Albemarle Corporation (NYSE:ALB) BMO Capital Markets 2024 Investor Conference February 26, 2024 1:30 PM ET

Company Participants

Kent Masters - Chairman, President and Chief Executive Officer

Conference Call Participants

Joel Jackson - BMO Capital Markets

Joel Jackson

We're kicking off this afternoon's session is arguably the world's most influential -- lithium producer. The last one's been very busy for Albemarle obviously, navigating this dynamic in the lower lithium price environment and trying to balance growth opportunities with prudence. And Albemarle also of course has bromine and catalyst businesses. So please join us in welcoming Kent Masters, the CEO of Albemarle with a fireside chat. We have an app, as you guys know. Please submit your questions and we'll be happy to weave them into the conversation.

Question-and-Answer Session

Operator

[Operator Instructions]

Joel Jackson

Okay, Kent, so I mean what makes lithium price rebound here? Do you think that lithium or spodumene will fare better this year? What does all these different scenarios mean for you operationally?

Kent Masters

Well, I'm not sure I'm going to answer when they'll rebound or I mean think what drives that will be a supply-demand balance and how demand looks out through the balance of the year. And then how much volume comes out as a result of the current pricing environment that we're seeing. So we're seeing volume come out now. It's come out slower than we had anticipated and we have to see how that happens. And so that's where that supply-demand fits and if we get a little more growth and a little less supply, we think prices will bounce.

Joel Jackson

And talking about if enough supplies come out of the market or not, we've seen Greenbushes, your partners have cutbacks in production recently. You talked about last week some cuts to Wodgina utilization rates. We've seen some other things happen in the space. Arcadium knocked down on [inaudible]. Do you think enough production has come out of the market and Lepidolite is blurry? Or do you think more has to come out?

Kent Masters

I think more has to come out and I think it's happening. It's a matter of, it's a little slower, I think it's probably, you can't turn on a dime. People have been holding in there and we'll see. I think the real driver is going to be this higher cost supply in China. That's a pretty big volume. And typically, Lepidolite based, we'll just have to see how that comes out.

Joel Jackson

And so let's talk about that, right? So, you've got cost curve support levels, which are a big question in the industry. There's a lot of blurriness, new African supply for spodumene we’ve seen a last couple of years, Chinese Lepidolite different mines. You can say Lepidolite, but it's lots of mines at different cost basis. Some are integrated, some not. So what sense do you have where kind of the cost curve is?

Kent Masters

Well, as you said, it's a lot of mines, a lot of conversion across that cost curve. So it's a lot of different pieces, but there are big chunks in there that are somewhere between $10 and $20 that will, from Lepidolite standpoint, and as prices dropped, we believe those will come out of the market, and that's where the biggest chunk is. There are other pieces, I mean, while we've turned back at Wodgina and Greenbushes, it's pretty small and those are like turn downs that can come back immediately. Once you shut down a plant, it's more difficult to get it back.

Joel Jackson

You can submit questions on the app, as I mentioned a few minutes ago. I think I did. I mean, it was an interesting decision, right? Here's Greenbushes. It's the best mine out there. It's ultra-low cost, and the partners decided to lower production. It's an interesting decision. It makes sense. But what is that a commentary on where the best asset in this commodity is taking down time to help balance the market?

Kent Masters

Well, I think it's -- we haven't cut back our take from Greenbushes, but our partner has and so we've adjusted the mine as part of that. Historically, if they would have cut back, we would have taken their volume, and this time we haven't done that. So I think it's a matter of having integrated players trying to manage through the supply chain when you have a resource and conversion all the way into the end market. I think you're seeing the integrated players trying to manage through that.

Joel Jackson

Kent, we'll come back to Greenbushes a little bit later. One thing I wanted to talk about was, so here we are, and we're trying to figure out what you should do operationally, and what's really become apparent more so the last bunch of months is really how limited visibility there is in the industry. It seems like across the battery and the lithium supply chain, a lot of different players and industry players are relying on one or two data source providers for, data providers for inventory information or things like that. How reliable -- how much data do you have available to you to make these decisions? How reliable is the data that you have?

Kent Masters

Well, it's never reliable enough, and we don't take anything off the shelf and just kind of trust that. We either stress test it, we pressure test it with our customers, with other suppliers, people in the market, both on a global basis and locally with teams that we have, and we've got to build better capability to do that. So I agree that industry data is not very good and even after we go through it and add our knowledge and all the information we have and talking to the industry players, we adjust that for us and that's a proprietary model. We spend a lot of time and a lot of effort on that and we need better information and we need more time and effort on it as well.

Joel Jackson

How might you be able to build better capability for visibility?

Kent Masters

I think it's about having people on the ground locally and talking to all the people in the supply chain. So customers, suppliers, cathode makers, battery makers, OEMs all the way through to the mine and understanding and piecing all that together and we've, historically, we've had that information but maybe we put a little too much weight on one piece of it versus another and it's just about getting better at managing all the data that's out there. And adjusting it for what you know and what you think you don't know.

Joel Jackson

And then just specifically on what's going on in the industry like it does seem like there's been further downstream, a lot of inventory in the system, in the battery supply chain, the EV supply chain. So how is that impacting kind of a lack of restocking we've seen of carbonate hydroxide spodumene in the last little while?

Kent Masters

So that's one. It's difficult to know once it goes downstream into a battery and into a car, exactly what inventory it fits. So we anticipate, look, we're looking at EV growth in the mid-30s this year, that's how we see EV growth and we're forecasting lithium growth to be in the mid-20s. So there's probably eight points or so difference between that and the majority of that's inventory. There's a couple of other pieces, but the majority of that is inventory. So we see it takes just about an eight point drag on the market.

Joel Jackson

Do you think the industry at the point where maybe we need to have a little more pain for a little while to maybe cut a little more production, cut some projects out of it. You took some pain by slowing down or maybe stopping things from other permitting in the US Mega-Flex plant. It just sees more supply come out of the ‘25, ‘26, ‘27, ‘28. Do you maybe move on to the next leg of growth or leg of attractiveness for the industry?

Kent Masters

Yes, so it's interesting. I mean, near term, the price in the market today, and if you just were to forecast that out, that does not justify reinvestment. So I think you'll see projects come out down the road. Now, that's when the market is already forecast to be short. So that's just going to make that more difficult. But that's the dynamic that's happening. And if pricing stays where it is, I don't think there's a business case for a Western conversion supply chain.

Joel Jackson

Like four or five years ago, when we had the last kind of end of the downturn, what Albemarle was able to do was you acquired the control of Wodgina. You were able to basically keep it offline for a year or two years or delay a year or two to help balance the market. But then the market was smaller. Wodgina was pretty big. It doesn't feel like those levers are available to you now, as maybe they were four or five years ago. Is that fair?

Kent Masters

Well, the market's much bigger now. So you have to be careful that it's growing 20%, 30% a year. So it's a different business than it was then. And it may not give you the same levers, but I think if you, what you're going to see, it's the pieces that are at the high cost that are going to come out and be forced out by the pricing because people are operating below cash cost and they can't do that for very long. And it's probably a lot of smaller pieces and maybe a couple of big chunks within China that come out and solve that problem.

Joel Jackson

I mean the other question is that's so topical among investors is lithium prices, lithium price indices. We've seen a lot of fragmentation, right? There are futures exchanges, new ones, there's different benchmarks. It seems to be a lack of liquidity in many of them. Like how is that changing? How you look at the business, your discussion with customers, maybe pricing mechanisms, how they might change in future contract discussions?

Kent Masters

Yes, look, it's an immature market and the lithium business is immature. It's only been through a whatever you want to call it, cycle and a half, maybe two. And the futures exchanges are even more immature. So but we need those for allow customers to hedge, allow producers to hedge so you know what you can get certainty in your business. So we need those but they're immature at the moment. We need some that are less China oriented because almost everything is about China dominates this market. We need Western indices that will come, we believe prices will bifurcate between China and say North America. But call it the West and we need financial markets that indicate that and people can buy and sell on those bases. But we're a way away from that. But they have to move forward and mature and that'll take some of the volatility out of the industry.

Joel Jackson

Okay, so I got a question on the app that I want to ask. So it's how do you see the EV supply chain developing in North America to be competitive?

Kent Masters

Yes, well, yes, the supply chain, so meaning I'm going to talk about them critical minerals and particularly lithium. It's a challenge at the moment. The current pricing I talked about how we're below reinvestment rates. That's particularly challenging in the West because capital intensity for conversion is higher. You still need resource somewhere in the world to feed that. We have a mine at Kings Mountain and we continue to work on that, but we're kind of slow playing it. We're doing the permitting work, but not everything else given the current pricing environment. And we had the conversion project on the books that would have been fed by Kings Mountain, which we've now pushed out. So I think it's challenged at the moment and we need price recovery in order to support that.

Joel Jackson

Do you think policy in the States, IRA or whatever, is good enough right now to incentivize the investment needed?

Kent Masters

The IRA by itself does not. I don't think it's good enough because it's not working and it's not set the pricing difference between China and North America yet. Everyone wants IRA compliant material at the moment, but there's not a lot of it out there. But that's what everyone wants, but the pricing hasn't changed on that at the moment. So, we think it will. It just needs some time to mature in the marketplace.

Joel Jackson

And then I mean like sentiment in the U.S. for EV is much different than sentiment. You go over to China, there's EVs everywhere and in the U.S. it’s still at, you can't get away from every few days another article written in some paper, EV, Hertz doesn't want them, they're too expensive. I mean, how does the sentiment change in the U.S. to help push demand that way?

Kent Masters

Look it’s, the U.S. is a small part of the global picture, so the overall part that's not really driving it, but it is important for a North American supply chain and frankly for the U.S. or the West to have an automotive supply chain, ultimately those will be EVs and I think the U.S. has to react to that. So, I think it's a challenge at the moment, but IRA is not enough on its own, it's not doing it.

Joel Jackson

Okay, let's transition to talking more Albemarle as a company as opposed to sort of the macro things that you're dealing with. So I think what's been very topical the last little while is sort of how you're managing, again, growth opportunities, is the last mile of some of your projects, especially Kemerton in Australia, with trying to maintain a decent balance sheet. So maybe you could talk about, and you announced the other week what you were doing with CapEx in January, actually with CapEx. But what would make you take pause and decide to really slow down this last mile capital to really preserve the balance sheet this year?

Kent Masters

Yes, so what we're, in the cuts we made, what we're trying to do is thread a needle between the efficiency of the capital that we're spending. So there's a, you said last mile project. So we have projects that are very near finish, and if we were to stop them, it'd be very inefficient from a capital project standpoint. And then to restart them later would be very costly. So ultimately, our cost position would be more difficult, and we believe in the long-term growth profile of this business. We think that we need those projects to preserve our growth in the latter part of the decade. So we're trying to thread the needle there and just cut those efficiencies, the projects that it's efficient to cut, and that got us to the 16, 17 that we're talking about. We've taken other costs.

We've taken people out of the organization. We're doing things to focus on cash, to kind of bolster the balance sheet. We've restructured our credit agreements so we have a little more flexibility. So that's what we're trying to do to get through this period that allows us to be efficient and preserve our growth profile. If we can't do that, we'll have to get -- it’s more draconian from a CapEx standpoint and very inefficient from those future projects.

Joel Jackson

And you can elaborate on some of the OpEx levers that you're pulling also. And also, is there some potential down the road with your Talison and Greenbushes partners to maybe make those operations more efficient too from an OpEx point of view?

Kent Masters

Look, there's an opportunity to make every operation we have more efficient. So we took $300 million out of our, from a productivity standpoint last year. We'll target to do that again, of something like that. And then we'll become more mature as a mining organization. We rely on our partners to help us with that. There's efficiency there. But that $300 million I talked about was just primarily in our conversion operations. And across the balance of our business between specialties, energy storage, and catching. But we've got a culture of driving cost out of the business. And as we grow, all of those new projects and new plants create new productivity opportunities. So that's a big part of our structure and how we operate.

Joel Jackson

I mean, what's been also very topical has been what's happening at Greenbushes and Talison, right? Greenbushes and Talison. So maybe you can talk about that. So the distributions didn't occur to yourself in January and the partners trying to figure out what the year will look like. Maybe you can comment on what you can on that so far?

Kent Masters

Yes, well, it's complicated because there are three partners and I think we're all aligned to what we want to happen, we just need to make that happen through a joint venture that between the three of us we completely control that, so it's just getting alignment and producing and curtailing CapEx in a joint venture that's probably it's, that's more difficult than doing in our direct operation. So it's, there's just a little lag there probably not as efficient as we should be as being able to pivot within the joint venture but we're working with our partners to become more efficient at that.

Joel Jackson

If I recall at the Greenbushes JV level, there's $6 million or $7 million of net debt at according to IGO we reported that at the Greenbushes level, oozy of net debt, which I think is a normal level so it's the balance sheet for the JV is okay, right?

Kent Masters

Balance sheet for the JV is fine.

Joel Jackson

Okay and so when do you think you'll be able to update the market on what distributions might look like in the short term?

Kent Masters

I'm not sure we would plan to do that until our next quarterly earnings. We're working on driving all of those pieces through the business, but that's something we would do. I don't think we would do it before quarterly earnings.

Joel Jackson

Okay, fair enough. So I had a question from the app, more of a macro question. But it does relate to Kemerton. So I mean, why are, the question is, why are all the new lithium hydroxide plants outside China struggling to reach capacity?

Kent Masters

I think China is good at this. I mean, we built a number of facilities in China and operated, and there's a machine in China that's just very good at this. In Australia, for Kemerton, in our case specifically, we executed that during COVID. And we probably underestimated just the workforce, take COVID aside, just the chemical processing workforce, people that were skilled in chemical processing capability in Australia and to start up those plants without help. So we've gotten help now. We can bring people in. We bring teams from China. We bring engineering from the US to support that. I think we just -- we underestimated the workforce. We've had to now, now we're gone back and we're training the workforce kind of more or less from scratch for chemical processing, going back to fundamentals, and then we're starting to get momentum around that and building that up.

So, Kemerton's operating, Kemerton I's operating at about half rates and we're making a qualified product, not qualified product, on spec material. We still have the final get the, not have the final qualification tick from a couple of our customers, but we're producing on spec material that meet our customers' specifications at about 50% rates so we think we'll be able to accelerate there. And then train 2, all the lessons we've learned from 1, we can apply to train 2. We expect that to go much faster, but we have to prove that.

Joel Jackson

And, so going back, so if we think of going to 2025 when you finish up Kemerton and most of your capital spend, would you expect ‘25 would be really close to maintenance capital kind of level, you can cut it if things don't improve in the market or maybe give a little bit of spending for permitting Kings Mountain a little bit?

Kent Masters

So, it depends on the market, right, so if probably say, market stays flat, then we'll have much more flexibility in ‘25. It'll be above maintenance capital, but not much. We can cut that pretty much without affecting too much of the assets that are near finished. So we don't have that issue of the inefficiency of cutting a program. This would be about cutting things that are more for the future. But we'll have that flexibility in ‘25.

Joel Jackson

Fair enough. Okay, the other thing that I want to talk to you about is what we're really hearing in the industry is kind of a change in how feedstock might work. So maybe the history, sorry, the future of some brine production would be, say Argentina, where it's harder to make a value grade carbonate, maybe the world shifts to more techno grade carbonate at the brine producer site and it's upgraded to value grade later on or maybe we stop shipping spodumene around the world than we ship lithium sulfate. I mean, can you talk about discussions that might be happening around feedstock changes and how that might change your strategy, or if anything?

Kent Masters

Well, yes, you hear those conversations. I don't think anyone's really done that. I mean, the upgrading carbonate, technical grade, is not new. We do that with silver peak carbonate at Kings Mountain today. So we convert that to high drop battery grade hydroxide at Kings Mountain. So we've been doing that for a long time. And I think that's a well-worn path. It adds cost because it's another step and you bifurcated the supply chain. But it does add cost, but it's another way to do it. Sulfate would be, I would say, a similar answer. If you can work out where you break it. You'd have to dry it to ship it. There's been an inefficiency around that, but you're shipping more condensed material, more dense material when you're -- in terms of lithium, if you ship that around the world, you leave tailings, most of the tailings in a jurisdiction that's used to that, as opposed to one that doesn't like that. So Europe, North America, for example. So I think, look, it's a credible strategy, but there's a lot of detail that has to be worked out about it, no one's really done that yet.

Joel Jackson

So you talked about last week, or the week before, sorry, it was last week, two weeks ago. Maybe you wanted to talk about maybe exploring noncore asset sales. I mean, obviously the catalyst business, you can look at that noncore asset sales, sorry. You've talked about before for years, maybe trying to sell a catch and catalyst. So are noncore assets to you just really the catalyst business?

Kent Masters

Well, I'd say noncore assets is just part of us trying to make our balance sheet a little bit stronger. So there's a number of investments we've made. We don't see strategic anymore, so we'll clear those out. We've done a couple of those in the last few months. And cathode is the big one about that. So we've kind of decided, we felt like cathode need to go through a turnaround program and we're kind of right in the middle of that. We're trying to manage it like as if we were a private equity company, so we kind of carved it out of the broader part of Albemarle. We've allowed them more degrees of freedom strategically. We've set up their own incentive programs, and I think we're on a good path. Now, we kind of want to see three years of the right level of EBITDA before we go through that process again. Now, we could do it sooner if there's interest, but we're just trying to optimize that. We felt the last time we went through that; we didn't get the price that we liked, and we thought it was a great asset. We didn't want to sell it at a discount, and I think that's still our view.

Joel Jackson

Would you look at maybe selling some of the smaller stakes you have in some lithium or spodumene developers?

Kent Masters

I think we will look at that, but I mean, it depends on where we get to from a price and how, where we are from a market standpoint, we still want to develop new resources, putting a stake in a small and resource up front -- a small stake up front, learning and growing that is still a strategy we would like to follow. We think that's the way to get lower cost resources without paying a fortune for them for the future supply, but we have to be able to afford that. And I've been saying today, with prices stay where they are, that's not something we'll be able to do, but the prices recover, we would go back to that. So I want to preserve optionality by keeping them, again, if I have that flexibility.

Joel Jackson

And you're still going to complete some permanent activities at Kings Mountain, right, the U.S. sponging play, the task you have, and what would make you restart Kings Mountain and Richburg, the U.S. Mega-Flex plant, what would make, like what has to happen for that to get restarted?

Kent Masters

I mean, I have to have a view of investment economics, right, that we see that, and it's difficult to see that with the prices today. I like to see an indicator where they come back and we see that. And that supply chain in North America really is developing. I think that's going to be a key for us. But frankly, when we do the math on the projects, they don't give us good returns at the moment.

Joel Jackson

So you just see OEM plans, that's your talk, like high level, that sort of investment.

Kent Masters

Yes.

Joel Jackson

Okay. So obviously we saw your competitor in Chile and brine SQM come to a settlement with Codelco and Corfo. You have leases out to 2043 or 2044, ‘43. Are you engaging discussions with Codelco or it's 20 years to now see you then? Or what's it like?

Kent Masters

Well, I think first is we want to let SQM and Codelco finish their deal. They did a MOU, right? So they don't have a deal yet. So we want to wait and see that. We're not in a rush to do it because we do have the 2043. But once we see what they have and then we may have conversations, it allows us to get more resource, more brine in a partnership. I'm going to operate what we have on our own. I mean, if there's a win-win, we would look to execute on something like that. We don't know what that looks like yet and we're not in a big rush. But I think first we want to see SQM and Codelco finish what they put out, see what it really looks like and then we'll take our view then.

Joel Jackson

I think what's happened in the space in general is investors have really started to value lithium producers as mining companies and giving you mining stock valuations, which probably isn't fair. What has to happen, do you think, to get back your specialty chemicals multiple?

Kent Masters

Well, I think we have to stabilize the volatility in the market or at least in our P&L to some degree. Look, it's all the things that we do. We've had the world-class resources. We think we're as good as anyone at building conversion assets and we've done that on multiple continents around the world. So we think we're very capable of building out and supporting this energy transition as a company and with the strategy that we have. But we have to stabilize the pricing that flows through our P&L. It can't go from $80 to $12 in a year and expect the market to give specialty chemical returns.

Joel Jackson

Can I realize you're going to read some opening remarks? Did you want to maybe finish the presentation with opening remarks, make them closing remarks, or not?

Kent Masters

No, I think, I mean, we've gotten into it. If you want me, I'll close if you want, where are we?

Joel Jackson

I’ll give you a question. I have a question for a closing question, or we're good? Okay.

Kent Masters

Yes, I'm fine.

Joel Jackson

Okay, what do you think investors, sorry, what do you think investors most, like what's most underappreciated about Albemarle right now? The company, the stock, what do you think people just don't give you credit for that they should?

Kent Masters

Okay, I think our biggest issue is the volatility that flows through the P&L. I'm not sure people appreciate the breadth of our resources, the cost position, the diversity across, multiple geographies around that. The capability we built to build conversion assets around the world, the technical work that we do with our customers understanding what the materials will be of the future and then building the supply chain to do that, whether that's salts or lithium metals or sulfide for sulfuric separators. I think there's a broad range of products that we sell today and that we work on to develop future supply chains. I think we have to tell that story a little better from a technical capability perspective. But the most important thing we have to do is try and take all of the volatility out of our P&L.

Joel Jackson

Thanks, Kent. Appreciate it. Thank you.

A - Kent Masters

Thank you very much.