February 15, 2018
Given that most of our readers follow FMC primarily for their lithium business, we decided to recap the earnings for this segment. In this post we look at their financial performance and review a few soundbites provided by the company in their discussion of competitors, “high cost spodumene” producers, and their outlook for supply and demand.
FMC Lithium made solid progress in 2017, with revenue of $347.4m (up 32% year over year), and operating profit of 126.7m (up 81% yoy). Further more, management mentioned that the lithium business operates at about 45% EBITDA margin.
Looking forward, here is a summary of the company’s 2018 guidance and expectations for the lithium business:
- Revenue of $420-460m (27% growth at midpoint)
- Q1 revenue of $95-110m
- EBITDA of $180-200m (34% growth at midpoint)
- Q1 EBITDA of $44-48m (78% yoy growth at midpoint)
- Price and volume will each contribute half of the increase in earnings
- Volume increase will largely be due to 4,000t of incremental capacity coming online from de-bottlenecking projects
- The company expects that 2018 prices will be higher than 2017
- They expect to produce 21,000t LCE (up from 18,500t)
- Overall capex of $250m, lithium will make up $105m of that
- Management is confident that they will file drafts of the required documents to spin the Lithium business in the summer, setting up a listing in the third or fourth quarter, and full separation in Q1 2019
Capacity and Expansion
The company noted that the Argentina operations can support up to triple current capacity. They finalized their agreement with Argentina which will enable them to expand production (to over 40,000t LCE) in the country, and separate the lithium business into a standalone company. Additionally, the royalty rates will remain similar to prior commitments of mid-single digits of sales out of their Argentina operations.
As for their approach to expansion- In the short term, they are focusing on doubling capacity. They will add 10,000t by 2020, followed by another 10,000 by 2022. They estimate that this will cost $250-300m in capital spend. Furthermore, they are exploring adding another 20,000t capacity by 2025.
Looking at their hydroxide operations- FMC Lithium delivered their first full quarter of commercial production at their LiOH facilities in China. During the year, they expanded capacity from 10,000t to 19,000t. Through de-bottlenecking projects, they expect to add another 4,000t in 2018.
“High cost spodumene” and Carbonate vs Hydroxide
Many investors and analysts that don’t pay too close attention to the lithium mining space subscribe to the generalization that brine-based production is cheaper than hard-rock production across the board. It is clear that FMC is trying to continue feeding into this notion, as they mentioned spodumene producers a few times on the call when discussing supply, referring to them as “high cost spodumene” each time. Interestingly, they even used that term when discussing hydroxide production, despite the fact that hydroxide is where the production costs start to even out between brine and hard-rock. Here are a couple of soundbites on that front
- “On the supply side, despite recent news out of Chile, we believe that supply for high-cost spodumene producers will continue to be needed to meet the end-market demand in every year through at least 2025. We expect this will create a price floor for lithium carbonate of low double-digit dollars per kilogram for at least the next seven years. FMC is very well-positioned to take advantage of these market conditions. Our business is focused on lithium hydroxide, and we have demonstrated that our approach to expanding our hydroxide capacity is more than capable of meeting the growth in demand with relatively low capital needs.”
- “The marginal producer of carbonate remains the high-cost spodumene source and will likely remain so even if demand fell by around 10% from our forecast. There is simply not enough brine capacity capable of being added by 2020 to change this.”
Supply and Demand
FMC spoke about their demand projections through 2025, which you can see in the above graphic. The story was similar to what you hear from most forecasters- they believe EV penetration will drive demand and that “we expect pure EV penetration to reach 2.5% by 2020 and 12% by 2025”
The company also provided a graphic (above) on the supply side in the form of an industry cost curve. They also addressed the recent oversupply fears that have been fueled by the SQM/Chile deal, saying “We have seen repeated examples of new entrants making large claims about intended capacity additions that are ultimately proven to be far too ambitious. Even a simple review will show that almost without fail, the capital costs increase significantly and the startup dates are pushed further and further back. Once projects have been brought online, we have seen production rates that fall far short of nameplate capacity, product quality that is inconsistent, and operating costs per unit of production that are far higher than what was originally projected. While it is possible today to construct the cost curve using announced project that suggests a risk of oversupply in the future, all available evidence suggest that this is highly unlikely to occur.”
Taking it a step further, FMC also addressed their Argentinean operations’ ability to compete with Chile, saying “you can see that at today’s price range for carbonate, the higher royalties payable in Chile means that there is no meaningful cost difference between carbonate produced in Argentina and in Chile.”
In summary, this sound bite best captures their views on the market through 2025: “we remain of the view that the risk to the demand side are that we are underestimating the level of EV demand and that the risk of the supply side is that we are being overoptimistic about industry’s ability to add capacity on time and on budget. ”
There were a few interesting questions regarding the lithium business that we have shared here.
- Nomura’s Aleksey Yefremov asked about the Q1 and subsequent quarterly guidance not being higher than the company’s Q4 performance of $48m in EBITDA.
- The company responded by saying “The fourth quarter is historically a quarter which is a strong quarter. Sales are high, and the products out of Argentina, because of the seasonality of our production, are very high.”…”You will see earnings ramping up and being at the highest level in the fourth quarter. First quarter, there is a good thing about the first quarter. If you look at the sales to earnings, it’s a high-profit quarter because the [product] mix is favorable.”
- BMO Capital Markets’ Joel Jackson asked about the carbonate/hydroxide dynamics- It seems like you’ll be short carbonate in 2019. Is that true? And then how will that work out? Will you maybe run hydroxide a little bit lower? Will you go into the market and purchase carbonate? What will margins look like? It seems like the Nemaska project being unfinanced it will probably not be able to offer your carbonate for at least a couple of years, so maybe you could just elaborate on that.
- The company was a bit vague, and evasive in their response: “The de-bottlenecking will come in over the course of 2018, and there’s potential upside there. This is a number of different projects that have different characteristics on yield and some incremental capability of equipment that we may see additional there. We do expect Nemaska volume to begin in 2019, and we still need to see, to your point, how much of that volume will be there, but there are commitments and penalties to that end. And we continue, I would say, a multipronged effort on the acquisition of carbonate elsewhere. So as you know, in 2018, we’ll continue to be long carbonate, and we have the ability to shift LCEs toward hydroxide to continue to grow.”
- Finally, Arun Viswanathan of RBC asked about why they believe pricing will continue to rise despite their demand slide (shown above) showing that effective capacity was higher than the market demand.
- Tom Schneberger, head of the Lithium business’ response: “First, let me comment on the effective capacity being above demand. If you look at 2017, effective capacity results were above demand. It doesn’t mean that the right products are getting to the customers. We saw 2017 demand limited by supply, and we saw prices up substantially in 2017. So the same could occur even though effective capacity is above demand. Looking at what we see 2017 to 2018, we’ve gotten price increases across all of our products. If you take the midpoint of the revenue and the LCEs, you can come pretty close to see that we got a revenue per LCE that is well above the market, and that is driven by a mid-teens increase in our lithium hydroxide product line.”
While FMC kicked things off, Albemarle and SQM will be announcing earnings in the coming weeks. So stay tuned via twitter or email to stay up to date on our post-earnings analysis as soon as they hit the tape!