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Morningstar | Initiating Coverage of Low-Cost Lithium Producer Livent With an $18 FVE and Narrow Moat Rating

We are initiating coverage of Livent, the lithium business recently spun off from FMC, with a narrow economic moat and stable trend ratings. With shares trading below our $18 per share fair value estimate, we view shares as slightly undervalued.

Livent's narrow moat is based on the firm's cost-advantaged lithium carbonate production. Livent's lithium carbonate is produced from its low-cost brine operations at the Salar del Hombre Muerto in Argentina. Because of a higher concentration of lithium in its brine that is extracted from the ground, Livent's operations sit near the bottom of the lithium carbonate cost curve, well below our $12,000 per metric ton long-term price forecast.

In the coming years, Livent plans to nearly triple its lithium carbonate production from 21,000 metric tons on an LCE basis in 2018 to 60,000 metric tons by 2025. Because of higher lithium prices and its low-cost carbonate production expansions, Livent should generate EBITDA margins above 40% in a midcycle environment. This sits above the 36% margin generated in 2017 on a pro forma basis. Livent will also grow its lithium hydroxide capacity from 18,500 metric tons in 2018 to 55,000 metric tons by 2025. Although we think the increased hydroxide capacity will be a profitable endeavor, we contend that incremental economic profits will be mainly derived from its low-cost carbonate production rather than the conversion of carbonate to hydroxide.

FMC still retains an 84.25% equity ownership stake in Livent. However, FMC has indicated that it will look to divest the remaining equity stake as early as 2019, depending on prevailing market conditions.

As a pure-play lithium producer, Livent is well-positioned to benefit from growing electric vehicle adoption. Using a regional buildup, we forecast that EVs will make up 15% of global light-vehicle sales in 2028, above the 11% consensus forecast. We also forecast that hybrids will make up 21% of global light-vehicle sales in 2028. Because of increased electric and hybrid vehicle sales, we forecast that lithium demand will grow 19% annually from 220,000 metric tons in 2017 to 1.5 million metric tons in 2028.

For more information, 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."