Electric vehicle (EV) sales are continuing to accelerate. According to some research, EVs could represent upwards of 20% of total new vehicle sales in 2023, up from 14% in 2022 and just 5% in 2020.
This is highly relevant for the lithium mining industry. A ton of new supply has come online in the last year, knocking basic lithium prices off of unsustainable all-time highs reached in late 2022. But demand still exceeds supply, and is expected to remain that way through 2030. This is great news for top lithium miner Albemarle (ALB 1.13%), which once again posted new record revenue -- and more important, profitability. Here's what investors need to know.
NYSE: ALB
Key Data Points
What lithium price disruption?
Lithium is, of course, a top ingredient that makes EVs tick. It's a prevalent element, in prolific use already and probably riding around in your pocket or powering your laptop. But the lithium ion batteries in an EV are exponentially larger than those in mobile devices, which means lots more lithium is needed.
Thus, though lithium pricing has fallen dramatically since November 2022, the main story here is about ramping supply to meet insatiable demand from automakers and their lithium ion battery-maker partners. And for the record, it appears lithium pricing has begun to stabilize since May 2023 -- but commodity prices can be highly volatile and unpredictable. A bit more on that momentarily.
Thanks to this supply story, Albemarle hit another quarterly earnings update out of the park. Q2 2023 sales increased 60% year-over-year to $2.4 billion. This performance was helped by the company's strategy of establishing long-term contracts with customers, with most of these sales contracts indexed to lithium prices with pre-established floors and caps to shave off commodity price wildness. A new supply agreement with Ford (F +4.11%) (which will begin in 2026 and terminate in 2030) embodies this strategy.
Albemarle says about 80% of its contracts are indexed, often with price floors and ceilings established. Image source: Albemarle.
Albemarle was also an early entrant into the lithium mining space ahead of the EV tidal wave, and it has established itself as a low-cost producer. What that means is that, even with lithium well off from all-time-highs, Albemarle is still rolling in cash. Net income was also up 60% year-over-year, up to $650 million. The company also has a solid balance sheet for a mining outfit, with $3.2 billion in cash and investments and $3.5 billion in debt.
Time to go shopping?
Given its stellar performance in Q2, Albemarle management took the opportunity to reverse some of its downgraded full-year 2023 financial guidance from three months ago. The bottom end of the outlook for sales was raised by $600 million and is now expected to be in a range of $10.4 billion to $11.5 billion -- implying growth of about 48% over 2022 at the midpoint. Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization, which Albemarle uses to track the progress of its operations) profit margin is now expected to be in a range of 37% to 38%, versus prior guidance of 34% to 35%.
Image source: Albemarle.
Albemarle stock trades for a seemingly cheap valuation of less than six times trailing 12-month earnings, and if the company continues to grow like it thinks it will, this could indeed be a great deal.
However, bear a few things in mind. The company's cash outflow has increased as of late as it spends to secure ownership of more lithium mining sites this year. Mining is a capital-intensive endeavor, and consistent cash flows are very far from the norm. The result is a very volatile stock price. Cash flows are also being reduced by a disclosed $219 million settlement with the U.S. Department of Justice involving third-party sales representatives violating anti-bribery laws, which Albemarle voluntarily disclosed all the way back in 2018. It appears this matter is now settled.
And to reiterate, lithium -- like all commodities -- is also highly volatile, as it's sensitive to very small changes in total market supply and demand. This also plays into Albemarle's financials, as can be seen from the company's quarter-to-quarter swings in sales and profit outlook.
It all adds up to a stock that should be approached with care. For most investors, mining stocks should be kept to a very small percentage of a total portfolio. I also believe portfolio rebalancing is a good idea if you do own mining stocks -- adding when lithium prices (and thus stock prices) tank, and trimming when they soar.
At any rate, Albemarle is my personal favorite mining stock, one that I plan to hold for the long-term as EV sales continue to gobble up market share. Despite headwinds, 2023 is shaping up to be another great year for this company.
