For decades now, China has aggressively moved to dominate any resource it can.
We saw it in the rare earth metals sector, though most of the production was internal.
We’ve seen it in massive land and crop deals in South America. Large tracts of farmland have been leased or purchased, alongside massive purchases of soybeans and other staple crops.
Africa, long underdeveloped, overlooked by investors, and under-appreciated by companies and governments alike, has seen a surge of Chinese investment in recent years.
These days, the headlines are focused on aggressive moves in the South China Sea because of massive armadas of patrol and fishing boats operating in contested, and even foreign national waters. All while reefs and remote rocks are turned into islands with ports and airfields.
Now, we’re seeing what could very well be the beginning of another wave of investment designed to secure a critical metal, as designated by the U.S. Dept. of Energy.
The metal is so critical that the National Defense Authorization Act of 2014 included it with five other metals to add to the National Defense Stockpile, the first time new materials were added in 20 years.
We’re talking about lithium, and a Chinese government-backed company called Tianqi Group’s efforts to control one of the largest lithium producers in the world.
Two of the Big Three
Lithium has traditionally been dominated by three big companies: Rockwood, which was acquired by Albemarle (NYSE: ALB), FMC Corporation (NYSE: FMC), and the Chemical & Mining Co. of Chile (NYSE: SQM).
Tianqi Lithium already is producing lithium from the only big project outside of South America. Through a joint venture with Albemarle, it has a major stake in the Greenbushes mine in Australia.
Now, it is looking for a controlling stake in the Chemical & Mining Co. of Chile.
On Monday, Tianqi said in a filing to the Shenzhen exchange that it is planning to buy a stake in AQM for $209.6 million from San Francisco-based SailingStone Capital Partners.
At $38 per share, which came with a 51% premium to Friday’s closing price, Tianqi now controls 2.1% of the company. The deal comes with an option on another 7% of SQM shares.
Meanwhile, it is pursuing a much larger deal. One which will cement as much control of SQM as possible.
Earlier this month, it signed a non-binding agreement with Soc. de Inversiones Oro Blanco SA to bid for its stake in Soc. de Inversiones Pampa Calichera SA, which in turn holds 23% of SQM.
The deal, while non-binding, is bound to go through. Chilean billionaire Julio Ponce, the former son-in-law of the infamous dictator Augusto Pinochet, controls the companies, and has already publicly announced his intention to sell his stake.
He faces investigations for illegal trading in SQM shares, so it is a safe bet he would like to unload the shares and quietly fade into the background of a haven for billionaires. Preferably one without extradition treaties.
Combining these purchases will put Tianqi right near the ownership threshold allowed. SQM’s bylaws prohibit any shareholder from holding more than 32% of the company.
The Race is On
Tianqi’s move, while disconcerting to the rest of the world, makes perfect sense. Lithium is facing a supply shortfall going forward that virtually requires any and every company that relies on it to power its products to secure as much as possible.
China has set a target of having 3 million electric vehicles on the road by 2025. That comes on top of growth of power-hungry mobile electronics and a massive ramp up of battery production from Tesla’s massive factory in Nevada.
According to consultancy CRU, this will cause the market for rechargeable batteries to double by 2025, less than a decade away.
At current production rates and maximum mine capacity, this is impossible. The race is now on to discover, develop, and ramp up production in new lithium mines as soon as possible.
Lithium spot prices have already soared as a result. In China, spot prices have risen from about $7,000 to $20,000 in the last year.
With current projections showing the supply squeeze remaining at least through the end of the decade, that is just a start.
Unfortunately for consumers, there just aren’t many high-quality potential mines out there.
Fortunately for investors, this virtually guarantees the best of them will go from small exploration companies into next decade’s major mines, with share prices rising in line.
Nick Hodge has been covering this sector for his readers for years. Check out his best pick.
