DETROIT () -- Investors for the long term, not in-and-out-on-any-positive-news traders, pay attention! I am today recommending that you look at a stock quote for Soc Quimica Minera De Chile S.A [NYSE:SQM] because a Canadian company, Potash Corp. of Saskatchewan, [TSX:POT] has done what any far sighted alkali metal producer in the global market should have done already: it bought additional equity and thereby increased its shareholdings in Chile's SQM from 25% to 32%.
I think that both companies are an excellent long-term investment and that their combination is a textbook case of synergy on a global scale. POT is a large Canadian based producer of nitrogen based fertilizer, used, for example, to increase yields of corn. It is making record profits. And, in case you don't see the connection I should point out that SQM is the world's largest primary producer of lithium chemicals.
Gosh, I guess this makes the two companies in combination a major, major player in the raw materials critically necessary for the production of the alternate fuel, ethanol and the lithium-ion batteries that are being touted and counted-upon as the holy grail needed to insure efficient, reliable, high performance hybrid powered, fuel cell powered and battery powered vehicles and heavy machinery.
I am congratulating POT's management for helping (North) American heavy industry to help itself. But first let me give the readers of Resource Investor a little background in the core competency of the two companies under discussion.
Potash is a term that has been in use for centuries to describe the residue left over from wood-burning fires. Trees tend to accumulate minerals containing potassium, and from their nutrients we now know when the wood is burned, the leftover ash is rich in a potassium salt called potassium carbonate.
Sometime in the past someone discovered that by adding this potash to boiling (originally) animal fats a material was obtained that upon cooling was stable and didn't rot. It had the unusual property that it could when dissolved in water seem to dissolve or at least float away (greasy) dirt from human skin and from sturdy textiles and animal skins. This strange material was called soap.
There are extensive natural deposits of potash in the west of the American continent, and POT was originally formed to exploit them mainly for fertilizer. Cellulosic plants accumulate potassium, because they use it in their metabolism, so the expanding granaries of the Canadian west needed potash. In time the progenitors of POT began to produce nitrogen-based chemicals also, because this is also a critical nutrient for food plants, and it takes energy to produce them. The abundant coal, oil, and natural gas of the Canadian west readily provided that. The efficient production of fertilizers is a growth business in an expanding global economy.
To understand what the products of SQM do, we note that potassium, a name with the same etymology as the word, potash, is one of the metallic elements called an alkali metal by chemists. This was originally because all of the alkali metals when dissolved in water produce strongly alkaline (caustic) solutions.
The lightest of the alkali metals, in fact the first element in the periodic table to be labeled a metal, is lithium. Beginning with lithium, the other alkali metals, in order of increasing atomic weight, are sodium, potassium, cesium and rubidium. Sodium and potassium are ubiquitous not only on the earth but in our civilization and our bodies. Sodium chloride, salt, is probably the best known and most frequently encountered chemical compound after water.
One important property of the alkali metals that has now come to the forefront of research is the extreme stability of their ordinary (ionic) chemical compounds. This means that the formation of the compounds releases a lot of energy, and if you reverse the process, separating the alkali metals from their compounds, such as when you charge a battery made with them, the battery can store a great deal of energy.
I myself was offered a research position at the Scientific Laboratories of the Ford Motor Company [NYSE:F] in the mid 1960s to work on a team devising a battery based on a molten salt bath consisting of sodium and sulfur. The test bed was a 600 pound behemoth running at a temperature well above 500 degrees. It was sealed, because any humidity would rapidly degrade it into a hydrogen puffing dragon, which at those temperatures would most likely cause the hydrogen to ignite and the "battery" to explode in a paroxysm of fire and deadly missiles of corrosive sodium and sulfur. It used exotic materials to contain the molten salt and the sodium and sulfur and precious metals to conduct the electricity to and from it. It was however, technically, an "alkaline battery."
I was under consideration for the job, because I then worked at Energy Conversion Devices [NYSE:ENER] where I had worked on a contract from Lithium Corporation of America to develop novel (electrical and electronic uses) for the lightest alkali metal, lithium, and its salts. I had actually built a working model of a "storage battery" using molten lithium carbonate, as I remember, on a table top.
Today, of course, that era of basic research is past. Today's applied research into commercial batteries and all future development are based on room temperature operation with safety the very first concern. The first steps had to be taken though and they were done in Detroit in an automotive dominated environment. It is interesting to note that the first steps towards the future of modern electric propulsion for vehicles were taken in Detroit. I must add, finally, that the nickel-metal-hydride storage battery, now in general use in hybrid vehicles and for portable electronics, was first developed at Energy Conversion Devices in Detroit under the direction of the same man who had me assemble the first molten lithium salt battery, Stan Ovshinsky.
When a deposit of natural brine, a usually saturated (it can't dissolve any more at a specified temperature) solution of common salt, exists somewhere, it always contains some lithium, because the chemistry of lithium is like the chemistry of sodium so that natural processes that concentrate sodium chloride solutions will also concentrate lithium salts if they are present.
There are two large brine deposits in the western hemisphere that are currently being extensively "mined" for lithium. One is in Nevada, the only commercial one in the United States, and is operated by Cyprus Foote Mineral, a wholly owned subsidiary of Rockwood Holdings, Inc. [NYSE:ROC]. The other, the world's largest brine source of lithium, 2000 square miles of "lake" that has been surveyed down to a depth of 40 meters, is "mined" by SQM, which on account of this deposit is the world's largest producer of lithium chemicals. SQM supplies 40% of current demand.
Lithium is also found in nature in ore bodies such as spudomeme in Australia, but I will leave that opportunity for a future discussion, as I will also leave the topic of the world's other semi-developed and undeveloped brine sources of lithium.
I spoke with Daniel Jimenez, Marketing Manager of SQM by telephone, from Chile, two weeks ago, before I knew about the original or now expanded equity position in the company by POT.
In any case SQM (and possibly POT) are well on the way to an improvement, if not a total solution, to the near term possibility of a lithium supply crisis, which I discussed in just a month ago. The high desert brine lake to which SQM has the exclusive rights for extracting lithium contains, they believe and state, at least 23% of the world's known reserves of lithium.
Using figures from the U.S. Geological Survey, Mineral Commodity Summaries, (for) January 2007, this would mean that SQM has access to at least one million and possibly as much as four million tonnes of lithium. Current (2006) world production of lithium, again according to the USGS, was 21,100 metric tonnes. SQM produced last year 8,300 metric tonnes. Supply and demand are currently believed to be in balance.
Today SQM produces 40% of current demand. It has in process an expansion of capacity that will raise this figure to 60% of today's demand, but since, as the company knows, its rivals in the U.S. and Asia (China and Australia) are also ramping up their supply SQM's expansion will ultimately lead to a net increase in total supply. The company says that by 2008 its increased production will begin, because it anticipated the increase in demand and began the regulatory process and the equipment and infrastructure expansion necessary two years ago in 2004.
Time frames for actual production of new material are a problem, because of a process bottleneck associated with brine deposits. It takes Nevada-based Cyprus Foote Mineral 18 months of natural evaporation to go from brine extraction to a concentrated material ready for final processing. In Chile, because of its higher and drier elevation this process, SQM says, takes around 12 months. A very significant competitive advantage in a high demand market where western hemisphere producers are constrained more by government (environmental) regulation than by any technical or equipment limited ones.
To me the most interesting statement by Jimenez during my telephone interview was the comment that at least one of the giant Japanese trading companies had visited SQM in Chile in mid 2006. What surprised me was that this was, he said, the first time a Japanese trading company had visited SQM. Japanese trading companies who I always laud as far thinking may be in the case of lithium perhaps not quite so sharp. I got the gut impression that no long-term deal or off-take agreement had been reached. No mention of any such agreement or negotiation was made or represented to me.
From a purely investment point of view, keep in mind that the majority of lithium ion batteries are made in Japan, China and Korea, all of which nations have strategic reserve programs, and you begin to see the dilemma for America.
Add to that the fact that car makers are not consciously aware that all battery makers get their cathode material from specialty chemical processors and you get OEM automotive strategic planners using data that may be incomplete making (risky) decisions on the availability of raw materials for as yet unfinished technology development.
Either the Japanese or, with increasing likelihood, the Chinese or Koreans, are going to beat everyone to the door and tie up the supply exclusively for Toyota, Honda, Nissan and their domestic manufacturers of portable entertainment and tool products, or a battery manufacturing company, or, even, a chemical processor could do it.
Keep in mind that the price of lithium is not the issue yet. The issue is insuring an uninterrupted supply of sufficient quantities to allow the OEM automotive industry to ramp up its production of non-polluting vehicles using lithium-ion technology based storage (rechargeable) batteries once a common technology has been agreed upon.
Until and unless the scientific community comes to a conclusion that lithium ion battery technology cannot be made safe and reliable enough or give sufficient performance upon which to base some or all of the global OEM automotive industry, then shares of companies such as SQM, POT and Foote will be an investment to be considered.
If short term traders or fund managers get involved then we may even see an irrational market with lithium producers priced at the margin, so that any announcement concerning lithium will see the shares of producers, battery makers, research and development companies, and even OEM automotive, entertainment and tool companies rise and fall with "cold weather in Chile (this would extend the drying time for the extracted brine), labour unrest in Chile or Nevada, logistical difficulties and the myriad of short-term common problems that only have negligible or no effect on supply being used to churn "lithium stock" prices just as today the same nonsense is used to churn oil prices.
I don't own, nor have I ever owned shares of POT, SQM or Cyprus Foote Mineral, but I have to admit that I have convinced myself that these are all investments I should take a look at right now. SQM will benefit from intense interest every time that any announcement is made in the fragmented world of battery research. Lithium related stocks may well become priced at the margin. SQM could be a good bet for traders, and, in the long term, if things work out, for investors.