, from the very start, in our engagements with the company, we have strongly encouraged Albemarle to lead their industry in terms of sustainability performance. We believe this will increasingly become a competitive differentiator,” he said.

Lithium demand
As more countries seek to switch from internal combustion energy technology towards electric vehicles (EVs), this has put a premium on sectors such as lithium mines and prices. Global consumption of lithium has soared from 70,000 tonnes in 2020 to 91,000 tonnes, according to Statista.com.

“Throughout our relationship with the company, we have sought external validation of our views and input from various sources. We have commissioned an independent third-party assessment of Albemarle’s sustainability performance, and we have also consulted with NGOs and hydrology experts to better understand the issues around water management and its potential impact on Albemarle’s operations,” he continued. 

“Since our first engagements with the company, we have observed the company make many positive changes, perhaps best exemplified by them including sustainability as one of their new core strategic pillars and also becoming the first lithium miner to commit to a highly regarded mining industry sustainability certification framework,” he said.

“Companies like Albemarle, which we believe have the potential to compound their earnings at more than 10 per cent per annum for a decade or longer while also paying resilient dividends, are rare. But these companies can generate very attractive returns for shareholders. Our job as portfolio managers is to build a portfolio of these carefully selected companies to provide attractive and sustainable returns to our clients,” he continued.