Q1 Earnings Preview

May 3, 2018

FMC kicked things off by reporting another strong quarter, especially in the soon to be spun off lithium business.  Segment EBITDA of $50 million was up 95% compared to the prior year quarter on revenue of $103 million, which was up 57% from the prior year quarter.  Driving these results were higher volume from debottlenecking projects in Argentina and the hydroxide expansion in China, as well as higher pricing year over year and lower operating costs.  Furthermore, the company raised guidance for the full year, expecting revenue in the range of $430 to $460 million, and EBITDA in the range of $193 to $203 million. The positive results and upbeat guidance should help raise intrigue in the lithium spinoff expected to occur later this year.

Looking beyond FMC, we have Albemarle Corp (ALB) and SQM expected to report earnings in the next two weeks.  While FMC definitely got things started on a positive note, investors will be watching results from these two dominant producers closely as lithium stocks have basically traded in a range after a steep selloff to start the year and are waiting for a catalyst to continue the 2017 rally.  Here are the key points to look out for in these earnings:

  • Pricing: Obviously, the big thing everyone always cares about is pricing received on products.  Albemarle will likely refuse to give too much commentary, so on their call, we’re looking more for sentiment and how they discuss the topic.  However, an important aspect to look out for as we get deeper into the year will be what they expect the back half of the year to look like. Some analysts are expecting a slight dip in pricing in the second half as new projects like Altura and Pilbara potentially come online.  We’re interested to see if SQM and ALB get asked about these projects or their impact on pricing, and how they’re looking at those scenarios.
  • Project updates:  SQM has two major JVs with partners Lithium Americas (LAC) and Kidman Resources (KDR), both of which have top tier assets.  While the projects are a couple of years from production, any update could serve as a catalyst for those stocks. Lithium Americas’ stock has come down harder than most, but that’s also because it ran up much higher than the rest as a result of their high quality project and the SQM JV deal. Down over 50% from the highs, any positive new information has the potential to ignite a rally.  And given that it is now a US-listed name, any positive update from SQM or ALB that brings investors back into the lithium story as a whole would be a positive for LAC as investors would use it as a pure-play vehicle for investing in lithium.

    Albemarle doesn’t have any exciting JVs in the junior space that investors are keeping an eye on, but commentary surrounding their JV with Tianqi Lithium in Western Australia is still important information to keep track of for investors.  The company is in the process of adding lithium hydroxide capacity to convert the spodumene that is produced, and will likely give an update on its progress and when we can expect it to come online.

  • Acquisitions:  The big news of late has been Galaxy Resources hiring JP Morgan to explore strategic alternatives for up to 49% of their Argentina project, as well as Mineral Resources looking to sell up to a 49% stake in their Wodgina project. Additionally, not too long ago Altura Mining was the subject of takeover speculation, and Tawana Resources merged with their JV partner.

    With deal activity heating up, and the stakes to secure lithium rising quickly, it’ll be interesting to hear what the majors are thinking.  SQM is looking to diversify outside of Chile, and already have two JVs. But we still wouldn’t count them out of the game, especially if rivals Tianqi, Albemarle, and Ganfeng are going to be active. Speaking of Tianqi, they’re rumored to be interested in the Galaxy deal, and we wouldn’t be surprised if an analyst used this as an opportunity to press Albemarle’s management on their thoughts surrounding the news as well as what they may be looking at purchasing themselves.  Both SQM and ALB are fighting to maintain market share as more and more lithium projects seek to come online and the pie as a whole continues to grow at a rapid pace. So listening to their rhetoric on acquisitions will be key.

  • Analyst focus:  Finally, since many investors are either growing bearish, or exiting the lithium sector completely, we’re interested to see what the analysts focus on. Over the previous few quarters, the vast majority of questions have been about lithium, with a focus on trying to gauge supply and demand tightness and its effect on pricing.  Any changes regarding the focus of Q&A will likely mean analysts are losing interest in the lithium story which would not bode well for those stocks. Also, we’ll be listening to see if more analysts are opening up to the bearish idea of oversupply being more imminent than previously thought, or if Morgan Stanley is once again the lone bear on the call.

With lithium stocks mostly trending sideways after getting beat up for the first one third of the year, the easy trending markets of 2017 are no longer here.  So seeking out as much information as possible and analyzing it to develop better investment theses is more important than ever. These earnings calls are part of that process, and we will be here to decode them for you, as always!

So stay tuned via twitter and email to get our analysis as it hits the tape!