Three commodities are foundational to human life: food, energy, and water. And they are closely inte...
Getting in Early on the Next Boom Commodity
03/03/2009 11:00 am EST
Nicholas Vardy, editor of Global Stock Investor, says lithium may be the oil of the 21st century, and he likes the world’s largest producer of it and other key commodities.
Sociedad Quimica y Minera de Chile SA (Chemical & Mining Company of Chile) (NYSE: SQM), the world’s largest producer of potassium nitrate, iodine, and lithium, has number-one global market share in all three crucial areas of its business.
[But] it is SQM’s position as the world’s largest producer of lithium carbonate that is generating the most excitement among investors—including Potash Corp. of Saskatchewan (NYSE: POT), which itself owns 32% of SQM.
Between 2003 and 2007, the battery industry doubled its consumption of lithium carbonate [as] demand for mobile devices has exploded. And lithium is the key ingredient in the rechargeable batteries that keep the world’s iPods, cell phones, and laptops going.
Lithium also powers the batteries that store renewable energy generated by turbines when the wind blows or solar panels when it is sunny. The use of wind turbines and solar panels is also on the verge of taking off.
But it’s the third factor— potential demand from the automotive industry—that has the biggest untapped potential for lithium. The electric car requires 100 times as much lithium carbonate as a laptop. Indeed, the green-car revolution has the potential to make lithium one of the world’s most important commodities.
Some experts fear that the huge increase in the number of electric cars will drain the world’s lithium supplies in a few years. Lithium, which now costs less than $1 per kilogram, will likely rise in price. The explosion in demand for lithium has mining companies looking everywhere.
Small and impoverished Bolivia suddenly finds itself sitting on more than half of the planet’s total lithium deposits. The government of President Evo Morales is an ardent critic of the United States and has already nationalized Bolivia’s oil and natural gas industries. Bolivia wants a largely state-run lithium industry from mining to industrialization.
Unlike Bolivia, SQM’s home country of Chile has long been a vanguard of free market economic reform in Latin America. Thanks to the government’s recently announced $4-billion fiscal stimulus package, Chile’s economy will avoid recession and is expected to grow 1.5% this year.
SQM already controls the Salar de Atacama, [which] contains 27% of the world’s reserve base of lithium. That makes Chile the Saudi Arabia of Lithium. If the lithium revolution continues and electric-powered cars are the wave of the future, SQM is in a powerful position indeed.
SQM’s financials are [solid, too]. Since 2004, revenues have grown at a compound annual growth rate (CAGR) of 15.4% and net income at 34.4%. In an economic recovery, demand for lithium is likely to soar and lift lithium prices. The same applies for an anticipated recovery in fertilizer prices.
Since early October, SQM has substantially outperformed the Standard & Poor’s 500 index and is on a steady upward trajectory. So, buy SQM at market today (it closed below $27 Monday—Editor), and place your stop at $21.50.
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