Albemarle to generate healthy bromine profits due to its low-cost position in the Dead Sea

Business Strategy and Outlook

Albemarle is the world’s largest producer of lithium, which generates roughly half of total profits. It produces lithium through its own salt brine assets in Chile and the United States and two joint venture interests in Australian mines, Talison and Wodgina. The Chilean operation is among the world’s lowest-cost sources of lithium. Talison is one of the best spodumene resources in the world, which allows Albemarle to be one of the lowest-cost lithium hydroxide producers as spodumene can be converted directly into hydroxide. As electric vehicle adoption increases, a high-double-digit annual growth in global lithium demand can be seen. In response, Albemarle plans to expand its lithium production from 88,000 metric tons in 2021 to over 450,000 metric tons over the next decade. This includes the company’s 60% interest in the Wodgina spodumene operation from Mineral Resources. Mineral Resources retains the other 40% interest and the two operate a joint venture, though this will likely become a 50-50 JV as the two are in discussions to expand the partnership. The joint venture will begin producing spodumene (lithium hard rock concentrate) and one 50,000-metric-ton lithium hydroxide plant in Australia. Albemarle will continue to increase its lithium capacity largely through brownfield expansions at existing operations, including the expansion of recently acquired spodumene conversion assets in China.

Albemarle is the world’s second-largest producer of bromine, a chemical used primarily in flame retardants for electronics. Bromine prices have begun to rise as increased demand for use in servers and automobile electronics is offset by a decline in demand from TVs, desktops, and laptops as well as lower demand for bromine used in oilfield completion fluids. Over the long term, Albemarle is to generate healthy bromine profits due to its low-cost position in the Dead Sea. Albemarle is also a top producer of catalysts used in oil refining and petrochemical production. These chemicals are highly tailored to specific refineries. However, the company is conducting a strategic review and may ultimately divest the business.

Financial Strength

Albemarle is in good financial health. As of March 31, 2022, the company’s net debt/adjusted EBITDA ratio was 1.9 times, within management’s target for a long-term ratio of 2-2.5 times. Albemarle should be able to meet all of its financial obligations, including dividends. Albemarle is completing the construction of two new lithium projects that were initially funded with a combination of debt and excess cash flow from its bromine and catalysts businesses. However, Albemarle raised equity in early 2021 as a way to deleverage its balance sheet and provide financial flexibility. This move made sense, given that the stock price was above the fair value estimate at the time. After 2022, Albemarle plans to expand its lithium capacity largely through the build-out of brownfield capacity and new greenfield spodumene conversion plants in China. While these expansions will likely be capital-intensive, they should be cheaper than building new greenfield lithium production assets in higher cost regions such as Australia. This should allow Albemarle to maintain the financial flexibility to expand its lithium capacity without considerably straining its balance sheet. Additionally, high lithium prices should allow the company to generate more cash flow from its existing businesses as a way to partially fund future capacity expansions. Further, Albemarle is undergoing a strategic review of the catalysts business and could divest it to pay for a considerable amount of the lithium capital expenditures over the next several years. Additionally, Albemarle could opt to raise capital through additional equity issuances if needed.

Bulls Say’s

Albemarle has top-tier lithium assets through its brine operations in Chile and spodumene hard-rock operations in Western Australia, which are among the lowest-cost sources of lithium production globally.

Lithium prices will remain well above the marginal cost of production through at least the remainder of the decade, leading to excess profits and return on invested capital for Albemarle.

Albemarle has low-cost bromine production through its highly concentrated brines in the Dead Sea and Arkansas

Company Profile

Albemarle is the world’s largest lithium producer. The robust lithium demand is predicated upon increased demand for electric vehicle batteries. Albemarle produces lithium from its salt brine deposits in Chile and the U.S. and its hard rock joint venture mines in Australia. Albemarle is also a global leader in the production of bromine, used in flame retardants. The company is also a major producer of oil refining catalysts.

(Source: MorningStar)

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