Arcadium Lithium

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

A global lithium producer with operations in Argentina, Australia, and Canada, focused on supplying lithium to the growing electric vehicle battery market.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

  • Lithium Production and Processing: Arcamdium Lithium (ALTM), is a global lithium chemicals producer focused primarily on producing battery-grade lithium chemicals, which includes lithium carbonate, hydroxide, lithium hydroxide monohydrate and lithium metal. The Company’s operations span several geographies, with key sites in Argentina, Australia, and Canada.
  • A Growing Market: Lithium is an important component in electric vehicle batteries, making ALTM well positioned in a growing market.
  • Strategic Locations: The company operates in regions with significant resources of lithium and with the capacity for cost-efficient production.

Revenue Distribution

  • Geographical Segments: Argentina, Australia, and the rest of the world. For the six months ended June 30, 2023, sales in Asia Pacific was ~$321.5 million (~44%), sales in South America ~$177.2 Million (24%), North America was ~$160 Million (22%), and Europe, Middle East, and Africa was ~$72.1 Million (~10%).

  • Product Category: The company operates two segments, Lithium Carbonate and Lithium Hydroxide. Lithium Hydroxide had 57% of total revenue ($381.1 million) and Lithium Carbonate had 43% of total revenue ($285.2 million) in first half of 2023.
  • Customer Base: Key clients include large battery manufacturers and auto companies that primarily need lithium-related products, and also producers of performance chemicals, polymers, specialty glasses, and greases.
  • Contracts: In 2023, the company entered a new supply agreement with a significant Asian customer for the supply of lithium, this contract extends their existing long-term supply agreements to this customer to supply, for the five year period of 2023-2027, an annual amount of 20,000-30,000 metric tons of lithium carbonate per year and a similar amount of lithium hydroxide.

Industry Trends

  • Rising Demand for Lithium: The global push towards electric vehicles (EVs) is fueling immense demand for lithium. This demand is expected to continue and increase at a high pace in the near future, driving a price surge for lithium related products.
  • EV Battery Technologies: Demand is also influenced by EV battery technologies, which are constantly evolving.
  • Global Supply Chain: The lithium supply chain is very complex, with most refining taking place in Asia. Companies such as ALTM are increasingly looking to create geographically diversified and reliable supply chains.

Competitive Landscape

  • Oligopolistic Structure: A handful of large players, such as Albemarle, SQM, and Ganfeng, dominate the global lithium market.
  • Barriers to Entry: The industry has high barriers to entry because of long development times and difficulty in getting regulatory approvals.
  • Technological Innovation: Companies are trying to innovate the lithium production process in order to increase production, lower costs and reduce time to delivery of the end product.
  • Environmental concerns: There are increased concerns over the environmental effects of lithium extraction, especially the use of water in Lithium Brines.
  • Geopolitical risks: There are geopolitical risks, like government regulations, exports restrictions, and other policies of various countries that could affect lithium mining and operations in different regions.

What Makes Arcadium Lithium Different

  • Combined Company Advantage: ALTM was formed through a merger of Livent and Allkem, which means the company has a larger scale and a more diverse portfolio of lithium assets. This also helps the company by achieving better financial stability.
  • Geographical diversification: ALTM is more geographically diversified than competitors. Their assets stretch from North America to Asia, and Latin America.
  • Cost Advantages: The company aims at producing a substantial amount of lithium at low costs compared to its competitors, through implementing best production processes, and strategic locations of the lithium assets. The company also focuses on improving production technologies in order to achieve higher efficiency at low costs.
  • Strong customer relationships: ALTM has developed significant long-term relationships with high-quality and well-established customers in the EV battery industry.

Financial Analysis

  • Revenue Growth: Revenue has shown substantial growth in recent years. For Q3 of 2023, Net revenue is at $413.4 Million, for 9-months of 2023 is at 1.3 billion, and projected revenues for 2023 is at $1.8 Billion. In Q3 of 2022, Net revenues was $230.7 Million.
  • Profitability: Although there are some fluctuations, gross profit, for the three months ended September 30th, 2023, is $191 million. Gross profit is $125.5 million on 2022. Operating profits and margins have improved significantly in recent years.
  • Debt: Long-term debt has been declining from year to year in order to reach financial stability. In addition, the current debt structure appears to be relatively low. Total debt reported on the balance sheet for September 30th, 2023, is $687.1 million.
  • Strong cash positions: The company has had a growing cash balance, mostly driven by positive cash flows from operations, with more than $1 billion as of September 30th, 2023.
  • Guidance and Forecasts: ALTM has reaffirmed the previous annual guidance for 2023 at $1.8 billion, also they expect continued expansion in the production facilities. With these future revenue and production projections, management is expecting continued revenue and earnings growth for the coming years, mainly driven by rising lithium production volumes, and higher pricing of the products.
  • Positive Outlook: the company is well poised to take advantage of higher lithium prices in the near future and increase revenue and profits. Management believes that the structural improvements in market conditions will lead to increase in the profitability and value of ALTM in the near future.
  • Concerns: ALTM faces large operating costs because of expansion plans and high inflation, also fluctuations in lithium prices could hurt profitability. Their long-term debt of around $700 million needs to be watched.

Risks to the Moat:

  • Technology Disruption: New extraction technologies or battery chemistries that reduce lithium demand may erode ALTM’s competitive position.
  • Increased Competition: New entrants or smaller companies in low-cost locations may threaten profit margins. Especially, as Chinese Lithium producers scale up production and reach higher market share at a cheaper cost, it could make competition more fierce.
  • Geopolitical risks: Changing regulations or political instability in the countries they operate may disrupt supply and profits.
  • Price volatility: The prices of lithium have shown to be very volatile, and this may negatively affect company’s revenues in the short term.
  • Customer Concentration: The company has some major customers, which means that a loss of a customer may negatively impact revenues.
  • Operational Challenges: Managing mining projects, especially in remote or challenging areas, can be complex and may increase costs or delay production. There have been significant delays in the Sal de Vida project, as well as production challenges and increased costs at Mt. Cattlin mine in Western Australia.
  • Environmental: Increased regulatory oversight due to the environmental impact of lithium mining. The company has been facing some environmental issues with its operations in Argentina. As environmental concerns are mounting, stricter regulation can increase costs and also delay project expansions.

Business Resilience:

  • High Demand: Increasing demand for lithium in EV batteries and other technologies will support the company’s revenue growth for the foreseeable future.
  • Asset Diversification: The combined company has a diverse portfolio of lithium assets located in multiple places, and they have access to higher quality lithium. It reduces the impact of operational disruptions.
  • Low Cost of Production: The company has been looking into ways to reduce its operating costs through implementation of latest technologies, and by improving production procedures. They are also focused on long-term contract negotiations with customers in order to maintain stability.

Understandability: 3/5

The business of lithium production and processing is moderately complex. While the overall concept of mining and producing battery-grade lithium is straightforward, analyzing the financial statements of a company in the mining sector and assessing the impact of various economic forces on the sector could become quite technical. The impact of governmental regulations and the unique competitive landscape in the lithium industry also creates complexity. The company has assets all over the world and understanding their supply chain and geopolitical risks is also hard. Understanding the merger between the two companies, and all the complexities that come with it, requires some additional understanding.

Balance Sheet Health: 4/5

The balance sheet of Arcadmium Lithium is currently quite strong and healthy and shows good progress from previous years. While debt is higher, with debt/equity of around 34%, it is still at a manageable level. Company’s cash balances have shown significant growth, and its revenues and earnings projections are also positive. The company also has the ability to refinance its debts as needed due to financial stability, and the company’s strong future cash flow also signals financial strength. This all shows that ALTM has a relatively healthy balance sheet.

Additional Information:

  • ALTM has recently entered into a new supply agreement with a South Asian customer with 20,000-30,000 Mt of lithium supply per year which will improve the companies cash flow and revenue for coming years.
  • There are ongoing investigations from the Argentinian government on possible manipulation of Lithium prices by different companies. ALTM is also part of the investigation and the company may have to pay a fine or face other consequences if found guilty.
  • There have been delays in completion of Stage 2 at Sal de Vida, and it is expected that it will be operational in the second half of 2024. Management are citing it as a factor of uncertainty for the near future.