Saturday, March 19, 2016

Update on my Albemarle (ALB:NYSE) purchase earlier this week

Earlier this week I said I was purchasing the leader in lithium production, Albemarle, as an addition to the portfolio. I already own Orocobre which is emerging lithium producer that is ramping production at their new mine in Argentina.

I have written in the past why I am bullish on lithium over the next few years.

To recap there is increasing demand for lithium due to electric vehicles and the need for storage of intermittent power production i.e. solar and wind along with battery powered portable devices. The supply of lithium does not appear to be able to keep up with demand which has led to price increases.

Albemarle is the leader in global lithium production and has done two things in the last year ensure they maintain their lead.

The first thing was the acquisition of Rockwood Holdings which was another large producer of lithium. The second news item that solidifies their number one role was the recent agreement Albemarle made with the Chilean government to increase their lithium brine extraction rate which will lead to increased production of lithium:

Albemarle Corporation a premier specialty chemicals company and leader in the production of lithium and lithium derivatives, announced today that it has been granted approval by the Environmental Assessment Commission (CEA) of the Antofagasta Region to increase its currently authorized lithium brine extraction rate at the company's facility in the Salar de Atacama, Chile.   The increase will enable the company to meet the accelerating demand for lithium, especially high purity lithium compounds required for the production of lithium batteries.

In addition, the company announced that it has entered into a Memorandum of Understanding (MOU) with the Chilean Government defining the terms of a partnership for an increased lithium quota consistent with the principles and goals of theLithium National Commission, as established in its final report issued in January 2015. The MOU provides Albemarle with sufficient lithium to support the production, over a 27-year period, of 70,000 MT annually of technical and battery grade lithium carbonate and 6,000 MT annually of lithium chloride at Albemarle's two manufacturing facilities in La Negra, Antofagasta, as well as at a third lithium carbonate facility that Albemarle will commit to construct under the MOU.

The investment thesis is simple; the company is the industry leader in lithium extraction, They are part of an oligopoly which includes SQM and FMC Corp. This gives them additional pricing power as demand continues to go up and supply remains tight. I think the company is abit undervalued as it got marked down a bit due to the debt taken on for the Rockwood acquisition. However they are already seeing synergies and cost savings from this acquisition. 

In a recent presentation management is forecasting an increase in free cashflow to around $600MM this year up from around $155MM last year. The management feels confident in their numbers as they raised the dividend 5% last year which is 21st straight dividend increase (current dividend yield is 2%). 

I am sure their is quite a bit more upside in buying various lithium juniors. However, as with most commodity booms every shyster in Vancouver is now going to start a "lithium" company and sell shares of their dream. Albemarle is a real company that knows what they are doing in this space and is making real money doing it. You can take a position and profit from the lithium boom without exposing yourself to all kinds of financing and mining risk. I mean seriously how many of the new lithium miners even have competent lithium mining management teams. The answer is not many. 

There is probably a good three to five years at least before any serious new significant lithium mines even get near coming online. In the meantime the demand for lithium continues to increase and Albemarle is in the driver seat as they are targeting the capture of 50% of all new lithium demand as a corporate goal. 

Albemarle (ALB:NYSE) is in the right place at the right time and is positioned to ride the lithium wave.

Here is the company's recent presentation on the global lithium market.

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