2023-10-21 08:30:00 ET
Summary
- Investors in Albermarle Corporation are likely stunned, with ALB falling toward its March 2021 lows, marking its worst hammering in recent memory.
- The decline is attributed to a considerable normalization phase in lithium oversupply concerns oversupply in the medium term. Could it get worse from here?
- Bank of America analysts downgraded ALB to Sell, citing a worsening profitability outlook and increased CapEx spending. The concerns are justified and aren't without basis.
- Despite that, ALB remains a significant low-cost leader in the lithium mining industry. As a result, it remains well-positioned to capitalize on further market share gains.
- I argue why, while I'm not bearish on ALB, significant damage has been inflicted on ALB's price action. A more cautious view is necessary for strong buyers to demonstrate their conviction first.
Leading low-cost lithium miner Albermarle Corporation ( ALB ) investors face the worst battering in recent memory as sellers fled, leading to an increasingly likely re-test of ALB's March 2021 lows.
ALB Quant Grades (Seeking Alpha)
Investors are likely stunned, as ALB isn't expensive, as I had highlighted in my recent updates on the stock. Accordingly, ALB is assigned a "B-" valuation grade by Seeking Alpha Quant, corroborating my thesis about its valuation. Despite that, with ALB significantly underperforming the S&P 500 ( SPX ) ( SPY ) since my previous update , investors must ask tough questions about whether ALB is a value trap. Notably, ALB has dropped nearly 46% over the past year on a total return basis.
Let me help clear the air on this matter. It's important to note that ALB still posted a relatively healthy 10% total return CAGR over the past five years, below the SPY's 10.9%. However, it's still slightly ahead of its sector peers represented in the Materials Select Sector SPDR ETF ( XLB ), as XLB posted a 5Y total return CAGR of 9.8%.
As such, I gleaned that the significant decline is consistent with a substantial growth normalization phase reflected in Albermarle's operating results after a robust period of growth in lithium prices, which peaked in 2022.
With battery-grade lithium carbonate prices trading below $25K per mt recently, hard questions need to be asked whether we could enter a period of oversupply in the medium term. I believe the battering in the underlying market has stunned investors, as the peak in 2022 reached a high of $75K per mt before collapsing toward the $50K per mt zone in March 2023.
Bank of America or BofA ( BAC ) analysts downgraded ALB to Sell this week, indicating their pessimism over the company's prospects through 2025. BofA anticipates that " lithium supply will exceed demand in 2024 and 2025," leading to a worsening profitability outlook for Albermarle and its peers. In addition, the period also coincides with a higher CapEx spending forecast for Albermarle, which could constrain its free cash flow or FCF profile further. In other words, the analysts contend Albermarle's increased CapEx profile couldn't have arrived at a worse time, given the significant decline in lithium carbonate prices from its 2022 peak.
Wall Street consensus estimates are in line with BofA's commentary. Accordingly, Albermarle's CapEx is expected to rise to $2.09B in FY24 before a further increase to $2.74B in FY25. I assessed it's consistent with Albermarle's long-term production outlook of reaching between 500K mt and 600K mt by 2030. With the Liontown non-binding offer being withdrawn recently, an outlook closer to the 500K mark is anticipated. However, I believe Albermarle could still be on the lookout for other opportunities to bolster its high-quality hard rock lithium deposits. In addition, the long-term outlook indicates a 175% increase at the midpoint from its 200K mt production base in 2022.
As such, the market's fears over a period of increased and potentially weaker prices are justified. More so, even industry participants didn't anticipate the significant downswing in lithium prices correctly in 2023, notwithstanding the continued advance of EV market share gains this year. Notably, the S&P Commodity Insights team put together the industry views in December 2022, articulating that " lithium prices will likely see strong support in 2023, with supply expected to remain tight amid bullish demand from the accelerating adoption of electric vehicles across the globe."
The Chinese EV market has continued to advance this year, although lithium carbonate prices kept falling. In addition, downstream destocking has continued in earnest, defying the usual end-of-the-year seasonal tailwinds for Albermarle and its lithium peers. Accordingly, " significant restocking has not yet occurred, and battery makers still have ample inventory." Despite that, BloombergNEF reaffirmed its view that the long-term outlook for lithium producers remains positive, indicating " global demand for lithium to grow nearly fivefold by the end of the decade." As such, Albermarle's long-term prospects as a low-cost lithium leader remain underpinned by long-term market share gains for EVs and energy storage solutions.
ALB price chart (monthly) (TradingView)
ALB's long-term price action has had significant developments over the past month that warrant attention.
As seen above, dip buyers have failed to defend the $170 support zone that was first formed in March 2022. The sharp decline in October is reminiscent of robust technical selling as investors anticipated a decisive breach of its long-term support. In other words, they likely adopted the "sell first and ask questions later" risk management approach.
ALB has inched closer to its March 2021 lows at the $135 level, which I anticipated should be re-tested. Furthermore, the technical damage in ALB is significant, as it could lose control of its 50-month moving average or MA (blue line). As a result, momentum buyers have likely fled and might not return unless they anticipate retaking control of the 50-month MA.
I believe ALB is undervalued. Also, it's important to note that I'm not bearish on ALB. However, caution must be heeded for now, giving time for buyers to demonstrate their conviction at the $135 level. If that level is supported over the next few months, I will reassess my rating accordingly.
Rating: Downgraded to Hold (on the watch for a rating change).
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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For further details see:
Albemarle: Time To Brace For The Impact Of Lithium Oversupply (Rating Downgrade)