Arkansas is hot right now, hot for lithium and Albemarle (NYSE:ALB) is joining the party. Albemarle has filed with the Arkansas Oil and Gas Commission to obtain permission to extract lithium (from its preexisting bromine operation) via a pilot plant. The intent is to begin testing lithium extraction. This is the same play book that Standard Lithium (SLI) used in Arkansas. Per the Arkansas Oil and Gas Commission (AOGC) we can see the Albemarle pilot plant application:

Albemarle Lithium Demand Outlook

Now why would ALB do this? I thought lithium was all but dead right? If you glance at depressed lithium company share prices it appears quite kaput. Looking over the May 2, 2024 Q1 transcript from ALB, we can see ALB's lithium demand outlook and it appears positive or maybe they are taking a long-term view point on lithium demand:

We continue to believe in the EV transition and the growth in lithium demand, as well as the opportunity it creates for Albemarle. Despite a downshift in demand growth in Europe and the United States, global EV sales were up 20% year-to-date, led by strong growth in China, which represents over 60% of the global EV market.

We continue to anticipate 2.5x lithium demand growth from 2024 to 2030. Additionally, we see battery size growing over time, driven by technology developments and EV adoption. These factors all translate to significantly higher global lithium needs. To put all this in perspective, we expect that this industry needs more than 300,000 metric tons of new lithium capacity every year to satisfy this growth. This means, we need more than 100 new lithium projects across resources and conversion between now and 2030 to support this demand." Source: ALB Q1 2024 earnings transcript (emphasis added)

The figures below are very interesting as they give you a good picture of regional demand for EV's. As you can see the ALB estimates paint a picture of rapid growth in Global and China EV sales (with China commanding 60% of global sales).

Below we see Europe EV and North American EV sales. Note the pace of growth is slower in Europe at 19% as opposed to China and Europe commands 20% of the EV market for sales. Lastly we see North America with its mere 10% share of global EV sales and weak 10% growth in sales. Hopefully we can see charging stations continue to be placed in North America to accelerate consumer confidence and sales. Of course this depends on healthy economic conditions.

Lithium Inventory

During the Q&A session one analyst inquired about lithium inventory levels. The ALB response was insightful.

First of underneath that the other factor as important is demand. China stands as a market and start -- first of all, the majority of demand in the world, over 60% of the demand and start contrast to the U.S. or Europe with very strong growth you may have seen reported even in April growth that was quite significant for various automotive producers, BYD being up 49%.

So there's very strong growth in China coming off of very low inventory levels. And that's obviously a favorable indicator for price in light of the pressure on producers at these price levels that Kent described.

And the inventory more specifically, what we're seeing is inventory is pretty much at very low levels, ending in March, relatively speaking. So less than 2 weeks from a lithium producer standpoint, and about a week for downstream cathode company. That's in China. It's a little higher for battery producers -- or excuse me, for battery inventories. But again, at levels that are very low compared to the average we saw in 2023.

So that, coupled with this demand signal we're getting from China, we see it as a positive signal for price going forward. And obviously, we'll have to -- we don't know for sure, but we'll watch that carefully. And should that happen, that will benefit our earnings going forward."

Given the demand outlook it makes sense that ALB would look to take its preexisting Arkansas operation and mimic SLI to extract lithium from the back end of its operations involving bromine.

An Albemarle Capex Shift

Albemarle has slowed down its lithium investments a little and shifted the focus. ALB has decided to focus on organic growth as opposed to M&A. Capex spending for 2024 per ALB is estimated to be between $1.6 to $1.8 billion (down from $2.1 billion in 2023). ALB is also deferring spending on its South Carolina lithium refinery project. However, ALB plans to move forward with permitting its North Carolina lithium mine.

Logically, it is much cheaper from a time and capital needs standpoint to extract lithium from a preexisting operation. Thus, with all the love being felt towards Arkansas via Standard Lithium and Exxon (XOM), it is no surprise that ALB is looking to start lithium production on its preexisting bromine operation. Hence, we see the AOGC permit application and this falls in line with the focus on organic growth as opposed to M&A.

Looking further into the slide deck we can see how ALB plans to address future lithium demand.

As a side note, it was interesting to see that lithium was mentioned 23 times in the slide deck while bromine was only mentioned one time.

Albemarle Risk And Financials

ALB is being cautious in its lithium expansions. They realize that lithium prices could remain low for some time. Time is something lithium investors need to consider. Will the potential stock gains compensate for the time capital is invested? I tend to think so. The biggest risk is frankly the economy. High interest rates and inflation is hindering the average person. If the economy continues to deteriorate then obviously car sales might be impacted. Looking at ALBs numbers we can see increasing revenues but also increasing costs as lithium prices decreased. Lithium prices have come down from the unsustainable $80,000 to the $12-$20k range (depending on the contract and market). These lower prices have returned ALB net income to normal levels for the time being. Per Google Finance:

Moving on to cash and debt we can see cash rising to $2.06 billion while debt is decreasing to $7.23 billion. Given how large some of these projects are, large debt is not surprising, but ALB has the net income to service it. Still, it is good to see debt decreasing.

Conclusion

ALB obviously is following in the footsteps of Standard Lithium in Arkansas. I think ALB will be very successful. I do wonder who Exxon and ALB might go with for DLE (direct lithium extraction) provider. Could it be KOCH-Standard Lithium's DLE process? Maybe, after all Standard Lithium-KOCH have been testing it for years at a pilot plant and KOCH is a multi-billion dollar company with deep pockets. It might make sense to pair up given how many years Standard Lithium has been operating its pilot plant in the natural state.

In the end, some years down the road, Albemarle should have a successful lithium operation in Arkansas. Since it is a pre-existing facility, and no DFS has been released, we have no way of knowing the capital costs or the total output that is possible. It is simply too early in the game to know but the lithium project should be large enough to impact the bottom line deeply and in a positive manner.