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Morningstar | Albemarle Strikes Deal With CORFO; Maintaining $130 FVE as Shares Remain Deeply Undervalued

On Jan. 24, Albemarle announced that it has reached a deal with the Chilean regulator CORFO, which owns the Salar de Atacama assets where Albemarle produces lithium. With the deal, CORFO will not take Albemarle to arbitration, which the regulator had threatened to do in late 2018. Although no terms of the deal were disclosed, management announced its expectation that the deal would not have a material impact on the company's financial results going forward. We expected that a resolution to this dispute would occur this year and for Albemarle to be able to avoid arbitration. With our outlook intact, we maintain our $130 per share fair value estimate for narrow-moat Albemarle.

Albemarle leases the Salar de Atacama assets from CORFO. The disagreement between the two parties stems from a clause in Albemarle's lease when it was renegotiated in late 2016. The clause requires Albemarle to sell up to 25% of its battery quality lithium production to battery producers in Chile at the lowest price. The price that will be used was the source of the dispute.

We did not expect Albemarle would ultimately experience any significant financial impacts from the deal. However, given CORFO's history of taking Chile's other lithium producer, SQM, to arbitration, we think this risk was likely weighing on Albemarle's stock price.

At current prices, we view Albemarle as significantly undervalued, with the stock trading in 5-star territory. With the CORFO arbitration risk removed, we continue to contend that investors are undervaluing lithium companies. Current market prices imply overly bearish expectations for long-term lithium prices. Due to our above-consensus electric vehicle outlook, we forecast 19% annual demand growth for lithium over the next decade. This will ultimately require higher-cost lithium supply to come online to meet demand. As such, we continue to forecast a long-term lithium price of $12,000 per metric ton in 2018 real terms on a Chilean export basis.

For more information on our lithium outlook, please see our Nov. 30 report, "Put the Pedal to the Metal for Lithium Stocks: SQM and Albemarle offer attractive upside given our above-consensus electric vehicle adoption forecast."

For more information on our electric vehicle forecast, please see our Sept. 24 Observer, "Electric Vehicle Sales in China and Europe Will Leave U.S. in the Dust, Driving Above-Consensus Global Adoption Rates."