Morningstar | Nemaska Terminates Lithium Supply Agreement With Livent; Maintaining $18 FVE With Outlook Unchanged
On Feb. 19, Livent announced it will resume arbitration against junior lithium miner Nemaska Lithium as the two companies have failed to reach an agreement on a revised schedule for Nemaska to supply lithium carbonate to Livent. Under the agreement, Nemaska, which has yet to begin producing any lithium, is required to begin supplying Livent with lithium carbonate in April 2019 at prices below market value.However, last week, Nemaska released an investor update stating that the company will need an additional $283 million to finish construction on its spodumene and downstream lithium plants due to higher-than-expected costs. As a result, Nemaska will be unable to supply Livent with lithium carbonate. While Livent may be able to recover its $10 million investment in Nemaska plus a termination fee, the company will need to purchase lithium carbonate from third parties at market prices to use as feedstock for a portion of its lithium hydroxide production.
Regardless, over the long term, we expected that Livent would have to purchase third-party lithium carbonate at market prices to use as feedstock for hydroxide production. With our long-term outlook unchanged, we maintain our $18 per share fair value estimate for narrow-moat Livent.
We remain critical of Livent's lithium strategy to produce primarily lithium hydroxide because the company makes hydroxide from the conversion of carbonate, which carries a higher production cost than producing hydroxide directly from spodumene. As new spodumene-based hydroxide production ramps up, Livent's position on the hydroxide cost curve will increase. Further, Livent's hydroxide production using third-party carbonate sits at the high end of the cost curve, which results in a significantly lower profit margin. As such, we continue to prefer that Livent produce lithium carbonate and lithium chloride from its cost-advantaged brine as we forecast that these products will generate the highest profits for Livent over the long term.
For more information on our lithium outlook, please see our Nov. 30 report, "Put the Pedal to the Metal for Lithium Stocks."
Livent manufactures lithium. The company's primary products, namely battery-grade lithium hydroxide, butyllithium and high purity lithium metal are inputs used in various applications. The company produces lithium compounds for use in applications that have specific performance requirements, including battery-grade lithium hydroxide for use in lithium-ion batteries. The company also supplies butyllithium, which is used as a synthesizer in the production of polymers and pharmaceutical products, as well as a range of specialty lithium compounds including high purity lithium metal, which is used in the production of lightweight materials for aerospace applications and non-rechargeable batteries.
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