Acquisition Validates FMC As Lithium Pick
07/15/2014 5:22 pm EST
The acquisition deal announced today has a lot to do with the popularity and ever-growing demand for lithium batteries and MoneyShow's Jim Jubak thinks it will make one of his holdings turn out to be a very attractive buy.
Today, Albemarle (ALB) announced that it had agreed to pay $6.2 billion in cash and stock for Rockwood Holdings (ROC) in order to create “one of the world's premier specialty chemicals companies, with market-leading positions across four high-margin businesses: lithium, catalysts, bromine, and surface treatment.” In the acquisition, Albemarle paid a 12% premium over the market price of the shares of Rockwood Holdings.
It’s the lithium part of that specialty chemicals company that interests me (you might gather from my June 12 buy of FMC (FMC) in my Jubak’s Picks portfolio). I added that stock to the portfolio because 1) it was one of just four companies that control 90% of the global market for lithium, the key ingredient in the batteries that power everything from electric cars to cell phones, and 2) because the company had announced a restructuring that would produce a relatively pure play lithium supplier.
I think today’s acquisition confirms the value of the lithium growth story. But it raises the question of how much of a premium the market might pay for a purer play in lithium over the valuation of a specialty chemical company.
As Albemarle’s press release notes, global lithium consumption doubled between 2002 and 2012 and—currently—demand for lithium is growing about three times faster than the overall US economy as it tracks the increase in electronic devices that use lithium batteries and as demand increases for energy storage for everything from electric cars to backup power supplies. Sociedad Quimica y Minera de Chile (SQM), one of the other Big Four producers, predicts that the lithium market will double again in the next decade.
Rockwood, which had $479 million in sales of lithium in 2013, produces its lithium by evaporating brine from salt ponds in Chile and Nevada. (The Nevada brines are the only US source of lithium.) In December, the company bought a 49% stake in Australia’s Talison Lithium and its lithium rock mine in Western Australia. (Talison owns the world’s largest open pit lithium mine.)
Albemarle has been at work since 2011 on starting up a second US source of lithium from bromine salt ponds in Arkansas.
After the deal, the combined company will have major units in catalysts, bromine, surface treatments, and lithium. To a degree, that spread of products will reverse efforts at Rockwood to focus the company on lithium and surface treatments used to clean metals. Rockwood has sold off its businesses making clay-based additive, ceramics, and titanium-dioxide pigments. Those units are lower margin, more commodity chemical businesses than Albemarle’s specialty chemical businesses, but it remains to be seen how the market decides to value that mix against the mix at SQM and the post-restructuring FMC. Sometime in the first quarter of 2015, FMC will split into two companies. The first company, so far known as New FMC, will contain the pesticide, herbicide, and nutrition businesses. The second company, so far known as FMC Minerals, will own the soda ash and lithium units.
I think, eventually, the valuation premium will go to the purer lithium plan. And with FMC down 10.2% since my June pick, I think that probability makes FMC a very attractive buy right now in the light of today’s deal.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I’ll disclose my positions here.