This story has been told before (by me, at numerous points in 2023), but it appears that one of the leading producers of lithium, Albemarle (ALB +2.39%), is signaling that the worst might finally be over.
After a massive run-up in 2022 for the price of the commodity -- a key ingredient in electric vehicle (EV) lithium ion batteries -- lithium's market price proceeded to tank last year due to excess supply and other issues springing from a lack of price transparency in some markets like China.
However, so far in 2024, lithium prices seem to have stabilized just a bit higher than where they were in 2021. Albemarle itself provided a full-year forecast reflecting what it sees as lithium market price stabilization, and continued demand growth for its products driven by global EV sales. Is it now safe to buy the stock?
Focusing on factors that can be controlled
Before we delve into Albemarle's performance, let's first acknowledge one fact, same as at the end of December: The global EV market is still growing. While sales growth has sputtered in North America (Tesla drama, anyone?), consumers are still going strong in Europe and China -- the latter being far and away the world's largest market for EVs.
Image source: Albemarle.
To be clear, while Albemarle's volume of lithium sold continues to rise thanks to rising EV battery needs, there's a long road back to the peak that the stock had reached back in late 2022.
The first-quarter 2024 earnings report proves it. Quarterly revenue fell 47% year over year to $1.36 billion, and there was a loss per share of $0.08, compared to positive earnings per share of $10.51 in the year-ago period. Most of this decline was due to the collapse in lithium pricing.
Despite the ugly financials, Albemarle has laid out plans to remain profitable for the full 2024 fiscal year, albeit with a lower rate of profitability than in years past (about a 34% operating cash flow margin, versus 40% or more since 2021).
Despite the boom-bust in lithium, Albemarle has low costs of production (one of the benefits of being a first mover in this niche of mining). Management has undertaken cost controls, and it has refocused its spending this year on its most profitable mining development projects to sustain its future lithium supply growth.
In addition to the expectation that the volume of lithium sold this year will offset the big price crash, Albemarle also has a small chemicals and additives business called Ketjen that aids in fossil fuel refining and the development of clean fuels. Albemarle expects its Ketjen subsidiary to grow and deliver higher profits than in 2023.
Ultimately, it's the lithium market controlling the sails of Albemarle these days. But management seems to have weathered a severe storm and positioned itself for gradual recovery.
Time to buy the stock?
Last year, Albemarle stock fell to just a single-digit price-to-earnings multiple, which is about in line with a typical mining stock. It looked like a steal for a company expecting to grow the volume of its product sold by double-digit percentages (10% to 20% volume growth is the outlook for 2024).
But now the stock trades for nearly 50 times trailing-12-month earnings due to the lithium price crash. With Albemarle working through a recovery, and with no pinpoint on just how profitable the company can be, valuation metrics based on earnings per share aren't of much use.
One clue that Albemarle shares can gradually rise again from this point is the price-to-book value, which currently stands at 1.6. It doesn't exactly scream value, but it's the lowest it's been for this company since 2020.
Executing well on the development of new projects and keeping the cash flowing from existing ones will be keys this year for Albemarle. Expect this to be a highly volatile stock, though. Investors should bear that in mind when buying a position, if any, in this and other lithium mining stocks.
