Albemarle's Materially Undervalued
We think the oversupply causing lower lithium prices is temporary.
Albemarle (ALB) reported solid second-quarter results against a backdrop of falling lithium prices. Lithium adjusted EBITDA was flat year on year, and the company’s realized prices increased 2% as Albemarle sells lithium on long-term contracts, which insulates it from short-term price fluctuations. Management also outlined its revised strategy to increase its lithium capacity post-2021. Previously, Albemarle had focused on building new downstream hard rock conversion assets in Australia, which have a high capital intensity.
However, the company now plans to either acquire existing conversion assets or build lower-cost brownfield expansions at its existing sites. Although this will delay Albemarle’s lithium production growth until after 2021, we are in favor of the move as it greatly reduces the capital intensity of the capacity expansions. Having updated our model to reflect these changes, we maintain our $130 fair value estimate for Albemarle as the delayed lithium production is offset by lower capital expenditures. Our narrow moat rating is also intact. With the shares trading in 5-star territory, we continue to view Albemarle as materially undervalued.
Seth Goldstein does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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