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With Profitability and Recent M&A Back in Focus, Time to Revisit Lithium Americas

Momentum continues to be seen in the lithium space as Livent Corporation (LTHM) and Albemarle (ALB) reported earnings last week, both exceeding consensus estimates by large margins and proving that profitability has been underestimated for a long time by the market. Livent reported Q1/2022 EBITDA of $53.3M (consensus $44.0) and adjusted EPS of $0.21 (consensus $14) while Albemarle reported adjusted lithium EBITDA of $308M (consensus $226M) and adjusted EPS of $2.38 (consensus $1.64). More importantly, guidance was extremely positive as Livent increased its FY/2022 EBITDA estimate from $180M previously to the current midpoint of $320M (+78%) while Albemarle increased its FY/2022 adjusted EBITDA figure from a midpoint of $1.225B to the current midpoint of $1.850B (+51%), implying y/y EBITDA growth of +200%+. Though cost inflation was seen (largely from natural gas prices) the increase in guidance for both companies was largely driven by the expectation of higher base case pricing. As such, note that lithium carbonate prices have risen by approximately 80% YTD and have now steadied just under the 500,000 CNY/t level.

With companies struggling to meet the ever growing, EV fueled lithium demand, we note that Livent’s pipeline includes the development of its 50% stake in Quebec’s Nemaska Lithium project (remember that problematic one ?) which they hope will contribute 34,000 tpa of lithium hydroxide starting in 2025 (good luck!). Other near term planned capacity expansions are expected to add 20,000 tpa in 2023 and 2024. Albemarle’s lithium pipeline is even less developed with a growth strategy concentrated in China (Qinzhou, Meishan and Zhangjiaghang) with the projects at various stages of engineering, construction or commissioning. M&A in the lithium space remains hot with China’s Zijin Mining Group proposing last week to acquire an asset bundle which includes a 70% interest in the Lakkor Tso Salt Lake lithium mine in Tibet, for the equivalent of $1.15B. This comes just four months after Zijin acquired TSX listed Neo Lithium and its project in Argentina, for $720M.

With all the above said, at this point we highlight the pre-eminent lithium developer, Lithium Americas (LAC). Note the share price disconnect as post Q1/2022 financial results last week, Livent Corporation shares advanced by +32% while Albemarle shares advanced by +26%. Coincidentally, Lithium Americas’ shares declined by -3%.

Having won the bidding war last year for Millennial's flagship Pastos Grandes lithium brine project (Salta province, Argentina), LAC provides for an attractive (and now consolidated) growth opportunity near Cauchari-Olaroz (Argentina) with the potential to extract significant synergies. The Cauchari-Olaroz project is currently under construction (over 85% complete) and is due to start lithium carbonate production with commissioning targeted for H2/2022, ramping up to a rate of 40,000 tpa with a Stage 2 development plan for an additional 20,000 tpa. The project has a projected 40 year LOM with operating costs estimated at $3,600/t. As of the end of March, the company had nearly $492M in treasury (representing 15% of MCAP) while construction is fully funded with available debt. Note that in terms of pricing, 80% of planned stage 1 production has already been contracted for, at future prevailing market prices.

Equally important in our view is the fact that on February 28, LAC submitted a draft loan application to the US Department of Energy for funding to be used at the company’s other asset, the wholly owned Thacker Pass Lithium Project, located in Nevada. To further extract value, management is evaluating the possibility to spin out its US project. We would view the prospect of separating the US and Argentinian projects as very positive on a single project basis. This type of spin-out would lead to additional interest from specific investors looking for stand-alone asset and risk profiles in certain geographic regions, which may be constrained to them at the moment. Pure-plays always garner higher premiums, just ask any silver pure-play (...if any still exists). The time is certainly right for LAC at this current stage.

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