Albemarle Stock Tanks on Earnings. But Lithium Prices Are Going Up.

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Albemarle

stock fell, hard, after the lithium miner reported fourth-quarter numbers late Wednesday. Results were solid, but guidance for 2022 created confusion for investors. Wall Street, however, sees a catalyst for the stock: Lithium prices are still rising.

Albemarle stock dived roughly 20% to close at $197.02 Thursday. The

S&P 500
fell 2.1%. while the

Dow Jones Industrial Average
closed 1.8% lower.

Albemarle reported earnings per share of $1.01 on $894 million in sales. Wall Street was looking for $1 in earnings per share from $897 in sales. Results were, essentially, in line with expectations.

Looking ahead, the company expects to generate $6.15 in EPS from $4.4 billion in sales for 2022. Analysts are projecting $6.20 in EPS and $4 billion in sales.

The midpoint of Albemarle’s range of earnings forecasts is a little below the Street’s expectation, despite solid sales growth. What’s more, the range of EPS guidance was $1, going from $5.65 a share to $6.65.

Higher costs for raw materials are affecting the company, but it isn’t the reason for the wide range.

“I think people underestimated [we’re] starting up these new facilities,” CEO Kent Masters told Barron’s. Albemarle is growing its lithium capacity by more than 70% in 2022, giving it the ability to ship roughly 155,000 tons of lithium carbonate equivalent, up from 90,000 in 2021.

All that capacity doesn’t come on at once, however. It takes about two years to ramp up production in the lithium business, according to Eric Norris, Albemarle’s lithium president. “All the people are there, but sales are not there,” added Masters.

“The risk that we face is primarily in those plant startups,” said CFO Scott Tozier. “We certainly face inflation across all three of our businesses…it’s not as big a risk to the guidance as [plant start-up].”

Higher costs appear to have surprised investors. Realized pricing for lithium products might have surprised as well. Citigroup analyst P.J. Juvekar wrote Wednesday that the quarter might disappoint investors, but they “have to remember that [Albemarle’s] contract prices were set earlier in 2021, and current spot prices should not have had much impact on [fourth quarter] results.”

Most lithium business, about 90% according to management, is done on contract. Spot prices are only an indication of where contract prices are likely to head over time. The direction should be up. Lithium prices are 115% over the past three months and almost 500% over the past year.

Sales volumes for Albemarle’s lithium operation are expected to grow 20% to 30% as the company ramps up new capacity to meet higher demand for driven by rising electric-vehicle sales. The company also produces catalysts and bromine.

Juvekar is still positive on the stock. He rates shares Buy and has a $280 price target for shares. ISI Evercore analyst Stephen Richardson also rates share Buy. His price target is $295.

Richardson is still positive as well, writing Thursday the “lithium market dynamics we see on the screen drop to the bottom line—if 2022 guidance is to be believed—and that is what matters.”

Market dynamics still appear to be positive for Albemarle and its peers. “We’re looking at 150,000 tons to 200,000 tons of new [lithium carbonate equivalent] demand this year,” said Norris. “We see the lower end of that [range] coming on.”

As of the close of Wednesday trading, Albemarle stock was up about 5% year to date, better than the 6% decline of the

S&P 500.

Write to Al Root at [email protected]