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Nick's (Re)Pick: Hello Albemarle, My Old Friend

In this article, I wanted to revisit one of the first Nick’s Picks, Albemarle (Ticker: ALB), a chemicals producer that has three main segments: Lithium, Bromine, and Catalysts. I had to refer back to the article to recall my exact recommendation—thankfully it wasn’t a Buy given the stock’s poor performance, plunging some 30% since the time of writing! I noted back then that the stock was quite expensive as it sat around its all-time high, and that it might be worth waiting for the price to come back down before opening a position.

Well, fallen it certainly has—the stock has been getting hammered since reaching about $334 in November, with shares trading at $184 today. Now why is that? The primary reason is the price of lithium, which has retreated significantly over the last six months (See Exhibit A).

Exhibit A

It seems that the nosedive that lithium prices have been taking recently is bottoming out—the surge in prices in 2021-2022 created by skyrocketing demand from EV makers clearly wasn’t sustainable. While prices may not get back to 2022 highs, forward-looking projections show stable, more modest growth over the next few years—by 2025, prices are estimated to be 2X pre-pandemic levels. Furthermore, as I outlined in the first article, the lithium market is forecasted to be undersupplied until 2026, which should help to buoy the price over that timeframe. Nevertheless, while high lithium prices certainly benefit Albemarle, it’s not the sole source of their future growth; the primary driver is based on lithium demand (volume growth), specifically from the adoption of electric vehicles. This is certainly a much more predictable metric, with governments ratifying progressive EV policies with increasing regularity; for example, Europe is talking about banning the sale of new gasoline cars by 2035 (mirroring California’s stance on the matter). This is an indication of the considerable demand for lithium, or “white gold,” expected over the next few decades, which in turn should help to solidify prices over the long-term.

A more recent concern emerged out of Chile just last Thursday, when their President announced plans to nationalize the country’s lithium industry. This was big news because Chile possesses the largest lithium reserves in the world, and is second to Australia in total mine production—nationalization of these precious lithium resources could have far-reaching global effects on both companies and countries alike. While this policy still has to make its way through the legislature—and you can be sure that the US will administer diplomatic pressure on the Chilean government to abandon the measures (their lithium is one of select countries eligible for the new US EV battery subsidies in Biden’s Inflation Reduction Act)—the President is calling for state majority ownership of current and future lithium mines in Chile.

Albemarle is regarded as one of the two biggest players in the Chilean Lithium market (the other being SQM). As a result, both companies’ shares were down when the market opened the following day (last Friday). However, the stock market can act emotionally and irrationally, and as ALB investors headed for the exits, I believe that Friday was an example of such an occasion. Although I can’t imagine that ALB is thrilled with this proposition, the news (as currently presented) isn’t as bad as it may seem. The market seems to have realized this, with shares bouncing back by about 6% when the market opened yesterday morning.

The President said that Chile will honour all current contracts, which seemingly presents SQM and ALB with a choice—they can give the government a majority share of the mines, or alternatively they can elect to retain full control until the end of the contract (at which point they could potentially risk losing 100% ownership without any compensation). With that said, unlike SQM, whose leases are up in 2030, Albemarle’s contracts expire in 2043, giving them a fair bit of flexibility, especially considering that there are five national elections before 2043. Thus, barring any sort of unforeseen governmental overreach (e.g. mine seizures), it is very possible that ALB will be able to wait this out in hopes of a course reversal by the current regime or the election of new government altogether.

Furthermore, Albemarle is more diversified than SQM—ALB has two mines in Australia (and is attempting to buy Australian producer Liontown—Ticker: LINRF), one in Nevada, and the company is also hoping to get their North Carolina mine (which was closed in the 90s) up and running again. Of ALB’s 2022 total lithium output, 30% was mined in Chile, a relatively low figure, and if the government persists with even more stringent measures, Albemarle has plenty of time to further limit their dependence on the South American nation.

Now let’s talk valuation, which has seen significant change since my previous article. When compared to competitors within the lithium production industry, ALB shares appear to be cheap (See Exhibit B). Historically, investors have had to buy ALB shares at an average of about 17X forward earnings - Albemarle’s forward PE multiple currently sits at around 7x.

Exhibit B

While the stock was expensive when we first looked at it back in the fall, that certainly doesn’t appear to be the case anymore - the current valuation is very attractive in my opinion.

However, there is obviously a fair bit of risk here. Firstly, looking at the general industry (and as with essentially all commodities), stock performance is largely affiliated with the price of lithium. However, as I outlined, I believe that the spot price has found its bottom after a significant slide to start the year. Additionally, there is some political risk here - as I said I feel like ALB has a fair bit of flexibility in terms of its ability to deal with the Chilean government’s new lithium stance. Nevertheless, President Boric’s move to nationalize Chilean Lithium resources seemed to catch much of the world off guard, and it is possible that even more extreme policies could be implemented.

Having said this I firmly believe that this is a stock worth adding to your portfolio at the current price point.

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