JR Crooks is fairly new in his role as editor at Global Resource Hunter, but the two teaser pitches he has sent out in the last few months have certainly caught the attention of our readers — the first one was for the silly “Pyramus Compound” and his special “black goo” replacement oil that the world was going to go nuts for, and this one is also in the fuel space — though this time it’s “Salt Fuel” that he’s talking about.
Which, as you probably already guessed (but he doesn’t let on until near the end of the ad) is lithium. Which is a salt in some forms, and which is largely produced from naturally occurring brines. And it’s been just about the most exciting thing in resource investing for a couple years both because almost all other commodities and mined materials have been weak (though that’s been changing a bit this year, with at least a little bit of a recovery in copper, gold, oil and a few other commodities).
The lithium excitement in recent years has been driven almost exclusively by Tesla’s headline-generating “Gigafactory,” because that massive battery factory’s demand for lithium for lithium-ion battery production (as well as other, less notable production expansion at other factories) is expected to spur higher prices.
And JR Crooks has three favorite “Salt Fuel” stocks he likes, and drops a few hints as to which ones they are… so we can do a little research, toss ’em into the Thinkolator, name the stocks for you and, hopefully, give you a chance to think for yourself without the psychological pressure of the hard sell… or the reality-distorting field that’s created when you pay for information that is marketed to you so aggressively that it gets your heart racing.
So what are the stocks? First, let me share a little excerpt from the ad to give you a taste of what JR Crooks is selling:
“Energy war led by Elon Musk and Warren Buffett drives historic demand for Salt Fuel
- Set to replace oil as the universal fuel … Musk and Buffett are locked in a silent battle to stockpile 40,000 tons of the world’s Salt Fuel reserves.
- The department of defense is looking to secure tons of Salt Fuel
- China could potentially need 100,000 tons of mineral salt
- One little company is caught in the crosshairs of this billion-dollar battle with a potential production surge of 500%”
And he even includes my favorite Bloomberg Businessweek cover, from last month, that has Elon Musk and Warren Buffett grappling in the ring as they battle for leadership in solar power. Which is really not a lithium story, though as home energy storage becomes more widespread the solar story and the lithium story might merge someday — that’s really more a story about the fight between utilities and distributed solar about who pays for distribution and the electric grid.
(OK, yes, Berkshire Hathaway does own a stake in BYD, which is a Chinese battery maker that turned itself into an electric car and bus company… but that’s far from being a core business at Berkshire or a major focus of Buffett’s attention, it’s smaller than Berkshire’s subsidiary Duracell and doesn’t even merit a mention in the annual report).
And then there’s a spiel about how powerful this “Salt Fuel” really is…
“It’s nearly impossible to understand how a new fuel could catapult to such prominence in just the last 10 years alone …
“And why visionaries like Elon Musk and a conservative investor like Warren Buffett (who still uses a tube T.V. in his office) are caught in a dead-lock battle over Salt Fuel.
“How unusual and unique is this fuel…? And why are Musk, Buffett and everyone else is caught in a gridlock for it?
“Salt Fuel, which is ‘Found in salty water, or brines, is the most cost-effective on the market. It is cheap and easy to extract. Will be a global game-changer,’ according to Economy Watch.
“‘Deposits are accumulations of saline groundwater that are enriched,’ according to the USGS.
“And energy expert and Geochemist Dr. Andy Robinson says … ‘All you have to do is drill a few wells and pump the liquid brine.’
With such unique characteristics … how does Salt Fuel fare against all the energy types?
- Unlike fossil fuel or coal … Salt Fuel is clean and environmentally friendly.
- Unlike uranium … it’s safe and can’t create a radiation hazard to mankind.
- Unlike wind and solar energy which needs ugly infrastructure like panels and wind mills … Salt Fuel is barely noticeable, and can be stored and reused on demand.
- Unlike geothermal energy … Salt Fuel can, and is already powering cars and buses and even airplanes.
I should probably point out that “salt fuel” isn’t really a fuel, of course, in this iteration it’s a battery component — it’s used for energy storage, not energy generation. The energy still has to be generated to charge the battery, whether it’s from solar power or coal combustion or whatever else… it’s been hard to compete with a tank of gasoline as an efficient “stored energy” solution for automobiles, but the hope is that storage will continue to get better, with more advanced batteries, and enable much more efficient use of solar or wind energy as gasoline replacements.
And yes, there are lots of other ingredients that go into making these lithium ion batteries — manganese, cobalt, graphite, the mix depends a bit on the variety of battery — but lithium is not nearly as common in the earth’s crust as most of them, is expensive and difficult to mine from rock, and is not produced as a byproduct of mining copper or nickel. Almost all of the world’s supply is indeed created from salty brines that are pumped out of the earth and processed.
And Crooks says the price is already shooting up…
“In 2014, the spot price for a ton of Salt Fuel was $6,000. By the end of 2015, it shot up to $14,000.
“That’s a 233% growth spurt in 12 months.
“At that rate, the price of Salt Fuel could surge 1,165% in the next 5 years alone.”
There is no spot price for lithium, it’s not a widely traded commodity — so that means any pricing should be taken with a grain of, well, salt… but lithium companies and investors generally believe the price is rising, and prices have spiked into the $14,000/tonne range in at least some deals in China over the past year (much of that is mined Australian spodumene that is processed to remove the lithium in Chinese plants — China continues to dominate the lithium battery business, mostly because of demand for consumer electronics-size batteries).
And the demand increases from the Gigafactory and other sources (continued demand for consumer electronics, other car companies, etc.) are not magical or new, the existing lithium producers are aware of these dynamics and have also expanded production and some new projects have started up or are close to starting to increase supply — so I have no idea what pricing will be over the next few years, though demand increases are widely anticipated.
What, then, are the the stocks from Crooks? Let’s check the clues:
“Explosive Salt Stock #1
“If There’s One Stock You Need To Own, This Is It ….
“This U.S. lithium salt producer just signed a deal with Chile to significantly increase its output of lithium salt.
“Of course this deal couldn’t come at a better time. At a time when Elon Musk is already hunting in Chile for lithium.
“Will Musk secure this contract as well? Time will tell. But we won’t wait to find out.
“Recently we’ve watched how this company invested nearly $600 million to increase production from its current 24,000 tons to 70,000 tons.
“In fact, “The (planned) increase will enable the company to meet the accelerating demand for lithium,” the company recently said in a statement.
“Production could potentially surge 500% in no time at all.”
That one is Albemarle (ALB), which bought lithium producer Rockwhood Holdings in 2015 and does indeed plan to invest up to $600 million to nearly triple their lithium production in Chile by 2020. That Rockwood purchase also got them 49% of Talison, the major hard rock lithium producer controlled by the Chinese company Tianqi, so Albemarle is effectively atop the heap in lithium.
You can see a nice investor presentation from Albemarle about their lithium business and their view of the lithium market here, they are indeed one of the major global producers (lithium brine has three major producers, all primarily in Chile — Albemarle, FMC, and SQM… Talison in Australia is the other major producer of what has been a four-company oligopoly for many years, though theirs is mined).
Albemarle’s earnings are expected to be down by a few percent this year compared to 2015, with single-digit growth expected in 2017, so perhaps that’s why the stock is still right in the $60 neighborhood where it has spent much of the past five years (though it did dip down to the $40s last year, so it has recovered nicely in recent months). It takes a couple years to ramp up production in the lithium salt flats in the Atacama desert in Chile (you have to pump up the brine, and it takes at least 18 months for it to evaporate so you can process the lithium), so growth should come with their production increases and the anticipated demand increases (assuming that drives prices up) but it might not be nosebleed growth.
Albemarle is a large company, with a market cap of about $6 billion and a few billion in debt, so it takes some substantial growth to move the needle — and they are a specialty chemicals company with lithium as only a part of the business. Though lithium seems to be the core of their growth strategy, and it is their highest margin product, it’s only responsible for about 14% of their sales and a little less than 25% of EBITDA and some of their businesses (like chemicals that go into heavy oil refining, for example) have been weaker of late.
But yes, they’ve become the biggest lithium producer, edging past Chilean lithium/iodine/fertilizer giant SQM.
“Explosive Salt Stock #2
“Get In on This Lithium Deal
“It’s a Salt Fuel company with manufacturing locations in China, Japan, India, the United Kingdom, Argentina and the U.S. …
“And this company is seizing market share hand over fist, without making many mistakes.
“After all, back in 1991, it supplied commercial lithium salt to Sony Electronics for the first lithium battery production.
“Just four years later, in 1995, it began supplying advanced lithium salt materials to the market.
“Then in 1998 it bought and operated a world class mine, in Argentina in the Puna Plateau area.
Y”ou have to understand this mother lode is one of the richest salt brines located 12,00 feet on the South American Andes …
“The area coined the ‘Saudi Arabia of Lithium,’ with 128 million tons of global salt reserves.
“It’s a rare privilege for one American company to own such a deposit at a time like this. It’s like holding all the aces.
“It’s no wonder this company said it will increase the price of its purified lithium salt because, ‘Continued market growth is outpacing current industry supply capabilities.'”
This is the smallest player among that four-company oligopoly — FMC (FMC), which, like Albemarle and SQM, is a specialty chemicals company with a long history and lots of different businesses, and a position in the salt brines of the Andes. FMC is the least levered to lithium of those four major producers, however, with only about $23 million in earnings from their lithium business in 2015. They expect that to grow sharply in 2016 thanks to both price increases and production increases, but it will still probably be in the $40 million neighborhood, which is about a tenth of the earnings they expect to generate from their largest division (Agricultural Solutions).
Analysts do expect them to grow a little faster than Albemarle, and the stock is a little cheaper, but neither will rise or fall based just on lithium prices — and it looks tome like ALB is significantly more levered to lithium than is FMC.
So there you have it — Crooks doesn’t focus on SQM, but that would be the other candidate among the major producers, and none of them are “pure play” stocks… but my suspicion would be that if lithium really takes off as a mainstream investment mania, as is possible but not very predictable, then SQM would get the majority of the attention, followed by Albemarle, even if that order should maybe be reversed.
My inclination would be to rank the three ALB, SQM, FMC on the fundamentals of their lithium businesses (and mind you, that’s just after looking over their numbers for an hour or so — this is not an in-depth analysis), but sometimes you have to step back from the analysis and think about the tendency of the markets: if everyone’s excited about oil, the first impulse is to buy ExxonMobil… if they’re excited about copper, it’s Freeport McMoran… if potash, then Potash Corp, etc. etc. If they’re excited about lithium, they’ll probably think first of SQM even if Albemarle is actually a bigger producer now and is getting similarly levered to lithium (SQM’s biggest business is fertilizer, but about 20% of their profits come from lithium — and, as with the others, their lithium production is increasing).
That’s just my personal hunch, that SQM is likely to continue to “headline” lithium stories and get investor attention. All three of the big producers (Albemarle/Talison, FMC, SQM) have had several weak years of deteriorating earnings, partly because of the strength of the US dollar and weakness in their other commodity-driven businesses (energy, fertilizer, etc.), and all three have significant exposure to lithium and good gross margins and growth prospects in lithium… but none is close to being a “pure play” on lithium. For that, you’d have to go to the “pure play” juniors who are exploring for lithium or just starting smaller projects and who are likely to be much more volatile as the lithium “story” jolts them up and down. We talked about a few of those in our look at the “Metal Oil” stocks teased by Energy Investor a little while ago, so you might check that out if you want to look for something jumpier. Or, of course, feel free to share your thoughts on these or any other lithium ideas with a comment below. Thanks for reading!