3 Bargain Commodity Stocks to Ride the Wave of Global Energy Transition

The global focus on green energy does not mean that only renewable energy companies will benefit. There are several associated industries that are critical for a smooth and sustained global energy transition. According to the International Monetary Fund, the “energy transition requires substantial amounts of metals such as copper, nickel, cobalt and lithium.” Therefore, commodity stocks are a key investment theme in the coming years.

It’s worth noting that large supply gaps for lithium, nickel, graphite, cobalt, neodymium and copper are expected. Caused by a lack of investments and coupled with accelerating demand, this could translate into higher prices.

Therefore, industrial commodity companies are positioned to benefit from higher demand coupled with better price realization. As cash flow swells, there will be headroom to create shareholder value through dividends and share repurchase. Without doubt, it’s a good time to accumulate some of the best bargain commodity stocks.
Let’s discuss three commodity stocks to buy for multibagger returns until 2030.

Albemarle (ALB)

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Albemarle (NYSE:ALB) stock has been in a downtrend year-to-date. I see the correction as a golden opportunity to accumulate with ALB stock trading at an attractive forward price-earnings ratio of 6.

For 2023, Albemarle has guided for revenue growth of 50% on a year-on-year basis to $11 billion (mid-range of guidance). Due to decline in lithium price, adjusted EBITDA margin is likely to contract by 1,000 basis points to 37%. However, this factor is discounted in the stock. Further, the long-term outlook for lithium is positive, considering the demand-supply gap.

It’s important to note that Albemarle reported a lithium conversion capacity of 200 kpa as of 2022. The corporation expects to increase capacity to 550 ktpa by 2027. With tripling of capacity, revenue and cash flow growth is likely to be robust.

I must also add that Albemarle has an investment grade balance sheet. Even with the proposed acquisition of Liontown Resources (OTCMKTS:LINRF), credit metrics are likely to remain strong. This will support the company’s organic expansion plans and dividend growth.

Rio Tinto (RIO)

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Rio Tinto (NYSE:RIO) stock has been in an extended period of consolidation. A breakout on the upside seems likely for this undervalued commodity stock. RIO stock also offers an attractive dividend yield of 5.7% and dividends are sustainable.

An important point to note is that even with weakness in commodity price, Rio Tinto reported free cash flow of $3.8 billion for the first half of 2023. With an investment grade balance sheet and robust cash flows, Rio is positioned to make aggressive investments. For 2024 and 2025, Rio has guided for annual capital investment of $10 billion.

Specific to transition metals, Rio is investing in copper, aluminum, titanium and lithium, among others. With the investment in the Jadar lithium project, the company will be the largest supplier of lithium to Europe in the next 15 years. Of course, the iron ore segment will remain the cash flow driver.

Freeport-McMoRan (FCX)

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Freeport-McMoRan (NYSE:FCX) stock has remained sideways year-to-date. The decline in copper price is a concern, but the long-term outlook for the metal remains strong.

To put things into perspective, it’s expected that an investment of $250 billion will be needed by 2030 to meet the heightened demand for copper. However, high financing cost is a headwind to investments and it’s likely that copper will trend higher on potential widening of the demand-supply gap.

Freeport-McMoRan is well positioned to benefit with the company having strong fundamentals. For Q2 2023, Freeport reported operating cash flow of $1.7 billion. Even with weak copper prices, the company has an annualized OCF visibility of $7 billion. While the company expects stable production through 2025, higher realized prices will positively impact cash flows.

It’s also worth noting that the company’s net-debt-to-adjusted-EBITDA is currently at 0.9. This provides flexibility to advance the organic project pipeline and ensure production growth beyond 2025.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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