EUR 850.00 For Business Accounts Only

Morningstar | No Surprises in Livent's First Earnings Report as a Public Company; Maintaining Our $18 FVE

In its first quarter as a public company, Livent reported solid third-quarter results, with pro forma EBITDA up 25% year on year primarily due to higher volumes and prices, partially offset by higher operating expenses. FMC had completed the initial spin-off of Livent in October and plans to divest the remaining stake in 2019. With few changes to our long-term outlook, we maintain our $18 per share fair value estimate for narrow-moat Livent. With shares trading slightly below our fair value estimate, we view Livent as fairly valued on a risk-adjusted basis.

We note that Livent's focus on converting its lithium carbonate to lithium hydroxide carries near-term margin contraction risk as the company ramps up its capacity. By 2020, Livent plans to expand its lithium carbonate and lithium hydroxide annual production capacities by 10,000 metric tons each. Livent plans to use its greater carbonate capacity as feedstock to produce lithium hydroxide.

However, historically, lithium producers have faced greater operational challenges in bringing on new brine-based lithium carbonate production versus hydroxide conversion. As such, Livent risks completing its new hydroxide capacity before its low-cost carbonate feedstock production ramps up. If that were to occur, Livent would have to purchase carbonate on the open market at spot prices, which are likely to be much higher than Livent's own production costs, and as a result, Livent's operating margins would contract significantly until its low-cost carbonate production is ramped up.

While our base case assumes that Livent is able to bring on both of its capacity expansions on time, our bear-case fair value estimate assumes delayed carbonate production forces Livent to purchase its lithium carbonate on the open market at higher prices, generating lower operating margins. Our bear-case fair value estimate is $7 per share.