Albemarle Faces Shareholder Skepticism

Albemarle, a lithium miner, is experiencing a decline in its stock shares following the announcement of a capital raise. Shareholders are expressing caution due to the potential dilution that may result from the company's latest move.

Understanding the Capital Raise

In a recent development, Albemarle revealed its plans to sell up to $2 billion in depositary shares, which represents a 1/20th interest in a share of series A mandatory convertible preferred stock. While the terminology might be slightly perplexing, the gist of it is that the company is introducing new convertible preferred stock. The specific details such as the conversion premium, dividend, and other terms are yet to be disclosed as the deal is finalized.

Market Response and Analyst Insights

In response to this announcement, Albemarle's shares have witnessed a significant drop of 7.4% in premarket trading, currently priced at $123.30 per share. In contrast, S&P 500 and Nasdaq Composite futures have experienced decreases of 0.3% and 0.6%, respectively.

Analyst Charles Neivert from Piper Sandler highlighted the necessity of this capital raise due to capital spending requirements. Neivert expressed concerns regarding the company's ability to fund essential projects in the face of declining lithium pricing in the market. With benchmark prices plummeting by approximately 70% over the past year to around $15,000 per metric ton, projections indicate a cash usage of about $400 million by 2024.

Conclusion

As Albemarle navigates through this capital raise amidst challenging market conditions, shareholder sentiment remains cautious. The impact of the dilution resulting from the issuance of convertible preferred stock coupled with the pressure on cash flow due to declining lithium prices presents a formidable challenge for the company to address in the coming years.

Lower lithium pricing impacting Albemarle stock prices

Albemarle stock has taken a hit, dropping approximately 49% over the past year amidst lower lithium pricing pressures. Despite this, the company anticipates cash from operations before capital spending to reach around $1.3 billion, with plans to allocate roughly $1.7 billion towards plants and equipment investments by 2024.

Analysts' outlook on Albemarle stock

Analyst Neivert holds a pessimistic view towards Albemarle stock, rating it as Sell with a price target of $122, contrary to the average analyst sentiment. While 62% of analysts covering Albemarle have provided Buy ratings, with the average Buy-rating ratio for S&P 500 stocks standing at approximately 55%. The average analyst price target for Albemarle stock currently sits at $150.

Factors contributing to stock decline

Apart from concerns surrounding cash flows, Albemarle stock has also been impacted by dilution resulting from the issuance of new convertible stock. This diversion of cash flow away from common shareholders, combined with the potential increase in common stock if the new issue is converted, has led to a decline in the stock price - a common reaction to significant capital raises. The recent $2 billion capital raise represents roughly 13% of the company's current market capitalization.