The advancement of electrical vehicles (NYSE:EV) is creating considerable momentum in the green energy sector. Some of you may recall my previous article from the beginning of July on Tesla Motors going public. Although this company left investors' mouths watering over the 4th of July weekend, they quickly began to realize the volatility of Tesla's new IPO; which triggered my search for an alternative way to benefit from the electric car industry. I'm talking about Lithium.
The lithium ion battery is a relatively new technology with development stage only being initiated in the 1980s and going commercial in the 1990s. With a technology so new, there is considerable room for improvement, which in my mind only signifies the sustainability of lithium batteries for years to come. In order for this new-age vehicle to operate, companies need to be able to manufacture high-quality lithium batteries and it all starts with battery grade lithium. Investors need to realize producers of lithium will play a key role in the future development of the electric car industry. Companies who are able to produce inexpensive battery grade lithium will succeed immensely, and it all comes down to the production costs.
Let's start by taking a look at difference between brine and clay producers, and what this means for production costs.
Brine production is not only the most commonly used way today, but also has been historically the least expensive way to produce lithium. In South America, brine producers have been pumping the salty water out of dry salt lakes, evaporating the water, and then treating the lithium left behind in the brine in order to produce a chemically controllable form. The largest lithium producer worldwide is currently Chile, accounting for the production of 12,000 metric tonnes and 3 million in reserves. One of the main issues that Chilean brine producers face today is the constraint on production. The Chilean government classifies lithium as a strategic resource allowing the government to regulate the production. Regulation within Chile will be something to keep an eye on while you invest in lithium. I'm not too fearful though, mainly due to the recent transition from the previous left-wing party to the pro-business and pro-mining, President Sebastian Pinera.
Clay producers, on the other hand, implement a crystallization process to extract the lithium. In Nevada, one clay producer has a clear advantage when it comes to the quality of their clay. According to Western Lithium's scooping sample, the clay is 99% commercial quality. Not only should the lithium be extremely clean, but the quality will help cut down on production cost as well. It all comes down to the quality of the material and the presence of contaminants. Currently, it is more cost-effective to produce high-quality clay than low-quality brine.
At this point, there are a few major producers on the market right now.
Chemical & Mining Company of Chile (NYSE: SQM) is the largest lithium producer in the world, and is located near the Bolivian border. Bolivia is also known as the "Saudi Arabia of lithium" which could mean good news for SQM. The underlying issue with production in Bolivia is not only the potential nationalization of lithium production, but also the magnesium levels in the brine which could increase production costs. Keep in mind that SQM doesn't operate solely as a lithium-based company, but also has as a focus in products like fertilizer and iodine. On the bright side, SQM has entered into discussions with Japanese automakers about direct lithium sales. The most advanced negotiation including a proposed sales agreement with Nissan. SQM would supply Nissan with 10,000 metric tonnes of lithium with revenues reaching $55 million annually.
Rockwood Holdings (NYSE: ROC) is the second largest lithium producer worldwide. ROC holds 10 separate divisions and operates as the parent company to Chemetall, which is the leading producer of lithium compounds. ROC and SQM are similar in the fact that both companies are not pure lithium companies.
FMC Corp (NYSE:FMC) is the third largest lithium producer with a forward PE of 11.9. FMC was able to beat earnings estimates with an EPS increase of 35%. FMC currently holds 15% of the world's production in Argentina at Salar Del Hombre Muerto (see below).
With the industry gaining traction, we will surely see some new competitors come out of the woods. Market shares will be split up among low-cost producers once the industry picks up a little more momentum. If you don't have the comfort level to invest in individual companies, you might consider Global X Lithium ETF (NYSE: LIT). All three of the companies previously mentioned are in the top 10 holdings of LIT.
In the coming years, we will see a larger scale demand of electric cars and in turn lithium batteries. Electrical vehicles like the Chevy Volt and the Nissan Leaf will be hitting markets in 2011. Nissan has even entered into an agreement with Enterprise Rent-A-Car and Hertz to supply electrical cars in city locations. Enterprise has already signed up for 500 cars and will supply charging stations in Manhattan and one at the New York airports. It's time to turn this GREEN investment into green in your wallet.
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Global Profits Alert (GPA) is published by Trippon Financial Research, Inc. a financial media organization with offices in the United States, Hong Kong and Mainland China. GPA is written by Jim Trippon in conjunction with George Wolff, Sunny Wang, Jim Trippon, Kelley Damiani and J. Daryl Thompson.
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