Specialist
Former director at chemicals manufacturing company
Agenda
- 2023 volume and profitability drivers
- Long-term capacity strategy, including international projects and domestic facility build-out plans
- Competitive positioning and long-term cost curve positioning
Questions
1.
Looking to the lithium demand Albemarle faces in 2023, are you worried at all about downward pressure on volume? There have been concerns around the potential for China-based EV demand coming off. Are you worried about that?
2.
If the China-based EV market drops off, is there off-take demand elsewhere to backstop Albemarle’s capacity? The company is at 200-220 kilotonnes of lithium carbonate right now, so what’s going to backstop that, if not the China-based market?
3.
How do we differentiate downside insulation from negative spot price movements vs exposure or leverage to upside? Elon Musk just came out with the Tesla earnings and said Tesla doesn’t have a demand problem, it actually has 2x as many orders as product capacity, implying demand is quite strong, at least in the US or for Tesla. Assuming that puts upward pressure on spot prices for carbonate equivalent, do you think Albemarle can capture that upside, or would it have contract rates that sit below spot?
4.
Albemarle’s 2030 lithium carbonate demand forecasts were recently adjusted, increased by 15%, which the company put down to the Inflation Reduction Act and improved expectations around EV demand. Do you think that the assumptions there are reasonable? How could the Inflation Reduction Act and the improved EV demand improve or justify its uplifted demand forecast?
5.
Are there are any risks around Albemarle’s long-term demand forecasts, based on the relative penetration of lithium carbonate vs hydroxide?
6.
My understanding is that brine operators enjoy a cheaper cash conversion cost per tonne when converting of brine into lithium carbonate vs producers that might be weighted or believe in a hydroxide future and have spodumene feedstock, given the higher cost associated with converting that. Albemarle has exposure to both brine and spodumene, but now seems to be more on the hydroxide side. If the future is largely carbonate, does that threaten the company’s cost position long term, especially relative to brine producers?
7.
Based on your base-case scenario, where demand remains strong in 2023, do you expect a major decline in lithium prices as players such as Goldman Sachs have forecasted?
8.
Assuming prices start to decline substantially, is there a price level where you think EBITDA generation for Albemarle comes under significant pressure? Goldman’s bearish call on lithium is saying LCE [lithium carbonate equivalent] prices will drop to USD 11,000 per ton by 2024. Could the company make money at those sorts of prices?
9.
In Albemarle’s most recent strategy day disclosure, it mentioned the acquisition or investment cost for a lithium resource sits around USD 5,000-25,000 per tonne. Do you think that incentive price of USD 11,000-13,000 per tonne of LCE would have uplifted substantially?
10.
What’s your view on Albemarle’s fairly ambitious 2027 sales and EBITDA targets, 2.5x and 2x respectively? Does that growth trajectory in both sales and EBITDA sound reasonable to you within a four-year timeframe?
11.
In its Q3 2022 call, Albemarle’s management has said the pace of marginal cost elevation is looking to be mid-to-high-single digits. Do you have any reason to believe that elevation of marginal cost production might move at a faster pace than that mid-to-high-single digits?
12.
When we talk about Albemarle’s weighting towards hydroxide and the spodumene capacity that’s coming in, we’re talking about hard rock mining vs something more OPEX- and CAPEX-light, so brine. Do you think the company is putting itself at risk of locking in this higher or sustaining cost curve, that it may be building out capacity in an environment where it has to lock in higher-than-normal EPC [Energy Performance Certificate] costs and so on, and so risks coming in with a cash cost curve that is a lot higher than originally projected? Perhaps its targets of 2.5x sales vs 2x growth in EBITDA by 2027 might be missed and EBITDA comes in lower, for example.
13.
Do you think Albemarle has the ability to retain its cost curve positioning vs peers? My understanding is that the company is in the first quartile. Do you think that’s going to be long term, especially when we think about players such as Livent, SQM or any of the China-based convertors?
14.
Are you worried about other players entering the upstream space? For example, Rio Tinto is still looking at getting Jadar off the ground, which would be a very big deposit and a completely different mineral, jadarite. The company is also looking at other lithium acquisitions and is well-capitalised. Are you worried about new entrants?
15.
Assuming Albemarle’s cost curve is upward-sloping, what potential initiatives or strategies are there for the company to improve its cost position or otherwise hedge out the general cost creep factor? This could be technology-based initiatives, or anything with extraction methodology and improving recovery and assets.
16.
You mentioned the clays have been too expensive to extract. My understanding is that in 2021, Albemarle was looking at clay deposits in proximity to Silver Peak and evaluating the feasibility of extraction technology for clays and adding that to the Silver Peak resource. Do I take it that this has been a failed exercise and that clays, at least for the company, have been an uneconomic deposit type?
17.
As of its strategy day on Tuesday 24 January 2023, Albemarle wants to essentially triple its annual output from around 200-200 kilotonnes at the end of 2022 to 400-650 kilotonnes of lithium by 2030. That’s quite a lot of capacity, so what are the key execution risks you foresee?
18.
You mentioned Albemarle starting up Kings Mountain again, potential permitting or restart issues and how Piedmont has had significant local regulatory pushback in the same general area while building its mine. Do you anticipate the issues Piedmont went through are the same the company will face in trying to restart Kings Mountain, given that it’s the planned feedstock linkage for the mega-flex facility?
19.
Assuming there are any issues with the reopening of Kings Mountain, do you think there are alternative feedstock linkages possible for Albemarle’s mega-flex facility? The company has planned the capacity to be 100 kilotonnes of LCE, so could it just get the feedstock from elsewhere if it faces issues with getting Kings Mountain back up and running?
20.
What are your views on Albemarle’s capital costs as a result of the ambitious expansion plans and potential related funding constraints? The company’s CAPEX for 2023 was projected at USD 1.7bn-1.9bn and because of all the capacity coming online, that CAPEX is projected to rise from USD 2bn to up to USD 4bn-4.4bn by 2027. That’s obviously a big shift, over 2x what’s projected for 2022 and higher than any CAPEX I’ve seen in recent history for it. Given that substantial uplift in CAPEX and capital spending requirements, how much of a financing constraint do you think it faces?
21.
Do you think Albemarle would be able to self-fund just from retained earnings, or do you anticipate a move to the capital markets in the near term in order to underwrite some of the capacity under development?
22.
Albemarle has significant investment in Australia, in Kemerton, Talison and Wodgina. When could cash start to flow here? What did you see as the pros and cons of the company’s investments in Australia?
23.
Do you think Albemarle would take the expansion option it has for 100 kilotonnes of lithium carbonate capacity at Kemerton? Could the company double down in Australia, or has the outlook on the country soured at all?
