Lithium Down But Not Out

Includes: FMC, LIT, ROC, SQM, USGT
by: Josh Hutheson

The Lithium ETF (NYSEARCA:LIT) is trading just above its 52 week lows as a variety of factors have knocked the ETF down. However, the drivers for the soft metal that existed in the beginning of the year, sending the ETF higher, still exist today, creating an opportunity in lithium-related plays.

Lithium is the lightest of all solid elements and the first element in the alkali metal column in the periodic table. It is silvery white, soft and reacts immediately with air and water. Lithium is a rare element because of its highly dispersed occurrence in the earth's crust. Economic concentrations occur in salts from surface and substance brines and in the minerals petalite, spodumene, amblygonite-montebrasite and lepidolite in giant pegmatite deposits.

Until now, lithium has been a minor commodity used in small quantities by manufacturers of glass, grease and mood-stabilizing drugs. In recent years demand has skyrocketed due to the increase in mobile phone, laptops and assorted electronic devices popular with consumers. Lithium-ion batteries have become the rechargeable battery of choice and are now almost used exclusively in cell phone and computer batteries with items such as shavers, power tools, and hybrid and electric cars switching over from the nickel varieties. The benefits of lithium-ion batteries include: higher energy density to weight ratio, longer life, and no memory effect. Between 2003 and 2007 the battery industry doubled its consumption of lithium carbonate, the most common ingredient used in lithium-based products.

The growth has continued. Global lithium demand has increased over 25% between 2010-2012 with lithium batteries being the primary driver. The future also looks bright as the total product of electric cars using lithium ion batteries is expected to reach 1.5-3.0 million in 2015 and 5.0-10.0 million in 2020. Total lithium demand is expected to double by 2020. Here are three stocks that stand to benefit from increases in demand for lithium:

Rockwood Holdings (NYSE:ROC) is the world's largest producer of lithium products with a worldwide employee base of approximately 10,300 people and annual net sales of approximately $3.7 billion. Rockwood recently made an acquisition of a lithium company, adding to its lithium holdings and placing a big bet on the future of the commodity. Rockwood agreed to acquire Talison Lithium for about C$724 million ($728 million) to diversify its supply of the metal used in rechargeable batteries. ROC paid more than a 50% premium and a rich EBITDA multiple, signifying the value of the asset. According to Bloomberg, Rockwood is paying more than 33 times Talison's EBITDA versus a median EBITDA multiple in three comparable non-ferrous-metal company takeovers with a value of at least $100 million announced in the past two years was 15.

Analysts applauded the deal. "We like this deal for Rockwood as it makes them the clear global leader in lithium," Chris Shaw, an analyst at Monness, Crespi, Hardt said in a note. "This deal is less about the immediate benefits of accretion but more of a long-term strategic move."

Next on the list is Sociedad Quimica Y Minera (NYSE:SQM). SQM is an integrated producer and distributor of specialty plant nutrients, iodine, lithium, potassium-related fertilizers and industrial chemicals. Its products are based on the development of high quality natural resources that allow the company to be a leader in costs, supported by a specialized international network with sales in over 100 countries.

Revenues for SQM's lithium segment reached $164.9 million during the first nine months of 2012, an increase of 24.8% y/y. The company commented that demand growth continues to be led by the battery market, along with important growth in uses related to glass and grease. SQM further noted that the lithium market is positioned to grow in the short and long term resulting from the development of new technologies related to energy storage. Volumes increased over 14% in the third quarter when compared to the third quarter of 2011. Increased demand has impacted market prices, which have increased over 10% in the first nine months of 2012 when compared to the first nine months in 2011.

Last but not least is FMC Corp (NYSE:FMC). The company is a diversified chemical company serving agricultural, industrial, environmental, and consumer markets globally for more than a century with innovative solutions, applications and quality products. In 2011, FMC had annual sales of approximately $3.4 billion. The company employs approximately 5,500 people throughout the world, and operates its businesses in three segments: Agricultural Products, Specialty Chemicals and Industrial Chemicals.

The company's lithium segment has struggled recently due to operational issues. However, the company expects improved operational performance. Also, it announced a 10% price increase for lithium metals just two months ago.

One final note, a secondary play on the lithium-ion battery demand is graphite. It is estimated that there is over 2 to 3 kgs of graphite in a hybrid electric vehicle (NASDAQ:HEV) and 25-50 kgs in an electric vehicle (NYSE:EV) using lithium-ion batteries. Canaccord Capital estimates that the HEV and EV market will grow to 11 million units by 2015 and that by 2020 the market penetration rate of HEVs and EVs will reach 10-20%. According to Canaccord, this will increase incremental global lithium carbonate demand for battery applications by 286,000 tons. The natural flake graphite required to meet this demand is over 1.5 million tons, which is well above current annual worldwide production of natural flake graphite. USA Graphite (OTC:USGT) is one of those producers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.