A Lithium Play

07/21/2014 12:01 am EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

Albemarle's recent purchase of the largest lithium producer has MoneyShow's Jim Jubak looking at the long-term outlook for this increasingly important metal.

On July 15, Albemarle (ALB) announced that it would acquire Rockwood Holdings (ROC) for about $6.2 billion in stock and cash. This is basically a lithium deal. There are really only four companies that control most of the world's lithium. It's about 90% and Rockwood is one of these, so basically what you're getting is a specialty chemical company, Albemarle, that had a lithium business, now is acquiring a company that had been slimming down until there was really very little other lithium and surface treatments, the business that Albemarle is in, so they're trying to combine these two and get more of a pop from lithium. Lithium demand has grown, it's about doubled in the last decade and it looks like it's going to double in the next decade. Lithium is used in batteries that are used in everything from Tesla's to hybrids to cell phones to flashlights, to anything where you need a rechargeable energy supply.

Now the issue really is as you look at this, it's not that demand isn't going to grow. You're looking at I think sort of a steady state right now. The big pop comes in 2017 forecasters say when demand for automobiles really pushes the demand up in the whole sector. Now the question is while you've got four companies that control 90% of the world's lithium supply, these companies themselves are by and large not pure plays, so for example, the lithium company that I added to Jubak's Picks back in June, FMC, has - produces lithium. It also has a fertilizer business, agricultural chemicals, all of those things that put together make up one company, but it sort of dilutes the impact that lithium has.

Now FMC is dealing with this by spinning off into two companies starting probably sometime around the first quarter of 2015. One of those companies will be a much purer lithium play than FMC is, the agricultural chemical business will go into the other section and lithium will be one of the major businesses of the second company, so the question is not just whether you want this demand, but how you play it. SQM, the Chilean company, another big producer has a fertilizer business that really dilutes again the lithium production. Now what's interesting to me in this deal is that Albemarle is going to be a specialty chemicals company of which lithium will be one of its four major units. Albemarle had been selling off its commodity chemicals business, like titanium oxide pigments to sort of move itself closer to a pure play in lithium, but this acquisition is going to create a specialty chemical company that has higher margins, but in some sense it won't be as focused on lithium. The question is how the market is going to set values for all of these companies, which have exposure to lithium, but none of which are pure plays, how much are pure plays really, really important. FMC is down about 10% since I bought it as of June 15 and given that and the spinoff, to create a purer play, I think it's the best play in lithium, but it remains to be seen how the market decides to value all of these different combinations.

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