Arcadium Lithium: Fallen Star Is Awaiting To Come up (NYSE:ALTM)

Funding thesis

Firstly of 2024 two huge lithium manufacturing firms merged (Livent and Allkem) and new big – Arcadium Lithium (NYSE:ALTM) – got here to existence. As we wrote earlier in our article, dated again to twenty fourth of Might, that merger with the Argentine-based lithium producer and Allkem has created one of many world’s largest vertically built-in lithium producers with the potential manufacturing as much as 248 thousand tons of the commodity by 2027. We nonetheless anticipate that new firm can attain its potential manufacturing ranges by the tip of 2027.

Nevertheless, we decreased our expectations about lithium carbonate costs from $32 thousand a ton to $15.5 thousand a ton in reference to the upcoming emergence of a surplus in the marketplace within the close to future. Although the lithium market can be in a surplus in nearest 2 years we anticipate that the new manufacturing quantity will offset declining costs. Our Score is BUY.

Lithium market

Because the begin of 2024, lithium carbonate costs have stabilized at ~14 thousand a ton, following an prolonged decline in 2023. The decline of costs for the commodity accelerated in 4Q 2023 as market contributors feared that further provide would come to market earlier and immediate a surplus of the commodity as quickly as 2024. Downward strain on costs additionally comes from such elements as expectations of slower gross sales of new-energy vehicles and the information of an EU investigation of subsidies for EVs imported from China.

China continues to be the inspiration for the EV market. EV gross sales dropped by 9% y/y in February, or 41% m/m, to 401 thousand items, as a result of prolonged New 12 months celebrations. However in response to CPCA, gross sales of new-energy vehicles totaled 1.1 mln items (+25% y/y) over January and February of 2024, and the extent of penetration reached 36.7%. The CPC has taken observe of the slowing progress within the trade and, in response to Bloomberg, is weighing the choice of slicing the down cost for automobile purchases.

We don’t anticipate that the expansion of the EV market will decelerate an excessive amount of over the medium time period as a result of cannibalization of ICE automobile gross sales by EV gross sales. Varied producers announce releases of recent fashions nearly each quarter, pushing to the sidelines the acquainted lineup of ICE vehicles, and that’s a long-term pattern. Based on McKinsey, complete gross sales of EVs will attain 48.5 mln vehicles a yr by 2030, that means a compound annual progress charge of 26%.

Concerning the provide scenario. Costs of lithium carbonate and lithium hydroxide peaked on the finish of 2022 yr (>$80 a kg of LCE), which was largely pushed by expectations of a structural scarcity of the commodity for years to return amid the speedy transition to electrical automobiles in China, the EU and the US whereas the event of deposits holding the commodity lagged behind.

Nevertheless, together with rising inventories of the feedstock at refineries (primarily in China, which accounts for greater than 60% of all refining volumes) and its customers – carmakers – amid a slowdown within the EV market, the market additionally acquired large provide, which occurred sooner than market contributors had deliberate, inflicting costs to retreat over a prolonged time period.

In 2023, the scarcity decreased to 37 thousand tons of LCE, in contrast with 65 thousand tons of LCE in 2022. The years 2024 and 2025 are anticipated to see a surplus that may develop as a result of inflows from Australian manufacturing, the place lithium output will rocket from 386 thousand tons of LCE to 633 thousand tons of LCE (the nation makes up 50% of the worldwide lithium extraction capability); from China’s personal working deposits, the place manufacturing will nearly double from 166 thousand tons of LCE to 373 thousand tons of LCE (home producers have been sponsored in an effort to cut back dependence on international suppliers); in addition to from Chile. All of it will present for manufacturing to rise at a compound annual progress charge of 25% by means of 2025, whereas demand, in response to the Australian Division of Trade, Science and Sources, will expand at a charge slower than 20% y/y. Because of this, the excess will maintain at about 4% of complete demand yearly.

Present costs for the commodity (lithium hydroxide and lithium carbonate) have already made refining feedstock into lithium nearly unprofitable below spot contracts. Based on McKinsey, the breakeven level for refining feedstock into lithium in China averages about $12 600 per ton (it may be increased or decrease relying on the know-how/contract costs), in contrast with spot costs of about $14 000. In different phrases, if lithium costs transfer under $12 thousand, it is going to shut down refining in China (which accounts for 70% of world refining), and in consequence, demand for mining operations in Australia will plummet abruptly. China is the primary gross sales marketplace for Australia, which doesn’t refine lithium itself.

Outlook for monetary efficiency

Given the quicker decline of costs in markets world wide amid considerations about an oversupply of the commodity, we’re decreasing expectations for Arcadium Lithium’s promoting costs of lithium hydroxide from $18 thousand a ton to $16.4 thousand a ton for 2024, and from $18.5 thousand a ton to $16 thousand a ton for 2025. The cuts to the promoting value had been pushed by the discount of the outlook for the commodity’s spot costs from $32 thousand a ton to $15.5 thousand a ton in reference to the upcoming emergence of a surplus in the marketplace within the close to future.

Due to this fact, we’re decreasing the forecast for the merged firm’s 2025 EBITDA from $933 mln (+100% y/y) to $520 mln (+12% y/y).

Valuation

We’re decreasing the goal value of the shares of the merged firm from $13.3 to $9 as a result of:

• the decreased EBITDA forecast for 2025;
• the decrease low cost now that the FTM valuation interval has shifted.

Based mostly on the brand new inputs, we’re sustaining the score for the shares at BUY.

The valuation of $9 was achieved by means of discounting the share value goal for 2025 to the FTM valuation on the charge of 13% every year. Because of this, the goal value of the shares is $9.

Dangers

• One of the very important potential threat for the brand new firm is important enhance in money value of manufacturing and refining which can result in manufacturing curtail.
• On the 14th of March Argentine court halted work on key Arcadium Lithium projects. The supreme courtroom of Argentina’s Catamarca province compelled Arcadium Lithium to halt the development of two essential tasks within the Fenix and Sal De Vida till the environmental affect of mining is evaluated. In case of destructive outcomes Arcadium Lithium can lose 22000 t/y LCE and 30000 t/y LCE by 2027. It might result in a lower in manufacturing ranges to barely 200 thousand tons per yr after 2027.

Conclusion

Arcadium Lithium is a wager on the long-term pattern for the worldwide transition to electrical automobiles. The corporate now will solely profit from excessive costs for the commodity and can be capable of conclude long-term contracts at useful costs.