By Jacob Sonenshine

The price of lithium has been tumbling for a long time and it's taken miner Albemarle's stock down with it. We're not ready to give up on it yet.

Yes, we were too early in calling a bottom when we recommended the stock this past April, but we're still fans of the stock. Lithium has economic value, so Albemarle shares are still worth owning. It's just a question of at what price.

The key to a turnaround will be lithium prices. They dropped from an all-time high of about $76,000 per metric ton in 2022 to roughly $11,000 in April this year. Months later, it hit a low of just over $5,000 before bouncing to just over $7,000. The plunge was driven by a weak Chinese economy -- the country represents a large portion of lithium demand -- and a broad slowdown in the growth of EV production, where lithium is used to make batteries.

Albemarle's sales and earnings have fallen with the price of lithium. The company is expected to report $5.4 billion in revenue next year, according to FactSet, down from projections for $7.2 billion in April. Margins have been more than cut in half, which means analysts now forecast losses instead of profits.

Albemarle is doing what it can to cut costs, but it isn't easy because it has to commit some money to capital investments. Estimates call for a cash loss of $86 million next year, its third consecutive year of cash burn. As a result, the company has had to raise money through various forms of financing, and now has over $1 billion in cash on hand.

Still, the market is concerned about the company's financial standing. It has about $3.5 billion in debt, and will need to generate cash or raise more money soon to pay it off, especially because the company has $420 million of debt due next year. Since our April pick, Albemarle stock is down 23%, to $88.

Higher lithium prices could boost the stock -- and there's a good chance they could go higher. Electric vehicle and battery demand is still growing, even if that growth is slowing more than originally hoped for. Albemarle grew volumes of lithium sold in its Energy Storage revenue segment by 16% in the third quarter from the year before. What's more, the People's Bank of China unleashed hundreds of billions of stimulus dollars into its economy this year, which should support EV demand.

"High barriers to entry, the difficulty of adding supply, and robust demand growth expectations will likely support balanced-to-tight markets [and] lithium prices," writes RBC analyst Arun Viswanathan, who mentioned that auto makers around the world are still ramping up their EV production and want to secure their lithium supply through multiyear contracts.

Recovering prices plus management's forecast of 15% volume growth annually for the next three years would push profit margins higher, as the sales growth would outpace the cost of production and fixed expenses such as depreciation. The resulting cash flow would also make the company's debt look less burdensome, making investors more comfortable paying a higher earnings multiple.

"Sentiment can only get better over time," writes BMO analyst Joel Jackson.

It can't get much worse.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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December 30, 2024 03:30 ET (08:30 GMT)

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