Albemarle Earnings: Higher Lithium Prices Drive Strong Profit Growth

Albemarle’s ALB second quarter results exemplified our near-term outlook for the company and lithium producers in general. In the energy storage (lithium) business, adjusted EBITDA grew nearly 93% versus the prior-year quarter driven primarily by higher prices. This is in line with our view that, despite lower lithium index prices in 2023 versus 2022, producer contract prices would rise.

With our outlook for Albemarle intact, we maintain our $350 per share fair value estimate and narrow moat rating. Albemarle shares were up slightly at the time of writing as the market reacted favorably to management’s guidance raise for the year, underpinned by higher realized lithium prices. However, at current prices, we view Albemarle shares as materially undervalued, with the stock trading in 4-star territory and at more than a 40% discount to our fair value estimate.

Albemarle is one of our top lithium picks. The company offers investors near pure-play exposure, with almost 90% of profits coming from lithium. Additionally, we see relatively lower company specific risk in Albemarle versus other lithium producers. While all major lithium producers are investing heavily to expand capacity, most of Albemarle’s expansions will come from the buildout of existing resources. Further, even when Albemarle is building new downstream processing capacity, the company is essentially replicating existing facilities in new locations, which in our view, reduces project execution risk.

We expect the lithium market will end 2023 in a deficit, driven by rising electric vehicle sales and the growing buildout of energy storage systems, the utility-scale batteries used to support renewable power generation. As demand more than triples by 2030 to 2.5 million metric tons from 800,000 in 2022, we expect the lithium market will remain in a deficit, supporting prices well above the marginal cost of production. We forecast prices will average in the mid-$30,000 per metric ton range from 2023 through 2030.