March 1, 2018
Below you will find our transcript of Albemarle Corporation’s Q4 2017 earnings call. These are our personal notes posted directly after the call. As such, please excuse any incomplete sentences/questions, or missed words. It is not to be taken as a verbatim transcript.
CFO: Ricardo Ramos
CEO: Patricio de Solminihac
- Net income reached $428m, up 50% from $238m
- Q4 earnings $110m
- Strong results based on several factors
- Record sales vol in pottasium
- Higher lithium prices
- Started 2018 with very positive news for the company and lithium market- termination of arbitration with corfo allowing us to increase production to 2.2mt of lce to 2030
- Comes with higher lease payments, which starts when deal is signed (March 2018 potentially)
- We believe that lithium demand will remain strong- approximately 18% growth per year for next 5 years
- Approximately 50kt per year of additional supply will be needed
- We are expanding carbonate capacity to reach 100ktpa by 2019
- $170m expansion
- Further expansion will depend on market growth
- We expect to maintain 25% market share
- Prices already 20% higher than what we saw in Q4 2017, much of our negotiations with customers have finalized for first semester of 2018
- Lithium demand could grow over 20% in 2018
- EV demand expect to grow 30-35% pa next five years
- Despite potential new capacity coming online in second half of 2018, we still expect pricing to be up compared to second half of 2017
- We continue to focus on growth in all 5 business lines, and expansion of announced capacities
- $517m in capex expected for 2018, $157m outside of Chile
- During 2017 we paid approx. $370m in dividends, while reducing net debt/EBITDA ratio to .3x from .6x
- Reported over $1B in cash
Q & A
Q: Ben Isaacson, Scotia Bank- How much lead time will you need to go beyond the announced 100kt in Chile. Would you need to build a new facility, and how long would that take?
A: We increased the announced expansion for this year to 70kt, and in 2019, we expect to have an additional 30kt to reach 100kt. We would need less than 2 years to increase an additional 20-30kt of capacity beyond that.
Q: Joel Jackson, BMO- You’re seeing your competitors announced very large expansions in last few weeks, and also new increased demand expectations. You said 30-35ktpa growth in demand, your competitor is now saying 70ktpa growth, do you think that is reasonable?
A: What we indicated is that we believe that demand will increase by 50kt per year. In the past we have been short on demand expectations. We will have to see how EVs develop. With the information we have right now, is that new demand will grow at 50kt per year.
Q: To get above 100kt capacity, how much brine do you have? Do you need to pump more brine? Do you have enough to get to 150kt? Can you give us an idea of the work needed to get to 150, 200kt in Atacama?
A: Our plan is that we will not need to pump any additional brine. What we will do is optimize the yield with news way of doing it. That will allow us to produce all the additional lithium we want to produce without pumping new brine. Most of the investment that we will do will be at the chemical plant site.
Q: Okay but what about beyond the 100kt?? To get an extra 50 or 100 beyond 100kt?
A: Yes, that is my answer for beyond 100. No additional brine needed.
Q: Your capital intensity is below customers. Competitors are paying $10,000 or $15,000/t to bring on new capacity. What stops you from going bigger in Chile given this fact?
A: We have to define our strategy. We think that it is a wise move on our side to have a diversification, which is why we will continue with Argentina and Australia which are also on the low end of the cost curve. On the other hand, it’s one thing to talk investment, but there’s also opex. Of course, we have great opex/capex in Atacama, but we will have to pay much more rent.
Q: Just following up on the geographical diversification, can you elaborate a bit more on why that’s important to you and your customers, and whether there’s any relationship there with the types of lithium chemicals your seeing in particular demand for clients- for example hydroxide or battery grade carbonate? Not as competitive to produce OH in Chile anymore given royalties?
A: We represent 30-50% of some of our customers’ needs, and they are investing heavily in their businesses. So, they want to make sure that the risk of not being able to supply for some time in the future is well balanced. When you’re only in one location, there’s risks of strikes, earthquakes, regulations, etc. So, when you’re able to bring supply from different locations, you’re well balanced and able to assure less risks to customers. Of course, that is balanced together with the total costs- capex, opex, rent. We want to be flexible. Also important is that we see the lithium market will continue to grow. We have more than 20 years of experience, and we believe we are in an important period. So, we will continue to look at the growth and also diversification.
Hydroxide vs carbonate- yes there is more demand with hydroxide right now, so we are increasing our capacity here in Chile. Expect to end this year with capacity of 13.5kt. Also analyzing what is best to produce in Australia.
Q: The 52kt you are adding in 2019, are you planning to increase your hydroxide capacity in Chile beyond the 13.5kt?
A: We have not decided yet, we want to see how the markets respond. Right now we are going to 13.5kt so it’s a big expansion.
Q: The guidance you gave on pricing, you referred to the market price being strong in the first half of this year and then maybe stabilizing or falling slightly in second half. To clarify, what specifically are you speaking to when you say pricing- is it spot prices in china, prices you are realizing, etc.?
A: We always refer to the price that we are realizing. And we believe that is a good representation of what the market price is. Of course, there are some differences between some big consumers and small consumers, but this is the average price that we are realizing in our sales prices. Given our size, diversification, we think it represents the market price.
Q: Chris Terry, Deutsche Bank- production profile you outlined. You said 70kt capacity by end of the year, and you’ll produce 5kt more than 2017, implying 55kt. And then 100kt capacity by 2019- what sort of production do you expect, and what’s the expected ramp up to the full 100kt?
A: We are operating at full capacity over the last few years, and sometimes even beyond nameplate. In the future that cannot be the case as we’ve seen in other business lines. So, two things are important- capacity, and how much you want to produce and sell. Right now, we are trying to produce as much as we can, as fast as we can, and sell to the market. 2018- as you say, we will have 70kt capacity, and producing 55kt. We are expecting to sell 55kt. Next year, we could be able to sell 80kt if we want potentially, the full 100kt capacity won’t be available on day one.
Q: You’re saying for the hydroxide mix for this year, the additional 6.5kt to take you to 13.5, you don’t complete that until later in the year. Will you see any effects in second half of the year?
A: We expect to sell more than the previous year, but not that much. Then we will have to decide based on the market what our mix will be next year.
Q: So you get 13.5kt of hydroxide from next year onwards, and minimally in 2018?
A: Yes, in 2019 we expect to sell much more than we do this year.
Q: A high level question on the production profile- you have the capacity to go above 200kt, and you’re saying you’ll expand at a rate that matches what customers want. If competitors announce more expansions, will you react by adding more capacity to maintain market share?
A: I don’t think that the other companies will have the real possibility of increasing capacity at the lowest cost. We understand, and we believe that we are one of the lowest cost producers. Our thinking is that we will keep our market share, the market is growing a lot, so to maintain it we will need to grow a lot. There are many dynamics that we will have to see in the market. The beginning of last year we saw a lot of new capacity announced that could’ve come online in second half of the year, but that didn’t happen. The growth of the market was faster than expected, and supply didn’t come on as fast as expected. We want to be prepared to respond to customers on time, and to increase if the market needs more products.
Q: In terms of balancing the growth and capex you’ve got coming up, with dividend potential, can you restate goals on the dividend side?
A: The shareholders have approved the dividend policy. We are increasing our investment in plants. But at the same time we are generating strong cash. We have $1B in cash, and a very low net debt/ebitda.
Q: BOFA Merrill Lynch- on potash, what is your expectation of long term production of potash given the expectations of lithium production.
A: As we have indicated, we are right now operating in a way to optimize lithium production without pumping more brine, so of course it’s affecting our production of potash. Last year we sold 1.35mt of potassium chloride/sulfate, this year we expect to sell less than 1mt. In general terms, I think we will be able to sell 900kt of potassium chloride.
Q: Can you provide additional details on lithium volumes, and the market overall?
A: We have been in this market for 20 years, seen many different stages, and lots of promises for new production- China, Australia, US, etc. The track record has not been that good though. So right now, there’s obviously stronger demand, more incentive to bring on new supply. But we will have to see, we will follow them of course, and try to understand how competitive they are. But we will not make the mistakes we made in the past- adding capacity just to respond to the market.
Q: Lucas Ferreira, JPM- Your view on long term prices. After agreement with Corfo, the stock is down 25%, people are becoming more bearish on the long-term view. Where do you see the incentive price to keep expanding brines, as well as spodumene or different regions of the world. How fast do the industry cost curves flatten out? Do you think spodumene could be seen as the long-term support to the cost curve?
A: long term price is the million-dollar question, that depends on supply and demand balance. We have been short on our demand forecasts in the past. I personally have the view that the demand will grow beyond our base case. Regarding the industry- as I said they haven’t had a great track record, some projects take a long time, some don’t even work. Comparing hard rock vs brine, I don’t like saying that one is worse than another one. There are great hard rock projects, like Mt Holland, and there are also bad hard rock projects. There are great brine projects like Atacama, but also bad brine projects. You have to take each project on its own merits. So, my view on long term price- it will be a very tight market. That won’t resolve this year. We don’t have any precise information to look beyond 2018/2019.
Q: Your price outlook for the year, you said you were optimistic. Seeing 20% higher than Q4, can you give more color on that? And also, on the inventories, and the value chain?
A: Regarding 2018, what we indicated is that we’ve closed most of our sales for the first semester of the year- prices are up 20% compared to Q4. Regarding the second semester, even though there are new possibilities of supply coming online, we still think the prices will be higher than 2017.
Q: The 20m charge related to Corfo- where was that allocated? Below or above the EBITDA line? And when will we get a breakdown of the cost allocations? Would like to know how it impacted results in Q4?
A: It was reflected in 2017, and below the line.
Q: Alexander Falco, HSBC- I have a question on the rationale on the first phase of the expansion. Could you walk us through after that, what is going to be the decision-making process in order to go full on, or is it something contingent to where the market or price will be? Or does it even matter since you’re the lowest cost producer in the world? Any IRR threshold, any decision-making process you can walk us through?
A: Our position is that we are increasing capacity of our plants, and the engineering will be optimized to have very low capex. We can go with additional projects as I indicated, but we have time to decide that. We have to first run our plant at 70kt, and then 100kt next few years. And then we will decide beyond that. The official process is just optimizing plans for the long term. We will apply our experience from history and other business lines into the decision making.
Q: Can you talk about the ramp up for the next few years? Do you expect a gradual ramp up, full on ramp up?
A: We expect to have the 70kt capacity to be ready by the end of the year, so we can operate that next year. Then we will be building the additional 30kt next year, ready in the second half of the year. So, some of that might come on in the end of 2019 as well.
The original earnings press release, as well as those of other companies in the space can be found on our Li Newsfeed.