Albemarle Earnings: Strong First-Quarter Profits Show Value in Market-Based Lithium Pricing

We maintain our Albemarle ALB fair value estimate of $350 per share from after incorporating the company’s first-quarter results. Our narrow moat rating is unchanged.

Albemarle shares are up 6% at the time of writing as the market reacted positively to management’s outlook that lithium prices will rise in the second half of the year despite the company’s guidance cut due to lower spot prices in 2023. At the current share price, we view Albemarle shares as significantly undervalued with the stock trading in 5-star territory at a little more than half of our fair value estimate.

The current stock price implies lower lithium prices for longer due to falling spot prices, which are down a little over 50% from the start of the year. However, we point to a temporary slowdown in demand as the driver of falling prices and forecast strong demand will ultimately keep lithium undersupplied for the remainder of the decade, leading to higher prices.

In 2023, Albemarle completed its transition from long-term fixed price contracts to selling 10% of lithium at spot prices with the remaining 90% at index-referenced prices. These index contracts price lithium with a cap and floor with prices fluctuating based on index price movements with generally a three-month lag. This should allow Albemarle’s realized prices to more closely match market price movements, which was a driver of record first-quarter profits. However, it also means the company’s lithium prices will be more volatile going forward and will fall to a greater extent when spot prices decline.

Regardless, we remain in favor of the move, as we think it will maximize profits over a full cycle as Albemarle should realize higher prices versus other lithium producers who opt for more fixed-price contracts. We doubt any lithium producer can achieve higher average prices through long-term fixed-price contracts than market-based pricing.