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Quick Note On Recent Lithium Majors' Earnings

Kyriakos Petrakakos profile picture
Kyriakos Petrakakos


  • Albemarle and SQM are down 27% and 24% respectively YTD, whilst the S&P 500 is practically flat.
  • Fall comes on the back of CORFO deal and Morgan Stanley Report.
  • Competitive advantages these companies have enjoyed, including customer trust and lowest cost to market, remain unchanged.
  • Current share prices could prove attractive to latecomers.

Not an auspicious start of the year for the two largest producers of lithium in the world with sharp share price declines in spite of improved revenues and earnings factoring out one-offs.

Source: Capital IQ

Admittedly, including SQM's (NYSE:SQM) $20 million settlement with the Chilean government and Albemarle's (NYSE:ALB) $366.9 million TCJA-related provisional net tax expense, both companies had GAAP earnings per share below consensus estimates. Another concern was with the Capex of both ALB (ca. $500mn in 2018) and SQM ($170mn over the next couple of years), which will lower the latter's FCF in the near future and lead to negative cash returns for the former in 2018. I am personally a bit puzzled by this as I find the ability to deploy cash to invest in lower cost production to be a source of competitive advantage, especially if there aren't any funding concerns. I would expect the Street to also deem these investments to be value accretive in due course.

Casting the aforementioned aside, if we judge the underlying businesses of both companies excluding one-offs, we find that they have been improving consistently over the past year owing to a mixture of improved demand and pricing. This was highlighted by Albemarle in its earnings presentation (SQM deck not available).

Source: Albemarle Q4'17 earnings presentation

In light of this operational performance, one ought to wonder what has lead to such precipitous share-price falls. Two catalysts can be singled out. First, in mid-January, SQM reached an agreement with CORFO that grants it the right to expand its production by an additional 2.2 million MT of Lithium Carbonate Equivalent (LCE) through 2030 in Chile. That was then followed by a related announcement by Morgan Stanley (MS) in late February claiming that because of the impending excess supply, LCE prices

This article was written by

Kyriakos Petrakakos profile picture
Musings on sectors that will be foundational to life and economic activity in the next 20+ years.

Analyst’s Disclosure: I am/we are long SQM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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