It's no secret that fast and steady uptake of electric vehicles (EVs) has created insatiable global demand for lithium. Lithium-ion batteries aren't new, but the battery in a car is much larger than one powering a phone or laptop -- and lithium miners are racing to ramp up supply.
But it's also no secret that lithium prices reached unsustainable levels late in 2022, and have fallen back toward earth in 2023. That has created a revenue and profit growth headwind for top companies in this mining and base materials niche like Livent (LTHM), which I recently took a small starter position in to complement my larger holding in top lithium producer Albemarle. Here's how Livent is managing the bumpy road that has been 2023 so far.
A small operation with big aspirations
Livent is a small company among its mining and base material peers, but it isn't exactly a fresh start-up. It was spun off from agricultural chemicals company FMC in 2019. Livent retains some traits of its former parent, focusing on the manufacture of refined products with a smaller focus on raw lithium mining. But the company has done well during its first few years as a stand-alone business as it has geared up to meet demand for its battery and automaker customers.
This focus on the sale of lithium materials that are ready to use in the manufacturing of a battery has served Livent well during the lithium price downturn. Raw lithium (like lithium carbonate) pricing has been halved from peaks in late 2022 as more global supply has come online from miners like Albemarle. But Livent just reported sales not too far off from all-time highs thanks to its own volume production increases, and more stable pricing for its refined material sales (versus more volatile raw material pricing).
Second-quarter 2023 revenue of $236 million was down 7% from the first quarter, but did represent an 8% year-over-year increase. Generally accepted accounting principles (GAAP) net income of $90.2 million fell 22% from last quarter due to higher expenses and slightly lower selling prices, but still increased 50% from the year prior due to efficiency gains as Livent's global manufacturing operation reaches fuller capacity.
The company also reiterated its full-year 2023 financial outlook, with management expecting a 32% increase in revenue and a 55% increase in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) at the midpoint of guidance.
A merger, and a new project in Canada
Some of the biggest news of the last quarter was the announced merger between Livent and Australia-based lithium miner Allkem. The all-stock deal remains on track for completion by the end of 2023, and should pair two growing and profitable outfits together to create a more vertically integrated EV chemicals producer.
The rationale is Allkem's mines in Argentina and Western Australia could help keep Livent's lithium chemicals refining facilities full at a lower cost than what Livent can source from third-party miners. This pairing would put the new company on a more level playing field with integrated lithium miner and chemicals manufacturer Ganfeng Lithium in China, as well as top raw lithium miner Albemarle, which has been investing in its own refining operations as of late.
Additionally, Livent is now constructing a mine and refining facility in Quebec (called the Nemaska Lithium project) that will begin production in 2025 and 2026, respectively. Livent announced an 11-year supply agreement with Ford Motor Company from these new operations last quarter as Ford tries to rationally expand its EV production in the coming years.
By some metrics, Livent is starting to look cheap. Shares trade for 13 times trailing-12-month earnings, and 22 times trailing free cash flow. However, the value here will be realized if Livent can continue to execute on its supply increase plans, and assuming lithium pricing doesn't deteriorate further from where it is now. Given the big increases in EV demand, it appears raw lithium markets have stabilized for now, leaving Livent to prove it can continue to fill up its manufacturing pipeline.
Given how it's done so far, though, I've started nibbling on Livent as it charts a path toward becoming one of the top names in the lithium industry in the coming years. Bear in mind the wild volatility inherent in Livent, though, which is normal for any mining and base material stock as they can be highly sensitive to commodity prices and small changes in global supply and demand. Consider utilizing a dollar-cost average plan to build a larger position over time, if you choose to do so at all.
