Summary
- Lithium investors probably shouldn't fret about the recent market overreaction, since global demand for the commodity should remain robust throughout this decade.
- LTHM's top and bottom lines are insulated through 2023 as well, since 70% of its contracts are at fixed pricing terms.
- Notably, the company expects to expand its production output by 50% YoY to 45K MT lithium hydroxide by the end of 2023, softening the impact of the rising inflationary pressures.
- We think investors may see LTHM breach its February 2023 support levels soon, hitting its January bottom of below $20.
The Lithium Investment Thesis Is Still Robust
The Livent ( LTHM ) stock rallied impressively by 11% after its excellent FQ4'22 earnings call , attributed to the EPS beat and more than decent forward guidance.
However, the optimism has unfortunately been digested, largely due to Contemporary Amperex Technology's [CATL] strategic choice in offering battery discounts to Chinese automakers. In our view, this was highly reminiscent of Tesla's (NASDAQ: TSLA ) recent move in cutting their EV prices .
The strategy worked for the latter in the US, with the Model Y sold out for Q1'23 with deliveries extended between April and June 2023, against the same-month delivery for a Model Y placed in early December 2022.
With the lion's market share of 37.1% in the global EV battery market in 2022, similar to TSLA at 65% in the US EV market , we could not help but wonder if CATL was similarly chasing volume growth at a time of reduced discretionary spending.
Now how will this impact LTHM, due to the perception of lower lithium prices in the short term? We are not concerned really, since the mining company has deftly negotiated up to 72% of its 2023 volumes at fixed pricing terms, with one contract already set through 2024.
Moderating Lithium Prices
We understand the pessimism from the moderating lithium prices, with the commodity (lithium carbonate) costing 422.5K Yuan per MT, down by -29.3% compared to 595.4K Yuan per MT at its peak in November 2022. However, we must also highlight that current lithium prices remain immensely elevated by +836.8%, compared to pre-pandemic prices of 45.1K Yuan per MT in December 2019.
Therefore, with over 20% of its volumes exposed to monthly adjustments based on spot prices, LTHM may still benefit some from the variable pricing structure, with minimal impact on its profitability moving forward.
Notably, the pandemic rally in the commodity prices had allowed the company to deliver a stellar performance in FY2022, with revenues of $813.2M (+93.4% YoY), operating margins of 41.7% (+31.9 percentage points YoY), and EPS of $1.40 (+677.7% YoY).
Record-low Lithium Inventories In China
This is also probably why the LTHM management continues to guide up to +20% YoY growth in sales volume and higher realized prices in 2023, despite the higher cost of goods/ operating expenses/export duties. It is significantly aided by the sustained supply deficit in comparison to the growing demand, resulting in record-low lithium inventories in China. With the country accounting for 36.7% of its revenues in FY2022, demand from China matters indeed.
We believe that CATL, the world's largest battery maker, had no choice but to cut prices, due to the impact of the Inflation Reduction Act [IRA] requirements, where EV batteries have to be manufactured domestically with trade-friendly supply chains. It was obvious that CATL had the majority of its factories located in China , with the exception of Germany and Hungary.
CATL previously supplied General Motors (NYSE: GM ), Volkswagen ( OTCPK:VWAGY ), BMW ( OTCPK:BMWYY ), and TSLA as well, with things uncertain now due to the IRA. Perhaps this was why the battery maker had to divert the impacted demand to the domestic market, by offering discounts of up to -7%.
However, we remain optimistic about lithium prices moving forward, with two Chinese miners, namely Sinomine Resource Group and Zijin Mining Group , expecting lithium prices to stabilize at between 300K and 400K Yuan per MT through 2023.
LTHM also strategically guides the expansion of its annual production capacity to 45K MT of lithium hydroxide by the end of 2023, growing tremendously by +50% YoY from FY2022 levels of 30K MT . In the intermediate term, the company also expects to add another 34K MT of output from the Nemaska Lithium project in Canada by FY2025, with another 10K MT from its recycling plant in Argentina/ Canada by FY2026.
As a result, LTHM may potentially hit its FY2023 guidance of mid-point revenues at $1.05B (+29.1% YoY) and adj. EBITDA at $545M (+48.6% YoY), despite the tougher YoY comparison.
So, Is LTHM Stock A Buy , Sell, or Hold?
LTHM 1Y EV/Revenue and P/E Valuations
LTHM is currently trading at an EV/NTM Revenue of 4.01x and NTM P/E of 12.38x, higher than its 1Y pre-pandemic mean of 2.79x and 11.95x, respectively. Otherwise, it is lower than the 1Y mean of 5.34x and 22.79x, respectively.
Based on its projected FY2024 EPS of $2.53 and current P/E valuations, we are looking at a moderate price target of $31.32. This nears the consensus price target of $32 as well, suggesting an excellent 32.5% upside potential from current levels.
LTHM 1Y Stock Price
However, we reckon there may be more attractive entry points moving forward, with the stock failing to breach February 2023 resistance levels thus far. While it is neither reflective of the company's execution thus far nor the commodity's long-term demand, the pessimism attributed to CATL's discounted lithium batteries may potentially pull the LTHM stock nearer to its January 2023 bottom of $18.97.
Lithium Demand Through 2030
Nonetheless, LTHM investors likely need not fret since we believe this headwind is merely temporary, attributed to the market's overreaction from CATL's price cuts. The global demand for the raw materials should continue to grow through 2030 to 2.11M MT , increasing tremendously at a CAGR of 18.09%.
Notably, lithium supply is similarly expanding hand in hand, with global mines expected to produce 1.03M MT by 2024 , against 2022 levels of 682K MT and 2021 levels of 546K MT.
With EVs comprising up to 73% of lithium demand by 2030, it is unsurprising that more and more automakers, such as GM , TSLA , Ford Motor (NYSE: F ), and battery makers alike have decided to form strategic partnerships with various lithium miners.
Therefore, investors may be well advised to add at $20 or lower, due to the improved margin of safety to our price target.
For further details see:
Livent: The Market Likely Overreacted - Contract Execution Remains Excellent