Two ways to play the lithium boom

The natural resources boom has triggered investor interest in little-known but important minerals such as lithium.

This soft, silver-white metal is used in the manufacture of pharmaceuticals, lightweight alloys for aircraft, glass, heat-resistant cookware, high-spec lubricants, airconditioners, synthetic rubber and aluminium.

But its most exciting use is in rechargeable batteries. Lithium products already power some 90 per cent of laptop computers and more than 60 per cent of mobile phones, with big future potential in battery-powered vehicles and power tools.

According to the US government’s latest Minerals Yearbook: “Lithium’s natural properties make it the most attractive battery material.”

The global market for lithium batteries has been increasing at annual rates of more than 20 per cent over the past few years, and reached an estimated value of $4 billion in 2005.

“Lithium batteries hold tremendous potential for continued growth,” says the American study.

“Although some safety issues remain, new technologies are being developed,” and performance improvements have been significant, with a doubling of energy density over the past 16 years.

Larger lithium batteries are being incorporated in new products. Last year heavy-duty machine-tool manufacturers Milwaukee, Dewalt and Bosch “introduced complete lines of tools designed around lithium-ion batteries” that are “expected to eventually replace tools using nickel cadmium batteries,” as they deliver up to 50 per cent more power, with longer running times and more charging cycles.

Major automobile manufacturers have announced plans to switch from nickel cadmium to lithium-ion batteries for their future generations of hybrid electric vehicles, and there is increasing prospect of their use in plug-in pure-electric vehicles.

Such uses “could create tremendous increases in demand for lithium,” says the US study.

Price data for lithium is not readily available as the metal is not traded on public exchanges, but one industry source claims the price of lithium carbonate – the most important internationally-traded lithium compound by volume — has doubled this year, to $5,500 a ton, driven by strong demand for rechargeable batteries.

World production of lithium is only some 22,000 tons, the biggest suppliers being Australia and Chile.

It’s very difficult to invest in lithium. I have not been able to find any pure plays. However, here are two stocks to consider.

Two stocks to gain access to lithium

The Chilean company SQM, listed in Santiago and in New York ADRs, has the Canadian fertilizer giant Potash Corp. of Saskatchewan as its godfather, with a 36 per cent interest.

SQM owns vast resources of lithium, nitrate, iodine and potassium minerals in Chile’s Atacama desert. It controls more than a third of the internationally-traded market in lithium.

Trouble is, the company only gets 12 per cent of its sales from lithium. It’s predominantly a supplier of fertilizers and iodine.

Nevertheless, SQM seems to be a well-managed company that you might want to have a piece of, despite that limited exposure to lithium. Its sales topped $1 billion last year. Net income reached $141 million, having grown at an average annual rate of 37 per cent over the past four years.

Although the shares are currently trading on a price-earnings multiple of 28x, with a twice-covered dividend yield of only 1.5 per cent, the chart looks good, suggesting that investors are buying into the company’s fertilizer and lithium growth prospects.

Much more speculative is Admiralty Resources, listed in Australia.

It is developing two major projects in South America – Rincon Salar in Argentina, estimated to contain 1.4 million tons of recoverable lithium and 2.5 million of potash, and due to come into production in a year’s time, and Santa Barbara in Chile, an iron ore mine that’s about to start up.

AR is still running big losses, but investors obviously believe those will evaporate, as an initial $200 million of annual revenues start to flow in from the two projects.

The share price has quadrupled this year and the chart looks great.

If anyone knows of a better way to invest in lithium, let me know and I’ll pass it on to readers.

By Martin Spring in On Target, a private newsletter on global strategy

One Response

  1. 07/01/2013, lamejohnny wrote

    Old feldspar mines in the Black Hills have huge logs of lithium. Not mined since WWII.

Commenting on this article closed

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