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Investors give big thumbs down to Albemarle's securities issue

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2024-03-06

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A massive thumbs-down from US investors to the move by lithium and chemical giant Albemarle, to raise up to $US2.01 billion in an issue of securities.

The shares slumped more than $17 to their lowest level since November 2020 as investors went right off the proposed issue.

Albermarle is looking to raise an initial $US1.65 billion from the issue and reckons underwriters will want another $US262 million.

The company is marketing a 7%-7.5% coupon for the securities, which will have an interest in mandatory convertible preferred shares.

"This was unexpected news, as we view Albemarle’s balance sheet as healthy,” according to Seth Goldstein, equities strategist at Morningstar.

US analysts wondered about the timing of the issue, coming so soon after January’s big cost-cutting statement.

The shares were driven to just under $US109 in early February after the significant round of cost, spending, and job cuts announced a couple of weeks earlier - half a billion dollars was lopped off projected capex for 2024.

They had peaked at an all-time high of $US325 in November 2022 (when global lithium metal prices were peaking above $US80,000 a tonne). Prices are down around 70% to 80%, and remain weak, even amid talk of a recovery in China where a price war in EVs is deepening.

Since that low, the Albemarle share price had risen to $US142.80 on March 1, but the shock issue news late Monday saw them pounded lower on Tuesday to $US109.40, a loss of 17.9%.

"Shares are likely to be under significant pressure on this news, which in our view indicates an inability to fund these projects considering the current and possible near-term future pricing for lithium products over the next two years," according to Piper Sandler's Charles Neivert.

While some investors will view Albemarle's offering as a negative, "the move should bolster ALB's balance sheet and liquidity during a period where cash flow may be tight, with no dilution until 2027," Wells Fargo reckoned.

The major reason for the raising is that Albemarle cash on hand, cash generation, and planned capex this year do not add up - there is a shortfall with the most urgent need to get rid of the massive buildup of short-term debt - from $US2.18 million in 2022 to more than $US620 million at the end of December 2023.

That’s ‘current’ debt with a term less than a year and must be either repaid, rolled over, or converted into longer-term debt. Seeing Albemarle’s long-term debt rose well over $US3 billion last year, converting it to that sort of debt is next to impossible.

There must be quite a few Albemarle investors thankful that Gina Rinehart forced the abandonment of the $A3 a share, $A6.6 billion bid for Liontown. If totally debt financed, that would have nearly doubled debt, while cash flow dried up and costs rose from the implosion of lithium demand and prices.

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