What's the idea?
- The ongoing energy transition and accelerating vehicle electrification is likely to boost the global EV sales, driving demand for critical feedstock, such as lithium.
- Livent is a leading fully-integrated lithium producer, with significant lithium resources in Argentina and Canada and lithium manufacturing facilities in the U.S., China and the United Kingdom, close to the firm’s customers.
- The company’s management has been implementing an immense growth strategy, aimed at both expansion of production capacity and diversification of product portfolio with high added value products.
- The anticipated Livent’s merger with Allkem will create the world’s third-largest integrated lithium chemicals producer by production capacity.
- The company has been capitalizing on Argentina's favorable tax and regulatory environment for decades, and the company’s access to low-cost lithium operations in the country has made Livent one of the most profitable lithium producers.
About Company
Livent Corporation (LTHM) is a fully integrated lithium company that produces high performance lithium compounds. Livent’s product range includes battery-grade lithium hydroxide, butyllithium, lithium carbonate, lithium chloride and other specialty products that are critical to the fast-growing electric vehicle, broader battery and other markets. The company holds significant lithium resources in Argentina and Canada, and has manufacturing facilities in the US, China and the UK. Livent and its predecessor firms have been engaged in the lithium business since 1942. The company is headquartered in Philadelphia, the U.S.
Why do we like Livent Corp?
Reason 1. Accelerating trends of vehicle electrification and renewable energy adoption
Livent was founded in 2018 as a result of the restructuring of FMC Corporation, which handed over all its lithium business units previously operated through various subsidiaries to Livent. In October 2018, Livent conducted an initial public offering of its common stock and has been operating as an independent company since that time.
Livent’s lithium has vertically integrated business, covering the entire value creation chain:
- The company holds licenses for lithium deposits in Argentina and Canada, where it produces lithium carbonate and lithium chloride.
- Lithium carbonate can be either used directly in various industries, from battery manufacturing to the production of cement densifiers, greases and lubricants, or converted to lithium hydroxide and specialty lithium salts that are used in the production of high energy density lithium-ion batteries for electric vehicles (EV), stationary storage applications, pharmaceutical applications and catalysts for chemical intermediates. Livent’s lithium hydroxide manufacturing facilities are located in the U.S. and China.
- Lithium chloride is mainly used in the production of butyllithium, specialty organics and high purity lithium metals. These compounds are widely used in the manufacturing of pharmaceutical and agrochemical polymers, synthetic rubber applications, lightweight alloys for the aerospace industry, non-rechargeable batteries, etc. The company’s butyllithium and lithium manufacturing facilities are located in the U.S., the UK and China.
Most of Livent’s revenue comes from the production of lithium hydroxide, with the share of 51% in 2022, followed by butyllithium which accounts for 34% of revenue. Sales of lithium carbonate and lithium chloride account for 9% of the total revenue, while the share of high purity lithium metal and other specialties stands at 6%. The company operates in the following geographical areas: Asia (70% of the revenue), North America (18%), Europe, Middle East, and Africa (12%), and Latin America. Livent supplies a number of large car manufacturers, including Tesla, General Motors, and BMW.
2022 revenue breakdown by product and geographical area
Livent’s product portfolio perfectly fits the world’s needs in commodities that are critical to the ongoing energy transition to low-carbon economy. Firstly, a major trend is the accelerated electrification of vehicles. According to BloombergNEF, despite supply chain disruptions, macro-economic uncertainty, and high commodity and energy prices, global EV sales saw another record year in 2022, exceeding 10 million, up 60% relative to 2021 and 10 times the sales just five years ago (1 million in 2017). The EV share in total car sales jumped from 9% in 2021 to 14% in 2022. This resulted in the global EV stock reaching 26 million in 2022, up 60% compared to 2021. As for geographical trends, China still dominates the global EV market, but sales are rising quickly elsewhere too.
In its basic scenario, called The Stated Policies Scenario, IEA expects total EV sales, including battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs), will reach 20 million in 2025 and 40 million in 2030, representing over 20% and 30% of all new vehicle sales, respectively. This will result in the total EV fleet soaring from 26 million in 2022 to about 240 million in 2030, with a compound annual growth rate (CAGR) of 32%. In this scenario, EVs will account for around 10% of the road vehicle fleet by 2030. Forecasts by Goldman Sachs Research are also quite bullish: EV sales of 73 million and the 61% share of EVs in worldwide car sales by 2040.
Global EV stock forecast for 2022–2030
Secondly, vehicle electrification drives demand for lithium-ion batteries that increased by 65%, from 334 GWh in 2021 to 551 GWh in 2022. From a geographic perspective, EV battery demand in China grew over 70% in 2022 relative to 2021, while in the U.S. it soared by around 80%, despite EV sales increasing only by 55% in 2022. According to IEA, battery demand is set to increase significantly by 2030, reaching over 3 TWh under the basic scenario. Given the current lithium-ion automotive battery manufacturing capacity of roughly 1.5 TWh, to meet that demand, more than 50 gigafactories of 35 GWh of annual production capacity each would be needed by 2030 in addition to today’s capacities.
Global battery demand dynamics by region
Thirdly, the future of the global butyllithium market looks promising with opportunities in pharmaceutical, intermediate and battery applications. Market Research Community expects the global butyllithium market to reach about $1,1 billion by 2030, with a CAGR of 6.5%. The major drivers for this market include rising demand for polymer initiators and pharmaceutical grade products, and increasing consumption of industrial chemicals in various end-use industries such as energy and agrochemicals.
The actual future growth rates may differ from the forecasts to a certain degree. For example, at the beginning of 2023, the EV market experienced a sales slowdown because of the weak economic recovery in China and the end of government incentive programs for EV buyers in select regions. Whatever the future growth rates, an array of long-term legislative and fiscal initiatives across the globe, from the US Clean Vehicle Tax Credit and Inflation Reduction Act to Europe’s Net Zero Industry Act to numerous Chinese national and regional action plans, are expected to heavily contribute to the expansion of the EV and battery markets, driving demand for critical materials, such as lithium.
Reason 2. Biggest lithium resource base and promising growth opportunities
The majority of Livent’s lithium resource base is concentrated in Argentina, third-largest country by confirmed lithium reserves in the world after Chile and Australia. According to the U.S. Geological Survey (USGS), Argentina’s lithium reserves are estimated at 2.7 million metric tons (MT). Livent’s primary Argentine project is Salar del Hombre Muertoin, where lithium has been extracted for more than 25 years.
In 2022, Livent’s Argentine operations produced 21,700 MT of base lithium, including 16,950 MT of lithium carbonate and 4,750 MT of lithium chloride, up by 12.6% from 19,265 MT in 2021. The output of lithium compounds increased by 7.7% to 24,101 MT over the same period. Despite high lithium demand, Livent’s capacity utilization rates are at 80.4% and 71.9% for base lithium and lithium compounds, respectively. Such relatively low utilization rates are partly explained by seasonal factors, as lithium production in Argentina is highly dependent on weather, including the varying evaporation rates and amounts of rainfall that impact the concentration in large evaporation ponds and influence the downstream processes.
Livent’s lithium capacity and production volumes
Livent’s management has developed an impressive growth strategy that implies both the expansion of lithium production capacities and the diversification of product portfolio by adding new lithium compounds and high purity lithium metals, such as recently developed LIOVIX. Moreover, the strategy puts a high emphasis on research and development (R&D) and technological advances in the production and processing operations. Thus, the current roadmap includes the following stages:
- In Argentina, the company plans the three-phased expansion of lithium carbonate production capacity from 18,000 MT to 80,000 MT by 2029–2030. The first stage of the capacity increase by 20,000 MT is scheduled to be completed in Q1 2024.
- In the US, China and Europe, Livent plans to expand the lithium hydroxide production capacity by 20,000 MT and the lithium recycling capacity by 10,000 MT by 2025. The first stage of the expansion is planned to be completed at the end of Q3 2023, adding 5,000 MT of lithium hydroxide production capacity.
- In Canada, where Livent owns a 50% stake in the Nemaska Lithium project, the company produces spodumene concentrate which is then processed to get lithium hydroxide. The project’s annual capacity is 235,000 MT of spodumene concentrate and 34,000 MT of lithium hydroxide, respectively.
As a result, by 2030, Livent’s lithium production capacity is expected to surge 3.6-fold to 97,000 MT per year, while the output of complex lithium compounds will grow 2.6-fold to 87,515 MT per year. In addition, the spodumene concentrate project in Canada and European lithium recycling business will broaden the company’s product portfolio. Thus, Livent investments are focused both on capacity expansions, and product and geographic diversification.
Livent’s capacity expansion plan
On top of that, in May 2023, Livent announced a merger deal with an Australian lithium producer Allkem, that will lead, if succeeded, to the emergence of the world’s third-largest lithium producer by production capacity. This will be an all-stock merger of equals, with Livent shareholders receiving 2.406 shares of the combined company for each existing Livent share and getting a stake of 44% in the new company. The transaction is expected to close by the end of 2023. Livent’s management believes that the deal will combine highly complementary assets and business models of the two companies, and produce an array of positive synergies effects, including immediate increase in operating and commercial scale, lower growth risk, more resilient supply chains, and strong pipeline of advanced projects.
Forecast attributable lithium production capacity
Amid lithium prices decline over the first months of 2023, Livent's merger with Allkem seems a win-win deal that will enhance pricing power of the combined company and produce economies of scale advantages.
Reason 3. Long-lasting competitive advantages
Livent’s Argentine assets appear to present advantages not only in terms of lithium reserves volumes, but also in terms of low operating costs. The country’s regulatory policies, including the Argentine Mining Investment Law, are aimed at boosting its lithium production, and thus offer lithium mining investors several specific financial incentives:
- A 30-year tax stability period with fixed national, provincial and municipal tax rates
- Deduction of search, exploration and feasibility study expenditures from the income tax base
- Refund of the Value Added Tax (VAT) paid during the exploration stage
- Accelerated depreciation of fixed assets
- 3% cap on royalties payable
While the overall tax burden for mining companies in neighboring Chile amounts to about 40% and can be raised to 46.5%, Argentina’s regulatory environment seems much more favorable, which can boost its lithium exports. Livent is one of the few companies that has a well developed lithium business in Argentina, and therefore can capitalize on its low-cost operations, competing successfully with its peers.
However, there are some developments that pose a threat to Livent’s fiscal stability. First, its 30-year term fiscal stability agreement with Argentina’s authorities expires in 2026 and the company will need to negotiate a new agreement. This could meet particular obstacles if far-right political forces, with their populist and unpredictable agenda, gain power in the coming elections. Secondly, over 2019–2022, there have already been several attempts by the Argentine regulators to impose certain export taxes on lithium exports that did not exist at the time Livent started its operations in the country decades ago. For instance, the latest attempt was made in January, 2023, when the Argentina Ministry of Economy issued a resolution to cancel an export rebate regime relating to lithium products, which was followed by Presidential Decree No. 57/2023 in February, 2023. Despite the company’s attempts to exercise its fiscal stability rights through litigation and request an administrative reimbursement for the imposed excess export taxes, there can be no guarantee that Argentine favorable regulatory policies will last forever, which endangers Livent’s future cash flows.
Another Livent’s competitive advantage is the fixed-price contracts with its clients that allow the company to hedge against possible lithium price volatility. Over the last couple of years lithium prices have soared from around $20 per kg in mid-2021 to almost $80 per kg a year later, and then collapsed from record-high levels to about $25 per kg over the first three months of 2023. By mid-2023, the prices slightly recovered to $40 per kg, but are likely to remain under pressure due to the economic slowdown risks.
In spite of such recent fluctuations, Livent has been able to enjoy higher selling prices in 2Q 2023 due to fixed-price contracts. According to its CFO Gilberto Antoniazzi, about 70% of the company’s lithium hydroxide production this year is contracted and the 2023 prices have been largely fixed, with only 30% of sales exposed to spot pricing. This 70/30 volume allocation helped the company to outperform in Q1 2023, despite the lithium prices downturn, and beat the analysts’ revenue and EPS estimates by 10% and 54%, respectively. It also allows Livent to retain flexibility in selecting which product line to focus on.
Lithium price dynamics
Commodity prices are difficult to forecast: Some investment banks analysts predict the demand for battery-grade lithium outstripping supply and the subsequent rise in lithium prices up to $62 per kg, while others expect the prices to enter a period of controlled decline, settling back to around $20 per kg by the end of the decade. By now, Livent has managed to successfully navigate short-term challenges in the lithium market due to the company’s fixed contract pricing. Such a strategy seems rational since it secures future cash flows necessary for the implementation of the company’s ambitious growth strategy.
In any case, Livent’s expected merger with Allkem and expansion of projects will create the world’s third-largest lithium producer that will be able to both withstand unexpected macro-economic fluctuations, and benefit from strong lithium demand and favorable pricing conditions, while demonstrating outstanding overall financial performance in the coming years.
Financial performance
Livent’s 2022 financial results can be summarized as follows:
- Revenue increased from $420.4 million in 2021 to $813.2 million in 2022.
- Gross profit surged from $91.2 million to $398.1 million YoY.
- In 2022, the company returned to operational profitability, reporting operating income of $348.9 million, while in 2021 it experienced an operating loss of $0.8 million.
- Net income accounted for $273.5 million in 2022 versus $0.6 million a year earlier.
- Operating cash flow skyrocketed from $26.4 million to $454.7 million YoY.
- FCF also soared from $ -105.5 million in 2021 to $117.8 million in 2022, less than operating cash flow due to 2.6 times higher capital expenditures.
The key factor contributing to such splendid performance is higher pricing across all products partially offset by higher logistics, raw material and other operating costs coupled with a slight decrease in sales volumes.
Dynamics of annual financial results
Dynamics of annual financial results
Livent's financial performance in H1 2023 is presented below:
- Revenue increased from $362.2 million to $489.3 million YoY.
- Gross profit grew from $163.9 million to $309.7 million YoY.
- Operating income amounted to $284.8 million versus $140.1 million a year earlier.
- Net income increased to $205.0 million in H1 2023, a notable improvement from $113.2 million a year ago.
Despite better overall performance in H1 2023 relative to H1 2022, in Q2 2023, Livent reported revenue of $235.8 million, an 8% YoY increase, but missed Wall Street estimates by $16 million. After hitting a record of $253.5 million in Q1 2023, revenue fell in the next quarter as the company reported a slight decline in average selling prices. Still, Livent expects a full-year revenue of $1.0 billion to $1.1 billion, and adjusted EBITDA of $530 million to $600 million.
Dynamics of half-year financial results
Livent maintains a robust balance sheet:
- The leverage ratio, defined as the ratio of total debt to assets, stands at 11%, which is closer to the lower end of the average range of 6%–33% for lithium producers.
- Total debt is $242.7 million, as of June 30, 2023. Given $167.8 million of cash and cash equivalents on the balance sheet, the company's net debt accounts for $74.9 million.
- Inventories, comprising work in progress and finished goods, increased sequentially by 48% in Q1 2023 relative to Q4 2022. However, in the course of 2023, the lithium demand started to rebound, while the company’s inventories stood at the same level by the end of Q2 2023. Livent’s inventory turnover ratio for 2022 was 2.89x, which means that it turned over its inventory every 127 days on average during the year.
- Livent’s cash flow from operations fluctuates from year to year, but over the last three years it has never stridden over the negative zone, with its average value stood at around $162 million. In H1 2023, Livent had $181.6 million in operating cash flow.
Stock valuation
By average multiples, Livent trades at a premium to other profitable lithium producers: EV/Sales — 4.26x, EV/EBITDA — 7.74x, P/FFO — 7.72x, P/E — 12.14x. However, unlike many peers, Livent not only makes profit but also has promising growth opportunities, including those from the expected merger deal with Allkem, owns an integrated and diversified product portfolio, and, therefore, offers the best return per unit of risk taken.
Comparable valuation
The minimum price target set by Raymond James is $30 per share, while Piper Sandler Companies values Livent at $38 per share. According to the Wall Street consensus, the stock’s fair market value stands at about $34, implying a 56.7% upside potential.
Price targets of investment banks
Key risks
- The EV and battery markets are relatively new, rapidly evolving, and hence could be affected by numerous factors, especially including deterioration in the global economy, severe competition, tax and economic incentives, etc. If the market develops more slowly than expected, Livent’s business, prospects, and financial results could be affected.
- Lithium prices are volatile, especially due to changes in the supply-demand balance. Some of Livent’s lithium supply contracts are tied to the current prices, which could have a material adverse effect on the company’s financial performance if lithium prices decline.
- Livent gets a substantial portion of its revenue from a limited number of customers, and the loss of, or a significant reduction in orders from, a large customer could have a material adverse effect on the company’s business.
- Livent has been able to capitalize on its 30-year term fiscal stability agreement with the Argentine authorities over the past decades. This agreement expires in 2026, and Livent’s inability to prolong it due to various factors could deprive the company of one of its key competitive advantages.