PODCAST: Albemarle Corporation CEO Luke Kissam on becoming the world’s lithium king

Midas Letter
Midas Letter
PODCAST: Albemarle Corporation CEO Luke Kissam on becoming the world's lithium king

Albemarle Corporation (NYSE:ALB) CEO Luke Kissam on the future of lithium is featured in this podcast from 2016.


James West:    Luke, thanks for joining us today.

Luke Kissam:   Hey, thanks for having me. I really appreciate it.

James West:    Luke, Albemarle is positioning itself to be the major global provider of lithium, especially to the lithium ion battery segment. Is that accurate?

Luke Kissam:   Yeah, I think that’s an accurate statement. In early 2015, we acquired Rockwood Holdings, which I believe had the best lithium business in the world. And through future investments and technological advances, we’re positioning ourselves to capture 50 percent of all the future growth in lithium.

James West:    Wow, that’s substantial. And so what is the demand picture for lithium products going out, say, three, five, and ten years?

Luke Kissam:   I think they’re all fairly consistent. If you look at – I’ll divide it into different markets. If you look at traditional uses such as glass, ceramics and greases, they’re really expected to be GDP-type growth with a few pockets of higher growth here and there, with items such as shatterproof glass for mobile phones and tablets and some of the specialty greases.

Then if you get into the electricity, and get into the battery demand, you have portable electronics, power tools and handhelds are expected to continue to grow about 8 to 9 percent per annum. And then when you look at the plug-in hybrid electrics and the electric vehicles, that’s really where the largest growth comes from, and that’s 20-plus percent.

Now, current indications are that electrical vehicle growth is on track to reach global sales penetration of about 2 percent in the next five to six years. 2015, the fleet sales penetration was about 0.6 percent, which was a 70 percent growth over 2014. Each 1 percent penetration would drive a lithium demand of roughly 50,000 metric tonnes a year.

James West:    Wow, okay.

Luke Kissam:   You know, the only thing I want to add is, we haven’t talked about grid and power storage applications. But if you look out farther than five years, in that ten-year time horizon, I would expect we would start seeing meaningful demand from power storage and grid applications, which I think has the potential to be larger than what electric vehicles will be.

James West:    Wow. Okay. So now let’s talk about Tesla Motors, and they just launched their S3. How important is Tesla’s gigafactory to lithium demand, and what is Albemarle’s strategy for supplying it?

Luke Kissam:   Well first of all, I think Tesla brings a significant amount of recognition to this space and interest in this space. Tesla is making driving an electric vehicle cool, and everybody wants to be cool, and so any interest in that space benefits us.

With regard to supplying Tesla, we supply to all of the major battery producers today, so we sell to people who supply the batteries to Tesla. And if you looked at their announcement today to give you an idea, the global market in 2015 for lithium on a lithium carbon and equivalent basis was roughly 175,000 metric tonnes. And if you look at the rate of the new models, the subscriptions that were taken for those new models, was around 270,000 subscriptions. That would roughly be, you would roughly need somewhere between 15,000 and 20,000 metric tonnes of lithium carbonate equivalent to supply that demand.

So that is a huge step for the demand and that’s grown it, but we don’t just need Tesla to be successful; we are somewhat agnostic. We need electric vehicles to be successful. So we’ve got GM, BMW, BYD, all of the ones, in Asia and Europe and the US, we want them all to be successful and are working with supplies to make sure we get them the product that they need with the quality specs that they need, when they need it to be able to fund this great growth that we see.

James West:    Okay. So what’s your strategy for competing with the likes of SQM and FMC?

Luke Kissam:   Well first of all, Albemarle can’t handle all this growth all by itself. So we need strong growth around the world; we need a strong SQM, we need a strong FMC, we need a strong Tianqi in China and some of the players in Asia. So there’s plenty of room across the portfolio for these major competitors that are out there today, and I want them to be strong. And our advantage, I believe, is we have the best known brine reserve in the world in Chile. So both Albemarle and SQM today operate in the Salar de Atacama, so both of us at a low cost position in Chile, and really the low cost position in the world.

You can also make lithium from spodumene rock. We have 50 percent of a joint venture, or 49 percent, excuse me, of a joint venture in Australia called Talison, and that is the richest lithium deposit in spodumene rock in the world. So what Albemarle has that the other majors don’t have is, we got the lowest cost basis in brines, and we also have the lowest cost basis in rock, and we’ve got geographic diversity and that’s in addition to our resources in Nevada.

So we’ve got North America, South America, and Australia. We have the geographic diversity no one has, and the basis no one else has. So that’s how we’re going to compete.

James West:    I see. And what is the difference between spodumene and brine lithium? Is there a chemical difference, different applications?

Luke Kissam:   It’s really not different applications; either one of them, depending on the source, can be made into battery grade and non-battery grade applications. It depends upon what the concentration level of the lithium is, as well as the impurity profile, and it would be a mistake to lump all brine together versus all spudomene rock, because it’s just different in the resource. It’s not homogenous around the world.

James West:    I see. Okay. So what about junior lithium explorers? At this point, there’s a whole crop of them popping up all over the world, Nevada and Argentina, that are laying out the case that they are going to be suppliers to this explosion in lithium demand. How do you see that panning out?

Luke Kissam:   Yeah. Well, I think again, it’s going to have significant growth, and we need all the major players to be successful. So our continued success is really based on decades of direct experience of actually being in the lithium business. And during that tenure, we’ve really amassed a wealth of proprietary know-how and technologies in the extraction process, and then in the derivatization. We’ve got our established infrastructure, environmental permits, and proven process capabilities around the globe for our customers. And because of our consistently strong free cash flow that Albemarle enjoys as a company, and our attractive margins, we’re going to be able to continue to invest in those resources where we already believe we have an advantage.

So as a result of that, if we’re going to be able to, I think, out-invest most of these players and get a better cost position overall. I don’t see anything that’s going to come close to our cost position.

The other thing I’d point you to is, Oracobre. Oracobre’s a new entrant into the market in Argentina. They’re basing that on a brine reserve that they have there. And they have a pretty good, a pretty fair brine reserve there; they’re not dissimilar from FMC’s reserves from a quality standpoint and from an impurity standpoint level. So world scale, good quality brine, will make good quality lithium. It took them a decade from discovering the reserve to where they are today and it’s starting up production. So it’s not a process that one can get in overnight; I think we’re probably going to see some spodumene mines in Western Australia come online in ’17, ’18, that’ll sell spodumene rock to some Chinese converters, but otherwise, I have a hard time seeing anybody coming into the market in a meaningful way, with quality product, at a cost position similar to the majors, anytime in the near future.

James West:    I see. But would you say that they have a hope, like Lithium America just did that joint venture with SQM, is that sort of the path that juniors are going to be restricted to?

Luke Kissam:   Well, I’m not sure. First of all, pride always comes before the fall. So we take everybody serious for what they are, and we’ve got a team that tracks all new resource finds and potential projects, and if one looks like it’s better than ours, we’d certainly explore it, but we’ve never seen that. So I think we’re going to take these very serious competitors, and we will again, there’s space in the market for players. But they’re going to have to be in a cost position and a technological advantage and have the cash to bring it to market. I mean, it’s not insignificant the amount of cash it’ll take to build a derivative plant to beat this quality spec. so I think you’ll see, I think SQM entering into that joint venture is a positive step for the industry, because as I said, we need strong competitors around the globe who understand this business and understand what it takes to be a credible supplier.

James West:    Okay. So I saw Tesla sign two conditional offtake agreements that were non-binding, with two juniors in Nevada. And it basically stipulated that we will take your lithium off you as long as you can meet quality, tonnage and price requirements. And the price requirements stipulated, it didn’t specify but it said it had to be below what the market was right now. Is that sort of an unrealistic way of Tesla sort of coming to the majors and saying, you’ve got to compete better on price because we’ve got these juniors in our backyard? Is that the strategy there?

Luke Kissam:   You know, it’s hard for me to get into someone else’s mind and say what a strategy is, and I certainly wouldn’t bet against Tesla and Elon Musk, okay? They’ve been – unbelievable achievements and a great visionary. I think at this point in time, I like the position that the industry’s in. we’re obviously investing today, and will continue to invest and meet the demand. So I don’t think they’re going to have to go there; I think they’ll get a better cost position with, and more security of supply, which is what the market needs. They need stable, security of supply, stable quality, to be able to meet the demand, to make sure the batteries are operating in the manner that the customer is going to expect.

So I think that all that will work its way out. This is really an industry at its infancy, and so there’s going to be a whole lot of shake-out, and I just want to make sure that we’re investing in meeting the demands and needs of our customers in a way that allows this market to continue to grow.

James West:    Sure, okay. In a best case scenario, in the charts in your presentations, you show that there could be as much as 300,000 tonnes per year demanded of lithium by 2020. How soon do you think that the existing suppliers will be able to rise to that demand challenge for batteries going forward?

Luke Kissam:   I think that if you look at that, we believe that the production for the near term can expand at the same rate as demand. Lithium’s tight today, but the market’s not being starved by any respect. So we have in ’17, additional volume available at a 20,000 metric tonne plant that we just completed will be online, and we’ll have the brine to feed that plant. So that’s 20,000 metric tonnes; I talked about the spodumene plants in Western Australia. We could also increase demand at Talison if the joint venture thought that was necessary.

So I don’t see an issue in the near term over the next three to five years, where we’re going to see a shortage of supply that won’t be able to meet the demand. So I feel very confident that the marketplace will be in good shape.

James West:    I see. Do you have an anticipated sort of price per tonne going forward out to 2020, that you expect the world supply will settle into?

Luke Kissam:   You know, I find it a good practice not to discuss what I’m going to price to my customers in a public forum. It’s kind of like having a discussion with your wife; you don’t want to hear that on the airwaves. So we’re going to price this product to get a fair return for the money we’ve invested, and a fair return for the capital that we’re going to need to invest going forward to meet the market demand, and one that will also allow our customers to thrive in the marketplace.

James West:    Okay. So at this point, what percentage of Albemarle’s revenue and earnings are lithium-related, and how is that going to change going out two, five, ten years?

Luke Kissam:   In lithium, in 2015, lithium-related revenue was roughly $500 million at a total revenue of about 3.65 billion. And our EBITDA was about 210 million out of a total adjusted EBITDA of about 958 million. And because of its growth profile, over the next three to five years it’ll become a larger portion of the revenue and profits that Albemarle will enjoy.

James West:    Okay. Are there any events on the horizon that you think might derail the lithium boom, or spark a boom in any of Albemarle’s other product categories?

Luke Kissam:   Yeah, I think that with regard to lithium, we really follow battery technology very closely with Argonne National Laboratory, Stanford, MIT, and really are out there trying to understand what’s going on in the battery world. And for the next – we don’t really see anything that could replace lithium on a commercial scale within the next 10 to 20 years. And anything that would replace lithium ion contains lithium. So they’re working on lithium sulfate, they’re working on lithium air. There could be opportunities for those, and what we’re trying to do is ensure that we understand what those qualifications, what the specs would be for those in order to get battery-grade specs so that we’re staying in advance of it. And we just don’t see anything that can cause significant commercial disruption over the next 10 to 20 years.

James West:    Okay, well that’s a comfortable place to be, then. So what’s the ultimate objective of Albemarle in terms of positioning itself to capture the opportunities of the future, and how should people think about Albemarle?

Luke Kissam:   Well I think if you look at all of our business, we really think we have great potential going forward. We’ve put together some great assets here, we’re focused on delivering sustainable energy solutions to the planet. And we believe that’s where the majority of our future growth lies, in our lithium business and our catalyst business. We’re finding better and more sustainable solutions really drives what we do, and our goal is to help our customers make more money, and we want a piece of that money that they make. And that’s how we’ll make our money. So I look forward to the growth of lithium. I don’t think there’s another market in the chemical or the material space that can see the type of potential growth that lithium has over the next five to ten years, and our job in this market is to ensure that we’re there with the quality product in the quantities that are needed to drive this potential growth. And we certainly have an investment plan to allow us to get there.

James West:    All right, Luke, thank you so much for taking the time today. We’re going to catch up with you in about six months and see where you’re at. Thanks again for your time.

Luke Kissam:   Thanks a lot. Enjoyed talking to you; have a great day.

James West:    Thanks, Luke. Bye for now.





James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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