Sell this lithium stock with high exposure to the chemical's price, Goldman Sachs says

Published Fri, May 19 20236:26 AM EDTUpdated Fri, May 19 20231:10 PM EDT

Sociedad Quimica y Minera de Chile , or SQM, is worth dropping given its direct exposure to lithium prices, Goldman Sachs warned. Analyst Marcio Farid initiated coverage of the lithium producer's stock with a sell rating. His $60.60 price target implies shares could slide 16.7% from where they ended during Thursday's session. "We recognize SQM's unique, large and low-cost asset base, as well [as] the company's distinctive ability to operate brine ponds, but believe this is already priced in," he said in a note to clients Friday. "We also think consensus is too bullish on their forecasted lithium prices, potentially leading to earnings downgrades in the short-to-medium term." Farid noted his sell rating is out of the norm on Wall Street. Nearly two-thirds of analysts rate the stock a buy or equivalent rating, according to Refinitiv. Lithium prices have taken dramatic swings in recent months. Farid said the sell rating is due in part to the firm's expectations for a multiyear oversupply of lithium and continued price pressure. He noted Goldman sees strong demand growth for the chemical, known for its use in electric vehicle batteries, being overshadowed by an even greater increase in supply. The price moves come at a time when the company's performance is increasingly tied to the price, with Farid noting the chemical's relevance increased from 40% of EBITDA in 2019 to 80% in 2022. Farid also noted there are uncertainties tied to the company's concession renewal and if that would have any new terms or costs. He said Salar de Atacama, the company's main asset and source of lithium, has a concession ending in 2030, but a renewal is not in Goldman's base case expectation. Those uncertainties have been bolstered by plans from Chile to nationalize the country's lithium resources, he said. The company could also see limited production growth compared with peers after 2024. That relatively small growth expectation, paired with the forecast of oversupply, can signal a potential decline in free cash flow, Farid said. He said declining prices should be partially offset by growth in production, strength in other businesses and lower costs related to royalties and taxes. Despite these reasons for optimism, Farid said EBITDA and free cash flow should both struggle in the coming years as a result of the challenges around pricing and supply. The stock has lost about 8.8% so far this year. — CNBC's Michael Bloom contributed to this report.