“The Battle for the 3rd Element” Money Map

by Travis Johnson, Stock Gumshoe | October 8, 2009 10:38 am

Solved: Lithium Stock Teaser from Horacio Marquez

Well, again we’re talking electric cars — today’s teaser from Horacio Marquez[1] for his Money Map VIP Trader[2] newsletter ($995 — “on sale,” naturally) is all about the coming crunch of demand for the “3rd element” as electric cars take center stage and dramatically increase prices for this critical battery[3] ingredient.

And yes, the “3rd element” reallly is third — it is, as Marquez eventually tells us, Lithium, which is right after Hydrogen and Helium on the periodic table, and is the lightest metal on earth. It’s also a key ingredient in Lithium-Ion batteries of various types, including most commonly the rechargeable cell phone and laptop batteries that have boosted lithium[4] demand over the past decade or so.

But the real big demand, many expect, will be from electric vehicles. Every teaser for any lithium-related company, whether those that make the batteries or those that “mine” the raw material, uses similar projections of ten to twenty pounds of lithium carbonate per car battery (versus a couple of ounces, at most, for most consumer electronics batteries), and if you boost the numbers up from the current paltry levels to a million cars, or to two or three million over the next five years, the demand increases dramatically.

Which ought to be good for these businesses, no?

What Marquez is teasing for us here is a lithium producer, not a battery maker — which does make some basic sense, if the price of lithium spikes the battery makers, who face a lot more competition than the lithium producers, will be squeezed from both sides (by higher input prices, and by competition). That’s not to say that there isn’t some potential competition in the lithium mine space, too, as new projects get developed to take advantage of rising prices, but it’s certainly far more limited.

So … there are a few major lithium producers, and a number more of nascent producers and exploration companies that are trying to develop lithium resources — which one is Marquez teasing?

Let me share with you just a taste of his intro, first, to get you salivating a little bit:

“The 3rd element will soon siphon off $10.4 TRILLION in oil[5] revenues…and replace 148 billion barrels of black gold[6]…

“The U.S. government is quietly spending billions to control this rare substance as a matter of national and economic security…

“Early-in investors could turn every $10,000 into $290,400….

“I simply had to find out for myself what could possibly be worth $10 trillion…

“And after a mind-numbing 26-hour journey, I’ve finally arrived.

“The terrain stretching out before me is staggeringly surreal…

“A desolate moonscape covering 1,800 square miles, 50 times drier than Death Valley. Punishing solar[7] radiation fries unprotected human flesh in minutes.

“Why did I come here?

“For one very simple reason:

“This windswept sea of white holds the key to the world’s energy needs for the next 50 years.

“Locked beneath its surface are millions of tons of a rare element with the capability of replacing 148 billion barrels of oil. Or more.

“Already, this wonder element is the most sought-after – and fought-over – commodity on the planet.”

Good stuff, eh? Though we should, of course, throw a teensy little wrench in — this doesn’t in any way get rid of the earth’s demand for fuel, electric vehicles would arguably be much more efficient energy consumers than gasoline-powered cars, but the energy to charge those batteries still has to come from somewhere. And since China[8] and the US are the world’s largest sources of demand for personal car transportation, it seems awfully likely that a large portion of the electricity that powers these electric cars will come from … burning coal[9]. Still, creating and distributing energy in central locations is bound to be much more efficient than a country with millions of little power plants (gasoline powered car engines).

But anyway, we can make the argument that lithium can undercut OPEC to some degree — and, perhaps more importantly for Marquez’s teaser, we can argue that the lithium market right now has something akin to an OPEC of controlling companies that keep a good handle on pricing.

So which one of these companies is Marquez teasing?

“It All Comes Down To ONE Company

“One company controls 30% of the world’s proven reserves of this rare element.

“More importantly, it owns claims on the highest quality and most cost-effectively refined reserves of this element.
Already, this dynamo of a firm controls 50% of the world market for this little appreciated substance.

“These advantages give this one firm a huge head start over virtually every other competitor in the world in the battle to control the 3rd Element.

“Clearly, the opportunity for early investors is almost beyond calculation.

“Just in the next 90-120 days, investors in this most precious commodity could see gains of 100% as the world market for this substance shoots past $90 billion.

“By the time the big positions are staked out and the wealth carved up, early in investors could see every $10,000 invested turn into as much as $290,400.

“And as with oil before it, the biggest winners will be those who control the most and best reserves. And that’s where this small gem of a company comes in.

“Early investors in this relatively small and unknown company could be the biggest of the big winners in the race to control the 3rd Element, destined to become the “new oil” of the 21st century. ”

And then we start to get slightly more specific …

“This Small Firm Will Turn The Energy World On Its Head

“We’ve already seen the inevitability of lithium’s rise to energy dominance …and the inevitability of stratospheric lithium price rises.

“But here’s why this one firm could capture the lion’s share of the boodle…

* “It owns 30% of the world’s known lithium reserves…

* “It controls 50% of the world’s market for lithium products…

* “It’s the only major American lithium producer…

“In fact, despite what you may think you know about producing lithium, this American firm owns reserves in the one spot on earth with nearly five and a half times more recoverable lithium than any other place!

“This last point bears repeating…”5½ times more recoverable lithium than any other place”… because it’s key to this company’s dominance and profitability.

“Sitting On The Mother Lode of Lithium

“In this one spot, there are only two operating lithium mines, and they are quietly pumping 70% of the world’s raw lithium out of the ground…

“But here’s the deal… not all lithium is created equal… nor is all lithium equally profitable to refine.

“To simplify, large concentrations of lithium are found in only two forms – spodumene and brine.

“Spodumene is underground ore. It has to be painstakingly extracted, and meticulously dried and processed with harsh chemicals like sulfuric acid before it can be refined into the fine powder used in batteries.

“All of this takes a lot of money.

“On the other hand, brine-based lithium is easily accessible. It forms in large pools laying 90-130 feet under the surface of gigantic salt beds. After it’s sucked to the surface, evaporation transforms it from light yellow slush into raw lithium.

“The merciless sun – right here where I’m standing – does all the work! So the cost of mining lithium brine is less than half the cost of extracting spodumene ore.

“Where others pay $2,400 a ton to extract lithium…our tiny company pays a mere $1,200 a ton. And as the price of lithium shoots skyward, this cost advantage – and profits – will increase exponentially!”

And out final clue, in the P.S.:

“Just as I was finishing this letter, President Obama announced he’s releasing another $2.4 billion in funds to jump start production of electric cars, including an outright grant of $29 million to our little-known company.”

That grant was announced in August (all the electric drive recipients are listed here, just FYI[10]), it was actually for $28.4 million, and it went to Chemetall Foote, which is a lithium producer that’s owned by the stock that Marquez must be teasing today …

Rockwood Holdings (ROC)

Rockwood is, through its Chemetall subsidiary, one of the largest lithium producers in the world — along with FMC Lithium and the big daddy of them all, Chile[11]’s SQM. Rockwood and SQM are the two companies who are producing lithium carbonate from the brine pools beneath the Atacama desert in the Chilean Andes, the world’s largest single source for lithium and the lowest cost production site.

And it’s that Salar de Atacama site that Marquez must be talking about, the one he visited that was horrifically inhospitable to all forms of life (nothing but sun, heat, and salt). This is indeed one of the world’s largest reserves of lithium, which is much cheaper to produce from these salt brines than from mined ore (they just pump up the brine and let it evaporate in large pools in the sun, then truck off the concentrate for refining). There are other major salt brine resources in the world, but SQM and Rockwood are the only ones actively producing a major resource like this, as far as I know.

The largest lithium resource in the world, by the way, is not too far away from the Atacama — it’s in a similar salt brine resource in Bolivia called the Salar de Uyuni. Estimates say that this one resource, currently almost completely untapped, represents about 50% of the world’s known lithium. There are many folks who would like to produce this lithium in Bolivia, but Bolivia is extremely anti-foreign-investment right now, arguably with good reason (they’ve got a long history of being exploited), so while the Bolivian government would like to build their own lithium mining operation at Uyuni, there’s no guessing as to how long it will take them to do so without foreign expertise or investment … or whether they’ll end up being a large producer at all.

But in the meantime, Rockwood and SQM are the only two producers in the largest producing lithium “mining” area (it’s really more “pumping” than “mining”), and this tease certainly seems to be for Rockwood, a US company, not for SQM, a Chilean agricultural powerhouse that’s primarily a fertilizer[12] firm, despite the fact that they produce more lithium carbonate than Rockwood. (Incidentally, Potash Corp of Saskatchewam owns about a third of SQM — they tried to take it over at one point — so that’s yet another way to get some lithium exposure in a North American investment, as long as you really want lots of fertilizer exposure, too.)

Incidentally, Chemetall Foote, the lithium production investment of Rockwood Holdings, was one of the lithium pioneers … they were the ones who were mining in North Carolina decades ago, and who helped to discover the lithium brine process of cheaper production in Nevada and, later (and on a much larger scale) in Chile. They are also a major refiner of lithium, developing and selling new lithium-based oxides and hydrides and whatever else they call all that stuff that I don’t understand. The division is now generally called Chemetall Lithium, though Rockwood’s web of interconnected firms gets a little confusing, and they have a good background on lithium production and projected demand here[13] if you’re interested. They’re even setting up a pilot plant for recycling lithium ion batteries, which might end up being a big deal someday (as with many other batteries, a lot of the raw material is still potentially usable after the battery is no longer functioning).

So … how about Rockwood Holdings as an investment? This is not just a lithium company, more of a broad specialty chemicals and materials company (you can get a quick overview of their major businesses and end markets here[14]). In fact, in their last earnings press release they didn’t even use the word “lithium” — though it’s obviously one of their important products and it is usually covered in detail on the conference calls (you can read the Q1 transcript here[15], for Q2 (the most recent report and call) you’ll have to listen, no transcript available — the recording is available here[16]).

They are marginally profitable as of the last quarter, and as a chemical supplier to many industries they “enjoyed” a dip in demand for many of their products during the economic slowdown (profit last quarter was down 98%, they saw no clear recovery but also said demand was “stabilizing”) — analysts do expect them to report a better profit next year, however, giving them a forward estimated PE of about 18.

They carry a lot of debt (not necessarily shocking for a chemical producer), which may be part of the reason that they got truly hammered in the market crash, with a low in March of about $4 (they have been extending their debt maturities recently, so I haven’t seen anyone who’s particularly worried about their debt right now). They have already recovered nicely from there to the current price of about $18, thanks in part to the resurgence of interest in lithium companies following all the battery buzz for firms like A123 and Warren Buffett[17]’s coattail-rider BYD. The shares were actually quite a bit higher a couple weeks ago, up around $23, but took a solid hit when SQM cut prices.

And of course, Rockwood is not exactly a top secret company — they were even on the CBS Evening News [18] a while back (this is where you can insert your snarky remark about how something that appeared on CBS would still be unknown to most of the country).

If you’re interested in smaller companies and “junior” producers of lithium that are more directly leveraged just to lithium prices (and, one would have to imagine, also much riskier investments), there was a great interview with a lithium analyst by the folks at the Gold Report[19] a couiple weeks ago that’s worth a read, it names some of the more interesting junior lithium players, including a couple in Bolivia, and has a good overview of that analyst’s view of the lithium market.

Oh, and as with all things — the economy matters. lithium prices are still high by historic standards, and may well climb dramatically higher in the decades to come, as Marquez clearly believes … but the latest move in pricing by SQM, which helps to control the world market, was a cut in prices for this year’s contracts[20]. Perhaps this is just like OPEC keeping prices low enough to spur demand and build a market, and to discourage the development of new, competing lithium resources … but it also may mean that windfall profits are not exactly right around the corner for these firms, so, as always, patience is probably a virtue when investing in any of the lithium companies. They may well take over the world, but it probably won’t be this week.

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