the middle east of lithium

The Daily Reckoning Australia

Coutomer, France - Melbourne, Australia

Friday, 13 June 2008

In This Issue:
Reckoning with batteries

A new consumer in town

What are we doing with our money?
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From Dan Denning at the Old Hat Factory:

--It's your lucky day!

--Your full service Daily Reckoning will return next week. Meanwhile, your editor just completed the last work on the mid-year double issue of the Australian Small Cap Investigator. The lead story contains two tips on an industry we believe has received scant attention—but is vital to the modern economy.

--We can’t give away the goodies though, not until paid-up readers have had a chance to review. However, while we work with the printer to get the issue out the door today, we can share with you a piece of the double issue that did not have any share tips. It’s about Lithium.

--Toyota announced today it would aim to develop new Lithium-ion batteries to replace the Nickel Metal Hydride batteries currently used in the Prius. Lithium-ion batteries last longer and deliver more electricity. But there are some challenges too. Sometimes they explode. We had a look at Lithium doing some advance research for next month’s report. Some of our conclusions are below, in quotation marks.

--By the way, this is what we do when we’re not reckoning with the bear market in credit and the demise of the U.S. dollar. We turn over rocks looking for the best Aussie investments we can find. It is, after all, why we moved here in the first place.

--“Before it became popular with batteries, Lithium was used mostly in the production of ceramics, glass, and pharmaceuticals. And until recently, this demand was extremely good news for Australia.”

--“Australia has abundant lithium resources at the Greenbushes spodumene deposit in Western Australia. In fact, the Greenbushes deposit is the largest, highest-grade spodumene deposit in the world. According the Australian Mine Atlas, Greenbushes as an economically demonstrated resource of 170,000 tonnes of Lithium.”

--“That resource benefitted the former of Sons of Gwalia Mining in WA (Herbert Hoover’s old outfit). That outfit is now defunct (more on it below). And though (thanks to Greenbushes) Australia has the fourth-largest Lithium reserves in the world, the nature of those reserves means than Greenbushes may not benefit from the boom in Lithium that may come from increased lithium-ion battery production.

--“Spodumene deposits are not economically viable for the production of Lithium-ion batteries. But the brine lakes and salt pans of South America are. That is where Lithium’s investment future lies. There is so much Lithium carbonate in Bolivia, Argentina, and Chile that the whole region has been called “the Middle East of Lithium.” In a world full of plug-in-hybrid cars, you can see why the comparison is apt.”

--“Lithium-brines are rich in Lithium chloride. There are several major sources of these brines: in the U.S. state of Nevada (Sliver Peak and Clayton Lake), in Chile (Salar de Atacama), and in Argentina (Salar de Hombre Muerto).

--“Chile was the world’s largest producer of Lithium last year, followed by Australia, Argentina, China, and Russia. For that reason, Chile’s Sociedad Quimica y Minera (NYSE:SQM) is probably the most direct lithium “play” in the market. The company produces lithium carbonate, iodine, and potassium nitrate.”

--“A “downstream” lithium play ( a company that uses lithium carbonate in finished products, rather than producing lithium carbonate itself) is U.S.-based FMC (NYSE:FMC). FMC operates in three divisions: Agricultural Products, Specialty Chemicals, and Industrial Chemicals.

--“But for my money, the most interesting plays are “upstream” in pure lithium producers. And even though they are all in South America, there are at least three Australian companies worth having a closer look at.” --More on this story—and all the macro news that’s fit to challenge—next week.