Livent Earnings: Higher Lithium Contract Prices Will Drive Solid Annual Profit Growth

Livent’s LTHM second-quarter results exemplified our near-term outlook for the company and lithium producers in general. Adjusted EBITDA grew 42% 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 Livent intact, we maintain our $42 per share fair value estimate and narrow moat rating.

Livent shares were down in afterhours trading. At current prices, we view Livent shares as materially undervalued, with the stock trading at roughly half of our fair value estimate.

We think the market is assuming lower lithium prices as China spot prices have begun to fall. However, in 2023, this should not affect Livent too much as only 30% of its volumes will be sold at variable price contracts, with the remainder sold at fixed prices.

Additionally, we think the spot price is likely to rise by the end of the year as demand grows faster than supply. 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.

For Livent, rising spot prices should bode well for the company’s profits as it transitions to more variable price contracts with shorter-term price resets and merges with Allkem, who sells lithium and lithium concentrates (spodumene) at market prices. We are in favor of more variable price contracts as we think it is difficult for any company to realize a higher price versus the market over a number of years.