Albemarle released its Q1 2019 results shortly after Livent released poor earnings and weaker guidance for the year ahead. Whilst Albemarle failed to enjoy the benefits of the substantial rise in lithium chemical spot prices in China during 2016 and 2017, the company's long term offtake contracts to clients located largely outside China, have immunized it from the sharp correction witnessed during 2018 and 2019.
Albemarle has highlighted a "shift" in 3,000-3,500MT of production/sales for Q1 to later in the year due to rains in the Atacama (evaporation pond dilution) and qualification delays for the Xinyu II expansion program. This is interesting as production expansions using the same operating process and material (Greenbushes spodumene concentrate) would usually not require a meaningful qualification window (4-6 months) - they expect the qualification process to be complete by Q3 as Xinyu II was up and running in Nov/Dec 2018. The market rumour is that there have been some personnel "issues" between US management and Chinese staff at the plant. Xinyu has been successful in the past and Greenbushes is the best spodumene concentrate available (2.4% grade), so it's likely to achieve its targeted capacity output going forward. The company expects to achieve a nameplate capacity run rate by year-end. Albemarle has stated that the production loss in Q1 will be made up in subsequent quarters but also stated that brine production volumes from South America as a whole would be flat in 2019. My supply models are forecasting 37,000 MT for La Negra in 2019, 3000MT below their estimates.
The slide highlights the differential between Albemarle's lithium segment trailing 12 months adjusted EBITDA selling under long term contracts and the China battery grade carbonate spot price.
Unlike Livent, Albemarle's strategic customers continue to meet their offtake commitments. This is one of the key investment arguments for buying the company. As previously disclosed, they see demand at 1M MT (with an upside bias) in 2025, driven largely by the energy storage market. I have discussed the topic of supply/demand in more detail here. The chart highlights an expected step change in demand from 2023 onwards when OEM's launch new electric vehicle models to compete against their ICE alternatives. According to forecasts, battery prices should be below $100/kWh by 2023/2024. If you look at Albemarle's projected production profile, the company's main future projects (Kemerton and Wodgina) are targeting increased volumes/ramp up from around 2023.
Targeted future expansion/project plans:
- La Negra III and IV 40K MT capacity - commission date Q1 2021
- Increase lithium yields in the Salar de Atacama by 30% - target H2 2021
- Kemerton lithium hydroxide plants (Greenbushes expansion) - phase 1 of 3 production trains of 20-25K MT each, in stages between H2 2021 and H1 2022
- Greenbushes expansion plan - allowing 1.95M tonnes for output - subject to final WA environmental approval - aiming for Q4 2020
Based on history it's likely that these target dates will be delayed and/or tailored to market demand for lithium chemicals. Albemarle's acquisition of 50% of Wodgina from MRL for US$1.15bn combined with a capex contribution requirement estimated at US$800m, the capital intensity per tonne of installed capacity for the project is ~US$40,000. Assuming a final capacity utilization of 80% would mean a final number of US$50,000/t. Given those metrics, the JV would need to achieve a sales price of US$14,000/t+ for LiOH for Albemarle to achieve its 2x WACC (~17%) IRR hurdle rate. During the construction and ramp-up phase of the hydroxide plant, Albemarle has the marketing rights for Wodgina's spodumene concentrate. As the spodumene concentrate market is already oversupplied, the price pressure that Wodgina's 750K MT (at 100% capacity) of material would exert has been a cause for concern. Non-integrated Chinese producers of carbonate have pushed the China carbonate spot price down and Albemarle is well aware of what would happen if they were to sell Wodgina's output to these carbonate producers. As such the company has stated that they will not sell this material unless there's demand and they can sell at attractive prices.
As of Q1 2019, Albemarle believes it can grow its lithium EBITDA in the high teens mostly through volume growth (15,000-20,000 MT) with a slight increase in pricing over 2018. In my opinion, this targeted volume growth will be a stretch, however, this seems to have been factored into the current share price of ~US$70.
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