3 Things for Albemarle Investors to Watch in 2019

The world's premier lithium producer is struggling to convince Wall Street of its growth potential, but investors can watch for these signs of progress.

Maxx Chatsko
Maxx Chatsko
Jan 22, 2019 at 9:32PM
Energy, Materials, and Utilities

Check out the latest Albemarle earnings call transcript.

Shareholders helplessly watched the trajectory of Albemarle (NYSE:ALB) stock change, going from an unstoppable ascension through late 2017 to a staggered walk in the year or so since. To be fair, the company was trading at a healthy premium at its peak, and its price was partially built on irrational expectations for lithium stocks. But the sell-off appears equally irrational, especially in light of the steady growth and rising operating income delivered last year.

Executing on strategic objectives hasn't bought the business much sympathy from Wall Street, which remains sour on the lithium industry for the time being. That doesn't mean individual investors have to agree with analysts. In fact, there are at least three aspects of Albemarle's lithium business to watch in 2019 that have the potential to prove Wall Street wrong and lift shares in the near future.

A contract and pen sitting on a desk.

Image source: Getty Images.

1. Lithium contract development

In February 2018 analysts at Morgan Stanley issued a controversial report questioning the future growth of the lithium market. That spooked markets, and sent shares of major lithium producers sharply lower -- a drop from which they have yet to recover. Nonetheless, the report may end up providing a net benefit for investors, as it prompted Albemarle to significantly improve how it communicates its internal lithium strategy to the markets.

The company has gone to great lengths to explain in simple terms how the lithium market works and why it sees global lithium demand rising 263% from 2017 to 2025. Importantly, Albemarle has worked to erase concerns that it may be expanding too quickly by showing investors it has the great majority of future production entered into long-term supply contracts.

Albemarle boasted total production capacity of 65,000 metric tons (MT) of lithium carbonate equivalent (LCE) in 2018, but expects that to increase to 165,000 MT LCE by 2021. While that would represent a significant jump in output, the business has nearly 138,000 MT LCE of that expected production capacity signed into long-term supply agreements right now. That should provide certainty for the business and investors going forward, especially as the percentage of expected output entered into supply agreements approaches 100% in 2019.

A drawing of a car with a plug trailing behind it.

Image source: Getty Images.

2. Electric vehicle developments

To state the obvious, nearly all of Albemarle's continued growth in the lithium market will be dependent on the rise of electric vehicles (EVs). The company's own projections call for transportation applications to increase its lithium demand from just 50,000 MT LCE in 2017 to 550,000 MT LCE in 2025. The rise of the suddenly profitable Tesla certainly helps that outlook, as does the fact established automakers are expected to pour $300 billion into EVs and battery manufacturing in the near future. 

Investors can watch for continued product teases and launches from automakers in 2019 as an indication that Albemarle will be proven correct. The business actually has good insight into how the market will develop, especially considering it has 84% of its expected production capacity in 2021 entered into supply agreements already. But since that alone hasn't helped to nudge analysts into bullish territory, perhaps it will just take a few more correlated data points.

A hand drawing an ascending bar chart on a chalk board.

Image source: Getty Images.


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3. Growth projects staying on track

There are only three assets and five project stages in total driving Albemarle's expansion efforts, and investors will want to keep an eye on them to ensure they remain on schedule. The company refers to these projects as the "Wave 1 expansion", which will increase annual production capacity by 100,000 MT LCE between now and 2021. Here's what to expect:

Project

Nameplate Production Capacity

Primary Product

Expected Start

Xinyu II (China)

20,000 MT LCE

Lithium hydroxide

2019

La Negra III / IV (Chile)

40,000 MT LCE

Lithium carbonate

2020

Kemerton I / II (Australia)

40,000 MT LCE

Lithium hydroxide

2021

Source: Investor presentation.

Importantly, the Wave 1 expansion includes 75% of Albemarle's expected lithium hydroxide output in 2021. Lithium hydroxide is becoming the go-to material for lithium-ion battery manufacturers because of its purity and how quickly it can be transformed into products. (All of the company's Wave 2 expansion projects are for lithium hydroxide.) Successfully starting the upcoming projects, then ramping them up to full nameplate capacity over the subsequent months, will be a big test for the company.

That's especially true considering each project requires custom material processing units owing to the high variability of raw lithium resources from one mine or brine to the next. If Albemarle is going to hit a home run in the lithium market and gain the confidence of customers, it needs to demonstrate that its separation technology works close to flawlessly.

A crucial year ahead

Bringing the Xinyu II project online in 2019 will mark an important step forward for Albemarle's lithium business. It will be the first step in an ambitious expansion effort that, if successful, will increase annual production capacity from 65,000 MT LCE in 2018 to 165,000 MT LCE in 2021 -- and then as high as 325,000 MT LCE in 2025. If the business pulls it off, then Wall Street will be forced to give the company a market cap much higher than $8.1 billion. And all of this doesn't even take into account the company's "other" business units, which aren't exactly slouches. Simply put, there's a lot to look forward to in the year ahead for patient investors with a long-term mindset.