With inflation running hot, it's been quite the year for companies that mine and refine raw materials. Top lithium supplier Albemarle (ALB 0.31%) is no exception. Though the stock has been highly volatile, it's up nearly 30% over the last year, compared to a nearly 4% decline for the S&P 500.  

Lithium is in sky-high demand right now as electric vehicle (EV) battery manufacturing ramps up. But with lithium prices near record highs and Albemarle stock up so much already in the last year, is it too late to buy?

A massive upgrade to the 2022 outlook

It's first worth mentioning some risks with owning stocks like Albemarle. Mining and raw material producers are highly reliant on market prices for commodities. Commodity prices themselves are highly volatile and sensitive to even small fluctuations in supply and demand. Thus, this year's booming financial results could be followed by a big cool-off next year.  

To this end, know that Albemarle is currently working on numerous projects to boost the supply of lithium in the coming years. It isn't alone. With EVs expected to be on the rise for many years, plus renewable energy projects looking to plug giant batteries into the energy grid, other mining companies are also looking to cash in on the boom. At some point, new supply hitting the market could help soften the price of lithium -- and put a damper on the company's financial growth (even if the volume of actual lithium shipped increases). It is worth mentioning, though, that Albemarle sells nearly all of its lithium on a contracted basis, not at market prices. That could help offset some volatility, although those contracts are renegotiated every so often based on the going rate for lithium.

Nevertheless, if you believe lithium demand will head steadily higher over the next decade and beyond, this is a top stock to consider. Albemarle's second-quarter 2022 results help illustrate why. Sales increased 91% year over year to $1.48 billion. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 214% to $610 million. For full-year 2022, management now expects sales to be in a range of $7.1 billion to $7.5 billion and adjusted EBITDA to be $3.2 billion to $3.5 billion. Just a few months ago, the outlook was for sales of $5.8 billion to $6.2 billion and adjusted EBITDA of $2.2 billion to $2.5 billion. Huzzah!

Additionally, thanks to the higher outlook for revenue and operating-level profit, Albemarle expects it will be slightly free-cash-flow positive in 2022. Again, bear in mind that Albemarle has a number of projects underway to boost lithium production. Getting operations up and running costs significant amounts of cash to purchase equipment and develop a production site (capital expenditures). Considering this, the outlook for free cash flow is as follows:

Metric

Previous Albemarle 2022 Outlook

Current Albemarle 2022 Outlook

Net cash from operations

$550 million to $850 million

$1.4 billion to $1.7 billion

Capital expenditures

$1.3 billion to $1.5 billion

$1.3 billion to $1.5 billion

Implied 2022 free cash flow

-$750 million to -$650 million

$100 million to $200 million

Data source: Albemarle.  

Is it too late to buy?

Albemarle's performance in the last year has been impressive, but it could run higher in the coming years if it delivers on expectations for steady production growth (it's expecting 20%-per-year average production increases by volume through 2025) and positive free cash flow. But a lot is riding on the company's ability to deliver the goods. The stock currently trades for 25 times enterprise value to expected 2022 operating income and 353 times expected 2022 free cash flow (at the low end of guidance).

Make no mistake -- if Albemarle reaches a profitable scale in the coming years as spending on new projects eases and free cash flow rapidly rises, there's lots of room for share price growth. But at best, expect a very volatile journey along the way. Such should always be the expectation for mining and base material producer stocks. Nevertheless, if you think lithium demand will keep climbing from here, there's a lot to like about Albemarle and its solid execution thus far as a supplier to the EV and renewable energy industry. I remain a buyer right now.