Investing in emerging technologies can often involve “picks and shovels” plays that are indirect ways to profit from the adoption of a certain technology. Take electric cars as an example. One investing thesis has been that Elon Musk’s gigafactory that builds lithium batteries to power electric cars is going to need a isht load of lithium. The interesting thing about lithium is that it doesn’t trade on commodity exchanges like any other metal such as copper or silver. In fact, you’ll have a hard time even tracking down the price of lithium. Regardless, we would expect that the demand for lithium should increase the price for lithium which should benefit lithium miners. As it turns out, 3 lithium miners produce 90% of the world’s lithium so investing in all three companies should be a no-brainer, right?
Not necessarily. In an article we published last year we talked about how the dominant lithium miners only derive a small fraction of their overall revenues from lithium. It’s kind of like the fallacy that buying shares of Google will give you exposure to every technology under the sun. When we published our first article on investing in lithium, the revenue contributions made by lithium production for these 3 mining stocks were as follows:
|FMC Corporation (NYSE:FMC)||6%|
|Sociedad Quimica y Minera (NYSE:SQM)||11%|
We advised investors not to invest in these 3 mining companies on the premise that they were not pure plays on lithium because they weren’t. Maybe at levels of 25% or more you might start to consider revenue contributions meaningful but at low double digits that’s not the case. We felt good about ourselves for making such a revelation, created a motif to track these 3 companies, and then went on our merry way. Imagine our surprise however when yesterday we saw that our lithium motif is up +55% since we created it in August of last year.
Now before we decide if we want our crow pan fried or steamed, we thought it would be prudent to see just how much lithium contributed to these share price increases. Let’s begin first by looking at the actual share price performance for each company since we first built our lithium motif:
- Albemarle (NYSE:ALB) +70%
- FMC Corporation (NYSE:FMC) +18%
- Sociedad Quimica y Minera (NYSE:SQM) +95%
We can see that all 3 lithium mining stocks outperformed the S&P performance over the same time frame of just +6% but SQM and ALB in particular have had spectacular returns. Now let’s take a look at how lithium is impacting revenues and profits for each of these companies based on their latest filings. Since each company breaks down their financials in a different manner, we’ll look at each one separately. First let’s start with ALB which breaks down their business into the following segments:
The problem is that we don’t know what percentage of “Lithium and Adv. Materials” is actually just lithium. Digging deeper into a recent investor presentation shows us the first three quarters of 2016 when compared to the same time frame in 2016:
|ALB Lithium Revenues||460||369|
|Percent of Total||17.7%||13.1%|
|ALB Lithium Net Income||133.3||20.2|
|Percent of Total||27.0%||5.5%|
While the overall growth of lithium revenues is impressive, what should really be of interest is the incredible contribution that lithium is now making towards the bottom line. In that same presentation, ALB makes mention of the fact that they are using their bromine cash cow to make investments in lithium. In Q3-2016, the Company signed an agreement to acquire the lithium assets of Jiangxi Jiangli New Materials and also entered into an agreement with Bolland Minera for rights to the Antofalla lithium resource in Argentina. ALB goes on to say about lithium:
We expect continued strong growth for the remainder of 2016, led by demand in battery-grade applications and continued price improvement in Lithium. On a longer term basis, we believe that demand for lithium will continue to grow as new applications for lithium power continue to be developed and the use of plug-in hybrid electric vehicles and battery electric vehicles escalates.
Next, let’s look at lithium mining stock FMC. For Q3-2016, FMC provides an excellent slide that shows just how lithium performed for the most recent quarter:
It’s very interesting to see just how strong earnings increased for lithium, primarily as a result of “price / mix” which we can only assume means that the price of lithium has increased significantly. Next, let’s take a look at the financials for FMC that show lithium related revenues and profits for the 9 months ended September 30 2016 to get a better picture of what the entire year has been like:
|FMC Lithium Revenues||193||168|
|Percent of Total||8.0%||7.1%|
|FMC Lithium Net Income||48.9||11.9|
|Percent of Total||10.7%||2.8%|
While lithium’s contributions to overall profits have improved significantly, they are still not that meaningful at just 10.7%. Finally, let’s take a look at the last of our lithium mining stocks, SQM, which had the strongest performance of all three lithium mining stocks. This stock is now a pure play on lithium with some remarkable points to note as follows:
- Revenues for lithium and derivatives totaled US$337.9 million during the nine months ended September 30, 2016, an increase of 111.1% compared to US$160.1 million recorded for the nine months ended September 30, 2015
- Gross profit for the Lithium and Derivatives segment accounted for approximately 53% of SQM’s consolidated gross profit for the nine months ended September 30, 2016.
- Average prices for lithium increased close to 28% compared to the second quarter of 2016
- We continue to see very strong demand in the lithium market, primarily driven by batteries
- Global demand growth for this year will be between 12-13% when compared to 2015
- SQM will more than double production of lithium hydroxide which is increasingly becoming the preferred product used for lithium battery production related to electric vehicles
So now sales of lithium products contribute over 50% to the bottom line for SQM. That certainly helps to explain why their stock price has almost doubled in the past 15 months. Not only that but they expect growth to remain strong and they are developing an additional project that will come online at the middle of next year:
In March of this year, we announced a joint venture with Lithium Americas to develop the Caucharí-Olaroz lithium project in the Jujuy province of Argentina. We currently have sixty people working on this project, and can report that the project still expects to begin construction during the first half of 2017.
To conclude, just 15 months after our original article cautioning investors about the “pure play” potential of these 3 companies we can see that for all three lithium mining stocks, the contributions of lithium to the bottom line have now increased significantly with SQM having a majority of their profits now derived from lithium:
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