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Morningstar | Albemarle's Near-Term Lithium Profits Benefit From Long-Term Contracts; Maintaining $130 FVE. See Updated Analyst Note from 21 Feb 2019

Albemarle reported solid fourth-quarter results as adjusted EBITDA grew 12% year on year on a pro forma basis driven primarily by higher lithium volumes and prices. In its outlook for 2019, management forecasts lithium profit growth of over 20% year on year due to higher volumes, with prices remaining flat versus 2018. Although management acknowledged lower lithium prices as new supply comes online, Albemarle's near-term lithium prices are largely based on longer-term contracts with its customers. As a result, Albemarle is somewhat insulated over the next couple of years from falling lithium prices. With our outlook largely intact, we maintain our $130 per share fair value estimate for narrow-moat Albemarle. The market reacted favorably to Albemarle's guidance sending shares up nearly 8% at the time of writing. However, at current prices, we still view Albemarle shares as undervalued.

Our lithium price outlook is unchanged. We continue to forecast that lithium prices will fall over the medium term to $10,000 as new supply outpaces demand growth, from current prices of around $12,000 per metric ton (on a Chilean export LCE basis). However, as electric vehicle adoption continues to grow, in we forecast higher long-term lithium prices as higher-cost supply will be needed to meet demand.

We are encouraged by Albemarle's production ramp up of the La Negra II facility in Chile. Before Albemarle entered the lithium business by acquiring Rockwood in 2015, Rockwood management said the La Negra II facility was scheduled to be completed in 2014. However, La Negra II has faced substantial delays and will only begin operating at full production by the end of this year. Albemarle's successful ramp up of La Negra II, which is the company's first facility in Chile to produce all battery quality lithium carbonate, gives us more confidence that the company will be able to ramp up the La Negra III and IV facilities over the next few years with relatively fewer difficulties.

For more information on our lithium outlook, please see our Nov. 30 report, "Put the Pedal to the Metal for Lithium Stocks."

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."