Investing In The Lithium Oligopoly

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Includes: ALB, FMC, LIT, SQM
by: Livio Filice

Summary

Overview of applications and technologies that are driving the next wave of lithium investment.

Snap shot of the geographically regions where the top producers operate.

A summary of the producers dividends, geopolitical risk, price to earning and an ETF focused on lithium.

Since Sony Corp. (NYSE:SNE) launched their lithium ion battery in the early 1990s the world has been moving towards an increasingly mobile society where consumer electronics have dominated the retail and consumer markets. Everything from laptops, tablet PCs, mobile and smart phone, consumer gadgets and digital cameras have all benefited from the rapid advancements in the lithium ion battery.

Demand for lithium is taking flight

Today, lithium ion batteries are now in demand more so than ever due to an increase in the number of consumer products that are being sold. For example, low cost mobile phones are being widely deployed in third world and developing parts of the world. Next, the numbers of product applications which utilize lithium ion batteries are increasing and several emerging products are demanding more lithium per unit sold. A mobile phone requires a small amount of lithium carbonate while an electric vehicle requires a significant amount of the white metal. In addition to electric vehicles, automotive manufacturers are rolling out various hybrids and plug in hybrid vehicles. Stationary energy storage systems are also gaining significant traction, primarily in mature solar PV markets such as Hawaii, Germany, California, and Japan. As the cost of solar PV plus battery systems fall and electricity rates increase the economic model for these types of stationary storage systems become more feasible without government incentive.

In addition to solar PV self consumption markets there are a number of other applications that are consuming lithium ion batteries such as frequency regulation, battery backup and demand charge management amongst others. A paradigm shift is taking place regarding how the world produces, stores and distributes energy as the cost to produce solar PV has fallen below the cost to procure electricity from grid providers in select regions of the world.

All of these products are going to create demand for lithium that was not previously there so the growth case for lithium is evident and unavoidable. In parallel for with this rise in demand for lithium carbonate and lithium ion batteries investors should be seeking out investment opportunities in the supply chain.

I will now turn my focus to the lithium mining sector which is concentrated to a small group of producers who form an oligopoly. Most of the world lithium is exported from Argentina and Chile with some other high volume established facilities in Nevada and Australia. Further, the vast majority of lithium is extracted from lithium brines, or salars, which are salt lakes that provide a low cost lithium product as it utilizes a cost effective evaporation process for extraction rather than a traditional hard rock operation. Three key lithium producers include: Sociedad Quimica y Minera de Chile SA. (NYSE:SQM), Rockwood Holdings Inc. (NYSE:ROC) - now Albermarle Corporation (NYSE:ALB) and FMC Corp. (NYSE:FMC).

SQM is focused on their 40,000 t/yr lithium brine facility located in Chile at the Salar de Atacama. SQM is primarily focused on their Chilean chemical businesses which presents a significant geopolitical risk but has been a major contributor to the global lithium supply. At present SQM is trading around $25/share, which represents a 23 Price to Earnings ratio and an inconsistent dividend payment. In 2014, the company paid $1.41/share while in 2013 the company paid $1.04/share.

FMC, through their lithium division, has owned and operated a 17,000 t/yr lithium brine facility at the Salar del Hombe in Argentina. FMC is a very large and diversified multinational chemical company addressing the agricultural, consumer and industrial markets around the world through innovative solutions, applications and market-leading products. The company operates in three distinct business segments: FMC Agricultural Solutions, FMC Health and Nutrition and FMC Lithium (formerly FMC Minerals). At present the company trades at a 21 X Price to Earnings ratio while paying a quarterly dividend of .17/ share which yields 1.04 percent based on current trading levels.

Albermarle Corporation, who is a global leader in the specialty chemical business recently closed on the acquisition of Rockwood Holdings in an all cash and stock transaction. Through the acquisition they bought one of the only operating lithium brines in North America located in Silver Peaks, Nevada within close proximity to Telsa Motors (NASDAQ:TSLA) soon to be built Giga Factory. The Giga Factory once built and producing at its peak will be the largest lithium ion battery manufacturing facility in the world. It is expected to produce up to 500,000 lithium-ion packs per year primarily to address Tesla's growing battery requirements. Albermarle offers their shareholders a dividend which yields 2.09 percent on an annual basis and trades at a Price to Earnings Ratio of 21.55.

It is in my opinion that when investing in a specialty metal such as lithium, investors need to consider geopolitical risk and direct exposure to the industry. Is the investor looking for a modest or significant exposure to the material and what geopolitical risks are they willing to bear? SQM operates in Chile which in my opinion presents significant geopolitical risk whereas FMC operates in Argentina which also holds a modest amount of geopolitical risk. At present, it is extremely difficult for foreign companies to import capital into the country and to flow cash out of their banking system. Albermarle through its Rockwood acquisition now operates lithium assets in both Nevada and Argentina which presents the least amount of geopolitical risk.

However, none of the organizations are entirely lithium-based companies, which de-risks the investment as the companies are also tied to the performance of other chemical and metals. However on the contrary it does not provide direct exposure and upside to the lithium market, especially if a shortage of material begins to emerge or additional M&A takes place in the industry.

All of the organizations are trading around 20 times price to earnings ratio which indicates that all the shares are fairly valued. If dividends are of interest to the investor then all of the players offer some dividend but none of them offer anything significant or consistent. My personal opinion is that a specialty ETF such as the Lithium Global X Fund (LIT) would be a better way to gain exposure to the lithium industry while avoiding geopolitical risks or having to invest in the overall chemical markets. This specific ETF holds large investments in the three companies discussed in this article along with a number of other companies including Panasonic Corp. (OTCPK:PCRFY), SAFT Groupe SA (OTC:SGPEY), LG Chemical Ltd. (OTC:LGCLF), and Johnson Controls (NYSE:JCI) amongst other companies.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.