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Albemarle: Lithium Market Has Changed My Ratings

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Investment Thesis

Albemarle Corp. (NYSE:ALB) gained 15% in the previous 52 weeks but lost 18.5% YTD, underperforming the market, despite almost a sixfold surge in the global lithium prices during 2021 and almost 67% YTD.

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Trading Economics

My last sell rating for ALB was predominated by overly optimistic management estimates, significant insider selling, and overvaluation. Since then, the stock has been down almost 30%. However, some dynamics have also vigorously changed, shedding a positive light on the business.

The company’s revenue stream shares for the Lithium, Bromine, and Catalysts segments currently stand at 42%, 35%, and 23%, respectively. With the lithium market at the front seat of its future growth, the bullish sentiment on the industry is expected to reflect on the company’s stock.

Lithium Demand Growing With The EV Market

In 2021, worldwide lithium production, excluding the U.S, was about 100,000 tons, up from 82,500 in 2020, primarily due to the strong demand from the lithium-ion battery market and increased lithium prices. Roskill reports that global lithium demand is expected to remain strong, growing at a CAGR of 19.7% by 2030, with 75% of the total demand accounted for by automotive batteries.

Reportedly, the market for lithium related to battery applications has grown with a CAGR of 22% and is expected to grow at 20% per year by 2028, as EV sales surge to over 25 million units by that time. Andrew Miller, COO of Benchmark Mineral Intelligence, estimates that to meet its global climate goals by 2040, the world will require 17 times more lithium than its current production.

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Roskill and Benchmark predict the lithium supply and demand are on the rise with no signs of slowing down and possible supply shortages by the end of the decade.

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Albemarle

Lithium prices have strongly risen during the previous year due to strong demand but showed a decline in April because of the recent surge in Chinese production with a 41% supply increase in March and 42% YTD.

However, because of high fossil fuel prices and increasing EV demand, lithium prices are expected to continue with a strong trajectory.

Trading Economics

The Only Li Producing Mine In North America

The majority of the lithium production in the world is accounted for by mineral operations in Australia, Argentina, Chile, and China. Accordingly, China has outpaced the U.S in the lithium market by a wide margin, and the Biden administration has responded by deeming it a matter of urgency and national security.

According to Bloomberg, the government is contemplating adding battery materials, including lithium, to the list of items covered by the 1950 Defense Production, offering a $750 million investment vehicle for expanding the existing mine operations and conducting feasibility studies. According to Lithium Americas‘ (LAC) CEO Jonathan Evans, the administration offers 25-year treasury rate loans funding the mine’s construction project for 50 to 60% of its cost.

Albemarle’s Silver Peak site is the only lithium-producing mine in North America, producing about 1% of the global output, i.e., less than 20% of Tesla Gigafactory’s (TSLA) annual requirement. The company plans to double its production at the Silver Peak site during the next five years.

American Lithium Corporation’s (OTCQB:LIACF) TLC site’s Preliminary Economic Assessment (PEA) report has yet to be completed, evaluating the project’s capacity and product grades and determining its economic viability. The report is expected to be completed in Q2 2022. The TLC site is located near another competing project, the Australian company, Ioneer’s (INR) Rhyolite Ridge, a lithium-boron mine that could start production in 2024.

Lithium Americas will eventually become one of the company’s major concerns with its Thacker Pass site, the largest known lithium deposit in the US and one of the largest in the world. The site is currently undergoing disputes, and the exact timeline is still questionable.

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With a government that supports the growth of the lithium market, high commodity prices, increasing demand, and a strong competitive moat, the company’s prospects within its primary industry appear to be positive.

What’s Changed Since November?

In 2019 and 2020, low lithium prices forced the company to halt several operations and expansions. Still, the general market rebound and the commodity price surge in 2021 negated that effect, and Albemarle is now re-establishing its expansion strategy.

ALB’s plans to expand its Chilean site, Salar de Atacama, to increase its output from 60 to 80 thousand tonnes to 140,000 tonnes was recently approved by the Chilean government, triggering a possible $1 billion investment over the next 5 years.

The company’s La Negra site achieved its first production in October 2021 and is currently in commercial qualification, with first sales expected in the first half of 2022. Additionally, its Kemerton 1 and 2 sites are expected to generate their first revenue in the second half of 2022 and 2023, respectively, adding to the 20% to 30% volume growth expected in the current year.

In terms of a longer-term outlook, Albemarle expects to double its production at the Silver Peak site by 2025 with an investment of $30 to $50 million. So by the time the company starts facing direct geological competition from producing mines in the vicinity, it will be in a much strong position than today.

Given the strong geopolitical tensions, the company’s Chinese projects are also in the works, but I wouldn’t bank too much on its guided timelines. The projects still hold an upside, given that China is a supply chain behemoth, but the uncertain timeline and CCP’s unreliability are a significant risk.

It was too early for the company to be overly optimistic about these plans during my previous analysis, which spiraled the stock towards an all-time high price tag. However, after a 30% share value decline, a strong economic rebound, visible progress, and a quantifiable expected performance jump in 2022 on the back of a substantial price surge coupled with the volume growth, I expect the company to outperform its guidance numbers for 2022.

Much Better Valuations Than Before!

Because of the relatively depressed year, based on the current TTM valuation metrics, the company will still appear to be overvalued. Currently, I find it more pertinent to value ABL based on its forward metrics because of its newfound propensity for growth during the year and its likeliness of achieving these targets.

The significant ramped up 2022 EPS guidance of $6.15 at the midpoint is a substantial improvement from the $1.06 earned in 2021. Given that the soaring prices are not likely to come down anytime soon, the hike can be reasonably relied upon to continue in the foreseeable future. This brings the forward EPS to a multiple of 31.3x, almost 150% higher than the industry median but in line with its 5-year average.

This high EPS directly correlates to a 30% expected topline growth to $4.35 billion at the midpoint, bringing the PS value down to a more digestible 5.12. However, it should be noted that the valuation multiples are still obnoxiously higher than the industry median, just lower than its previously set highs.

Given a growth rate of 20% for the first 10 years and 10% for the rest of the timeline with a WACC of 7% and a terminal growth rate of 2%, the stock seems to be fairly valued with a downside of less than 5%, which can be reasonably attributed to a margin of error.

The growth assumptions have been taken in line with the company’s current high growth trajectory, with the EPS growth expected at a CAGR of 25% for the next 3 to 5 years.

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Conclusion

The stock might still seem overvalued for conservative investors based on the price ratios. Still, I consider this valuation reasonable for the stock in question because of the positive lithium market outlook. The company’s previously made comments that spiraled the stock price upward appear to bear fruit in the current year and will also play a prominent role in establishing the company’s growth profile, positively reflected in the stock.

With the lithium market now a matter of significant national interest, intense competition is looming around the company’s sites, with significant competitor advancements expected within the decade. As a first-comer, Albemarle will likely expedite and expand its operations to fortify itself against the expected industrial developments of its competitors.

In aggregate, the current year’s stock performance will be heavily influenced by the company’s progress in its expansion endeavors, its financial performance as opposed to the general market, and competitor developments. In light of all this, I expect the stock to do well during the year, with a strong upside for long-term investors.