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The Biggest Pure-play Lithium Stock Plans IPO

If making money off “the next big thing” was that simple, everyone would be doing it. Take solar as an example. It’s treated retail investors poorly, despite some phenomenal growth numbers. Then there’s lithium. When we first looked at this investment thesis, we dismissed it because the three major lithium producers only saw a fraction of their revenues tied to lithium. Last time we looked, those small fractions had turned into some big numbers. Now, we’re seeing one of those companies preparing to spin out their lithium production operations in an Initial Public Offering (IPO) that if successful, will provide retail investors access to the largest pure-play lithium stock on the market.

The Six Major Lithium Producers

In order to better understand the lithium market, we first need to understand the players. In 2017, the global supply of all lithium compounds totaled 270,000 metric tons. (Going forward, we’re just going to say “tons” because all you Yanks might get confused if we start using a measurement system that almost every other country in the world uses). The following six producers were responsible for 86% of the 270,000 tons of lithium compound production in 2017 (all market cap numbers in USD):

  • FMC (FMC) – Market Cap: $11.66 billion
  • Albemarle Corporation (ALB) – Market Cap: $10.5 billion
  • Sociedad Quimica y Minera (SQM) – Market Cap: $12.12 billion
  • Tianqi Lithium Corporation (002466.SZ) – Market Cap: $6.4 billion
  • Jiangxi Ganfeng Lithium Co. Ltd. (002460.SZ) – Market Cap: $5 billion
  • Orocobre Limited (ORE.AX) – Market Cap: $0.82 billion

(Note that we wrote about Jiangxi Ganfeng in a previous article titled How to Invest in a Big Chinese Lithium Company.) While all of the above companies have a story to tell, the one we’re going to talk about today is FMC because they’re planning to spin out their lithium operation as a separately traded entity under the name “Livent Corporation”. First, let’s talk a bit about the lithium market. (All information has been provided by Roskill Consulting Group Limited and/or FMC via the IPO filing).

The Global Lithium Market

The Livent IPO filing document contains an incredible amount of rich information about the lithium market, along with some spectacular predicted growth. The major driver for growth in the lithium compound market is expected to be the electric vehicle (EV) market. Those mandates come from the top, with governments around the world ushering in a new era of EVs:

Moving to electric – Source: Livent IPO Filing

In ten years’ time, electric vehicles will be responsible for consuming more than 60% of all lithium compounds. This would bring the global demand for lithium compounds to an estimated 878,000 tons, more than 4X the present global supply of lithium compounds:

Lithium Compound Growth Forecasts

Source: Livent IPO Filing

While those aggregated numbers represent an impressive +15.3% Compound Annual Growth Rate (CAGR), they mask some even better forecasts. You see, not all lithium compounds are created equal.

Performance Lithium Compounds

While lithium can be thought of as a soft, silvery-white metal, lithium compounds come in various forms for various applications. Without delving into the chemistry too much, we can simply divide lithium compounds into two broad types:

Performance lithium compounds are produced through chemical processes that utilize base lithium compounds, primarily lithium carbonate and lithium chloride, as inputs. Those processes require a great deal of expertise, and Livent has been refining their own proprietary processes for 60 years now. In 2017, 88% of Livent’s lithium revenues came from “performance lithium compounds” – which are expected to grow at even higher rates than base lithium compounds:

According to Roskill, the global consumption of performance lithium compounds in 2017 was approximately 67,000 metric tons and is expected to grow to approximately 461,000 metric tons by 2027, representing a +21% CAGR. Within performance compounds, Roskill forecasts that consumption of lithium hydroxide is expected to experience the fastest growth, from 20,000 metric tons in 2017 to 399,000 metric tons in 2027, representing a +35% CAGR.

It looks like lithium hydroxide is the place to be, and Livent sees that. At the end of 2017, Livent had produced 13,057 metric tons of lithium hydroxide which represented 45% of their total revenues in 2017. Here is a look at their capacity in 2017 (total possible that can be produced) and their production (what they actually produced):

Livent Production Breakdown

Source: Livent IPO Filing

Given the 2017 production numbers seen above, we might be tempted to think that Livent isn’t much of a player since they only produced 35,030 metric tons of lithium compounds in 2017, compared to a global supply of 270,000 metric tons. However, when it comes to lithium hydroxide (the lithium compound with the highest expected growth rate), Livent has a majority market share just north of 65%. And those numbers are expected to go much higher in the coming years.

Livent’s $1 Billion Growth Plan

Companies sell shares to the public in order to raise funds for further expansion, and Livent has some big plans for the $100 million they’re hoping to raise. In fact, that’s just a drop in the bucket compared to their planned investments. Over the next 5 years, Livent plans to spend over $1 billion on maintenance and expansion projects, all of which are expected to be contracted with customers before they commence production. By 2025, Livent plans to reach the following production capacities (cost estimates use the upper range and all expansion occurs in phases):

  • Lithium Carbonate – 60,000 tons (+375% increase) – Cost: $600 million
  • Lithium Hydroxide – 55,000 tons (+297% increase) – Cost: $170 million
  • Other unknown investments planned – Cost: $230 million

By now you may have realized that we haven’t even started cracking open the company’s financials. That’s because we don’t like to drone on aimlessly about how great a company’s financial numbers look (relative to what exactly?), but instead would rather take a quick look for any red flags and then move on to more interesting topics. A cursory look at Livent’s financials shows some very strong revenue growth from 2016 to 2017 which the company attributes to improved pricing and product mix:

Livent Financials

Source: Livent IPO Filing

Looks like some strong margins in 2016, but not so much in 2017, owing to some allocations that needed to happen as they prepared for the spinoff. Now, Livent just needs to make sure that nothing goes pear-shaped as they take on some heavy debt to fund their $1 billion expansion plans.

Conclusions

The commitments being made by global car manufacturers to produce more electric vehicles align with the various governments around the world that have announced plans to stop selling petrol powered vehicles by particular dates in the future. Here is a fairly compelling collection of recent announcements by auto manufacturers, stating their commitments to move toward EVs:

Recent Automotive OEM Electric Vehicle Announcements

We were able to put man on the moon, yet we still can’t figure out how to insert graphics in SEC filings without making them blurry – Source: SEC

Unless some new sort of battery emerges that uses little to no lithium, the growth story here seems solid. With firms like Goldman Sachs, Credit Suisse, and Merrill Lynch behind the Livent IPO, it’s likely to be a successful one. Just remember that nothing is a sure thing. Argentina has started begging for money again, and that’s where Livent operates. We call that “political risk”. There’s also “company specific risk”, which is what happens when you find out your operations manager was exporting tons of white powder that wasn’t lithium, but something a whole lot more fun. Going back to the first sentence of this article, if investing in the next big thing were that easy, we’d all be rich.

Should the Livent offering take place successfully, shares will trade under the ticker LTHM.

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