Possible Lithium Plays

Jeff and I were having our normal post-Saturday run breakfast and coffee this morning. The subject of lithium came up as we were discussing alternative energy plays. Lithium is the most efficient element that has been found to work well in batteries. It is a basic element and relatively prevalent / available, so it is not likely that something more effective will be found for battery construction. We agreed that the battery companies themselves, or the fuel cell companies, are a riskier play since it is not certain which configuration of battery technology will end up as the winner. So, Ballard Power (BLDP), Energy Devices (ENER) and ENER1 (HEV) are interesting, but risky plays on alternative energy.

No matter what alternative energy electrical source is developed, batteries will be very important to store the energy, whether for vehicles, or utility power production. Solar, Wind, and Fuel Cell technologies all require some form of storage to allow for changing production conditions (weather, night/day, etc). Lithium batteries are likely the best option to store that produced power, since lithium is a very efficient exchanger of ions. It ssems that there are many variations on lithium-ion batteries, but the difference is in the material for the cathode and anode. In all cases, the free-ion material remains lithium.

First, the basic science with reference to Wikipedia: Lithium-ion batteries (sometimes abbreviated Li-ion batteries) are a type of rechargeable battery in which a lithium ion moves between the anode and cathode. The lithium ion moves from the anode to the cathode during discharge and from the cathode to the anode when charging. Lithium is readily available and low cost to mine. It is derived from igneous (volcanic) materials such as granite. It is so reactive that it is not found on earth in its elemental form. It quickly gives up its spare electron to other elements and forms compounds, which is why it is a great battery material.

Lithium is a Group 1 (IA) element containing just a single valence electron. Group 1 elements are called "alkali metals". Lithium is a solid only about half as dense as water and lithium metal is the least dense metal. A freshly cut chunk of lithium is silvery, but tarnishes in a minute or so in air to give a grey surface. Its chemistry is dominated by its tendency to lose an electron to form Li+. It is the first element within the second period. Being in the second period, it has a very low mass (few protons and neutrons) which makes it very light. This is another reason it will always be the best material for battery construction where weight per unit of electrical storage is a key factor.

Lithium ion batteries are commonly used in consumer electronics. They are currently one of the most popular types of battery for portable electronics, which require a great energy-to-weight ratio, Li-Ion has no memory effect, and a slow loss of charge when not in use (5% per year). In addition to uses for consumer electronics, lithium-ion batteries are growing in popularity for defense, automotive, and aerospace applications due to their high energy density. However certain kinds of mistreatment or contamination during production may cause Li-ion batteries to explode during use. Making Li-ion batteries safe to use in high power applications like automotive, is a key technical challenge to be solved.

The three primary functional components of a lithium ion battery are the anode, cathode, for which a variety of materials may be used (Carbon/graphite, Iron, Maganese, Cobalt),and an electrolyte. Commercially, the most popular material for the anode is graphite, although materials such as TiS2 (Titanium disulfide) were originally used. The cathode is generally one of three materials: a layered oxide, such as cobalt oxide, a polyanion, such as lithium iron phosphate, or a spinel, such as manganese oxide. The electrolyte is lithium which does not vary from one battery design to another.

For more info on Lithium Battery technology see: http://en.wikipedia.org/wiki/Lithium-ion_battery

So, how to invest in this essential material for transportation and power storage? There are several lithium mining and chemical companies. FMC, SQM (Chilean company) and ROC. SQM is based in Chile and it is a almost pure play in lithium with a big increase in production in its future. At $44 a share on the NYSE (as of June 13), it is hardly undiscovered -- there are 1.2 billion shares outstanding and it carries a market cap of $54B and is selling at a P/E of 37.7. It was a $5 stock 5 years ago. But, if you want to speculate on lithium -- without having to guess who the big battery winner will be -- SQM is a good bet. SQM might be like POT before the ag plays really started to run. Even though SQM is already very large by market cap, if lithium eventually becomes the key component to all vehicles and a large percent of power generation, the global lithium market could easily exceed $1 trillion.

FMC is a diversified chemical company with a big exposure to lithium. It is selling at 20 times 2009 projected earnings. This stock was $7 five years ago and is now $77 so it too is not undiscovered. It has a much smaller market cap than SQM at $5.7B, so has a lot more room to run on that basis. With FMC, you have a broader based company and a small dividend to entertain you while you wait.

ROC specializes in specialty chemicals and advanced industrial materials but it is debt heavy. Today it trades for $40, is selling at 35.9X earnings and has a $3B market cap. It IPO'ed in mid-2006 at $20 so it is up 100% in two years. Although it is starting to gush cash, it is selling for 2x its PEG and vulnerable to an economic slowdown. It is, though, one of the big three in lithium mining and processing so, if lithium prices spike, this stock will benefit. It is probably the best bet as of today as it has more opportunity for growth than SQM and is a purer play than FMC.

Refining lithium from seawater brine has been discredited due to the inefficiency of separating out the other sea water minerals to get to the lithium, though there are some micro-cap companies continuing to promote this scheme. Another possibility is refining lithium from re-circulating water from geothermal sites, which are often in igneous formations since igneous materials come from volcanic / thermal processes. But this concept is unproven and still just a theory. So, earth mining remains the best option in the forseeable future. It would not be surprising to see other broad based miners like BHP, RIO, FCX to become involved in lithium in the future.

Oil Heavy Trusts Could Fill Your Wallet

The Cash is pouring into the Oil and Gas Canroys right now, and it will continue to do so at oil over $100 a barrel and gas over $10 a MCF.  All this cash must be redistributed if not reinvested.  Two weeks ago (May 21), PennWest announced it was acquiring a small oil company for $125M.  This will add 3500 barrels a day of production to PWE.  However, $125M is only one month of cash flow at PWE, so this does not really put any pressure on cash.  There is still plenty of excess to distribute with increasing dividends.

 

Isn’t the best way to beat the high prices at the gas pump investments in Canroys?  This has been my mantra for the past 3-4 years.  To underscore this idea, there was an article in the Canadian Globe and Mail that I read while in Calgary last week.  It was called: “Oil Heavy Trusts Could Fill Your Wallet”  https://secure.globeadvisor.com/servlet/ArticleNews/story/gam/20080530/RPARKINSON30   It references several recommended oil trusts and has Baytex and Daylight on its recommended list.  It does not list the gas trusts, though they are about 50/50 oil and gas.  They will also be increasing their dividends soon.