6 Key Things About Albemarle's Lithium Business and Outlook That Investors Should Know

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Albemarle (NYSE: ALB) recently reported robust fourth-quarter 2017 results, capping off a strong year. The world's largest lithium producer's quarterly revenue jumped 23% and adjusted earnings per share (EPS) soared 72% year over year, breezing by Wall Street's bottom-line expectation. For the year, revenue and adjusted EPS grew 15% and 29%, respectively.

The North Carolina-based diversified specialty chemical company's white-hot lithium business continues to drive growth, though its other businesses also performed solidly. Lithium prices and sales volumes continued to rise, thanks to booming demand for the silvery-white mineral to make the rechargeable lithium-ion batteries that power electric vehicles (EVs).

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Lithium stocks soared in 2016 and 2017, though have pulled back in 2018 due to concerns among some market participants about an oversupply situation arising, possibly starting as soon as next year. The major players -- including Albemarle, Sociedad Quimica y Minera de Chile, or SQM, and FMC Corp. -- are ramping up production at their existing mining sites and are in various stages of bringing new lithium sources on line, and numerous junior miners are exploring the viability of mining the "white petroleum," with a couple of them already producing some lithium.

Below are six key things investors should know from Albemarle's Q4 earnings call (transcript via Seeking Alpha).

For reference, here's a snapshot of Albemarle's Q4 2017 lithium business results.

Lithium Revenue

Lithium Revenue Growth (YOY)*

Lithium Revenue as a % of Total Revenue

Lithium EBITDA**

Lithium EBITDA Growth (YOY)*

Lithium EBITDA as a % of Total Segment EBITDA**

$289.6 million 39%

33.8%

$118.7 million 52.3%

48.3%

1. Wave 1 of lithium production capacity expansion is on track

From CEO Luke Kissam's remarks:

Once the projects in its first phase of planned expansions come on line, the company's annual production capacity will be 165,000 lithium carbonate-equivalent (LCE) metric tons. The Wave 1 projects are expected to be fully completed by 2021.

2. Wave 2 expansion plan is being accelerated

From Kissam's remarks:

The company is accelerating its Wave 2 plan because its Wave 1 output is already committed to its existing customers through 2021. Customers are contracting for lithium supplies as many years out as they can, indicating they largely believe that supply will remain tight relative to demand for some time.

3. Wave 3 expansion opportunities are being assessed

From Kissam's remarks:

Kings Mountain and Antofalla are hard-rock and brine resources, respectively. Albemarle inherited the Kings Mountain mine via its 2015 acquisition of Rockwood Holdings. If Albemarle reopens the mine, which discontinued operations in the early 1990s, it will be just the second operating lithium mine in the United States. The company owns the only lithium mine currently operating in this country, the Silver Peak brine mine in Nevada.

4. Company builds out production capacity only when it has committed buyers

From Kissam's remarks:

Albemarle is focused on long-term partnerships and executes long-term supply agreement with its customers. So when it builds lithium capacity, it's pretty sure it will have buyers for the additional output. Along with the company's flexibility in the timing and size of its planned expansions, this should alleviate some concerns about oversupply in the lithium market, at least in the near term. Additionally, Kissam said the company's "goal is to be the most profitable lithium business in the world," and that it's "not going to chase volume at the expense of value for the company and the shareholders."

5. Solid outlook for 2018 lithium prices

From Kissam's remarks:

While the company expects lithium prices to continue rising in 2018, it projects the pace of the increases will slow. In 2017, Albemarle's lithium pricing rose an average of 28%, so a high-single-digit price increase in 2018 would be a notable slowdown.

6. Company expects lithium market to remain in balance through at least 2021

From remarks by John Mitchell, president of Albemarle's lithium and advanced materials unit:

Management believes lithium supply is likely to fall short of forecasts. Kissam said that since Albemarle bought its lithium business in 2015, there's been a steady delay of projects, which have been regularly coming on line at a higher cost and producing a lower volume than the companies behind them originally projected. He also opined that the fact that Albemarle's customers -- which are largely in the cathode and battery space -- are entering long-term supply agreements and inquiring about even longer-term ones points to them believing that the lithium market will "remain tight for the foreseeable future." Moreover, he noted that automakers apparently believe this as well, since some of them are "trying to go directly [to suppliers] to grab lithium."

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Beth McKenna has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.