SQM And Albemarle: One Is The Better Buy As Lithium Prices Drop (NYSE:ALB)

The Lithium Investment Thesis Remains Robust

We previously covered Albemarle Corporation (NYSE:NYSE:ALB) and Sociedad Quimica y Minera de Chile S.A. (NYSE:NYSE:SQM) in April 2023, discussing their stocks’ over sold cadence at that time. This was attributed to Chile’s potential nationalization of the lithium industry.

While both had moderately recovered afterwards, the declining lithium spot prices had put further downward pressure on their prospects, naturally triggering the stocks’ retest of the April 2023 bottom.

ALB & SQM 5Y Stock Price

Lithium Carbonate 5Y Spot Prices

At the time of writing, Lithium spot prices have further retraced from the recent June 2023 heights of 312.5K Yuan per MT, or the equivalent of $32.87K per MT, based on the exchange rate at the time of writing. Assuming a sustained downward trend, the commodity may also retest its April 2023 bottom of 172.5K Yuan per MT, or the equivalent of $23.67K per MT.

While there remains a good distance from the pre-pandemic average spot prices of 77.5K Yuan per MT, or the equivalent of $10.63K per MT, it is evident that ALB’s and SQM’s stock prices have been impacted.

This is because ALB’s Energy Storage segment (comprising Lithium and Bromine) records revenues of $1.76B (-9.2% QoQ/ +119.7% YoY) in FQ2’23, naturally comprising the lion’s share at 74.2% (-0.9 points QoQ/ +30 YoY) of its overall revenues of $2.37B (-9.3% QoQ/ +61.2% YoY).

The segment is also a critical bottom line driver, contributing 90% (+1.2 points QoQ/ +14.6 YoY) of its overall EBITDA at $932.02M (-33.7% QoQ/ +92.7% YoY) in the latest quarter.

The same has been observed with SQM, with its Lithium revenues of $1.46B (-10.9% QoQ/ -20.6% YoY) comprising 71.2% of its overall revenues (-1.3 points QoQ/ +0.2 YoY) in FQ2’23. The commodity also accounted for approximately 75% of its overall gross profits.

Distribution Of Lithium Production Worldwide In 2022

With both ALB and SQM commanding approximately 36% of the global lithium production in 2022, it is unsurprising that their stock prices are closely linked to the commodity’s spot prices.

On the same note, with Chile looking to nationalize the lithium industry, both stocks may remain volatile for a little longer, since 29.4% of ALB’s lithium production volume and 85.8% of SQM’s volume are from Chile.

Assuming that the nationalization negotiations proceed as intended, it appears that both companies have no choice, but to “relinquish at least 51% ownership to Codelco” in order to extend and/ or expand their contracts upon expiry.

The Chilean government appears set to reform the industry as well, with over 50 mining companies already keen to negotiate new lithium contracts based on the new public-private model, with bidding to start by early 2024.

However, we remain optimistic about ALB’s and SQM’s prospects, attributed to their deep rooted expertise in Chile and close working relationship with the local governments. This is on top of SQM’s sustained contribution to the Chilean treasury, which amounted over $5B in 2022 and $1.7B YTD:

The successful public-private alliance we have with CORFO is also yielding great results, allowing us to contribute more than US$5 billion to the Chilean treasury, along with important contributions to local governments and neighboring communities. (Seeking Alpha)

As a result, we believe that the ongoing negotiations may yield satisfactory results for ALB’s and SQM’s long-term shareholders.

In addition, the global demand for Lithium is not expected to decline anytime soon. For example, the global EV sales (including BEVs and PHEVs) are still growing tremendously to 5.83M YTD as of June 2023 (+40% YoY), despite the elevated interest environment.

The same has been observed in the US, with the top five automakers reporting 463.89K of EVs sold YTD as of June 2023 (+37.4% YoY). This is despite the rising borrowing costs of 7.18% in July 2023 (+0.04 points MoM/ +2.34 YoY), compared to 2019 averages of 4.63%.

SQM and ALB’s Capacity Growth

ALB has also reiterated its lithium sales volumes of over 300 kt LCE by FY2027, expanding at a CAGR of ~25% at the midpoint from FY2022 levels. The same has been observed with SQM, based on the projected expansion at a CAGR of +14% through FY2025.

Lithium Carbonate Price Projection

Furthermore, Australia’s Office of the Chief Economist expects Lithium Hydroxide spot prices to remain stable at over $40K per MT through 2026, with it only moderating to $36.22K by 2028. This suggests that the two miners may be able to maintain their stellar top and bottom line expansions over the next few years, since supply is expected to remain tight through 2027.

As a result, we maintain our belief that the decarbonization cadence through the next decade may still provide massive tailwinds for energy storage and EV adoption, underscoring the importance of lithium-focused miners such as SQM and ALB.

So, Which Stock Is The Better Buy?

While we continue to maintain that both ALB and SQM stocks are suitable for commodity focused investors, it really depends on individual investor’s risk tolerance and portfolio focus.

ALB & SQM 5Y EV/Revenue and EV/ EBITDA Valuations

For example, since the start of the pandemic, it is evident that ALB has been able to maintain its premium valuations at NTM EV/ Revenues of 2.29x and NTM EV/ EBITDA of 7.78x, compared to SQM at 1.84x/ 3.69x, respectively.

The same has been observed, if we are to compare to the Metals and Mining sector median of 3.14x and 6.00x, respectively.

This is probably attributed to ALB’s well-diversified lithium mining locations across Australia at 64.7%, Chile at 29.4%, and the US at 5.8% as of 2022. This is compared to SQM’s location in Chile at 85.8% and China at 14.2% as of 2023.

ALB & SQM 5Y/ 10Y Returns

Therefore, despite ALB’s underwhelming 4Y average dividend yields of 1.14% compared to SQM’s 4.57%, both stocks have recorded similar 10Y returns, with ALB outperforming over the past five years.

Therefore, conservative investors with lower geopolitical risk tolerance may consider ALB instead, especially since its Chilean contract is only up for renewal in 2043, compared to SQM’s 2030.