Albemarle Stock: Growing Demand to Buy Lithium (NYSE: ALB)

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Albemarle Corp (NYSE: ALB) is focused on increasing its lithium business as the industry is expected to grow at a significant rate. According to the International Energy Agency, the demand for lithium will increase 40 times over the next 20 years (CAGR of 20.3%). The company is investing heavily to acquire lithium mining properties and to build lithium conversion plants. The company is classified as a dividend aristocrat because it has been able to increase its dividends over the past 28 years. The stock price is in a reasonable territory and can grow significantly in the coming years.

The main drivers of lithium demand growth are electric vehicles and consumer electronics. Total electric vehicle sales in the United States are expected to reach 670,000 in 2022, which is 37% increase YoY. The surge in demand is causing a substantial imbalance between supply and demand which is pushing lithium prices higher.

Albemarle Corporation supplies a wide range of specialty chemicals to the world. The company’s products are used for energy storage, automotive, energy refining, pharmaceuticals, etc. Currently, the company has 3 reportable segments: lithium, bromine and catalysts. The lithium segment is the main growth driver for the business as the demand for battery-grade lithium is increasing significantly. In 2021, the lithium segment grew at a rate of 19% compared to the total sales growth rate of 6%. Consequently, the segment represents 41% of total sales and 55.1% of adjusted EBITDA. The lithium segment recorded a CAGR of 15.3% over the period 2016-2021, while the second largest segment – bromine (33.9% of sales in 2021) recorded only 7.3% of CAGR.

Albemarle Segments

Sales Segments (Author’s model (10-K Company))

To strengthen its lithium segment, management has made several major investments in recent years. One of its largest lithium mines in the world – Greenbushes mine is expanding production. The company holds a 49% interest in the mine. The second phase of the mine expansion was completed in December 2019. The expansion increased the mine’s production capacity to 60,000 metric tons per year.

The company is actively expanding its operations in the lithium segment through M&A activities as well. In 2021, the company acquired Guangxi Tianyuan New Energy Materials Co. – a China-based lithium converter. The acquisition cost was approximately $200 million and strengthen Albemarle’s presence in the world’s largest lithium consumer (39% of world consumption). Albemarle CEO Kent Masters has spoken about the acquisition

The acquisition of Tianyuan, which owns and operates a newly built lithium processing plant, aligns with our strategy to pursue profitable growth in line with customer demand. This will be a key component of our next wave of projects to increase our conversion capacity in a capital-efficient manner over the next few years. As the global transition to cleaner energy develops rapidly, this additional lithium capacity will allow us to help our customers achieve their ambitions for growth and sustainability.

Management is inclined to expand its operations in China in the coming years, as in 2021 Albemarle Corp. signed investment agreements with Yangtze River International Chemical Industrial Park and Pengshan Economic Development Park to build 2 new lithium conversion plants with lithium hydroxide production capacity of 100,000 metric tons. . It is estimated that the construction of the factories will last 2 years and they will start operations by 2024.

In 2019, the company acquired 60% of the Wodgina mine from Mineral Resources (OTCPK: MALRY). According to the agreement, the company paid $1.3 billion for the 60% interest in the mine. The mine has a spodumene concentrate production capacity of 750,000 tonnes per year and approximately 152 million tonnes of lithium reserves. The mine was put on care and maintenance status in November 2019 due to low lithium prices. However, the mine is expected to be fully operational in September 2021, which will lead to a significant increase in revenue for the company.

The catalysts segment (22.9% of sales in 2021) could greatly benefit from the current energy crisis, as refiners need to invest heavily to increase the supply of refined petroleum products and balance supply and demand in the market for energy. According to WOO (World Oil Outlook) report in the period 2021-2045, downstream oil investments will total $1.5 trillion. The amount includes $415 billion of investment in developing new refining capacity and another $1.1 trillion will be spent on maintenance and replacement. The estimate does not take into account the current disruption of energy supply due to sanctions against Russia, which may significantly increase investment needs in the field. Albemarle offers hydrotreating catalysts and fluidized catalytic cracking products. FCCs have a fairly high demand in the United States as they are used in over 400 refineries and processes 5.3 million barrels of oil per day.

Albemarle actively invests in R&D to gain a competitive advantage in the market. The company aims to develop green chemistry technologies that are expected to reduce the use of raw materials and support an environmentally friendly production process. In June 2021, the company opened the BMIC (Battery Materials Innovation Center) in North Carolina. The facility will develop lithium metal anode technology, which increases battery energy density and reduces costs by up to 50%. The company has spent about 2% of its revenue on R&D over the past 5 years, as in 2021 R&D spending totaled $54 million.

Albemarle R&D Margin

Albemarle R&D Margin (Model by author (seekingalpha.com))

To improve the performance of its lithium-ion batteries and reduce costs, the company has sign a joint development agreement with 6K. The deal allows Albemarle to use 6K’s UniMelt platform to produce lithium batteries with disruptive new technology. According to estimates, the UniMelt platform allows the company to produce battery cathodes in 50% smaller factories with 70% less CO2 emissions and 90% less water consumption. Albemarle’s Chief Technical Officer, Dr. Glen Merfeld, has significant expectations of the deal:

Albemarle develops advanced lithium materials to enable breakthrough levels of lithium-ion battery performance. UniMelt plasma technology opens up new reaction pathways for lithium materials innovation. Our collaboration with 6K has great potential.

It should be mentioned that environmental issues are quite significant for lithium producers as the process is very water intensive. This is why the mining process is considered as destructive as coal mining. Environmental protests in Australia and Chile have forced governments to postpone new mining projects. The Serbian government has been asked to revoke the mining license for a $2.4 billion project due to environmental protests.

Threats

The company faces strict laws and regulations regarding employee safety and environmental issues. The wide range of restrictions in Europe and the United States slow down the processes of launching new projects and require substantial expenditure from miners. The United States has already begun implementing the Toxic Regulation Act, which aims to phase out toxic chemicals from its markets. The settlement could affect Albemarle’s existing and new products and reduce the company’s sales.

Rising raw material prices could offset sales price increases and reduce the company’s margins. Rising gas and oil prices have also hurt the company’s profitability as it primarily uses gas-fired power plants for its mines.

Finance

The company has been able to increase its dividends over the past 28 years, with the dividend yield standing at a level of 0.8%. The payout ratio of just 38.6% indicates the current yield is fairly secure and management has room to increase dividend payouts. The total dividend payment of $177.9 million in 2021 represents 51.7% of 2021 operating cash flow and only 22.3% of 2019 operating cash flow. is also healthy since the debt ratio is at a level of 0.43 while the interest coverage ratio is 9.67.

To calculate the relative value of the stock, we collected data from several peers who represent the lithium mining and chemical industries.

Valuation of Albemarle shares

Albemarle estimate (Model by Seekingalpha.com author)

As a result, we find that Albemarle’s multiples are above peer averages. However, when we exclude the multiples of the chemical stocks and compare the multiples of the ALB to the multiples of the lithium producers, we find that the stock is correctly valued.

Conclusion

The business represents a great growth opportunity as Albemarle can benefit from a significant increase in demand for lithium. The company is quite well positioned in its sector and can register a substantial increase in revenue in the coming years. We assign a buy rating to the stock and expect the market to outperform in the coming years.

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