Investment Options
The largest lithium producer is Sociedad Quimica y Minera (ADR) (NYSE:SQM), which produced 35% of global lithium supplies in 2012. While it is a big player in the lithium market, SQM generates the majority of its earnings from fertilizers such as potash, as well as from iodine. Sociedad Quimica y Minera (ADR) (NYSE:SQM) produces its lithium (and other specialty chemicals) from the unique salar brines of Chile. This is one of the lowest-cost supplies of lithium in the world, thanks to the concentrated portions of lithium already present in the brine, as well as intense solar radiation in the region.
Fellow lithium miner Rockwood Holdings, Inc. (NYSE:ROC) also benefits from the low-cost Chilean brine. The company mines its lithium in the same country as Sociedad Quimica y Minera (ADR) (NYSE:SQM) through its subsidiary Chemetall, albeit at a smaller scale than SQM. Rockwood Holdings, Inc. (NYSE:ROC) is also probably the purest play on lithium among the big three, as the company generated over 13% of its 2012 revenue from lithium. Furthermore, Rockwood Holdings, Inc. (NYSE:ROC) reached agreements to sell its ceramics as well as its clay-based additives business units in 2013, which should make lithium an even more important part of its continuing operations.
FMC Corp (NYSE:FMC) sources the majority of its lithium from salar brines in Argentina, which share a similar chemical composition as the Chilean brine, and thereby represent a low-cost supply of lithium. However, FMC Corp (NYSE:FMC) also produces some of its lithium from higher-cost mines in the U.S., thereby partially eroding its low-cost advantage gained from its Argentine operations. Also, FMC Corp (NYSE:FMC)’s lithium business is only a small part of the company’s overall business (which ranges from insecticides to pharmaceuticals), as the firm only generated 6.2% of its 2012 sales from lithium.
Valuation and Concluding Thoughts
In terms of valuation, based on market closing price on August 2, 2013, Sociedad Quimica y Minera (ADR) (NYSE:SQM) was trading for 11.7 times 2012 earnings, Rockwood was trading for 14.2 times 2012 earnings, and FMC Corp (NYSE:FMC) was trading for 22.4 times 2012 earnings.
While SQM might seem to be the biggest bargain among the three based on price to earnings ratios, the company may also prove to be a risky investment given that SQM’s single largest profit source is potash fertilizer, which faces an uncertain and potentially negative outlook after major Russian potash supplier Uralkali announced that it would be leaving one of the world’s two major potash cartels.
In my view, Rockwood is a better way to bet on rising lithium demand and tight lithium supplies, given its purer exposure to lithium than both SQM and FMC, as well as its much more reasonable valuation relative to FMC.
John Park has no position in any stocks mentioned. The Motley Fool recommends Sociedad Quimica (NYSE:SQM) y Minera (ADR). The Motley Fool owns shares of Rockwood Holdings. John is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Investing in the OPECs of Lithium originally appeared on Fool.com is written by John Park.
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