Is Albemarle Stock a Buy After Earnings?

Albemarle released its second-quarter earnings report on July 31. Here’s Morningstar’s take on Albemarle’s earnings and stock.

Key Morningstar Metrics for Albemarle

• Fair Value Estimate: $225.00
• Morningstar Rating: 5 stars
• Economic Moat: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Albemarle’s Q2 Earnings

• Lithium prices: Based on Albemarle’s energy storage volumes, we estimate its prices during the second quarter were just under $15,700 per metric ton. This was above index prices, which averaged just under $14,000. This shows Albemarle’s contracts, which are supposed to fall less than index prices in a falling price environment, are somewhat working.
• Lithium unit costs: We estimate the firm’s lithium unit production costs averaged a little over $10,300 per metric ton during the quarter. This is well above where we think its lithium production should be, and we expect costs will fall in the coming years as new projects are ramped up and the company looks to cut operating costs.
• Lithium growth plans: Albemarle announced it would focus on ramping up only the first phase of the Kemerton lithium hydroxide refining plant, while placing the second phase into care and maintenance and canceling the third phase due to low lithium prices. We expect the company will essentially stop all growth going forward as it looks to slash capital expenditures amid cyclically low lithium prices.
• We reduced our fair value estimate to $225 per share from $275 following Albemarle’s earnings on lower near-term lithium prices and lower long-term volumes amid growth project cuts. However, at current prices, we view shares as materially undervalued. We believe lithium prices are at cyclically low levels. While the downturn could last for several quarters, we think demand will continue to grow and supply growth will rapidly slow through the rest of the year, leading the market to return to balance and eventually move into undersupply in 2025, which will support higher prices.

Fair Value Estimate for Albemarle

We’re reducing our fair value estimate to $225 per share from $275 following Albemarle’s second-quarter results. We assume roughly a 10% weighted average cost of capital. We use a multiple of 11.5 times midcycle EBITDA to value free cash flows generated beyond our 10-year explicit forecast horizon.

Lithium will remain Albemarle’s largest business. We expect lithium prices will remain at cyclically low levels in 2024. Lithium carbonate spot prices, which tend to be a leading indicator of contract prices, are currently around $12,700 per metric ton (based on published indexes), down from $75,000 at the end of 2022. Prices fell due to slowing lithium purchases after inventory destocking. However, as demand growth remains strong, we expect prices will rise in 2025.

Read more about Albemarle’s fair value estimate.

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 brine evaporation 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. The firm’s advantaged position in bromine comes from its low-cost and long-lived assets in the Dead Sea and Arkansas. Production costs are largely determined by concentration, as higher concentration means less water needs to be evaporated to produce bromine from brine.

Read more about Albemarle’s economic moat.

Financial Strength

Albemarle’s second-quarter results reflected the lithium price decline, as companywide adjusted EBITDA plummeted 70% versus the prior-year quarter. Management announced further capital expenditure reductions and cost-cutting initiatives. Most notably, the company signaled it would place phase two of the Kemerton lithium hydroxide processing facility into care and maintenance and stop work on phase three. Management also signaled it will reduce its unit production costs to boost profits in the wake of lower lithium prices and cut capital expenditure further in 2025 and beyond.

Read more about Albemarle’s financial strength.

Risk and Uncertainty

We assign Albemarle a Very High Morningstar Uncertainty Rating. The company’s biggest risk is volatile lithium prices. Prices could decline if EV demand grows more slowly than expected or 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. In 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 50.1% 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, 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 could fall and remain lower for longer as new supply growth outpaces demand, weighing on profitability. Albemarle’s plans to increase its lithium production capacity would 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.

This article was compiled by Leah Breakstone.