Implications of SQM’s Split From LAC

August 15, 2018

Earlier this week, Lithium Americas (LAC) announced that Ganfeng Lithium would purchase SQM’s stake in the Argentine Cauchari-Olaroz project for $87.5m. As a result, Ganfeng will own 37.5% of the project, expected to begin production in 2020, with the remainder being held by LAC. This was major news for the industry as it brings up some interesting points for investors to think about when looking at the space.

Ganfeng’s Appetite: It’s no secret that Ganfeng is looking to deploy cash to secure their spot among the lithium chemicals suppliers of tomorrow. So we expected them to be aggressive, especially after their IPO later this year, in which they expect to raise $1B.  However, with this announcement coming before that event, it speaks to their desire to get their hands on top tier assets around the world, and the belief they have in the industry’s staying power over the long term. It will be interesting to see what they have in store once their war chest starts to overflow from the IPO proceeds.

SQM’s Focus: Perhaps the biggest surprise from this news for us was the fact that SQM is deciding to exit this investment.  At their last investor day, the company outlined their growth ambitions outside of Chile. Their operational and executional experience was a seemingly great fit for JV partners like LAC and Kidman Resources that had top tier assets needing development.  However, in less than a year since then, the CEO has resigned, and now they divested one of those two promising JVs. So it makes us wonder what SQM is focusing on going forward. Are they looking to mimic ALB’s strategy- owning the lowest cost assets in both brine and hard-rock, thus ensuring long term staying power regardless of whether carbonate or hydroxide wins out?  Or are they simply diversifying away from a concentration in South American brine based production? We’re sure these questions will come up in their upcoming earnings call, so more on that soon.

The hard-rock advantage?: One final consideration from SQM’s stake sale is what it means for the brine vs hard rock debate.  With battery chemistries gravitating toward hydroxide, hard rock producers are leveling the playing field in terms of production costs. And considering how much quicker they can come to market compared to brine, they’re arguably taking the lead on this front. Combine that fact with Chile’s higher royalty structures, and it’s easy to see why SQM may potentially be looking to shift focus away from South American brine to developing the hard rock project in Australia with Kidman. It’s definitely possible that SQM, one of the largest lithium producers, is signaling to the world that hard-rock production will be vital in the lithium supply game on the back of hydroxide demand, and as a result they no longer need a larger concentration in brine projects. As such, we believe this move by SQM is a vote of confidence in not only Kidman, but other high quality hard rock projects as well like Pilbara, Nemaska, and Sigma Lithium, among others.  

That’s not to say that brine projects should be cast aside or ignored, as they are still cost competitive overall, and maintain the leadership role for carbonate production. Furthermore, if some of the newer technologies start to pan out which would allow brine producers to go straight to hydroxide, they will become the lowest cost producers on both fronts.  Looking specifically at LAC, we’ve covered the company in the past, and remain optimistic in our outlook for the stock. At the end of the day, we view this news story as more of a vote of confidence in hard-rock projects, instead of a diminishing of confidence in brine projects.

As we mentioned, this story will continue to evolve as SQM holds their earnings call and subsequent investor day. So stay tuned via twitter and email to get our analysis and updates as they hit the tape!

Disclaimer: We own shares of Pilbara Minerals, SQM, Lithium Americas, and Nemaska.  This is not investment advice, readers should do their own research prior to investing.