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Morningstar | Trimming Albemarle FVE to $130 on Higher Wodgina-Related Capital Expenditures; Shares Undervalued. See Updated Analyst Note from 17 Dec 2018

On Dec. 17, Albemarle held a conference call to discuss the Wodgina acquisition that was announced last month. Albemarle will purchase a 50% interest in the Wodgina lithium operation for $1.15 billion from Mineral Resources, or Min Res. Min Res will retain the other 50% and the two will operate a joint venture together. While our outlook for Albemarle is largely unchanged from when the deal was announced, we trim our fair value estimate to $130 per share from $131 on slightly higher than anticipated capital expenditures related to the project. Our narrow moat rating for Albemarle remains intact.

At current prices, we view Albemarle shares as materially undervalued with over 60% upside. Albemarle's current share price implies lithium carbonate prices falling well below our $12,000 per metric ton long-term price forecast. We continue to contend that high-cost supply will be needed to meet demand as electric vehicle adoption increases.

During the call management provided more details on the transaction and the plan once the deal closes. Management now expects the transaction to close during the second half of 2019. By the time the deal closes, Min Res should complete the spodumene conversion plant at the Wodgina site. As such, Albemarle should immediately benefit from the JV selling spodumene to lithium producers in China who convert spodumene.

Ultimately, the plan is to build two lithium hydroxide plants that will have a capacity of 100,000 metric tons and use all spodumene produced as the feedstock. Management estimated Albemarle's portion would cost $800 million, which is higher than our initial expectations. Regardless, we continue to view the transaction as a good move for Albemarle as we view Wodgina as a quality spodumene asset that will provide the company with a second low-cost feedstock to produce lithium hydroxide. We forecast that lithium hydroxide produced from Wodgina spodumene will sit on the bottom quartile of the lithium hydroxide cost curve.

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."