It wasn't before, but now's the time to buy Albemarle shares... says UBS

As lithium prices in China continue to stabilise, UBS is getting back on board the Albemarle train.

We first really got to know Albemarle (ALB) earlier this year, when its third bid for Liontown Resources (ASX:LTR) lobbing $2.50 per share in cash, valuing the enterprise at $5.5 billion, was a significant step up on the $2.20 per share bid it placed in October 2022 and then a $2.35 per share on 3 March.

LTR said no thanks, and its share price has doubled year to date.

Falling prices for lithium have wreaked havoc on the major US lithium names and Albemarle has been front and centre.

Benchmark lithium prices are down about 54% over the past four months while Albemarle stock has fallen about 28%.

But with major expansions planned in Australia and China, Albemarle is eyeing a 20-30% CAGR in sale volumes in the coming years, tripling production to 300,000t of lithium chemicals by 2027.

To put that number into context, it is roughly the size of the entire lithium carbonate equivalent market in 2020.

The bank upgraded the stock to Buy from Neutral. It also hiked its price target to $255 from $196. The new target implies upside of nearly 23%.

“We see the current inflection in China lithium pricing and 2023 earnings reset leading to increasingly positive sentiment on the stock,” UBS noted.

“Inflection of lithium prices and battery production in China is setting a much higher floor vs prior cycles.”

Albemarle manufactures specialty chemicals, with its lithium division amounting to the bulk of the company’s business. Lithium comprises roughly 85% of Albemarle’s EBITDA, according to UBS.

If there were concerns the heat has come out of the lithium market, they are not being felt by the people driving the industry’s biggest players, who have maintained their bullish stance on the battery metal and the electric vehicle narrative even as spot prices have collapsed from last year’s record highs in China.

Earlier this month, Albemarle said it would spend over US$1 billion to build the third and fourth trains at its Kemerton plant in WA’s South West, a facility which will eventually produce 100,000tpa of lithium hydroxide and represent the largest processor of lithium chemicals outside China.

It is a big time investment. Stockhead’s Josh Chiat says Albemarle told investors on a recent call that the final bill for trains one and two will come in around US$1.5-1.7b, with a similar level of investment expected for the additions.

The Charlotte-based chemicals giant saw EBITDA up 270% to US$1.6 billion in the March quarter as lagging contract prices caught up to last year’s booming lithium spot market.

Even as indices fell between 50-60% year to date, Albemarle boss J. Kent Masters and lithium president Eric Norris remained confident in the state of the market.

Norris says destocking in China played a big role in the falling spot market, with some battery and cathode inventories now at under a week of consumption.

“Clearly not in the long run, a level that’s sustainable for sustained operation,” he told analysts on a conference call.

Reinforcing the feeling the issues are not a fundamental supply-demand issue and are centred around quirks of the Chinese market, the international to Chinese price spread is between US$15-20/kg, the widest on record.

In the bigger picture, Albemarle sees EV sales lifting 30% in China this year and close to 40% for the wider market.

UBS agrees, saying this week that with lithium prices finding a floor, Albemarle will be able to grow volumes as well as EBITDA.

“As prices stabilize, ALB volumes grow, and we move past temporary spodumene timing impacts, we believe ALB EBITDA can return to growth,” Spector said. “We model 3%/20% EBITDA growth Y/Y in 2024/2025e.”

Risks may also already be priced in to Albemarle stock, Spector added, specifically the expectation of lithium prices remaining at roughly $20 per kilogram.

“We see these assumptions as too bearish. Even in a scenario where Chile limits resource access (which we deem unlikely), by 2030e ALB will likely have ~365K ton in resource capacity ex-Chile,” Spector said.

Analysts at US brokers Baird also upgraded Albemarle this week to Buy from Hold. The price target went to US$288 from US$222 a share, as the stock trod water at circa US$200 on Monday morning.

Albemarle stock is down about 41% from its highs less than a year ago, Barid noted.

“Clarity on the impact of pricing, a reset of guidance, and Albemarle’s vertically integrated system position it as a leader for the near and longer term…. We see upside to [earnings] estimates from any increase in lithium pricing.”