By Wout Vergauwen
10 oktober 2017 01:00 CEST
Lithium newcomer AMG trades at attractive multiples to peers
New lithium production lines to add $100 million Ebitda a year
A 150 percent share surge makes AMG Advanced Metallurgical Group NV the standout performer on the Amsterdam Small Cap Index this year. The rally may just be getting started.
The Dutch metals supplier, whose 3 percent gain last week to 37.57 euros marked the highest weekly close since 2008, is pulling out all the stops to begin production in 2018 of spodumene, a source of lithium used to store energy in batteries from mobile phones to electric cars.
As governments roll out plans to phase out diesel and petrol vehicles in the coming decades, AMG is entering a market Bloomberg Intelligence analysts say may experience a stampede, with some carmakers predicting electric vehicles will represent as much as 25 percent of their sales by 2025 compared with just 1 percent of global auto sales currently.
Adding to its attraction is AMG’s plan to build a plant, possibly in China, to convert the spodumene feedstock into lithium carbonate, thereby “vertically integrating itself into the lithium supply chain,” said Kempen & Co. analyst Henk Veerman, who has a buy rating on the shares.
This year’s gains have pushed the stock above analysts’ 37.30-euro average price target for the next 12 months, according to data compiled by Bloomberg. That’s not subduing the bulls. All five brokerages that follow AMG recommend buying the stock. Citigroup analyst Krishan Agarwal initiated coverage at buy with a 42.50-euro price target in September. ABN Amro analyst Philip Ngotho says the shares could go even higher.
“There is significant re-rating potential,” Ngotho said in an interview. “If you apply multiples of the big lithium players to AMG’s lithium business, you could arrive at a fair value of around 50 euros.”
Adding lithium to AMG’s specialty metals and mineral product offering means the company is exposed to many of the world’s “mega-trends,” Citi’s Agarwal said in a Sept. 29 note. The company has very little debt, pays a dividend and “should be net cash next year,” bolstering the investment case of this “little-known metal growth stock,” he said.
The $2.5 billion global lithium market is controlled by four companies: Albemarle Corp., Sociedad Quimica y Minera de Chile SA, Tianqi Lithium Corp. and FMC Corp. Global production reached 190,000 metric tons of lithium carbonate equivalent in 2016, according to Bloomberg Intelligence analyst Christopher Perrella. The barriers to entry are high with investments often taking years or even decades to pay off.
AMG has said the first spodumene line -- in Brazil -- should be operational by mid-2018, with a second following a year later. “We hope to see further value created as we get closer to production,” AMG spokesman Steve Daniels said by phone. The company is scheduled to report third-quarter earnings on Nov. 2.
AMG expects to make a decision on the lithium carbonate plant by the end of this year or early in 2018, Daniels said.
“We’re still analyzing a number of different options. One of those options is to build a plant in China,” he said. With so many customers who consume lithium chemicals based in Asia’s largest economy, “China is obviously something that has to be considered,” Daniels said.
AMG’s spodumene lines should add $100 million to annual earnings before interest, depreciation and amortization, according to ING analyst Stijn Demeester. That should enable the company to easily meet its $200 million Ebitda target by 2020, and well within the 5 years it originally set out, he said.
Lithium Supply Chain
Challenges include possible delays or unforeseen hurdles to the Brazil site becoming operational, ABN Amro analyst Ngotho said. There’s also a risk that AMG’s move into lithium could soon make the company “more than 50 percent dependable on one material,” leaving AMG vulnerable if lithium prices went into decline, Kempen’s Veerman said.
The potential investment in China isn’t priced into Veerman’s price target of 33 euros.
With pricing trends in the lithium market difficult to predict, ING analyst Demeester said his share target of 36 euros is based on conservative prices.
“The stock hasn’t reached its limit yet, there is still room,” Demeester said. “When looking forward to Ebitda multiples, once the lithium concentrate production is operational, the stock is still very cheap versus lithium peers.”