Arcadium Lithium Stock: Lithium Prices Will Rise Again (NYSE:ALTM)

Lithium stocks are bouncing lower and the recent merger between Livent Corporation and Allkem Limited to form Arcadio Lithium plc (New York Stock Exchange:ALTM) could provide an opportunity to grab a forgotten stock in the shuffle. The stock quickly plummeted after the merger closed in early 2024. My investment thesis remains ultra bullish that lithium stocks originally covered Livent.

Completion of the merger

Arcadium Lithium completed the merger on January 4, and reported 2023 results only include Livent's numbers. In many similar cases, the market is confused by the numbers in the financials and wrongly assigns valuations based on acquisition growth metrics and not organic growth.

The merger involved shareholders of both companies obtaining the following Arcadium Lithium shares:

• Allkem shareholders received: (to) an ASX-listed Arcadium Lithium CDI; either (b) one listed share of Arcadium Lithium NYSE depending on where they resided and what election (if any) they had made for each share of Allkem common stock they owned, except for shareholders in certain ineligible jurisdictions, who will receive cash proceeds from the sale of Arcadium Lithium CDIs in lieu of such CDIs after closing.
• Livent shareholders received 2,406 listed Arcadium Lithium NYSE common shares for each Livent share they owned.

The combined company had pro forma 2023 revenue of ~$1.9 billion, although the combined business alone had Q4 2023 sales of $324 million for an annual run rate of ~$1.3 billion.

The merger is expected to achieve cost savings synergies of between $60 million and $80 million this year, on the path to $125 million in ultimate synergies. Arcadium will essentially reduce the overlapping positions between the two legacy companies to achieve these cost reductions that seem necessary just for the sake of revenue due to lower lithium prices.

Arcadium is an interesting story because the combined company is immediately forecast to increase lithium production by 40% annually in 2024. The forecast is for combined lithium production to reach between 50,000 and 54,000 metric tons of LCE from the growth at the Fenix ​​​​and Olaroz mines in Argentina.

As with the rest of the lithium market, Arcadium forecasts a slowdown in capital spending in 2024 and beyond, as long as lithium prices remain low. In it Publication of 4Q'23 resultsCEO Paul Graves highlighted how this market scenario is likely to drive future lithium prices similar to 2022:

“It is clear that very few lithium expansion projects make economic sense at current market prices, and the longer prices remain near these levels, the greater the impact on future supply shortfalls. “As we saw in 2022, this will increase the likelihood of a rapid increase in future lithium prices, although the complexity of the global battery supply chain makes it difficult to predict both the timing and extent of such an increase.”

Arcadium will reduce expansion capex to between $450 million and $625 million in 2024, with another more than $100 million for sustainment capex. Additionally, the lithium company has had issues with construction projects in Argentina, which could slow down 52,000 tonnes/year of LCE by 2027, although the company has suggested that existing projects with environmental permits already issued will not be affected.

Ultimately, lithium will face a likely scenario where production does not keep up with demand for green energy and electric vehicles, as prices now do not support future mine development.

Great potential for improvement

Arcadium Lithium ended 2023 with $1.9 billion in combined sales, while the stock's valuation is ~$5 billion. The new company has ~1.15 billion shares outstanding and shares are trading at just $4.5.

Investors really shouldn't bother focusing too much on 2023 results with the real key being what Arcadium Lithium will likely produce in 2024 and beyond. The combination of the two companies and the expected production growth for 2024 makes the investment decision focus on future goals, although this is quite normal for any stock.

The company had revenue of ~$1.25 billion based on lithium prices of ~$15/kg LCE. Remember, Arcadium Lithium would produce ~$2.8 billion in sales based on 2023 prices and higher production levels in 2024.

Considering the massive demand for EVs resulting from the conversion of all vehicles to electric in 2030 and beyond, along with lithium mining issues, the LCE price of $25/kg is a more likely scenario. Arcadium Lithium forecasts sales of ~$1.9 billion and adjusted EBITDA reaching $1 billion under that pricing scenario.

Remember, the company expects to spend more than $600 million in total capital expenditure this year and adjusted EBITDA of just $420 million will not provide the cash flows to continue spending even at the reduced levels of 2024. Arcadium Lithium would likely cut further capital expenditures in 2025 without a rebound in lithium prices.

Consensus revenue estimates forecast revenue will eventually rise to $2.5 billion in 2026. The stock will be cheap in either scenario if revenue tops just $2.0 billion and adjusted EBITDA tops $1.0 billion.

Carry

The key takeaway for investors is that, given the expected production growth and the likelihood that lithium prices will rise again, an investor should assume that Arcadium Lithium ends up achieving great success. Investors should take advantage of the current weakness in the stock to buy Arcadium Lithium.