Monday, February 14, 2011

Retire Fund: The commodity of the 21st century - M & A in the Lithium sector! tnr.v, czx.v, alk.ax, lmr.v, tsla, rm.v, nup.ax, srz.ax, usa.ax, jnn.v, abn.v, res, mcp, avl.to, quc.v, cee.v, sqm, fmc, roc, li.v, wlc.v, clq.v, lit, nsany, byddf, gm, dai, rno.pa, hev, aone, vlnc



   We have wrote before about recent M&A activity in Lithium space and you can find just a few companies left without strategic partnerships. We are following quite a few juniors in Lithium space and our two top picks are on the M&A radar screens as well. Rodinia Lithium has made an investment deal with Chinese Shan Shan and International Lithium to be spun out from TNR Gold. We have quite a few heavy hitters around that company with a very tight capital structure and insiders holding over 50% of the company. Sheldon Inwentash's PineTree Capital is holding a stake in TNR Gold among with Nova Gold and Barrick Gold. Canada Zinc Metals has a stake in TNR Gold and now 35% of that company is owned by Chinese Copper and Zinc giant Tongling.
  Retire Fund has come out recently with a very good coverage on lithium market and its recent plays.


Please, do not forget, that we own stocks we are writing about and have position in these companies. We are not providing any investment advise on this blog and there is no solicitation to buy or sell any particular company here. Always consult with your qualified financial adviser before making any investment decisions.

Retire Fund:

The commodity of the 21st century - M & A in the Lithium sector!

If you are a reader of this blog, then you already know how high I am on the birthing of the Lithium industry for Electric vehiclesin the 21st century.  All indications are that, by 2020, auto companies will be manufacturing more EVs and hybrid Electric vehicles, than gas powered cars. Certainly, that is the case for China, India and Europe.  America will trail this world changing development.  It will eventually be brought into the lithium economykicking and screaming, but resigned to what the rest of the world is already doing.

Rather than placing bets on which of the hundreds of labs around the world will develop the best battery, best technology or the most stable catalyst in its uses, I have been placing my money on the producers of lithium, specifically, the small and mid tier group that for the past two years have staked the best lithium properties around the world.

Larger producers such as SQM of Chile produce lithium only as a by-product of their massive potash operations, and refuse to sign agreements with auto companies, preferring instead to have buyers purchase supply from the spot market, a no no for auto companies due to assemply line production needs for an uninterrupted supply. SQM, along with FMC and Chematall, three of the big four, are already priced fairly high, because of their exposure to large investors, whose analysts project them as the only opportunities in the sector. The illustration here is over a year old.  Talison has now become the front runner in lithium production, with almost a third of worldwide production.


The potential for lithium production to satisfy the auto industry of the next decade is indeed, massive, but investors should not forget the many, varied uses for this 21st century resource.

Chemical uses forLithium include:

Batteries

The two main lithium battery types are:
  • Primary (non-rechargeable): including coin or cylindrical batteries used in calculators and digital cameras. The lithium battery has a higher energy density compared to alkaline batteries as well as a low weight and long shelf and operating life.
  • Secondary (rechargeable): the main applications are powering cell phones, laptops and other hand held electronic equipment. As with the primary battery, the lithium secondary battery has a higher energy density and lighter weight compared to NiCd andNiMH batteries.

Lubricants

Lithium is used as a thickener in grease ensuring lubrication properties are maintained over a broad range of temperatures.

Aluminum Smelting

The addition of lithium during aluminum smelting reduces the bath temperature which reduces power consumption, increases the bath electrical conductivity and reduces fluorine emissions.

Air Treatment

A number of lithium-based chemicals are used in air treatment. This includes lithium bromide as an absorption medium for industrial refrigeration systems and lithium chloride for humidity control and drying systems.

Pharmaceuticals

Lithium is used in the treatment for bi-polar disorder as well as in other pharmaceutical products.

Other Chemical Applications

Lithium chemical compounds are also used in a range of other applications including:
  • butyl lithium as a catalyst for polymerisation of synthetic rubbers
  • aluminum-lithium alloys
  • lithium niobate and tantalate in electronics
  • concrete additive
  • water treatment
  • specialty inorganics
. As billions of smart phone devices are being manufactured this year and beyond, what material do you think is being put into them for rechargeable energy storage. What material do you think is going into the massive Chinese electric bike market (75 million and climbing rapidly at this writing)

Technical applications for lithium include

Glass and Ceramics

There are three distinct markets for lithium in glass and ceramics:
  1. Glass: including container glass, flat glass, pharmaceutical glass, specialty glass and fiberglass. These glass products may be designed for durability or corrosion resistance or for use at high temperatures where thermal shock resistance is important. The addition of lithium increases the glass melt rate, lowers the viscosity and the melt temperature providing higher output, energy savings and molding benefits. Major producers of technical glass products are located in Germany, France, Japan and the United States of America.
  2. Ceramics: including ceramic bodies, frits, glazes and heatproof ceramic cookware. Lithium lowers firing temperatures and thermal expansion and increases the strength of ceramic bodies. The addition of lithium to glazes improves viscosity for coating, as well as improving the glaze's colour and luster. The major ceramic production centres include China, Italy, Spain and Mexico.
  3. Specialty Applications: including induction cook tops and cookware. Lithium's extremely low co-efficient of thermal expansion makes these products resistant to thermal shock and imparts mechanical strength.


Metallurgical

Lithium is used in mould fluxes for steel casting. The addition of lithium to continuous casting mould fluxes assists in providing thermal insulation and lubricates the surface of the steel in the continuous casting process. Lithium is also used in the production of iron castings, such as engine blocks, where it reduces the effect of veining, thereby reducing the number of defective casts. Producers of continuous casting steel are located around the world, including in the United States of America, China and Europe.

Electricity production for national grids (or international grids as the case may be in Europe) whether from  current sources but especially from wind, solar or any other intermittant energy production source, will require massive storage, and Lithium, in its various forms, utilizing various catalysts, is the material that will store it.


Merger activity has already begun, with the takeover of Salares Lithium last summer (a promising Canadian Junior with a huge resource in Chile) (which I owned) by Talison Lithium of Australia, which has been in the business for over 25 years producing lithium from its massive hard rock (spodomen) deposits at Greenbushes Australia. Talison thereby acquired the large Salares 7 brine project in Chile.
This takeover by Talison was, in my humble opinion, a very smart move on their part, as they move to consolidate even more of thie lithium pie in the future. Unlike others, they will have both spoodomen and brine producing properties, and their own processing plants.

A front running producer of lithium from spodomen, taking over a junior with ahuge lithium brine resource in South America, is, in my opinion, the canary in the coal mine (so to speak) of future merger activity in the sector. Lithium from spodomen is usually more expensive to produce than it is from brine deposits. (unless, of course, you have the richest spodomen deposit on the planet like Talison does at Greenbushes) However spodomen mining has one big advantage over brine, and that is, a continuous, healthy supply line to customers, that can be guaranteed and uninterrupted. The Auto industry needs uninterrupted supplies for its assemply lines. A syndicate of underwriters led by Cormark Securities Ltd. and including Scotia Capital Inc., Haywood Securities Inc. and Byron Securities Limitedis, at this writing, concluding a bought deal in Talison for over 10.7m shares that will put $80 mil cash into Talisons hands for the 100% increase in their Greenbushes operation and pre development of their Salars 7 operation.

The Atacama desert on the Puna Plateau (Chile and Argentina) is the driest place on the planet, and has some of the richest brine deposits. The combination of dry weather, sun and rich deposits of lithium (with a byproduct of potash) is what makes this place unique on the planet. There are also huge lithium deposits in Bolivia, China, and Afghanistan however Bolivia has a backward, leftist government that wants to develop its deposits without outside help from western companies, and it has a huge problem with high concentrations of magnesium (a pollutant in lithium deposits) which makes production much more expensive. It will be decades before they might be considered a player, if at all. Ditto for Afghanistan  (Do I have to explain why).

Talison (as you may have already deduced, my top pick in the sector) currently has 75% of the Chinese market and is ramping up its production in 2011 by 100% at itsGreenbushes operation to keep up with a huge increase in demand.. They currently have over 300 customers worldwide and have a 25 year head start on other producers.  Also, lithium is the only business they are in, unlike SQM, FMC or Chematall.

There are a number of promising juniors with large lithium brine projects in various stages of discovery or development.  Western Lithium (WLC.v orWLCDF.pk) (No current position) is one of those promising juniors with a large stake in Clayton Valley Nevada.

TNR Gold (TNR.V) (position held) will spin off International Lithium Corp. this spring according to company spokesman, Jerry Huang.  In that situation, the Lithium properties in South America will be spun off with International Lithium while the gold, silver and copper properties will stay with TNR. Holders ofTNR stock will receive 1 share and one warrant in ILC for each 4 shares held in TNR, thereby allowing shareholders to immediately own ILC shares.

Rodinia Lithium (RM.v or RDNAF.pk)  (position held) is another.  It also has a large deposit in Clayton Valley along with four very promising brine properties in South America.  Their Salar De Diabillos,(2700 hectares)  in Salta, Argentina, on the Puna plateau, is now in early stages of development.  Today in fact, Rodinia announced they are moving forcefully to develop ├Éiabillos as they just concluded a bought deal with a Chinese battery company, and are now flush with cash for development. Diabillos is their second largest Salar as the Salar de Salinas Grandes is almost twice as large at 4500 hectares. With two other Salars in the thousand hectare range, and over 50,000 acres in their Clayton Valley Nevada property, Rodinia is a fat pidgeon, ripe for the plucking. I believe Rodinia and Western Lithium (and possibly International Lithium) are prime takeover targets in the next 24 months.

Auto companies, auto parts companies and battery companies, have bought into promising juniors. Examples include Magna international buying into Lithium Americas Corp, BYD (of China) buying into a Tibetin LIthium Mine, Toyota investing in a Canadian junior etc. Recently Hong Kongs ShanshanResources Co. purchased the entire bought deal from Rodinia Lithium, at a price above the asking price, and it is that cash that Rodinia is now plowing into its Diabillos project.Unknown on this side of the pond, Sanshan is a rising producer of lithium-ion batteries for the Chinese market.

Dr. Jon Hykaway, of Byron Capital Markets, has developed  much expertise in lithium production and developments and you should put him on your reading list.  He was instrumental in developing Byrons lithium index.

Another expert in the field, Mr. R. Keith Evans, should also be on your reading list if you are an investor in this booming market.

In the 1800's it was railroads. in the early 1900's it was automobiles and airplanes, (steel, rubber etc)  In the 50's plastic, in the 70's computers, in the 90's the internet and today folks, the game changer is electrification and Lithium.

Do your due dilligence before investing, (there are also a lot of so called juniors that are going no where) but dont miss out on this once in a lifetime investment opportunity.

You owe it to yourself, and to your Retirefund.

Happy investing

HP
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