Electric vehicle (EV) production is a top priority among automakers this year. However, for miners and refiners of lithium, a key raw ingredient in the manufacture of the big batteries needed in EVs, 2023 has been a story of commodity pricing. 

You see, lithium demand is soaring, but that's not the only driver of revenue for lithium producers. Final pricing on the material is also a key factor. And after skyrocketing through late 2022, lithium prices have tanked this year as more supply of the elemental ingredient has hit the market.  

Lithium leader Albemarle (ALB 1.65%) has a plan to deal with the volatility, and it involves a key acquisition of pre-revenue start-up Liontown Resources (LINR.F -4.06%) in Western Australia. With due diligence of Liontown's assets now underway, is Albemarle stock a buy now?  

What Albemarle is offering Liontown, and what it could get in return

Earlier this year, Albemarle had made its interest in purchasing Liontown clear, but it only now just submitted its best and final proposal for the mining operation. If Albemarle's due diligence yields a green light, and Liontown agrees to the final terms, Liontown would be acquired for 3 Australian dollars per share, valuing the company at AU$6.6 billion, or $4.3 billion.  

It's worth noting this price is based on "the absence of a superior proposal," which has helped spur on a bit of speculation that a higher rival bid could be made for Liontown. Stay tuned to see if actual drama will ensue. 

But what would North Carolina-based Albemarle, or potentially some other suitor, actually be buying? As of right now, Liontown generates no revenue, and thus it loses a bit of money (AU$20.2 million the first half of 2023). Liontown reported AU$305 million in cash and AU$119 million in debt (drawn from a credit agreement with Ford Motor Company).

The real draw to Liontown, though, is its project in Kathleen Valley, a long drive into the Western Australian Outback from Perth. Earlier this summer, Liontown said it would begin bulk shipments of raw lithium ore it has been stockpiling at Kathleen Valley. It has inked supply agreements with Ford, Tesla, and lithium refining and battery manufacturing companies in South Korea and Japan. Additionally, Liontown has rights to other lithium projects in Western Australia in various phases of exploration and feasibility studies.

Albemarle's grand plan

Albemarle has established itself as a leader in lithium mining by recognizing the potential of EVs early on, and developing numerous low-cost production sites around the globe from which to supply raw material. Liontown could be an additional outlet from which to ramp up supply as EVs steadily displace internal combustion engines. It also diversifies Albemarle away from its production in Chile, which has suddenly been hit with potential political risk. 

But this offer is also about establishing and maintaining future market share. There are many dozens of lithium projects under development right now, and many more in feasibility studies. Of course, several of these will never reach actual production, and some that do will churn out little or low-quality material.  

Nevertheless, consolidation of existing sites ready for production could be key for Albemarle to defend its supply agreements with customers, as well as to protect pricing (and thus profitability) of its operations. Though lithium's plummet this year has dented the company's prospects a bit, it can continue to crank out cash by sourcing cost-effective resources and sustaining its supply agreements with automakers and battery manufacturers. 

Other lithium companies are also merging for similar reasons, like Livent and its pending tie-up with Australia's Allkem. 

Albemarle has said Liontown complements its long-term plans and could support its goal of increasing the volume of lithium sales by an average of 20% to 30% per year through 2027.

Time to go shopping?

Lithium's dip in 2023 has created ample volatility in lithium mining stocks this year, Albemarle included. Albemarle now trades for just under 7 times this year's expected earnings per share, about average for a mining conglomerate. However, lithium is a growth market, so if Albemarle can continue scaling up profitably over the next five years, the stock could be a great deal right now. 

Just mind the wild swings in share price inherent in this industry. Make any investment in raw material producers like Albemarle prudently, and not too large a part of your portfolio.