Get To Know Green Metals: Allkem

Summary

We review recent market projections for lithium demand and implications for one standout producer, in particular.

• Lithium producers are increasing their demand estimates—one by as much as 15% for 2030.¹
• Some projections indicate 70+ new lithium mines must be built to meet global battery demand by 2035.²
• In our view, Allkem is among the most well-positioned to take advantage of this accelerating demand trend.

Albermarle: Raising the Stakes

Albermarle, at a market share of 18%, is one of the world's largest lithium producers. A recent strategic update provided by the company indicated that they are more optimistic about the outlook for lithium now than a year ago.³ For 2023, the company forecasted demand at 1.2 million tonnes (Mt) of Lithium Carbonate Equivalent (LCE) and, for 2030, 3.7 Mt—a figure nearly 15% higher than last year’s forecasts and a compound annual growth rate (CAGR) equating to around 16% between 2025 to 2030. Moreover, these are markedly higher than others’ estimates.

The increase in demand forecasts is due to the Inflation Reduction Act and strong electric vehicle (EV) sales. As a result, Albemarle is estimating global EV production will rise from 11.2 million units in 2022 to 25.7 million units in 2025, to 46.9 million units in 2030, compared to its previous estimate of 41 million units in 2030. This translates into an EV penetration rate of 28% in 2025 (compared to 14% in 2022) and 48% in 2030.

As for global supply, Albemarle estimates 2.9 Mt of LCE will be produced in 2030. When combined with its optimistic demand profile, this translates into a lithium shortfall of about 800 Kt, therefore, possibly justifying its and others' continued expansion strategies.

Albermarle’s Lithium Demand Projections (Mt LCE)

Total Demand

By Application (MMt LCE)

Source: Albemarle. Data as of March 2023.

ALLKEM Ltd: The Making of a Major Global Lithium Company

Taking Advantage of the Perceived Increased Demand for Lithium

• In our view, few companies are better positioned than Allkem to benefit from the perceived rise in lithium demand resulting from the increasing adoption of clean energy technologies.
• The company is headquartered in Buenos Aires, Argentina, and has a global presence, with a diverse portfolio of high-quality lithium assets, in Australia, Argentina, Canada and Japan.
• By 2026, the company's production is expected to reach nearly 110 Kt LCE, making it a major lithium producer with, potentially, an attractive gross operating cash margin (82% as of December 2022).³
• Allkem is the result of the merger of Orocobre and Galaxy Resources in 2021 which created a company with exceptional growth prospects.

Broad-Based, Near-Term Growth at Scale

• We believe companies with diverse, near-term growth optionality and the opportunity to integrate vertically, like Allkem, are well-placed. Not least as we anticipate permitting and other regulatory issues are becoming bigger conundra.

Diverse Near-Term Growth Opportunities

Allkem, in our view, has one of the best production profiles with near-term expansion opportunities that could nearly triple production from 40 thousand tonnes per annum (Ktpa) of LCE to 110 Ktpa LCE by 2026 (see chart). Furthermore, its growth profile is broad-based, with options across the Americas in lithium carbonateⁱ and spodumeneⁱⁱ.

Allkem’s Stellar Production Profile

Source: VanEck, Allkem Ltd, Bloomberg.

• Olaroz – The company's flagship asset, Olaroz in Argentina (brine-lithium carbonate), is strategically located within the “Lithium Triangle” of Argentina, Chile and Bolivia. It markets technical-gradeⁱⁱⁱ and battery-grade^iv lithium carbonate to a diverse customer base in Asia, Europe and North America. Current production is around 13 Ktpa LCE, at a gross cash margin of about 90%⁴ (December 2022) and could grow by another 25 Ktpa LCE by 2025, as construction Olaroz Phase 2 nears completion.
• Sal de Vida – Sal de Vida, also in Argentina (brine-lithium carbonate), is an advanced-stage project with a design capacity of 45 Ktpa LCE of predominantly battery-grade lithium carbonate. Stage 1 of this project is currently under development, with completion estimated in 2024 at 15 Ktpa LCE. Stage 2 could deliver an additional 25 Ktpa around 2028.
• James Bay – James Bay, in Canada (hard rock-spodumene), is a mid-stage development project. Importantly, it has access to skilled labor and hydroelectricity while also being close to the rapid growth of North American and European EVs. With a 330 Ktpa (63Kt LCE) spodumene concentrate design capacity, it could become a large producer within the North American market. As of recently, material progress has been made regarding detailed engineering and permitting.
• Mt. Cattlin – Mt. Cattlin, in Australia (hard rock-spodumene), has committed to an extensive exploration and resource drilling program to extend the life of the mine by at least two years.

Vertical Integration Opportunities

In parallel with its upstream expansions, Allkem is planning on moving "downstream." The aim is to provide battery-grade lithium hydroxide^v conversion capacity in markets such as Japan and North America. Shifting downstream is a critical step that should boost margins, stabilize cash flow and provide insight into high-end growth markets.

• Naraha – Naraha, in Japan, is Allkem's battery-grade lithium hydroxide plant joint venture (75%/25%) with Toyota Tsusho Corporation. Designed to convert 9.5 Kt of technical-grade lithium carbonate from Olaroz into battery-grade lithium hydroxide. It achieved the first production of approximately 200 tonnes of lithium hydroxide at the end of 2022 and expectations are that it will reach a design capacity of 10 Ktpa over the next 12 months.

Several additional studies are underway that could potentially increase production capacity beyond 2026. For example, incentives from the U.S. IRA (Inflation Reduction Act) support building a hydroxide conversion plant in North America with feedstock like James Bay. Developing Olaroz (Stage 3) could also increase the company's annual production.

Strong Financial Position

• Unlike many other high-growth mining companies, Allkem has a strong financial profile. With zero debt on the balance sheet⁵ and strong cash generation (group gross operating margin at 82%⁶), the company could potentially self-fund its growth plans (capex) of around $1.6B from cash flow. Moreover, capex is projected to peak in the financial year 2026, after which Allkem could return excess free cash flow to shareholders via a dividend or other means.

Allkem’s Current Financial Conditions Appear Strong

Source: VanEck, Allkem Ltd, Bloomberg. Data as of March 2023.

The ability to self-fund its production growth is unique as many other emerging lithium companies with similar capex profiles will require external funding.

Pathway to Net Zero by 2035

• The importance of sustainability is evident in that the Chief Sustainability and External Affairs Officer reports directly to the CEO and has access to the Board via the Chair of the Sustainability Committee. Furthermore, the CEO compensation, or at least a significant portion, is directly linked to various ESG targets.
• A long-term commitment to sustainability underpins new projects and will enhance the company's international scale and project flexibility. For example, they are implementing renewable (solar) energy at Sal de Vida to cover at least 30% of energy use or sourcing 44% of energy at James Bay from hydroelectricity.
• Allkem places a lot of emphasis on its ESG credentials. As such, it has again been included in the Dow Jones Sustainability Indices (2022). We believe lithium producers with accredited ESG credentials will capture a market premium.

Conclusion

Allkem, we believe, is well on track to becoming a major lithium producer in scale and with strategic locations that are close to rapidly growing EV markets. Its growth profile, in our view, is among the best in the industry and is supported by a substantial resource and reserve base.

The key attributes that set Allkem apart are 1) production growth; 2) attractive margins; 3) self-funded growth; and 4) upside in the resource & reserve base combined with its ESG credentials that could result in it capturing a premium valuation.

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