Albemarle Stock Plunges on Big Share Issuance. Is It a Buy?

This story has been updated to reflect the terms of the share offering and Wednesday’s stock price swing.

Key Morningstar Metrics for Albemarle

• Fair Value Estimate: 275.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

Just as Albemarle’s ALB stock price was beginning to rebound from a steep 2023 decline, news of a big round of share issuances sent shares of the lithium producer down by nearly 18% before rebounding from the worst of the stock’s losses.

Albemarle surprised investors late Tuesday by announcing plans to issue up to $2.01 billion worth of convertible preferred stock. “This was unexpected news, as we view Albemarle’s balance sheet as healthy,” says Seth Goldstein, equities strategist at Morningstar.

Before the announcement, Albemarle’s stock had been showing signs of recovery after hitting its lowest level in roughly three and a half years. With sentiment battered by concerns about falling lithium prices, the stock was just under $109 per share on Feb. 5, down from an all-time high of $325 in November 2022. Over the past month, the stock had been moving higher, hitting $142.80 last Friday. However, Tuesday’s news sent the stock down more than 17.9% during the day’s trading. Albemarle finished the day at $109.40. On Wednesday, the stock bounced 9.3%.

When announcing the big share sale, Albemarle said the proceeds are intended for general corporate purposes, including “funding growth capital expenditures, such as the construction and expansion of lithium operations in Australia and China that are significantly progressed or near completion, and repaying the company’s outstanding commercial paper.”

Goldstein points to Albemarle’s 1.1 times net debt/adjusted EBITDA ratio at the end of 2023 as a sign of its strong balance sheet. He notes that this is well below the firm’s long-term target of 2.0-2.5 times.

Terms of the Albemarle Share Offering

“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,” Goldstein says. “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.”

“We view the issuance as highly dilutive to current common equity shareholders. Having updated our model to incorporate the preferred equity issuance, our Albemarle fair value estimate falls to $275,” he says. Previously the fair value estimate had been set at $300.00.

“At current prices, we view Albemarle shares as materially undervalued, with the stock trading in 5-star territory and less than 45% of our updated fair value estimate. Accordingly, we see strong upside to the current share price. With the share issuance now included in the market valuation, we see rising lithium prices as a strong catalyst for shares going forward. Accordingly, Albemarle remains one of our top lithium picks for investors.,” Goldstein says.

The preferred shares will trade under the symbol “ALB PR A.” The preferred shares will carry a 7.25% annual dividend.

The following are highlights of Goldstein’s current outlook for Albemarle and its stock. The full report and more of his coverage of Albemarle are available here.

Fair Value Estimate for Albemarle

With its 5-star rating, we believe Albemarle’s stock is significantly undervalued compared with our long-term fair value estimate of $275.00.

The bulk of the company’s growth will come from lithium. We expect contract lithium prices to rise in 2024. Lithium carbonate spot prices, which tend to be a leading indicator of contract prices, are currently around $13,500 per metric ton (based on published indexes), down from $75,000 at the end of 2022, due to slowing lithium purchases as a result of inventory destocking. However, as demand growth remains strong and outpaces supply, we expect prices will stabilize in the first half of 2024 and rise in the second half of the year.

In the longer term, we expect lithium prices will remain well above our long-term forecast for lithium carbonate at $12,000 per metric ton through the rest of the decade. Based on our price elasticity analysis, we forecast index prices will average a little over $25,000 per metric ton for the remainder of the decade. We expect high-quality lithium hydroxide, which is used in long-range batteries, will continue to sell at a premium to carbonate, reflecting higher conversion costs.

Our price prediction is based on our forecast for the marginal cost of lithium production on an all-in-sustaining cost basis. We expect lithium demand to grow nearly 20% annually, from around 800,000 metric tons in 2022 to over 2.5 million metric tons by 2030. By then, roughly 95% of lithium demand will come from batteries that require high-quality lithium with few impurities. To meet demand, higher-cost supply will need to come online from lower-quality resources that will require higher processing costs.

Read more about Morningstar’s fair value estimate for Albemarle stock.

Economic Moat Rating

We award Albemarle a narrow moat based on its strong and durable cost advantage in lithium and bromine production. Globally, lithium carbonate is produced from either lower-cost evaporation of brine or higher-cost mining of spodumene minerals. Albemarle has a cost advantage in lithium carbonate production due to its lucrative brine assets in the Salar de Atacama in Chile, which produces lithium at the lowest cost globally, excluding royalties. Albemarle has a long-term contract through 2043 with the Chilean government to extract around 80,000 metric tons of lithium per year.

Two factors make the Salar de Atacama the lowest-cost source of lithium in the world: dry conditions and high lithium concentration. It’s one of the driest places in the world and the largest salt flat in Chile, with an extremely high evaporation rate and low rainfall. Snow from the Andes Mountains melts and flows underground into pools of brine, which have the highest concentration of lithium globally. This high concentration makes the company one of the lowest-cost lithium producers even among brine-based producers. The company pumps the brine above ground into a network of large evaporation ponds. Water evaporates from the ponds over approximately 18 months, leaving behind concentrated lithium brine, which is then processed into lithium derivatives, including lithium carbonate and lithium hydroxide for batteries. Albemarle has a long-term contract through 2043 with the Chilean government to extract around 80,000 metric tons of lithium per year.

Read more about Albemarle’s moat rating.

Risk and Uncertainty

We assign Albemarle a High Uncertainty Rating. The firm’s biggest risk comes from volatile lithium prices. Prices could decline if EV demand grows slower than expected, or if new low-cost supply ramps up quicker than demand. New batteries, such as sodium-ion, could overtake lithium as the preferred energy storage resource.

Lithium production could ramp up more quickly than demand warrants if producers bring too much supply to the market. Further, new lithium production technologies could alter the cost curve in carbonate and hydroxide. Albemarle faces execution risk in ramping up its lithium production, which includes production delays and cost overruns.

Albemarle is also subject to political risk, especially in Chile. Under President Gabriel Boric’s announced plan to nationalize lithium, the Chilean government would own a majority stake in all projects. If this occurs, Albemarle could be forced to sell a 51% stake to the Chilean government at a price as low as asset book value to extend its lease when it expires in 2043.

Read more about Albemarle’s risk and uncertainty.

ALB Bulls Say

• Albemarle has top-tier lithium assets through its brine operations in Chile and spodumene hard-rock operations in Western Australia, which are among the lowest-cost sources of lithium production globally.
• Lithium prices should remain well above the marginal cost of production through at least the remainder of the decade, leading to excess profits and return on invested capital for Albemarle.
• Albemarle has low-cost bromine production through its highly concentrated brines in the Dead Sea and Arkansas.

ALB Bears Say

• Lithium prices will fall if new supply comes online faster than demand, which will weigh on profitability. Albemarle’s plans to increase its lithium production capacity will prove value-destructive in the wake of lower prices.
• Albemarle’s bromine business will decline from weak demand for flame retardants as consumers shift from computers to less bromine-intensive tablets and smartphones.
• Chile’s plan to nationalize lithium could result in Albemarle being forced to sell a majority stake to the government at a price around asset book value, destroying shareholder value.