Company Reports

The US on May 13, 2024, announced a series of new tariffs on Chinese imports. These include a 100% tariff on electric vehicles and a 25% tariff on lithium-ion batteries and battery parts. There was also a 25% tariff on critical minerals, which include graphite, permanent magnets, and cobalt.

Albemarle's first-quarter results reflected cyclically low lithium prices combined with temporarily high unit production costs. As a result, adjusted EBITDA fell 83% versus the prior-year quarter. Our views for lithium prices to rise in 2024 along with our confidence in Albemarle's ability to reduce its unit production costs throughout the year are unchanged. Having updated our model to incorporate Albemarle's first-quarter results, we maintain our $275 fair value estimate. Our narrow moat rating is also unchanged.

Albemarle is one of the world's largest producers of lithium, which generates the majority of total profits. It produces lithium through its own salt brine assets in Chile and the United States and two joint venture interests in Australian mines, Talison (Greenbushes) and Wodgina. The Chilean operation is among the world's lowest-cost sources of lithium. Talison is one of the best spodumene resources in the world, which allows Albemarle to be one of the lowest-cost lithium hydroxide producers as spodumene can be converted directly into hydroxide. Wodgina is another high-quality spodumene asset that provides Albemarle with a third low-cost resource, though not as high quality as Talison's. Albemarle also owns resources in the US and Argentina that are still in the early development phase, which should allow it to boost its lithium volumes through the development of new projects.

On April 29, lithium stocks rallied on the news of China's recently issued automobile subsidy. Consumers who trade in an older vehicle and buy a new vehicle that meets energy-saving requirements, including electric vehicles, can get a subsidy of up to CNY 10,000 (about $1,381) to reduce the purchase price through the end of 2024.

Albemarle announced the pricing and adjusted size of its mandatory preferred equity share issuance. The company will now issue up to $2.3 billion in preferred equity, including underwriter share options, up from prior plans of just over $2 billion. The shares will convert into between 7.618 and 9.14 common equity shares in March 2027, based on Albemarle's common equity stock price at the time.

Albemarle is one of the world's largest producers of lithium, which generates the majority of total profits. It produces lithium through its own salt brine assets in Chile and the United States and two joint venture interests in Australian mines, Talison (Greenbushes) and Wodgina. The Chilean operation is among the world's lowest-cost sources of lithium. Talison is one of the best spodumene resources in the world, which allows Albemarle to be one of the lowest-cost lithium hydroxide producers as spodumene can be converted directly into hydroxide. Wodgina is another high-quality spodumene asset that provides Albemarle with a third low-cost resource, though not as high quality as Talison's. Albemarle also owns resources in the U.S. and Argentina that are still in the early development phase, which should allow it to boost its lithium volumes through the development of new projects.

Albemarle announced a proposed public offering of depository shares, with each share representing one twentieth of a mandatory convertible preferred share that will convert to common equity. The total offering size is a little over $2 billion, including a share grant to the underwriters. The company plans to use the proceeds to help fund capital expenditures and repay short-term debt. This was unexpected news, as we view Albemarle's balance sheet as healthy, with a 1.1 times net debt/ adjusted EBITDA ratio at the end of 2023.

Albemarle's fourth-quarter earnings confirmed our view that the company is focusing on free cash flow generation over lithium volume growth amid the decline in lithium prices. As the company cuts operating expenses, this should support profits amid lower lithium prices. As Albemarle plans to cut capital expenditures and optimize working capital, this should support higher cash flow generation in 2024. Management's market commentary also confirms our view that growing demand and slowing supply will lead to prices rising in 2024. Having updated our model to incorporate fourth-quarter results, we maintain our $300 per share fair value estimate. Our narrow moat rating is also unchanged.

Albemarle is one of the world's largest producers of lithium, which generates the majority of total profits. It produces lithium through its own salt brine assets in Chile and the United States and two joint venture interests in Australian mines, Talison (Greenbushes) and Wodgina. The Chilean operation is among the world's lowest-cost sources of lithium. Talison is one of the best spodumene resources in the world, which allows Albemarle to be one of the lowest-cost lithium hydroxide producers as spodumene can be converted directly into hydroxide. Wodgina is another high-quality spodumene asset that provides Albemarle with a third low-cost resource, though not as high quality as Talison's. Albemarle also owns resources in the U.S. and Argentina that are still in the early development phase, which should allow it to boost its lithium volumes through the development of new projects.

Lithium spot prices fell over 80% in 2023. As prices reached all-time highs in 2022, new, higher-cost supply brought the market to balance, sending prices plummeting. Bears say oversupply conditions will occur in 2024 amid rising supply and slowing demand as battery electric vehicle, or EV, sales falter.

Albemarle announced a plan to change its focus in 2024. The company will now prioritize free cash flow generation over pursuing lithium volume growth as quickly as possible. As a result, Albemarle will reduce capital expenditures and operating expenses amid lower lithium prices.

Albemarle is one of the world's largest producers of lithium, which generates the majority of total profits. It produces lithium through its own salt brine assets in Chile and the United States and two joint venture interests in Australian mines, Talison (Greenbushes) and Wodgina. The Chilean operation is among the world's lowest-cost sources of lithium. Talison is one of the best spodumene resources in the world, which allows Albemarle to be one of the lowest-cost lithium hydroxide producers as spodumene can be converted directly into hydroxide. Wodgina is another high-quality spodumene asset that provides Albemarle with a third low-cost resource, though not as high quality as Talison's. Albemarle also owns resources in the U.S. and Argentina that are still in the early development phase, which should allow it to boost its lithium volumes through the development of new projects.

Lithium producer stocks fell on ExxonMobil's announcement that the company is planning to enter the lithium production industry through the development of a lithium project in the U.S. state of Arkansas. While Exxon provided little details on its plans, the company said it aims to begin lithium production in 2027 and produce around 100,000 tons per year by 2030.

On Nov. 6, shares of lithium producers Albemarle, Livent, and SQM fell on a broker downgrade. After reviewing the note, we see no reason to change our fair value estimates for the three narrow-moat companies. At current prices, we view all three lithium producers as materially undervalued relative to our base-case fair value estimates. Albemarle and Livent both trade at roughly 40% of our $300 and $38 fair value estimates, respectively, and in 5-star territory. SQM trades at a little less than 50% of our $95 per share fair value estimate. Along with Lithium Americas and Lithium Argentina, we view these five stocks as the most undervalued among our specialty chemicals coverage.

Albemarle's third-quarter results and management's updated guidance reflected the decline in lithium spot prices that will weigh on near-term profits. In response, management said it will review the company's lithium growth investments with a goal to preserve financial flexibility. We think the likely outcome will be Albemarle slowing its lithium capacity investment, which is in line with how the company has historically operated during a lithium price downturn.

Albemarle is one of the world's largest producers of lithium, which generates the majority of total profits. It produces lithium through its own salt brine assets in Chile and the United States and two joint venture interests in Australian mines, Talison (Greenbushes) and Wodgina. The Chilean operation is among the world's lowest-cost sources of lithium. Talison is one of the best spodumene resources in the world, which allows Albemarle to be one of the lowest-cost lithium hydroxide producers as spodumene can be converted directly into hydroxide. Wodgina is another high-quality spodumene asset that provides Albemarle with a third low-cost resource, though not as high quality as Talison's. Albemarle also owns resources in the U.S. and Argentina that are still in the early development phase, which should allow it to boost its lithium volumes through the development of new projects.

On Oct. 18, lithium stocks plummeted following a sell-side broker's downgrade for Albemarle and SQM. The downgrade is due to the outlook that the lithium market will move into a supply surplus in 2024 and 2025, leading to lower lithium prices. We disagree and continue to forecast a price rebound as strong demand growth outpaces supply leading to a supply deficit in 2024.

Albemarle announced it would walk away from a previously announced acquisition of Liontown Resources following the end of the company's due diligence period. We thought the deal made strategic sense for Albemarle as it would have provided a third high-quality lithium hard rock resource. However, the company’s all-cash offer price of AUD 3 per share was a fair price, resulting in neither value creation nor value destruction from the acquisition. Accordingly, we maintain our $350 per-share fair value estimate for Albemarle following the company's decision not to pursue the deal. Our narrow moat rating is also unchanged.

Albemarle is one of the world's largest lithium producers, which generates the majority of total profits. It produces lithium through its own salt brine assets in Chile and the United States and two joint venture interests in Australian mines, Talison (Greenbushes) and Wodgina. The Chilean operation is among the world's lowest-cost sources of lithium. Talison is one of the best spodumene resources in the world, which allows Albemarle to be one of the lowest-cost lithium hydroxide producers as spodumene can be converted directly into hydroxide. Wodgina is another high-quality spodumene asset that provides Albemarle with a third low-cost resource, though not as high quality as Talison's. Albemarle also owns resources in the U.S. and Argentina that are still in the early development phase, which should allow the company to boost its lithium volumes through the development of new projects.

In 2022, battery electric vehicles represented nearly 10% of global auto sales, up from a little less than 6% in 2021. Much of the growth occurred in China, which has been a leader in EV sales over the past decade. However, with national EV subsidies in China expiring in 2022 and far lower sales in the U.S. and Europe, the market questions if EV sales can continue to grow without subsides.