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Morningstar | Maintaining $130 FVE as Albemarle Reports Decent First-Quarter Results; Shares Remain Undervalued

Albemarle reported decent first-quarter results that were generally in line with our expectations. Adjusted EBITDA fell 9% year on year to $226 million, as  weather-related issues at the company's carbonate production facility in Chile resulted in lower lithium production and higher costs. However, management reaffirmed full-year adjusted EPS guidance to a range of $6.10 to $6.50, as the company expects to make up the lower volumes later in the year and forecasts stable prices. We view the guidance as achievable although we forecast Albemarle will come in at the low end of the range.

With our outlook largely unchanged, we maintain our $130 per share fair value estimate for Albemarle. Our narrow-moat rating also remains intact. At current prices, we view Albemarle as materially undervalued, with shares trading in 5-star territory. In our view, the market is forecasting that lithium prices will fall and remain lower for longer as new supply comes online.

We agree in the short term and forecast prices to fall to $10,000 per metric ton from $13,000 on a Chilean LCE export basis.  However, we contend that continued strong demand growth from greater electric vehicle adoption will require that lower-quality, higher-cost lithium resources ultimately be developed. Based on our outlook for the marginal cost of production, we forecast lithium carbonate prices of $12,000 per metric ton over the long term. For Albemarle, the higher prices should result in long-term EBITDA margins above 40%.

Albemarle sells its lithium on long-term contracts, with  80% of the company's lithium volumes contracted through 2021. While this limits some upside when lithium prices rise, it will also provides some downside protection when prices fall. While competitors Livent and SQM have announced expectations for prices to fall around 10% in 2019, Albemarle reported 3% higher prices during the first quarter and management said prices would be flat for the remainder of the year.

Heavy rains affected all South American brine-based lithium producers during the first quarter. Lithium is produced from brine by pumping the brine into ponds, letting most of the water evaporate over roughly 18 months, and then processing the remaining salt. When it rains, lithium producers must either wait for the additional water to evaporate or process the diluted salt, which results in lower production rates and higher unit production costs. For Chilean producers Albemarle and SQM, this issue is less impactful than for Argentinian producers due to higher concentrations of lithium in brine and higher natural evaporation rates in the Salar de Atacama desert in Chile. As such, Albemarle will likely face elevated lithium unit production costs throughout the first half of 2019 as it deals with the additional processing costs. However, these cost pressures should begin to alleviate over the second half of the year.

For more information on our long-term 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."