EUR 850.00 For Business Accounts Only

Morningstar | With Our Long-Term Lithium Outlook Intact, We Maintain Our Livent FVE; Shares Undervalued. See Updated Analyst Note from 13 Feb 2019

Livent reported decent fourth-quarter results as adjusted EBITDA grew 5% year on year. Higher volume and favorable foreign-exchange movements were partially offset by higher operating costs. In its 2019 outlook, Livent noted it is facing declining prices and weaker demand from its longer-term contract customers in China for lithium hydroxide. This is in line with our outlook that lithium prices will fall over the medium term from current prices around $12,000 per metric ton (on a Chilean export LCE basis) to $10,000 as new supply outpaces demand growth. However, as electric vehicle adoption continues to grow, we forecast higher long-term lithium prices as higher-cost supply will be needed to meet demand. With our outlook largely intact, we maintain our $18 fair value estimate for narrow-moat Livent.

In its 2019 guidance, Livent disclosed that it will purchase third-party lithium carbonate to supply a portion of its feedstock to produce lithium hydroxide. We continue to think that Livent's lithium hydroxide strategy comes with additional risk. We attribute Livent's excess returns to its low-cost lithium carbonate and lithium chloride production. By purchasing third-party carbonate, Livent's margins will fall regardless of lithium price movements, as margins will also be tied to the spread between carbonate and hydroxide. Given our outlook that demand for both lithium carbonate and hydroxide will continue to be strong, we would prefer that Livent focus on the production of low-cost lithium carbonate over the production of hydroxide, which does not carry the same cost advantage.

FMC announced it will fully spin off Livent on March 1. Although Livent is a publicly traded company, FMC still owns roughly 85% of shares outstanding. Once Livent is spun off, it will be able to fully operate as a separate entity without needing to receive FMC's approval for capital-allocation decisions.

For more information on our 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."