OROCF - Livent: Lithium Upside

2023-09-25 12:28:54 ET

Summary

• Livent Corporation has sold off due to falling lithium prices, but offers upside potential from the demand for EVs and new mining assets.
• The stock is already cheap, with a market cap of $3.7 billion, and trades at only 6x EBITDA targets.
• The merger with Allkem Limited provides cost synergies to further boost profits.

Even as lithium prices fall, Livent Corporation ( LTHM ) has become exceptionally cheap. The stock has fallen from a recent high of nearly $30 to below $18, but the opportunity is to ride potential future lithium shortages higher. My investment thesis is Bullish on the lithium miner, while the merger with Allkem Limited ( OROCF ) provides more upside from a boost to profits.

All Upside

Livent has slumped on lower lithium prices and a market selloff in risky, growth stocks. The lithium miner has nothing but upside to the business via the demand for electric vehicles ("EVs") and the opening of new mining assets in the next few years.

The stock is already cheap, with the company still guiding for adjusted EBITDA of up to $600 million for the year. The stock only trades at a market cap of $3.7 billion based on a listed diluted share count of 209.5 million shares.

The stock trades at only 6x EBITDA targets and the consensus estimates have sales doubling by 2026 or 2027. Livent has the new Nemaska lithium development project targeted for commercial production in 2025, followed by the lithium hydroxide plant in 2026.

The mine will have a total capacity of 235,000 mtpa spodumene concentrate with a plant for 34,000 mtpa lithium hydroxide. Livent has already signed up Ford ( F ) for up to 13,000 mtpa over an 11-year period, covering 38% of production.

Lithium prices have cratered this year, but market dynamics still support a supply deficit in the years ahead. China EV demand is growing at a 20% annual clip while the country is only growing supply by 6% and lithium demand is expected to skyrocket to 3 million metric tons by 2030, which is just around the corner as 2023 comes to an end.

Merger Upside

Livent agreed to a merger of near equals with Allkem back in May, with an expected close date at the end of 2023. The deal will create the 3rd largest lithium producer in the world behind Albemarle ( ALB ), with a nearly $20 billion market cap, and Sociedad Quimica y Minera de Chile S.A. ( SQM ), with a $16 billion valuation.

The big benefits of the merger are in the cost savings in a sector reliant on a commodity price. AllKem forecasts $125 million in cost savings once the company scales in 2027 and cuts ~$200 million out of capex spending.

The combined company had a listed market cap at the deal time of $10.6 billion, but the stocks have fallen substantially since the original announcement, with Livent trading at $25 at the time of the merger. The operational savings are a small fraction of the deal value, but the savings should boost profits.

Right now, Livent offers the better value trading at a discount here. Based on Allkem trading at $7.50, Livent should trade at $18.05 with the deal offering 2.406 shares for each Allkem share.

At merger time, the NewCo. traded at ~9x, 2022 EBITDA. The combined company has an EBITDA forecast for 2023 in the $1.5 billion range, up from $1.2 billion in 2022.

The stocks now have a combined market cap of $8.7 billion. The NewCo. will only trade at 6x adjusted EBITDA estimates with upside potential from additional lithium production and the bet lithium prices rally again on supply deficits in future years leading to far higher profits along with the cost synergies.

Also, the combined company has $1.4 billion in liquidity, along with positive cash flows, to fund future lithium production growth. The combined bigger business can definitely fund growth easier.

Takeaway

The key investor takeaway is that investors should use the recent weakness in lithium prices to load up on lithium miners. Livent Corporation is a great option to buy on weakness.

For further details see: