SQM - Albemarle: Buy More While It's Still Cheap

2023-06-25 01:13:18 ET

Summary

• Leading lithium miner Albemarle Corporation dip buyers returned to defend against a further selloff in April, as ALB outperformed the market since then.
• I encouraged investors to buy ALB's peak pessimism in April, as the valuation dislocation presented a fantastic opportunity.
• The company remains well-positioned to capitalize on the secular growth in EVs as the global transition expands to more markets. Therefore, the world needs more lithium, not less.
• With ALB still priced attractively, investors shouldn't miss the opportunity to buy more while it's still cheap.

I reminded Albemarle Corporation ( ALB ) investors that the steep decline in April represented a fantastic opportunity to add exposure, as investors bailed out following Chile's announcement of its plans to nationalize its lithium mining industry.

Moreover, I also presented information suggesting that the battering in underlying lithium carbonate spot prices in China could be bottoming out, as it attracted the supply chain to restock.

As such, the battering in ALB seems unwarranted, as it still has a long contract with the Chilean authorities until 2043. While its assets in Chile helped the company capitalize on its low-cost advantages, securing its economic moat, it also has resource assets in North America, Argentina, and Australia. Coupled with its well-diversified conversion footprint globally, Albemarle is extremely well-positioned to capitalize on perceived weakness in Sociedad Quimica y Minera de Chile S.A. ( SQM ), given its concentration risks in Chile.

Therefore, lithium mining investors, spooked by Chile's decision which also surprised ALB's management, are more likely to turn to ALB for exposure to the industry as both stocks fell.

Accordingly, ALB has outperformed SQM since their respective April hammering. As seen above, ALB/SQM's price action indicates that it could return to a long-term bullish bias, validating the bottoming since June 2022.

With that in mind, I assessed that investors are likely moving back into ALB as they look to partake in the secular tailwinds underpinning a recovery in its performance.

Management reminded investors in a June conference that it sees no near- and medium-term risks to its outlook in Chile. The company remains confident in its " ability to continue operating in Chile." It highlighted that no changes are expected through 2043, even though new extraction techniques are expected to be negotiated in partnership with the Chilean government. Despite that, these are not likely to impact its current operations, suggesting that near-term risks from more efficient extraction (thus leading to potential oversupply) could be overstated.

There should be little doubt that the movement in price and volume impacts Albemarle's topline and adjusted EBITDA. Notably, Albemarle expects continued volume growth through 2030, with lithium demand expected to rise from 1.2MMt in 2023 to 3.7MMt in lithium carbonate equivalent or LCE by 2030. The majority of the applications will be focused on EVs as it gains traction globally.

BloombergNEF's recent report in June suggests that the sales growth trend has been observed in " every major market, including India, Southeast Asia, Japan, China, Australia, the US, and Europe." Notably, the growth was set "against the backdrop of a flat global auto market."

In addition, a recent report by the International Energy Agency or IEA underpins the observation by BloombergNEF. The IEA forecasts that " global oil demand growth will significantly slow down in the next five years." As such, it expects a "peak in oil demand before the end of the decade." Notably, the agency stressed that the peak would be underpinned by the "shift to clean energy sources and electric vehicles, driven by higher oil prices and supply concerns."

Therefore, I assessed that ALB is well-positioned to navigate the opportunities in the secular growth in EVs, even though there remain headwinds over the political risks in Chile.

However, ALB is a globally leading low-cost lithium miner with cost-advantaged assets that bolsters its competitive moat. The political situation in Chile is likely to remain dynamic, and it's not until 2043 that the company's deal with the Chilean government ends. I believe the medium-term trend in EVs should provide a sufficient boost for investors, as ALB's valuation has likely reflected these headwinds.

Despite its market outperformance since its lows in April, ALB remains attractively valued at a forward EBITDA of 9.7x, below its 10Y average of 13.5x. Morningstar's fair value estimate of $350 is based on a 12.5 times midcycle EBITDA," which doesn't seem aggressive.

Therefore, I believe that the margin of safety remains favorable at the current levels, even though ALB's price action could face a pullback. I downgrade my rating to reflect its recent outperformance and less constructive price action as dip buyers have likely loaded in April. Despite that, ALB's opportunity and valuation remain favorable, and investors who missed its April lows should still find the current levels appealing.

Rating: Buy (Revised from Strong Buy).

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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