Electric Cars - Batteries - Lithium ; what stocks to buy (Morningstar)

Electric Car Demand Juices Lithium's Prospects

By David Wang | 11-27-15 | 06:00 AM | Email Article

We recently initiated coverage of lithium producers  Albemarle (ALB),  Sociedad Quimica y Minera de Chile (SQM), and  FMC (FMC). Lithium is a great way to gain exposure to the electric car market, providing investors with a play on the high-growth industry. Lithium has one of the best growth profiles across all the commodities that we cover. We expect at least high-single-digit annual demand growth; this requires that electric car sales achieve a market share of just 1% by the end of the decade, up from approximately 0.25% in 2014. Narrow-moat Albemarle is our preferred way to play the lithium market, since it has the most upside to growing volume. Its shares currently trade at a discount to our fair value estimate. We think SQM and FMC are fairly valued at their current share prices.

Although lithium volume growth should be strong, we are less optimistic about pricing. Lithium producers have increased capacity in anticipation of healthy demand growth. As a result of this plentiful capacity, we expect lithium carbonate prices to fall from $5,700 per metric ton in the first half of 2015 to real midcycle prices of $5,500 per metric ton, based on our estimate of the marginal cost production. Still, prices remain elevated compared with recent years as a result of strong demand growth.

Lithium is produced from either lower-cost evaporation of brine or higher-cost mining of spodumene minerals. Albemarle and SQM have cost advantages in lithium production because of their lucrative brine assets in the Salar de Atacama in Chile. Two factors make the Salar de Atacama the lowest-cost source of lithium in the world: dry conditions and high lithium concentration. This high concentration makes Albemarle and SQM the lowest-cost lithium producers, even among brine-based producers.

Albemarle makes up 35% of global lithium supply and possesses a narrow economic moat due in part to its advantaged brine assets in Chile. Given this, combined with its stake in Talison, a higher-cost Australian operation that produces lithium from spodumene mining, Albemarle has the best volume growth prospects among major lithium players. We expect the company to ramp up production and capture roughly half of incremental lithium demand through the end of the decade. Short-term headwinds in its refining catalyst business have driven down the share price this year, as integrated oil companies delay the replacement of clean fuel catalysts used to meet regulatory requirements. However, we expect these issues will abate as replacement is eventually needed. After a weak 2015, we should see profit growth from rising high-margin lithium production.

With 22% of supply, SQM also possesses a cost advantage in lithium, thanks to its Chilean assets. We do not award the company an economic moat, however, because it is possible that the company may lose its mining rights in a conflict with the Chilean government. Primarily as a result of this issue, we assign a Poor stewardship rating and very high uncertainty rating to SQM. The company is a low-cost producer of specialty fertilizer and iodine, but we expect realized prices to decline for those businesses.

Narrow-moat FMC is a higher-cost lithium producer and makes up 13% of supply. The company produces lithium from its salt brine operations in Argentina, which have experienced rampant inflation without commensurate currency depreciation. The recent election of a center-right party to power bodes well for the likelihood of peso devaluation, which would make FMC more cost-competitive against its peers. Lithium makes up a far smaller portion of the company's profits relative to its larger crop chemical division. The intangible assets associated with the crop chemical business form the basis of FMC's narrow economic moat. The shares have traded down significantly this year as a result of weakness in Brazil, FMC's primary end market. We expect the company's agricultural profits to improve, with additional upside, as Brazil is one of the few places with meaningful growth potential in arable land.

David Wang is an equity analyst for Morningstar.

Electric Cars and the Lithium Battery Market

Monday, Apr. 05, 2010
Why Start-Ups Are Charging Into Lithium
By Steven Gray / Detroit

In February, President Barack Obama told the crowd at a Henderson, Nev., high school that not so long ago, the U.S. made barely 2% of the advanced batteries used in the world's electric vehicles. Now, thanks to a multibillion-dollar federal investment, American companies are positioned to increase production tenfold — and potentially control 40% of the global lithium-ion-battery market by 2015. "We've created an entire new industry," Obama said.

Not quite, but certainly the beginnings of one. Demand for lithium-ion batteries is increasing dramatically as electric-car technology improves and prices drop. Nissan has introduced the all-electric Leaf, and this year Chevy will debut the long-anticipated gas-electric Volt. Those and future electric cars need battery packs, and at least a dozen American lithium-battery start-ups are competing with Asian companies such as Sanyo and Hitachi to provide them. "There's a tremendous amount of competition," says David Vieau, chief executive of A123 Systems, a Watertown, Mass., start-up powered by federal money that is vying for the business. (See the history of the electric car.)

And it's a ton of business. The consulting firm Pike Research estimates that the global market for lithium-ion batteries could grow from $877 million this year to $8 billion by 2015. In North America, the market is expected to expand from about $287 million this year to $2.2 billion in 2015.

A123 Systems is a window on how the government's multibillion-dollar electric-vehicle gambit is working. The company was founded at MIT in 2001 with a $100,000 Department of Energy grant. One of its early products was lithium-ion batteries for power-tool maker Black & Decker. Last year, A123 Systems got a $249 million federal grant to open at least three lithium-ion-battery plants in Michigan that will employ hundreds of workers. Michigan is home to or close to many of the plants where electric vehicles are being made, of course, and the state has a surplus of skilled workers. It's not, ahem, a bad choice politically either.

Vieau attributes his company's recent success in part to its deep finances and manufacturing capacity. Customers regularly ask, he says, "Do you have the financial wherewithal to keep up and execute at a large scale?" Companies like A123 are busy wrestling with two key issues facing electric-car batteries: providing enough power to the car's engine and storing enough power to guarantee a defined range — say, 200 miles (about 320 km) — between charges. The goal for electric-car manufacturers is an affordable battery that can handle countless partial charge-discharge cycles over an eight-to-10-year life cycle. The battery has to absorb energy from braking and provide short bursts of power for acceleration. Lithium-ion batteries, with their high density-to-weight ratio, provide the greatest acceleration and range with the fewest batteries compared with lead-acid or nickel-metal-hydride batteries. One big problem: they can overheat and even blow up — bad enough in a single-battery laptop but potentially disastrous in a multibattery electric car. So engineers have been busy resolving the heat problem and refining the batteries' ability to handle partial charge-discharge cycles.

As for affordability, lithium-ion battery packs currently cost about $1,000 per kilowatt-hour of capacity. Which means the GM Volt's 16-kW-h battery pack alone would cost $16,000, according to some industry analysts. The price per kilowatt-hour has to fall below $500 to make production viable — and it will.

Sakti3 is another company trying to create a breakthrough. The company was launched a few years ago at the University of Michigan by an ambitious young engineering professor, Ann Marie Sastry. Sakti3 is developing solid-state (as opposed to liquid) lithium-ion batteries that Sastry believes will enable cars to travel twice as far as batteries do now, allowing the cars to be used the way internal-combustion-engine-driven vehicles are. Her firm is developing prototypes to deliver to automakers later this year. Sastry's 20-employee firm, based in Ann Arbor, has generated millions of dollars in government grants and considerable buzz — but so far no juice.

Automakers, meanwhile, are developing their own battery capability. Ford, for one, believes that designing its own lithium-ion battery packs will help streamline the development of its electric vehicles and reduce the cost. Design experts will be brought in-house, says Nancy Gioia, Ford's director of global electrification. By developing battery packs, Gioia says, "we get the volume and scale of more than 1 million units on our battery-management systems. Our suppliers aren't in a position to do that yet."

While they wait for the U.S. electric-auto market to develop, some new suppliers are looking toward consumer electronic goods and markets outside the U.S. to keep their plants busy and improve quality until the big orders come in. "We're in the early stages of what will be a significant run-up," says A123's Vieau. "There's a lot of business out there." Sastry echoes that view, saying many automakers rely on engine suppliers. "If the dream I and others have is realized, we'll see batteries being treated like engines," she says. Job engines, no less.




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Commodity Plays on Electric Cars: Lithium

MONDAY, OCTOBER 12, 2009
COMMODITIES CORNER


Hybrids Drive Lithium Miners
By SHANE ROMIG | MORE ARTICLES BY AUTHOR
Lithium, the next big thing for car batteries, spurs mining plays

THE PUSH TOWARD ELECTRIC-CAR development in the U.S., Europe and Japan is fueling a mad dash to lock in lithium-mining rights high in the Argentine, Bolivian and Chilean Andes. Lithium is a key ingredient in the batteries that fuel electric and hybrid cars, and nowhere is there so much of the light, charge-holding metal as in the South American mountain range. What's more, as much as 90% of the world's known lithium brine -- in which the metal is in a relatively accessible dissolved state, rather than locked in stone -- is said to be in the region's salars, or salt lakes, in Argentina's Puna Plateau.
Already, well over half of the world's lithium output comes from mines in Chile and Argentina run by Sociédad Quimica y Minera de Chile (ticker: SQM); Chemetall Foote, a subsidiary of Rockwood Holdings (ROC); and FMC (FMC).While the U.S. has pledged $2.4 billion in stimulus spending on advanced battery technology, companies from Japan, Korea and China have been busy courting Bolivia's President Evo Morales to lock in supply deals from the Salar de Uyuni salt flats. In June, a consortium of Japanese companies, including Mitsubishi (MSBHY), Sumitomo (8053.Japan) and Japan Oil (9074.Japan) made a preliminary proposal to begin mining lithium, but Bolivia says it wants to see more domestic processing on-site before it will consider granting concessions. And in August, South Korea's state-run Korea Resources Corp., or Kores, said it had signed a memorandum of understanding with Bolivia's state-run miner, Comibol, to jointly study lithium-mine development.
THE RACE IS HOTTEST IN ARGENTINA. Dozens of junior exploration companies and speculative investors are betting big on the lithium-brine deposits there. New York-based research firm Hallgarten & Company analyst Christopher Ecclestone recommends taking a long, speculative position in two lithium leaders in the region, Orocobre (ORE.Australia) and Latin American Minerals (LAT.Canada). "They're pure-play," he says. Farthest along is Orocobre, which hopes to start construction on its Olaroz project in 2011. Latin American Minerals has locked in the rights to 93,000 hectares and is currently analyzing the results from a sampling program. Australia's Admiralty Resources prepped the massive Rincon project, but a Cayman Island-based entity controlled by the Sentient hedge-fund group snapped it up last year for the fire-sale price of around $27 million.
With expectations for booming demand, lithium users are banking on the South American miners. "While demand for refined lithium should continue to increase as electric-vehicle penetration improves, we expect supply to easily keep up," says Aimee Gordon, a spokeswoman for rechargeable-battery maker Ener1 (HEV). But some worry that a flood of new suppliers rushing to get lithium to market may pressure prices. (Lithium is not yet traded on a commodities exchange.)
In fact, Chile's SQM on Sept. 30 announced it was cutting prices for lithium carbonate and lithium hydroxide by 20% for new supply contracts to "accelerate demand recovery." That doesn't faze Orocobre's chief executive, Richard Seville, who says: "I don't think there is any risk of oversupply, as most of the projects [being talked about now] won't end up going into production."
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SHANE ROMIG is a reporter for Dow Jones Newswires in Buenos Aires.
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