Albemarle plans to issue up to $2 billion worth of convertible preferred stock. That amount equaled around 13% of the company's market cap, which was cut in half a year ago owing to a substantial decline in lithium prices and a failed Liontown Resources ( LINRF ) acquisition.

Following the news, the stock declined 20%, erasing all the gains of February's bullish run. Analysts, including Seth Goldstein from Morningstar, expressed surprise at the move, citing Albemarle’s healthy balance sheet.

Goldstein highlighted Albemarle’s low net debt/adjusted EBITDA ratio of 1.1 times at the end of 2023, well below the company’s long-term target of 2.0-2.5 times.

He also pointed out that lithium futures and China spot prices have recently increased. Rising lithium purchases by battery producers is driving the trend.

Goldstein anticipates lithium sales volumes aligning with end-market demand as inventory destocking concludes, achieving a double-digit growth in 2024.

Despite the initial shock, he views Albemarle’s shares as materially undervalued. They’re trading at approximately 40% of the fair value estimate of $300 per share.

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Meanwhile, per Barron's report, Piper Sandler analyst Charles Neivert mentioned that this capex-demanded capital raise "indicates an inability to fund (the firm's) projects considering the current and possible near-term future pricing for lithium products over the next two years."

Neivert, who also noted potential shareholder dilution, rates Albemarle as Sell, with a $122 price target.

According to the latest earnings, Albemarle expects its capex to be between $1.6 and $1.8 billion. This is just slightly below its estimated liquidity of $1.9 billion — including $890 million in cash, $800 million available under its revolver, and the rest on other credit lines.

While Albemarle’s short-term challenges revolve around lithium market dynamics, the company enjoys strengths in lithium and bromine production. It holds a narrow economic moat. This is primarily due to its advantageous position in lithium and bromine production, focusing on low-cost production in Chile.

A crucial aspect of Albemarle’s advantage is its long-term contract with the Chilean government. It allows the extraction of around 80,000 metric tons of lithium annually from the Salar de Atacama until 2043.

The Salar de Atacama stands out as one of the world’s lowest-cost sources of lithium production, attributed to dry conditions, high lithium concentration, and a favorable evaporation process.

However, this strength is also a risk due to the threat of lithium nationalization in Chile. President Gabriel Boric‘s plan to nationalize lithium projects, giving the Chilean government majority ownership, could impact Albemarle’s operations. In such a scenario, the company might be compelled to sell its stake at a potentially low price, affecting shareholder value.

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