Maintaining $350 FVE as Albemarle Shares Rally on Favorable Lithium Outlook; Shares Undervalued

After updating our Albemarle model to incorporate the company’s fourth-quarter earnings, we maintain our $350 per share fair value estimate and narrow moat rating.

Albemarle shares were up 6% at the time of writing on management’s outlook that lithium demand is beginning to pick up in China—after a brief slowdown in December and January—which is in line with our view that lithium demand growth will remain strong in 2023.

At current prices, we view Albemarle as undervalued with the stock trading in 4-star territory at a little less than 20% below our fair value estimate. Despite the rally, the current market price still implies lithium spot prices will see a large decline in 2023 as supply and demand return to balance. If this were to occur, it would be caused by the ramp-up of new supply exceeding demand growth. We view this scenario as unlikely due to what will likely be delays in new supply.

Admittedly, lithium carbonate spot prices have fallen a little over 10% from their highs last November. However, we think this reflects the slowdown in the Chinese EV market, which saw sales volume growth slow in December and January amid expiring federal government subsidies. Following EV automaker price cuts, demand will likely begin to rise, and we forecast higher EV sales in China in 2023, albeit at a much lower growth rate versus the 82% in 2022. Management’s comments of seeing orders pick up following the Chinese new year holiday are in line with our outlook.

Combined with rising EV sales in the U.S., following the Inflation Reduction Act and the continued buildout of energy storage systems to support renewable energy generation, we expect lithium demand growth will outpace supply growth in 2023, leaving prices higher.

Accordingly, we maintain our 2023 lithium carbonate spot price forecast of $70,000 per metric ton. For lithium producers, including Albemarle, this should result in their realized lithium prices, and profits, rising this year.