Albemarle (NYSE: ALB) recently reported robust fourth-quarter 2017 results, capping off a strong year. The world’s largest lithium producer’s quarterly revenue jumped 23% and adjusted earnings per share (EPS) soared 72% year over year, breezing by Wall Street’s bottom-line expectation. For the year, revenue and adjusted EPS grew 15% and 29%, respectively.
The North Carolina-based diversified specialty chemical company’s white-hot lithium business continues to drive growth, though its other businesses also performed solidly. Lithium prices and sales volumes continued to rise, thanks to booming demand for the silvery-white mineral to make the rechargeable lithium-ion batteries that power electric vehicles (EVs).
Lithium stocks soared in 2016 and 2017 , though have pulled back in 2018 due to concerns among some market participants about an oversupply situation arising, possibly starting as soon as next year. The major players — including Albemarle, Sociedad Quimica y Minera de Chile , or SQM, and FMC Corp. — are ramping up production at their existing mining sites and are in various stages of bringing new lithium sources on line, and numerous junior miners are exploring the viability of mining the “white petroleum,” with a couple of them already producing some lithium.
Below are six key things investors should know from Albemarle’s Q4 earnings call (transcript via Seeking Alpha).
A salt flat where lithium is extracted from brine. Image source: Getty Images.
For reference, here’s a snapshot of Albemarle’s Q4 2017 lithium business results.
Lithium Revenue Growth (YOY)*
Lithium Revenue as a % of Total Revenue
Lithium EBITDA Growth (YOY)*
Lithium EBITDA as a % of Total Segment EBITDA**
* YOY = year over year. **Albemarle uses EBITDA (earnings before interest, taxes, depreciation, and amortization) as its measure of segment profitability.
1. Wave 1 of lithium production capacity expansion is on track
From CEO Luke Kissam’s remarks:
With respect to our Wave 1 expansion plans, we remain on schedule and currently expect capital spending to be over $1 billion between now and 2021, with about half of that spend in 2018 alone. Projects in this wave include La Negra 3, a 40,000-metric ton [lithium] carbonate expansion in Chile; Xinyu 2, a 20,000-metric ton [lithium] hydroxide expansion in China; and a greenfield conversion plant in Western Australia. The first phase of this greenfield site will initially have 40,000 metric tons of conversion capacities, so we will build an infrastructure that is scalable for significant expansion.
Once the projects in its first phase of planned expansions come on line, the company’s annual production capacity will be 165,000 lithium carbonate-equivalent (LCE) metric tons. The Wave 1 projects are expected to be fully completed by 2021.
2. Wave 2 expansion plan is being accelerated
From Kissam’s remarks:
To address what would otherwise be an oversold position after 2021, we are now accelerating our Wave 2 plan, which will deliver approximately another 100,000 metric tons on an LCE basis early in the next decade. We have already commenced Wave 2 spending on clearly identified projects that include the yield enhancement technology in the Atacama [the salt flat in Chile where the company extracts lithium from brine], coupled with a further conversion expansion in Chile and additional capacity at the Western Australia greenfield site.
The company is accelerating its Wave 2 plan because its Wave 1 output is already committed to its existing customers through 2021. Customers are contracting for lithium supplies as many years out as they can, indicating they largely believe that supply will remain tight relative to demand for some time.
3. Wave 3 expansion opportunities are being assessed
From Kissam’s remarks:
[W]e are also in the very early stages of assessing Wave 3 opportunities, which are largely new resources including Kings Mountain, North Carolina; Antofalla, Argentina; and other prospective opportunities in our pipeline.
Kings Mountain and Antofalla are hard-rock and brine resources, respectively. Albemarle inherited the Kings Mountain mine via its 2015 acquisition of Rockwood Holdings. If Albemarle reopens the mine, which discontinued operations in the early 1990s, it will be just the second operating lithium mine in the United States. The company owns the only lithium mine currently operating in this country, the Silver Peak brine mine in Nevada.
4. Company builds out production capacity only when it has committed buyers
From Kissam’s remarks:
[W]e will only build out capacity to meet long-term commitments from our customers. We’re not going to be in the business of speculating on demand that might materialize.
Albemarle is focused on long-term partnerships and executes long-term supply agreement with its customers. So when it builds lithium capacity, it’s pretty sure it will have buyers for the additional output. Along with the company’s flexibility in the timing and size of its planned expansions, this should alleviate some concerns about oversupply in the lithium market, at least in the near term. Additionally, Kissam said the company’s “goal is to be the most profitable lithium business in the world,” and that it’s “not going to chase volume at the expense of value for the company and the shareholders.”
5. Solid outlook for 2018 lithium prices
From Kissam’s remarks:
We continue to see favorable pricing trends with overall pricing in lithium expected to increase by high-single digits on a percentage basis relative to last year.
While the company expects lithium prices to continue rising in 2018, it projects the pace of the increases will slow. In 2017, Albemarle’s lithium pricing rose an average of 28%, so a high-single-digit price increase in 2018 would be a notable slowdown.
6. Company expects lithium market to remain in balance through at least 2021
From remarks by John Mitchell, president of Albemarle’s lithium and advanced materials unit:
[W]e feel that supply and demand [are] going to remain in balance at least through the 2021 period.
Management believes lithium supply is likely to fall short of forecasts. Kissam said that since Albemarle bought its lithium business in 2015, there’s been a steady delay of projects, which have been regularly coming on line at a higher cost and producing a lower volume than the companies behind them originally projected. He also opined that the fact that Albemarle’s customers — which are largely in the cathode and battery space — are entering long-term supply agreements and inquiring about even longer-term ones points to them believing that the lithium market will “remain tight for the foreseeable future.” Moreover, he noted that automakers apparently believe this as well, since some of them are “trying to go directly [to suppliers] to grab lithium.”
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