Albemarle Plots Decade-Long Lithium Charge With Demand Racing Past Supply

Back in February, lithium giant Albemarle (ALB) looked like the stodgiest player in an industry known for its conservatism — instilled by periodic supply gluts and price crashes. Though lithium prices were surging and the EV boom demanded aggressive expansion, Albemarle’s fourth-quarter earnings showed output slipping in 2021, with little revenue uplift due to contracts largely tied to 2020 prices.

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But since Albemarle stock crashed on its Q4 2021 results and outlook, Wall Street perceptions have turned upside down. It’s now clear that Albemarle management was merely demonstrating the patience and confidence afforded by a winning hand.

Despite some big ups and downs, Albemarle stock has rallied more than 20% in a tough 2022, near record highs.

Now, partly thanks to the Inflation Reduction Act, Albemarle’s cards have only gotten better. Its winning streak appears likely to last through the decade.

Inflating Lithium Prices

Despite the law’s name, tens of billions of dollars of government incentives to buy and build EVs and batteries in the U.S. will help to keep lithium prices high.

“The government’s effectively subsidizing certain battery related materials” such as lithium, Cowen analyst David Deckelbaum told IBD.

Those subsidies, including $7,500 for a new EV and $45 per kilowatt-hour of battery capacity, could add up to $12 billion for General Motors (GM) alone by 2025, Wolfe Research analyst Rod Lache wrote in a Sept. 6 note.

Even if lithium prices stay high, those subsidies will grease the wheels for higher EV demand in the U.S., which has lagged behind China and Europe.

The law also includes a 10% tax credit to offset production costs of key battery materials like lithium.

That will help Albemarle to “build more flagship assets in North America,” Deckelbaum said.

Albemarle’s U.S. Lithium Plans

Albemarle has the only working lithium mine in the U.S., a relatively modest-scale operation that produces lithium from brine in Silver Peak, Nevada. A multiyear expansion should double the output in coming years.

But it also has aspirations to reopen its Kings Mountain, N.C., lithium mine. Albemarle closed it in the 1980s as its lower-cost brine operations ramped up in Chile.

On its Aug. 4, second-quarter earnings call, CEO Jerry Masters called Kings Mountain a “top-tier resource.” He said Albemarle plans to build a major lithium processing facility in the Southeast later this decade. That will have capacity to convert 100,000 tons of lithium ore annually from Kings Mountain and elsewhere into battery-grade lithium.

Albemarle also has highlighted potential to process lithium in the Smackover formation in south Arkansas, where it already processes bromine out of brine. The Inflation Reduction Act support might help greenlight that project, despite the technical challenge and costs, later this decade.

Albemarle’s Growth Spurt

As Albemarle’s growth plans for the U.S. take shape, it’s rapidly ramping up its lithium processing capacity outside the U.S.

“This year, we plan to deliver projects that more than double our annual (lithium conversion) capacity from 85,000 tons to 200,000 tons by year-end,” Masters said on the Q2 call. That could reach 500,000 tons by the end of the decade, Albemarle says.

In 2021, Albemarle announced a $200 million deal to buy a lithium processing plant in China. At the same time, it began laying groundwork to build two additional facilities in China by 2024.

In addition to its brine operations in Chile, Albemarle is a joint-venture partner in the Greenbushes and Wodgina hardrock mines in Australia.

Albemarle bought a 60% stake in the Wodgina mine for $1.3 billion in 2019, then promptly mothballed output. But that deal now seems to be paying off. Lithium production restarted earlier this year and should continue to ramp up to 80 kilotons per year by 2026, according to a new supply analysis from Deutsche Bank analyst Corinne Blanchard.

Albemarle Guidance Rockets

Albemarle was a bit slower than rivals like Sociedad Química y Minera de Chile (SQM) and Livent (LTHM) to benefit from the surge in lithium prices that began last year. But as lithium prices continued to surge early this year, contract renegotiations created a windfall. Albemarle’s latest guidance in August had full-year EPS in a range of $19.25-$22.25 vs. February guidance of $5.65-$6.65. At the midpoint, Albemarle earnings would surge 414% in 2022 vs. last year.

In the past, automakers used to rely on battery producers to secure supplies. But concern about lithium supply shortages now has automakers “engaging directly with mining companies,” Loop Capital analyst Christopher Kapsch said. In July, Livent announced a long-term deal “where GM is effectively paying years in advance for future supply,” he said.

On the Q2 call, Eric Norris, president of lithium operations at Albemarle, said the company is open to striking similar partnerships. But he added, “We’re not in a position where we need to raise capital. It would only be something we do as part of a broader deal to advance our strategic agenda and help our customers in the market.”

Lithium Deficit

Despite the race to ramp up production to meet demand, the lithium industry may be overmatched. After modestly raising demand estimates and trimming supply expectations, Deutsche Bank’s Blanchard predicts a widening supply deficit. She sees the market deficit holding in the 5%-10% range for a few years, then taking off to 34% by decade’s end.

“We’re seeing more investment (in lithium mining), but you’re not going to see the results of that investment for 5-10 years,” she said.

Blanchard’s new outlook sees lithium prices holding closer to current levels, boosting her lithium operating earnings outlook for Albemarle by 13% in 2023.

Even building facilities for processing the concentrate extracted from natural brines and pumped into evaporation ponds can take a couple of years. After that, it takes another six months for EV battery makers to sign off on lithium quality. That’s followed by two years to ramp up to capacity.

New technologies for tapping lithium resources are unlikely to provide a near-term fix for the lithium shortage, analysts say.

Direct lithium extraction skips the brine evaporation stage. But each such project requires “a very customized solution,” vs. a proven, repeatable solution, Kapsch said. “It’s effectively a science project,” with higher risk, a longer time line and potentially higher cost.

ALB Stock

Albemarle stock rose 1.5% to 280.94 on Thursday, rebounding from its rising 50-day moving average. Shares are consolidating after retreating from a record 308.24 on Sept. 14. The relative strength line, which tracks a stock’s performance vs. the S&P 500 index, is holding right at record highs.

SQM stock and Livent also have pulled back modestly from all-time levels. Wall Street analysts predict SQM and Livent earnings growth will outstrip Albemarle’s torrid pace this year.

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