Livent LBO Pitch Flashcards
What is Livent?
Livent is a ~$3Bn market cap U.S. based pure-play, fully integrated lithium company focused on producing performance lithium compounds out of its Argentinian mines in Salar del Hombre Muerto. Its primary products are lithium hydroxide (think Tesla batteries), lithium carbonate (also used for lithium batteries), butyllithium (pharmaceutical applications) and high purity lithium metal
What makes Livent a good investment?
1) Livent is well known as one of the leading producers in the lithium compound space, which has only a few well established competitors and high barriers to entry.
2) Possesses robust competitive advantages as one of a few vertically integrated producers and operating one of the lowest cost lithium deposits in the whole world.
3) Possess significant untapped capacity to expand its mining operations, positioning it well to benefit from strong secular tailwinds.
4) Given that lithium prices have bottomed out at between $11,000-$12,000 per ton, sector valuations are at a 4 year low. Presents opportunity to acquire the company at an attractive price.
What are some risks to this investment?
1) Demand for performance lithium compounds is largely driven by the EV market, whose short term prospects are materially impacted by government policy decisions.
2) If Livent’s relationship with the local Argentinian government were to sour, as it has for Albermarle in Chile, it could result in higher royalties paid to operate lithium mines at Salar del Hombre Muerto.
3) Lithium prices are volatile and could exert downward pressure on margins
What is the market outlook for performance lithium compounds?
According to the IEA (International Energy Agency): Annual lithium demand is expected to expand to 3.5x current demand (give or take 1.0x) by 2030.
Lithium is one of the most valuable inputs for the EV industry which is also expected to expand significantly. According to Bloomberg New Energy Finance’s May 2019 EV outlook: EV sales are expected to exceed 56MM units in 2040, constituting a penetration rate of 60% of vehicles sold. Furthermore, automotive OEMs (Original Equipment Manufacturers) plan to introduce longer range EV models (25% range increase by 2021 as compared to 2019 models). Increased range of EVs are generally attributable to larger battery packs which require higher lithium content, thus increasing lithium demand.
What has the lithium market’s growth looked like historically? How has Livent’s market share tracked that growth? Why has it tracked the way it has?
Lithium mine production has grown at a 60% CAGR from 2016 (38,000 metric tons) to 2018 (95,000) metric tons. Livent’s revenue has grown at a 35% CAGR over the same time. It’s closest peer, Albermarle, has revenue growing at a 15% CAGR over the same time period. It has tracked this way because there has been significant growth in Australia, a market Live t does not serve.
What are some key purchase criteria for Livent’s clients?
The most important purchase criteria are the purity of the starting components and the quality of the lithium compound. Lithium ion batteries can explode if the constituent materials are poor quality so quality assurance is of the highest priority.
Describe Livent’s Go-to-market approach/strategy
Livent exclusively deals in B2B contracts. Livent’s primary end customers are EV manufacturers, pharmaceutical companies and aerospace companies. Livent engages in long term supply contracts, generally around 10 years, and coordinates delivery of finished products to customers and bills them for shipping and handling costs
Can you elaborate on Livent’s growth opportunities?
Livent management has two main focuses in terms of growth:
- Expanding production capacity: Livent is well positioned to capture significant share of demand growth for performance lithium compounds. Operations at Salar del Hombre Muerto in Argentina are expandable. Also entered into 25% JV ownership of New Nemaska Lithium in Canada which is expected to be one of the highest yield spodumene mines in the world. Furthermore, it will facilitate Livent’s ability to meet Lithium demand growth in North America and Europe.
- Diversify source of supply: Now possesses the operational flexibility to source lithium carbonate from third party suppliers. And has acquired a 25% ownership of New Nemaska Lithium in Canada in 2020.
Describe the competitive dynamics in the Lithium compound production industry, discuss barriers to entry
Lithium compound production is a global market with significant growth occurring in Asia driven by the development and manufacture of lithium-ion batteries. With regards to barriers to entry, the market for lithium compounds presents three key barriers to entry:
1) Access to an adequate and stable supply of lithium
2) Technical expertise
3) Development lead time (how long it takes a company to design a product/manufacturing process and be ready to manufacture said product).
What differentiates Livent from its competition?
Livent possesses two primary competitive advantages:
1) Low production cost: Salar del Hombre Muerto is considered to be one of the lowest cost lithium sources in the world. Costs are lowered even further due to Livent’s proprietary selective adsorption and solar evaporation process. This process allows producers to extract lithium directly whereas traditional solar evaporation process removes all other compounds from the mined brine until only Lithium is left. This cuts production time from 18-24 months down to ~24 hours. It also improves recovery from 40% to over 90% of all Lithium.
2) Vertically integrated manufacturing approach: Provides Livent with more control over its value chain (the progression of a company’s primary activities and costs such as operations, outbound logistics, sales and marketing and service). Vertical integration not only further lowers production costs, but can also ensure that starting components are high purity which is an important KPC (key purchase criteria).
Describe Livent’s market positioning
According to Roskill’s 2018 estimates (leading market research platform for all things EV and specialty chemicals), Livent is one of the five largest producers of Lithium carbonate equivalents. Others include SQM (Chile), Albermarle (US), Sichuan Tianqi (China) and Jiangxi Ganfeng Lithium (China).
Roskill reports also state that Livent is one of the two largest producers of downstream lithium chemicals outside of China (Albermarle being the other).
Lastly, Livent is the only fully integrated producer of high purity lithium metal in the Western Hemisphere
Breakdown Livent’s geographic exposure
65% of Livent’s sales come from Asia, 20% from North America, 15% EMEA and 1%> from South America
What is Livent’s revenue and revenue growth?
2019 revenue was $388MM and has grown at a 15% CAGR since 2016
What is Livent’s EBITDA and gross profit?
Livent’s gross profit in 2019 was $115MM and its EBITDA was $90MM.
What is Livent’s margin trajectory?
Livent’s margins were increasing at ~7% YoY until 2019 when they dropped by ~15% due to a 25% drop in Lithium prices. Volume of sales remained steady hence there being little fluctuation in COGS as compared to 2018..
