Friday, October 02, 2009

Lithium market: Sociedad Quimica y Minera de Chile SA announces price cuts for the metal used in batteries. TNR.v, CZX.v, SQM, ROC, FMC, WLC.v, CLQ.v,

As you remember, we have a heavily vested interest in Lithium market health and our Junior Lithium and REE plays will fly with Lithium prices double from recent level. We are monitoring carefully Lithium Demand and if our case for Electric Cars adoption rate is correct, we will have that scenario in place. It would be very nice to have for the hot money another announcement in place: that SQM rises its prices by 50% due to high demand - but let's be serious, Electric Cars are only coming on the roads as a mass market product in 2011. It is all about explosive growth of Electric Cars, which are not on the roads yet, but there is plenty noise about ones coming. We are in the Kondratieff winter and our Lithium and REE bullish case is a play on Reinflation and Points of Growth: rising of the Emerging World, which can not live with the same rate of mobility penetration as in the West without suffocating its own population and decreasing standard of living in the West with Electric cars economics supporting Baby Boomers coming out of working force. Current Lithium producers from Brines like SQM, FMC and ROC would love to see them alone in the Supply chain in 2015, when Lithium and REE demand will pick up due to Electric Cars claiming over 2% of sales. They will double the prices without any competition. We will put just a few observations of this move by SQM:

1. Lithium Carbonate production from Brines has a cost close to USD 2300 per ton according to Jon Hykawy from Baron Capital.

2. Hard Rock / Spodumene mining has the highest cost - maybe as high as USD 6400 per ton.

3. This move is putting hard rock mining effectively out of business with recent prices. Here it is important to note: in hard rock mining REE content and credit will become crucial as we have pointed before. REE are produced only from Hard Rock mining. Juniors here remind us Silver market with silver at USD7.00 per oz: if you believe in higher Lithium and REE prices due to demand in 2015 and have access to capital you can build a portfolio with mix of low cost Brines properties and Hard Rock properties with high REE content. Development of Brine operations will take 2-3 years and Hard Rock can take 5-7 years. Another story if you are already producing now only Lithium from spodumene, have debt to be repaid tomorrow and SQM is cutting prices.

4. This cut will not really affect battery makers now: cost of metal content in the battery is less than 3-5%. What this move can affect is that SQM will secure more buyers from them. Company aims to increase its market share of promising commodity. On another side you can not simply increase supply pumping out from existing Brines without limits: you will damage the water table and Lithium content in the end - it is a living system. For SQM Lithium production is just part of revenue stream and others like FMC and ROC have other revenue streams as well: like potash - their production will be affected as well in case of damaging water table.

5. We are confident that if our scenario on Lithium Demand is taking place additional Supply will be provided by Juniors as with other metals, Majors will be acquiring those who will develop Brine operations first and hard rock mining with REE credit later.

Soquimich Falls Most Since June on Lithium Price Cuts

By Nathan Gill
Oct. 1 (Bloomberg) -- Sociedad Quimica y Minera de Chile SA, the world’s largest lithium producer, led declines on Santiago’s Ipsa Index after announcing price cuts for the metal used in batteries.
Soquimich, as the company is known, fell 3.6 percent to 20,630 pesos, the steepest decline since June 22. The Ipsa retreated 0.6 percent after four days of gains.
The Santiago-based company said yesterday it will reduce lithium carbonate and lithium hydroxide prices by about 20 percent for the renewal of all supply contracts to accelerate demand recovery.
“We expect the news to lightly pressure shares down because of its negative impact on Ebitda in the short term,” BICE Inversiones wrote in a note to clients today. “This will be compensated in the mid-term by the increase in the company’s market share and a sooner-than-expected recovery in demand.”
To contact the reporter on this story: Nathan Gill
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