Recently a Member of Pat McKeough’s Inner Circle asked for his views on a specialty chemical company whose main area of growth is lithium. As the demand for lithium rises from makers of electric car batteries, smartphones and other sources, Albemarle Corp. continues to acquire more lithium salt deposits. Its revenue and earnings made substantial gains in the most recent quarter. Still, Pat cautions that the rush to fulfill lithium orders could result in a glut of supply and a slide in prices.
Q: Hi: What is your opinion of Albemarle (ALB)? Thanks.
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A: ALBEMARLE CORP. (symbol ALB on New York; www.albemarle.com) is a global specialty chemicals company with three main businesses: Lithium and Advanced Materials, Bromine Specialties, and Refining Solutions. The end markets it serves include petroleum refining, consumer electronics, energy storage, construction, automotive, lubricants, pharmaceuticals, crop protection, food safety and custom chemistry services.
The company’s main growth area is its lithium business. It develops and manufactures a broad range of basic lithium compounds, including lithium carbonate, lithium hydroxide, lithium chloride, and value-added lithium specialties and reagents. Those include butyllithium and lithium aluminum hydride.
This operation (around 43% of overall sales), should prosper with increasing lithium demand. Lithium is needed by the makers of electric car batteries, electric grid and power storage entities, and the makers of smartphones, portable electronic devices, and lubricants.
Most of today’s lithium comes from brine solutions drawn from salt lakes such as the Chabyer in Tibet and the Salar de Atacama in Chile. This is cheaper than producing lithium from hard-rock mining and other sources, and the recovered metal is suitable for most uses.
Growth stocks: Deals in Argentina, China and Chile expand lithium salt deposits
Albemarle continues to acquire lithium salt deposits in order to secure a firm raw material inventory. In November 2016, it entered into a deal with Argentinian miner Bolland Minera SA to acquire exclusive lithium exploration and purchase rights in the Antofalla region. It also reached an agreement with China’s Jiangxi Jiangli New Materials Science & Technology to purchase its lithium salt production assets; with the Chilean government, Albemarle will also mine lithium salts in the Salar de Atacama region.
The company’s revenue for the three months ended June 30, 2017, rose 10.1%, to $737.3 million from $669.3 million a year earlier. That’s mostly thanks to growing demand and higher prices for lithium.
Earnings, excluding one-time items, increased by 20.4% in the latest quarter, to $126.5 million, or $1.13 a share, from $105.1 million, or $0.93 a share.
As of June 30, 2017, Albemarle held cash of $1.0 billion, or $9.02 a share. Its debt of $1.4 billion is a low 10.9% of its market cap.
The company’s lithium holdings should let it continue to increase its earnings and sales, at least in the near term. Still, longer term, lithium could also fall victim to the oversupply issues that often plague commodities when producers rush to catch up with rising orders. Lithium deposits that previously were deemed uneconomical to mine could be accelerated into production and that would bring prices back down.
The stock trades at 26.7 times its forecast 2017 earnings of $4.37 a share. The shares yield 1.1%.
Inner Circle recommendation: Albemarle Corp. is okay to hold, but only for aggressive investors.
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