Albemarle: Looking Attractive Here

In March of this year, I concluded that I was warming up to the shares of Albemarle (NYSE:ALB), a premier lithium play - in this premium article. This came as the company enjoyed a boom in lithium prices, accelerating Albemarle´s transition to become a pure play on lithium.

While lithium prices were cut in half, they were still up massively based on a historical perspective, making Albemarle very profitable and able to fund its aggressive capital spending plans.

Despite the cyclical element, there was a huge secular growth element as well, making me cautiously upbeat.

Lithium

While Albemarle has been seen as the play on lithium, the company (certainly a few years ago) only relied on lithium for a relative smaller part of the business. With roots going back to the 19th century, the company generated $3.2 billion in sales in the year 2020 on which EBITDA of $852 million was reported, for margins around 25% of sales. Net earnings of $364 million worked down to an earnings number of around $5 per share.

Albemarle was seen as the key player in the upcoming EV revolution, although that the company has seen very depressed free cash flow metrics while it was building up this business. In the meantime, the company still had large non-lithium businesses as well.

For the year 2019, the lithium business made up 37% of sales, as these activities were complemented by a bromine specialty business (responsible for a third of sales) and the Catalyst segment. The company torched along a $2.8 billion net debt load, with EBITDA only coming in at $800 million as net capital investments of $600 million at the time were substantial, essentially eating all the earnings.

The promise of the lithium business made that a $10 stock in the 2000s boomed at $140 in 2017, as lithium prices rose to $150k per tonne. Shares fell to the $100 mark in 2020 with lithium prices down to $50k per tonne at the time. Shares rallied post the pandemic to a high above the $300 mark late in 2022 mostly as lithium prices jumped to levels as high as $600k per tonne!

These lithium prices drove spectacular results. While 2021 revenues rose in a very modest fashion, with sales up to $3.3 billion and EBITDA improving to $870 million, the share of the lithium business grew to 40%. For 2022, the company guided for sales to rise to $4.2-$4.5 billion, but the rising lithium prices provided a huge boost to the numbers.

In the end, the company ended up generating $7.3 billion in sales last year with operating profits tripling to $2.4 billion, with earnings reported at $22 per share. Moreover, based on the fourth quarter numbers, the business was posting sales in excess of $10 billion per annum and earnings around $3 billion.

These huge earnings are welcomed, allow the business to fund continued capital spending plans as the company actually guided for 2023 sales between $11.3 and $12.9 billion, with EBITDA seen as high as $4.2-$5.1 billion as the non-lithium businesses are now overshadowed by the lithium business.

Important to understand: the 2023 guidance was based on 30-40% volume growth, although that there were concerns on lithium prices which fell to the $300k per tonne mark in March. In fact, lithium prices fell below the $200k per tonne mark in April, although they have returned to more than $300k by now again.

With net debt of $1.7 billion by year end 2022, the firm was on a solid financial footing with capital spending seen at $1.8 billion in 2023, roughly five times the depreciation cost of $340 million. With earnings power of $30 per share translating into a mere 7 times earnings multiple, there were very real risks to the 2023 guidance, and competition might be invited as well, while the car market was set to soften a bit as well. That said, the long term demand outlook for the industry made me upbeat.

What Now?

Since March, shares have been trading flattish at $220, even as shares dipped to the $170s in April when lithium prices fell to their lowest points.

In March the company announced a $3.4 billion deal to acquire Australian-based Liontown Resources, granting the business a massive 63% premium to the unaffected share price in order to secure more supply over time.

The company was confident to pursue this deal as it posted solid first quarter results early in May, although softer than expected given the recent lithium price dynamics. First quarter sales rose by 129% to $2.58 billion, as the run rate in terms of sales, falls short of the full year guidance, driven by softer pricing. The company posted an operating earnings number of $1.1 billion, with net earnings of $1.2 billion coming in even stronger due to equity in net income of unconsolidated investments, with earnings reported at $10.51 per share, largely in line with adjusted earnings per share.

Net debt of $1.6 billion was rather flat, as the Liontown deal would increase pro forma net debt to $5 billion, still manageable, as substantial net capital investments remain. Amidst lower pricing, full year sales are now seen at $9.8-$11.5 billion, with EBITDA now seen between $3.3 and $4.0 billion, translating into earnings between $21 and $26 per share. Given the recent price trends, I really think that despite the lowered guidance following the release of the first quarter results, there are upside ¨risks¨ to the full year guidance here.

In May, the company announced a massive deal with Ford (F) as well with Albemarle set to supply 100,000 metric tons of battery-grade lithium hydroxide in the latter 2020s, translates into $30 billion contract at prevailing lithium spot prices. That is important, and based on a 5-year contract, the deal will be responsible for about $6 billion in annual sales, equal to about 50% of current sales, although likely far less at that point in time.

With the deal sufficient to produce about 3 million e-vehicles, according to the press release, that indicates that each vehicle will require about 33 kilograms of lithium to go into production. Based on a prevailing spot price of $300k per tonne, that suggests each car carries about $10k in lithium, a huge expense of course. The same logic indicates unless efficiency of batteries will improve greatly, is that the fixed cost component is large and a reason why there might be a cap on lithium prices as well, before killing demand (unless subsidies distort a level playing field (even more)).

Given all these trends and with some near term sequential profit decline priced in, I remain very upbeat on the shares here. Of course price and competitive risks remain, but in my view the largest risk might be geopolitical (think of legislation/confiscation moves). This became very much evident in the recent woes around Chile of course, hence a deal with Liontown (boosting exposure to Australia) might be key as well.

Despite some concerns on this front, I am impressed with the continued earnings power here and even as net debt ticked up a bit, leverage is no concern here. In fact, the door will be open for increased dividend payouts at this rate to come, on top of the organic growth reported here, making me still upbeat on Albemarle here.

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