SQM - Albemarle: Now In The Bargain Bin

2023-04-23 02:14:14 ET

Summary

• The Chilean government's decision to nationalize its lithium mining industry has significantly affected Albemarle stock this week.
• The downdraft sent ALB plummeting to its 52-week lows, triggering a frenzy of panic selling among investors.
• However, ALB's current lease in Chile runs out only in 2043. Moreover, volumes at risk are expected to be less than 10% by then.
• While the nationalization threat may have caused a stir, our assessment indicates that investors should focus on the more critical near- and medium-term lithium pricing dynamics and competitive pressures.
• With ALB about to re-test its long-term moving averages, high-conviction investors should get ready to add more positions through the recent volatility.

Leading lithium mining company Albemarle Corporation ( ALB ) was hit by a massive downdraft yesterday, as the Chilean government announced its plans to nationalize its lithium mining industry.

While ALB's 10% decline was less than Sociedad Quimica y Minera de Chile S.A. ( SQM ) stock's nearly 20% battering, ALB has collapsed more than 40% from its early February highs.

Hence, the announcement by the Chilean government was untimely, as lithium prices could be on the verge of bottoming out, which was also observed by Bank of America or BofA ( BAC ).

BofA's analysts highlighted in early April that " restocking could lead to a pick-up in [lithium] prices towards H2 2023." However, they also cautioned that "new mines should prevent a major rally."

Bloomberg reported recently that " China's lithium market is showing signs of bottoming out after a sharp decline in prices by over two-thirds in just five months."

Notably, stockpiling activities have fallen markedly, with "inventory in the supply chain already at a low level." As such, we should expect a more robust recovery of "downstream demand" in H2, helping to stem a further free fall in lithium prices.

We also gleaned that China's battery-grade spot lithium carbonate prices have started to stabilize over the past week, holding the level at about RMB 178.5K per MT.

As such, we observed that ALB buyers have also returned over the past two weeks, likely positioning for a more robust H2 recovery. However, this week's significant fall likely invalidated the recent buying momentum, as ALB re-tested its 52-week lows.

However, Albemarle reminded investors that the company " expects no material impact as the Chilean government made clear it will fully respect existing contracts."

Despite that, the reaction over the past week suggests that investors weren't so sure and are likely pricing in further uncertainty to account for the political risks.

Nevertheless, investors need to assess whether the runway is long enough for Albemarle in Chile, as its current lease will run out only in 2043.

As such, Morningstar updated its valuation framework, suggesting "minimal impact on its valuation in the next 20 years." Moreover, given its geographically-diversified production base, Chilean mines are expected to account for "less than 10% of volumes at stake in 2043."

Hence, Albemarle has more time to work on its production than SQM, whose lease runs out in 2030. With that in mind, investors should not expect a significant impact on ALB relating to the political risks in the near- to medium-term.

Instead, we assessed that investors' focus should remain on determining whether they are convinced that the spot lithium market is bottoming out. Also, it's essential to consider more efficient extraction techniques that could impact medium- to long-term lithium pricing through the cycle.

Moreover, China's EV battery leader Contemporary Amperex Technology Co. Limited or CATL's recent announcement that it's ready for volume production on its inaugural sodium-ion batteries needs to be watched carefully.

Accordingly, CATL highlighted that it " will produce its first sodium-ion battery to power electric vehicles built by Chinese brand Chery." In addition, China's EV leader BYD Company ( OTCPK:BYDDF ) could also launch its Seagull hatchback equipped with its sodium-ion battery.

As such, the decision by China's battery leaders to install sodium-ion batteries could threaten the dominance of lithium batteries, providing a viable alternative to cheaper EV models and lowering the potential of current lithium forecasts.

As such, we believe investors must assess these challenges in the near- and medium-term as more pressing than the threat posed by ALB by the Chilean government.

ALB's valuation doesn't seem aggressive now, rated with a B- grade by Seeking Alpha Quant. Hence, investors considering adding more through the plunge are likely buying at discounted prices.

The panic selling over the past week has closed the gap toward ALB's March 2022 lows, which could see buyers returning to support that level.

We view the $165 to $170 level as a strong support zone, undergirded by ALB's 200-week moving average or MA (purple line). It's also in line with ALB's long-term uptrend.

However, the caveat is the re-test has yet to occur, and therefore market operators could send it down to re-test that level to compel more holders to exit before reversing the momentum.

Despite that, we assessed that the risk/reward for ALB had improved markedly, with long-term moving averages in close proximity.

Rating: Strong Buy (Revised from 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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