Lithium prices have been plummeting this year as new production comes online to meet surging demand from electric vehicles (EVs) and energy grid storage solutions (big batteries to store power for later usage). However, it's a healthy situation for the economy. Lithium prices skyrocketed to unsustainable levels in 2022 due to a lack of supply. Currently, lithium carbonate, a key ingredient in EV batteries, is down some 70% from highs but back to where it was priced just in late 2021. This development brings a little relief to EV automakers as they scale up their own production without worrying about excessively expensive basic material costs.
Nevertheless, uncertainty in lithium prices has done a number on lithium mining stock Albemarle (ALB 1.71%). Shares are down nearly 50% from all-time highs set in the second half of 2022, and management did lower its outlook for revenue and profitability in 2023 due to current market pricing conditions. But is the situation really that dire for this top lithium mining operation?
Business is still in overdrive for 2023
Bear in mind that Albemarle, a global mining company that has been around for decades, made a hard pivot to lithium in the last few years. However, it takes substantial time to get a new mine up and running. 2022 was the year production really started to take off and reach a profitable scale.
This explains why Albemarle's first-quarter 2023 revenue more than doubled year over year, up 129% to $2.6 billion. Net income increased 389% to $1.2 billion since Albemarle was barely profitable this same time last year. On an adjusted basis, earnings per share (EPS) were up 334% to $10.32.
Registering year-over-year growth will get tougher going forward, though, given that Albemarle's production later in 2022 was soaring, as were lithium prices. As expected, Albemarle management lowered its guidance for sales and profits this year, but perhaps a bit more than originally expected. Revenue is now expected to be in the range of $9.8 billion to $11.5 billion (down as much as 13% from prior guidance for $11.3 billion to $12.9 billion). Adjusted EPS is now expected to be in a range of $20.75 to $25.75 (down as much as 22% from previous guidance for $26.00 to $33.00). Albemarle historically struck long-term supply contracts with customers to avoid some of the volatility in lithium pricing, but some customers apparently have been wanting to move to a supply agreement based on current market pricing instead. Thus the drop in financial outlook as lithium prices have tanked and those customers now get to buy at reduced pricing (at least for the time being, anyways).
Despite the lowered guidance, note that Albemarle is still expecting respectable growth in 2023 as demand for lithium from EVs and energy storage remains high. At the midpoint of the new outlook, revenue is expected to be up about 45% from 2022, and adjusted EPS is expected to be up 6% -- the lower EPS growth accounting for the big drop in lithium price, which makes the base material a bit less profitable than during its peak last year.
Is Albemarle stock a buy?
Albemarle was one of my top-performing stocks of 2022, but I put a pause on purchasing more shares in the back half of the year and early in 2023. It was becoming increasingly clear that last year's massive surge in lithium price was unsustainable, and a cyclical downturn in the battery ingredient was coming.
Now that lithium prices have cratered, things look far more favorable for buying more Albemarle stock. After all, though more supply of lithium from other mining operations, as well as a sluggish economic recovery in China (the world's biggest market for EVs), has brought base material pricing back down, Albemarle remains highly profitable. Shares now trade for just 7.7 times the midpoint of forecasted 2023 adjusted EPS, about in line with the average mining stock valuation multiple. For reference, the average price-to-earnings ratio of mining companies in the iShares MSCI Global Metals & Mining Producers ETF (PICK -1.24%) currently stands at 6.5 (on a trailing-12-month basis).
Albemarle isn't just any old mining company, though. All base material and metals businesses are highly cyclical, but lithium demand is growth-cyclical. Demand for lithium is expected to continue trending up throughout the next decade, thanks to the exponential volume needed for the big batteries needed in EVs and energy grid storage applications. Sure, pricing will be volatile (a situation Albemarle can at least partially mitigate with its long-term contracts and partnerships with customers), but management still expects an average of 20% to 30% growth in lithium sales volume through 2027.
Don't get me wrong -- I expect Albemarle stock to remain wild this year as the market grapples with lithium price swings and lots of noise in EV and energy grid demand. But this once again looks like an attractively priced lithium mining stock after the big sell-off. I plan on adding to my position soon.
