Albemarle Corporation (ALB) Earnings Call Transcript & Summary

Hello, and welcome to Albemarle Corporation's Business Update Call. [Operator Instructions] I will now hand it over to Meredith Bandy, Vice President of Investor Relations and Sustainability.

Thank you, JL, and welcome, everyone, to Albemarle's conference call to discuss our announcement confirming a best and final nonbinding proposal to acquire Liontown. You'll find the press release and a presentation posted to our website under the Investors section at Albemarle.com. Joining me on the call today are Kent Masters, Chief Executive Officer; and Scott Tozier, Chief Financial Officer; Eric Norris, President, Energy Storage, is also available for Q&A. We appreciate you joining us on short notice and at this early hour. Our team is split between different locations and more balancing time zones, but wanted to speak to you all before the market opens in the U.S. As a reminder, some of the statements made during this call, including our expectations, anticipations and beliefs regarding the future constitute forward-looking statements. These may include statements regarding the likelihood and expected timing of the proposed transaction, entering into a definitive agreement and the benefits of the proposed transaction, including potential financial and operating results, production capacity, volumes and pricing. Please note the cautionary language about forward-looking statements contained in our press release and presentation, which also applies to this call. Also note, some of the comments today refer to non-GAAP financial measures. Reconciliations can be found in our associated transaction materials. And now I'll turn the call over to Kent.

Thank you, Meredith, and thanks to everyone for joining us. I'm excited to talk to you all about our proposed acquisition of Liontown and their world-class spodumene asset at Kathleen Valley. I'll start by taking you through an overview of our announcement as well as the strategic rationale. Scott will then review the financial benefits and how the proposed transaction fits into our M&A strategy. And finally, we'll take questions as time permits. Pursuing value-enhancing growth is core to Albemarle's strategy. We have clearly defined criteria and disciplined capital allocation priorities that we regularly discuss with our shareholders and our Board. For all the reasons, we'll go over today, we believe that Liontown is a compelling opportunity. As such, on September 3, Albemarle submitted a best and final nonbinding proposal to acquire Liontown for AUD 3 per share in an all-cash transaction. Following receipt of the proposal, Liontown's Board confirm that it intends to unanimously recommend that its shareholders vote for the transaction. There are several conditions to executing a binding agreement to acquire Liontown. We will enter a period of exclusivity to undertake confirmatory due diligence as part of that process. As a reminder, this is a nonbinding proposal. There is no guarantee that Albemarle and Liontown will enter into definitive agreements or complete a transaction. If we reach a binding agreement, we expect to complete the proposed transaction in the first half of 2024, pending Liontown shareholder approval, Australian regulatory approvals and other closing conditions. Now if you'll turn to Slide 5, we have consistently outlined and progressed our strategy to deliver long-term shareholder value. The potential acquisition of Liontown advances each pillar of this strategy, first, to grow profitably by partnering with our strategic customers. Liontown has signed 5-year offtake agreements with some of our existing customers. We have strong relationships with these customers and intend to continue to partner with them under Liontown's existing contracts. Second, to maximize productivity. We intend to deploy our operating model, the Albemarle way of excellence, to deliver significant benefits at the Kathleen Valley project. We are confident this will allow us to realize financial benefits and accretion in this transaction. Third, to invest with discipline. This transaction aligns with our capital allocation priorities which include investing in high-return growth while maintaining our investment-grade credit rating and funding dividend payments to our shareholders. And finally, the transaction advances our sustainability efforts as a market leader, Albemarle is defining the standards for sustainable lithium production. A few months ago, Albemarle's Salar de Atacama plant in Chile became the first lithium mine in the world to publish an independent audit report under the rigorous social and environmental standards set by IRMA, the Initiative for Responsible Mining Assurance. Liontown shares our values in sustainability excellence and is progressing their own IRMA self-assessment. Through this transaction, we will continue to apply those standards while leveraging the great work they have already done to establish Liontown as a responsible supplier. Turning to Slide 6. I'll outline the terms of the nonbinding proposal and the significant value we expect to deliver for shareholders. As I mentioned, the recommended offer is AUD 3 per share in an all-cash transaction, which values Liontown at approximately USD 4.3 billion. We expect to generate base case returns significantly above Albemarle's weighted average cost of capital with the potential to realize operational, logistical and downstream synergies leveraging our disciplined operating model. We plan to provide more detail on these synergies pending a definitive transaction. And while delivering these financial benefits to our shareholders, the structure also allows us to maintain a strong balance sheet. Now on Slide 7. We are primarily acquiring Kathleen Valley, which is a Tier 1 asset with world-class scale and economics and high-grade reserves with a long mine life. Kathleen Valley is an attractive spodumene resource given its scale, quality and near-term production and executability. The asset is less than 12 months to first production due in large measure to Liontown's experienced leadership team and their strong mining experience. Significant volume is expected beginning in 2024 and ramping to an annual run rate of approximately 550,000 tonnes of spodumene production by 2026, with the potential to reach 700,000 tonnes by 2030. These incremental volumes accelerate growth and act as a key building block for Albemarle's lithium resource growth strategy. Slide 8 demonstrates the grade and scale of Kathleen Valley compared to other preproduction lithium resources in Western Australia. Generally speaking, higher grade and larger scale assets tend to be lower-cost resources. Kathleen Valley is one of the few known world-class resources yet to be developed. Slide 9 shows the geographic proximity of Liontown's assets to Albemarle's existing operation, which creates a significant opportunity to deliver growth and synergies. We also have established logistics and connectivity within Australia, providing accessibility to global markets from this IRA-compliant region. Now on Slide 10. As part of our broader strategy, we have outlined the key criteria we use to evaluate M&A opportunities, potential transaction with Liontown checks these boxes. Liontown complements our existing portfolio and further illustrates our disciplined investment approach. I'll now turn it over to Scott to highlight how this transaction delivers value for Albemarle shareholders from a financial perspective. Scott?

Thanks, Kent. The proposed acquisition of Liontown provides clear and compelling value to Albemarle shareholders with risk-adjusted value accretion. As a reminder, we target more than 2x our weighted average cost of capital at mid-cycle pricing and a minimum of 1x our WACC at trough pricing. And we expect to achieve our hurdle rates at reasonable lithium pricing scenarios, including net tax benefits, considering only limited synergies. We thought it would be helpful to walk through what lithium prices are needed to achieve our targets. Under the terms of the proposed transaction, we estimate that meeting the onetime WACC base case requires just $15 to $20 per kilogram, 2x WACC would require a long-term lithium price in the range of $25 to $30 per kilogram and 3x WACC would require $40 to $45 per kilogram similar to recent market pricing. In short, this is a win-win transaction that delivers an attractive premium for Liontown investors while positioning Albemarle and our shareholders for long-term growth and value creation. Slide 12 demonstrates Albemarle's strong balance sheet and financial flexibility, supporting potential acquisitions and growth investments like Liontown. We expect to finance the transaction with a combination of bonds, prepayable debt and available cash on hand. Pro forma for this transaction, Albemarle expects to maintain a strong balance sheet with net leverage of approximately 1.2x, and we are committed to our investment-grade credit ratings. Looking ahead on Slide 13, we are working closely with Liontown to reach a binding proposal. We are entering into a period of exclusivity to undertake confirmatory due diligence and negotiate that binding agreement. As is customary with all Australian transactions, an independent expert will then need to conclude that the proposal is in the best interest of Liontown shareholders. We anticipate completing the transaction in the first half of 2024, subject to Liontown shareholder approval, Australian regulatory approvals and other closing conditions. I'll now turn it back to Kent for some closing remarks.

Thanks, Scott. Liontown is an outstanding asset that enables accelerated long-term growth and aligns with Albemarle's M&A strategy. As we've outlined today, the proposed acquisition enhances the scale of our industry-leading energy storage business, expands our strong growth position in Western Australia, where we have significant expertise. It increases our opportunity to meet rapidly growing lithium demand and to create significant value for Albemarle shareholders. With that, I'd like to turn the call back over to the operator to begin the Q&A portion.

[Operator Instructions] Your first question comes from the line of Josh Spector of UBS.

I'd just be curious. So if this acquisition of Liontown goes through to a binding offer, how does that change your outlook for capital expense over the next kind of 5 to 10 years? You previously highlighted what you thought you could do in 2027. Just curious about resource and a downstream perspective, if this increases or decreases your organic capital spend as a result?

I don't -- it probably doesn't change our perspective overall. But part of this is -- I mean we have 5-year offtake agreements. Ultimately, our goal would be to convert this into lithium salts, downstream. So there's probably an investment out there. But I don't think -- if we look at the forecast that we put out there, it doesn't really materially change it. So we've always talked about building out gaining resources and building conversion for that, and this is just executing on that strategy.

Your next question comes from the line of David Deckelbaum of TD Cowen.

Congrats on the increased bid here. With my question, I just wanted to ask just -- maybe just on the last part, how do you see Kathleen Valley sort of fitting into the conversion portfolio that you have currently? Or would this be incremental in terms of downstream conversion investments? And are there any limits on -- or existing agreements that would limit your access to the upstream resource for downstream purposes?

Okay. So we'll come back on that last part. I'm not sure I understood that question. But look, in general, look, we're building out assets. And as we ramp them up, we hope that if we go above nameplate, gives us extra capacity. And given the scale of our operations, that we fit some of this into that. But I think ultimately, we believe that we would need to build conversion for this resource in time because of the -- to understand the resource completely and due diligence, but -- and they have 5 years where the volume is more or less committed, but we'll have time. Ultimately, we would expect to build conversion to accommodate this. Now whether that is incremental capacity to some of our existing assets or a new conversion asset in a new location, that's something we'll have to figure out.

Your next question comes from the line of David Begleiter of Deutsche Bank.

Kent, back in '21, Liontown put out an NPV of Kathleen Valley about AUD 4.2 billion. I know it's about 2 years old, the NPV analysis and that DFS. Is that still relevant, do you think? Or has that changed materially since then?

I think the market has changed significantly since then. So we have -- look, we have publicly available information like you do. That's what we're working off of, and that's part of the due diligence period. So that was their analysis, but I do know market prices have changed quite a bit since then. So I think we'll leave it at that. We'll get into due diligence, and we'll figure out how that looks.

And Kent, I would just add that, David, we've used several different valuation methodologies beyond just what they've done in their DFS, including a net present value analysis on our own even in multiples, discounted cash flow. So we've looked at this 7 ways to Sunday ultimately to make sure we're being disciplined around how we're investing here.

Your next question comes from the line of Joel Jackson of BMO Capital Markets.

So when you talk about some of the pricing that you're assuming to provide what the takeout multiple is and the leverage. What strikes me is that -- and I know what your methodology is for providing lithium forecast, you don't really want to do that. But your Albemarle, and this is Liontown, they're a junior developer. Why are you using as a base case, their lithium price forecast from their DFS as what you're showing The Street for take-up multiple and for leverage? Now I appreciate on Slide 11, you're showing different sensitivity. So as part of that question, though, are you assuming $15,000 to $20,000 a tonne LCE which is the hydroxide is the floor price, is what you're assuming? Because I do find interesting how you're presenting the multiples on this. And maybe you could, again, put color on what you think the right floor price is.

Yes. So look, we -- as you said, you know we don't forecast the lithium price out there and nor do we make public how we do these evaluations. So we've given you sensitivities of what would be required to meet basically what we've said publicly, which is -- when we do a deal like this at the bottom of the market, we would expect it to cover our cost of capital in 2x at mid-cycle. And we've given you 3 examples of that, which cover that and basically says it's a pretty good financial investment. So I wouldn't read into it any more than that, other than to say we're investing in our view, consistent with our strategy, and we've given you some examples of price points around that, that has shown up in the marketplace.

Your next question comes from the line of Kevin McCarthy of Vertical Research Partners.

Kent, would you comment on the amount of due diligence that you've been able to do to date, how much is on the come? And then related to that, is there a minimum level of synergies that you would anticipate? And if so, what's the amount of those and where would they come from?

Yes. So look, the due diligence that we've done so far is all outside-in. And we think -- and given that, we feel pretty good about it. They've gone public with their capital estimates as recently as early in the year. So it's not like we're working off old capital estimates. They're pretty recent. But it is all outside in, and we need to go in and get a better view of that. That's where we are in the process. So we'll see. But the key diligence items for us is on the resource, on the capital and on the commercial agreement. That's what we feel like we need to really just understand a little bit better. And then synergies are -- we have not -- we've included minimal synergies in the base case that we have, but we have upside. And those are everything that you would think of around tax synergies and logistics synergies around our network in Australia. And then -- and frankly, one of the things we're getting in this is additional mining resource, right? People and skill sets that we're actively building out our mining capability. And in Western Australia, it's a very tight labor market. So we'd be able to pick up great mining skill sets with this asset.

Meredith will now read an online question.

Thanks, JL. So we do have a couple of questions from the chat, but I wanted to share. So Patrick Cunningham from Citi asked, Liontown has the majority of volumes contracted to 2030. Does this meaningfully change contract exposure to index prices? And are there any discounts within these contracts?

So we need to -- that's one of the parts of due diligence is going to understanding those contracts. So we know what they've said publicly is that they're indexed and they're indexed to hydroxide prices. And that's -- and so we need to understand that to be able to answer that question. So that's to come.

Okay. And then one last question from the chat. Michael Sison from Wells Fargo asks, I appreciate your WACC analysis given different price ratios for lithium. How do those ranges affect your leverage ratios, particularly at the lower end of the range provided? And how much cash do you need to leave on the balance sheet to run the business?

Great. I'll take that, Kent. Ultimately, I think at the lower end, you probably add, I don't know, 0.1 to 0.2 turns from a balance sheet perspective, somewhere in that range. Cash, I don't think we -- I think we've got reasonable cash on the balance sheet, particularly outside the United States. So I'm not concerned that we'll have to have too much incremental cash in order to support this business. Historically, we've been able to run Albemarle globally on around $300 million at a minimum of cash available. Does this push it up for a little bit of time? Probably, but not dramatically.

Your next question comes from the line of Arun Viswanathan of RBC Capital Markets.

Could you describe a little bit more about the Kathleen Valley asset? How would you compare it to Wodgina and Greenbushes from a concentration standpoint? And ultimately, you noted that it was 12 months or so from development. So are you sticking to that schedule? When do you expect this to come online?

Okay. So what -- again, what we said, we need to go do due diligence to really understand that. That's what they've said publicly. So that -- we kind of -- that's kind of our base assumption. Now we've done synergy sensitivities, obviously, around that. But we -- that's why we want to get in and do the due diligence. So we really understand that. But our base case assumption is what they've gone -- what they've said publicly. And then we showed you the resource versus some other assets out there. So it is good concentration. It's great scale and a good jurisdiction, particularly from a mining standpoint. So that's what makes it a world-class asset, the quality and the size and the fact that it's in Western Australia. And again, all of this is all public information that Liontown has reported, and we'll get in and do our work just to confirm all of that. But there's pretty good information on it given the reporting required for public companies in Australia, but we don't have any information beyond that.

Your next question comes from the line of Colin Rusch of Oppenheimer.

Can you guys just give us a sense of the negotiating dynamics? Obviously, you've raised the price a couple of times here. How competitive is this situation? And I guess, how aligned are you with the management team, even with this unanimous announcement? Is there still some friction here with these guys?

Okay. Well, that's speculation, I would say. Look, we negotiated to something that they're happy with and we're happy with. And I think if you look at the valuation, it's a full offer, but it's -- and you see the returns that we're provided, that are provided to us. And I think it is our -- the synergies and the fact that we can execute and leverage this at scale and innovate into our business gives us synergies that no one else can bring to this. But we'll see. I think we're aligned and we're going to move quickly to close this. So I think they want to do the transaction and we want to do the transaction. But we've got to work through the due diligence and the detail around that. But I think it's our scale and expertise that provides some of those synergies that get us above everybody else.

Your next question comes from the line of John Roberts of Credit Suisse.

Good luck with the transaction. Mineral Resources a few days ago said they're optimistic about taking spodumene to 30% concentration. Do you have a view on that? And would Kathleen Valley be a lot more valuable to you if that were possible?

Yes. So I can't comment on what MinRes is saying. And that's -- the plan for this is 6% spodumene as kind of -- which is an industry standard. All of our conversion plants are based on that. That's a midstream strategy that is -- look, it's a new strategy and it's a possibility, but that's not what we're looking at in this takeover. I mean we could go to that at some point in the future, but we're based on their plans as well as ours would be based on industry standard 6% spodumene and then converting that to salt downstream.

Your next question comes from the line of Laurence Alexander of Jefferies.

What would be the incremental CapEx for Phase 2?

Yes. Laurence, I don't think we know yet. I think that's part of what we need to do to get into -- when we get into due diligence is to see how well that is built out in terms of their plans for Phase 2 and what that increment is. So from outside-in information, it's not clear yet.

And your last question comes from the line of Chris Kapsch of Loop Capital Markets.

So my question around the analysis where you would earned 2x your weighted average cost of capital on mid-cycle pricing. Does that factor in additional capital that might be required for extra conversion capacity? And also, it sounds like the Kathleen Valley DFS assumptions are directionally helpful. But based on your answer to a prior question, are you suggesting the only major difference from today versus then is the spodumene concentrate pricing?

Yes. So just to be clear, the return analysis is based off of these kind of illustrative prices, just to give you a sense of where those prices would have to be to get to our returns. It's really more indicative as opposed to what the internal estimates are. I'd say on the second part of your question, the key things that are incremental from that DFS are going to be updating market conditions, the latest information around their capital spend, the latest view around synergies, as Kent has looked at. Ultimately, you can see this is -- and from a lot of different directions, a very good return for Albemarle shareholders. So...

Yes, if I think -- if I understood the gist of your question, so I mean, we looked at it both ways. But we do a downstream asset. That will be a separate investment that will have stand-alone economics around that. And this is really about just the asset and then executing it on the strategy now that they put forward. Our plan would be to convert this to salts at some point. Exactly how we do that, we would have stand-alone economics that we would value that as another investment.

Thank you. That's all the time we have for questions. I will now pass it back to Kent Masters for closing remarks.

Okay. Thank you all for joining us today. We look forward to advancing this process and progressing our long-term growth strategy, maximizing productivity with opportunities for further expansion and ultimately generating significant value for Albemarle's shareholders. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.