A Long Look at Lithium: Chile's SQM Poised for Growth

Sociedad Quimica y Minera (SQM), headquartered in Chile, looks poised for solid returns as global markets demand more lithium-ion battery energy and agricultural resources. SQM is a leading producer of key resources such as potassium nitrate, iodine and lithium carbonate. It also produces specialty plant nutrition products, iodine and lithium derivatives, and certain industrial chemicals, including industrial nitrates. SQM is well positioned as the world population adds 700 million new middle class people (examples, China 350 million and India 100 million respectively) by 2022.

Of particular interest is the Chilean-based SQM’s 30% global market share of Lithium derivates used for electric vehicle (EV) lithium-ion batteries.

Its primary competitor, Rockwood Holdings' Chemestall Division (ROC), has 28% global Lithium market share. However, Rockwood -- exposed widely among several sectors -- reported a 21% decrease in net sales for Q2 2009 with debt issues and poor earnings per share results.

SQM is financially better positioned long-term, given low debt and Lithium plays with contributing plant nutrition (agriculture) and iodine (medical) revenues, despite its just announced 11% earnings decrease for Q2 2009.

Deposits of lithium are found in South America throughout the Andes mountain chain. Chile is the leading lithium metal producer, followed by Argentina. Both countries recover the lithium from brine pools. In the United States lithium is recovered from brine pools in Nevada. Over the past five years, foreign direct investment inflows into politically stable Chile have quadrupled to some $17 billion in 2008.

However, nearly half the world's known lithium reserves are located in Bolivia, a politically unstable nation sitting along the central eastern slope of the Andes. Most recently, Bolivia has negotiated with Japanese and French firms to begin extraction. The US Geological Survey estimates Bolivia's Uyuni Desert has 5.4 million tons of lithium, which can be used to make batteries for hybrid and electric vehicles. This is the largest amount of lithium in any country, compared to Chile's 3 million tons and the United States’ 760,000 tons.

Additionally, China's proven lithium reserves (converted into pure lithium) have reached 3.35 million tons, meaning China ranks the fourth in terms of salt lake brine lithium reserves and lithium ore resources. There is potential production of up to 64,000 tons per year if projects in Qinghai province and Tibet proceed.

The total recoverable lithium worldwide has been estimated at 35 million tons, which includes 15 million tons of the known global lithium reserve base. The National Research Council panel estimated lithium resources at 10.6 million tons for the Western World. With the inclusion of Russian and Chinese resources as well as new discoveries in Australia, Serbia, Argentina and the United States, the total had nearly tripled by 2008.

As the global economy recovers, it should be moving towards a mix of alternative energy such as electric lithium based and renewable energy sources that are only found in specific regional locations. These factors, combined with SQM's low debt ratios and solid gross margins, should continue to generate significant earnings per share returns by 2010.

Upon examination, of particular note is the future CO2 environmental impact of EV lithium ion battery waste. For example, the U.S. Army spends about $72 million annually on the purchase of batteries. Over the past 18 months it has seen a significant increase in use of the BA 5590 (12-volt lithium battery) with 10 lithium cells, weighing approximately 2.5 pounds. The cost of these batteries is $65 each with disposal cost as a hazardous waste at $9.22 each. On average, 30% of the recycled batteries processed have greater than 70% of their life span remaining and are re-issued, saving the U.S. Army about $500,000 per year.

Note the EV battery C02 emissions results below:

It will be interesting to watch the volatile EV lithium-ion battery manufacturing sector shake out with players including; A123Systems (AONE), Hitachi (HIT), Matsushita (MC), Mitsubishi (MSBHY), Sanyo (SANYY.PK), Advanced Battery (ABAT),Valence Technology (VLNC), Ener1 (HEV), China BAK Battery (CBAK), UltraLife (ULBI), Enersys (ENS), and Exide Technologies (XIDE) among others.

We also foresee that global demand for SQM's industrial nitrates for thermal energy storage in solar energy plants will significantly increase consumption (mixture of sodium nitrate and potassium nitrate).

The intense sector competition, mostly from Asia (e.g., Lithium Energy Japan Venture), particularly among Lithium-ion battery manufacturers, further makes the case for SQM as a stable long-term alternative energy plus agriculture stock portfolio addition.

As the global economic recovery accelerates, driven primarily by emerging markets, look for SQM to post 15% sales growth or about $1.82billion revenues for 2010.

Disclosure: None

Comments

[Jason Hamlin]

I like SQM, but I think better returns will be had from junior lithium players such as WESTERN LITHIUM (WLCDF.PK).

www.westernlithium.com/

2009 Aug 14 04:32 AM

[Davewmart]

Thanks for driving a nail into the coffin of arguments about running out of lithium.
For other readers who don't closely follow the technology it is worth pointing out that both lithium and lithium carbonate are often referred to, the latter of which contains around 20% pure lithium by weight.

2009 Aug 14 07:37 AM

[Paul Harper]

Great article, I dabbled in this a while back, looking at Bolivia & what the lithium deposits could mean, you've obviously carried out some great research on this subject.
Am also a new holder of SQM in my ong portfolio & don't think I'll be doing much with it for a long time to come.

2009 Aug 14 08:11 AM

[Juan Carlos Zuleta]

Davewmart, from the information provided by SQM during my visit to Salar of Atacama in Chile back in January 2009, lithium carbonate has only 6% of Li content.


On Aug 14 07:37 AM Davewmart wrote:

> Thanks for driving a nail into the coffin of arguments about running
> out of lithium.
> For other readers who don't closely follow the technology it is worth
> pointing out that both lithium and lithium carbonate are often referred
> to, the latter of which contains around 20% pure lithium by weight.

2009 Aug 14 08:38 AM

[ari5000]

unfortunately -- this article doesn't go into the actual value of $SQM. Very detailed -- but the next question is: how much of the story is already priced into the stock?

I find miners are the most difficult companies to value (perhaps biotechs are harder) but it seems to me SQM is very expensive -- the Street is clearly aware of the potential for huge lithium sales.

I'd rather own XIDE or CSGH.ob or something smaller/ with more potential in the stock. But not the worst idea. Good luck.

2009 Aug 14 09:22 AM

[jerrydd]

While a good short term bet it seems over 3 yrs they will have a lot of competition as many other sources of Lithium are found, especially in the US.

There are already large new finds here and no one has tested the 100's of thousands of brine pools tapped by oil, NG wells yet for Li content.

Plus other batteries like sodium, alum/zinc-air plus many others.

Bolivia had better get on the bandwagon or they will be left behind.
.

2009 Aug 14 09:30 AM

[stockferret]

Canadian Lithium plays have been on fire this week. CLQ and WLC are looking very bullish right now. Another advantage is buying them on the TSX and getting CAD exposure.

2009 Aug 14 09:57 AM

[Alan Young]

I like the business SQM is in-- not just lithium; fertilizer is an important product, too.
And I like Chile, and keep some exposure to it.
But looking at the valuations, it appears too pricey. When the price corrects back to about 30, I'd be a buyer.

2009 Aug 14 10:08 AM

[William M. Wright]

Thanks James, this is very educational. Now we know why SQM a $15 stock in Oct. 2008 has already doubled in value. Looks like it peaked out in May. Once again, the collective wisdom of buyers anticipated this 2009 energy play.

2009 Aug 14 10:57 AM

[Davewmart]

I based my figure of 20% lithium in lithium carbonate on Chemettall's figures here:
www.chemetalllithium.c...
If anyone is a good enough chemist, they could work out the weight ratio from the chemical formula of lithium carbonate - Li2CO3.
It is certainly beyond me!
In any case there is certainly plenty of lithium, as Chemettall makes clear in the pdf linked on the site I referenced.


On Aug 14 08:38 AM Juan Carlos Zuleta wrote:

> Davewmart, from the information provided by SQM during my visit to
> Salar of Atacama in Chile back in January 2009, lithium carbonate
> has only 6% of Li content.

2009 Aug 14 11:07 AM

[User 357705]

Not a very good investment with Duhmerica's long and inglorious history of invading countries that have strategic assets.

2009 Aug 14 12:10 PM

[Davewmart]

'According to the United States Geological Survey (USGS) US reserves of lithium total 760,000 tons. One kilogram of lithium equals 5.3 kilograms of the lithium carbonate used to make batteries.'
www.marketoracle.co.uk...
This link also gives some investment plays for US production of lithium.

2009 Aug 14 12:22 PM

[shine4u]

don't forget the guano

2009 Aug 14 01:44 PM

[Granville]

On the weekly chart of SQM, MACD and RSI are rolling over. Price has been flat since mid-May, is still short of the May '08 highs and momentum is weakening. All this against a backdrop of unanimous sentiment against the dollar. Break out of this narrow range and hold 40, and you have a new game. Until then, it is better to watch this and keep your powder dry. A rebound in the dollar, and this could revisit 30. 30 or so, down about 20% from here, would not violate the uptrend, and would be a much better entry point.
None of this is to say that this wasn't a well-researched, well-presented article.

2009 Aug 14 02:48 PM

[Snitzer]

I'm holding ROC, as much for their ceramics as LI holdings, but SQM is on the watch list with a $31.00 target, then we'll look again.

2009 Aug 14 10:32 PM

[Tim Hannon]

Hi, does anyone know how much lithium is in a lithium-ion car battery?

2009 Aug 14 11:41 PM

[Davewmart]

'To put the demand for lithium supplies into perspective, the Alliance’s 250kg AESC batteries contain 3 kg of lithium. According to the mining companies Chemetall and SQM, lithium reserves are currently estimated to be between 14 and 17 million tonnes.'
www.greencarcongress.c...

This is for a 15kwh pack.
So around 0.2kg/kwh
Chemettall has since upped it's estimates of reserves to around 30 million tonnes:
www.chemetalllithium.c...

Be careful of the figures you see around, as lithium carbonate is often referred to also, of which only a proportion is pure lithium.
See the discussion earlier in the thread for how big a proportion of lithium is contained in lithium carbonate.

2009 Aug 15 04:57 AM

[Papasmurf]

Would it make more sense to invest in the value added end of manufacturing the batteries rather than the raw materials? Who manufactures these batteries where batteries are a major source of their revenue?

2009 Aug 15 01:06 PM

[Davewmart]

Would whoever downgraded my references to lithium supplies like to provide their own references, or some sort of joined up rationale to what they are trying to say?
If I state an opinion and that is downrated, that is fine, but if I just provide references to facts, I am at a loss as to what critics are trying to say - they don't like the facts, or they have alternative data, or what?
Just downrating without rationale seems to me extremely stupid.

2009 Aug 15 03:13 PM

[User 422955]

Three articles on SA have recently recommended SQM. This is, by far, the best of the three. The emphasis on other SQM products is also excellent. I still don't understand what the "specialty" fertilizers are, or who else makes them. As one of the world's leading producers of Iodine, SQM is also an interesting stock.

Lithium mining, like other kinds of mining, has considerable environmental costs. No one knows how the environmental impact of different kinds of car batteries will play out.

Disclosure: No positions.

2009 Aug 15 05:57 PM