Albemarle, SQM Belted on Chile Lithium Move
Shares in the world’s top two lithium producers - Albemarle and SQM - tanked on Friday after Chile moved to take control of the country’s lithium industry by saying contracts with the two giants would not be renewed under a new public-private partnership model.
Investors dumped the shares in New York on Friday with SQM losing more than 18% in value while Albemarle slumped 10% - both yearly lows.
Shares in both companies had already been weakened by the 50%-60% slump in world lithium prices this year before the announcement from Chile’s President Gabriel Boric stunned investors on Friday.
After Friday’s slump Albemarle shares are now down 47% from their most recent high and SQM shares are down more than 22%.
President Boric revealed the plan in a TV address, saying his government would nationalise the country’s lithium industry and its reserves via a model that would see private companies forced to partner with the state to develop the local industry.
Chile currently has two contracts with two major lithium producers - the deal with global leader, Albemarle, runs out in 2043, while the one for SQM, the second largest globally, ends in 2030. Both will not be renewed, according to the announcement.
It's a move that could very well underwrite the future of the Australian lithium industry for decades if the proposal survives an increasingly hostile Chilean Congress later this year. The Congress in March rejected a controversial move to increase taxes on mining - especially copper and lithium.
Chile, which gets most of its lithium from processing brines, unlike Australia where it is extracted from hard rock ore (spodumene), has the largest reserves in the world and is the second largest producer after Australia.
Chile’s reserves are in giant salt flats in the very dry northern part of the country, just under the Andes mountain range. Bolivia and nearby Peru share the same geological formations and hold significant reserves, as does Argentina on the other side of the Andes.
Chile is home to the world’s most profitable lithium producer, SQM with Albemarle second. Albemarle is the leading global producer, just ahead of SQM.
Chile’s President Gabriel Boric statement is only a plan and the country's Congress will have to approve the idea and has so far been resistant to some of the President’s more aggressive moves on taxation of copper and lithium mining and ownership.
His move comes after the failed attempt in March to impose higher taxes on Chile’s huge copper industry where BHP is one of the top producers but the biggest producer is the undercapitalised and poorly-run Codelco which is the largest copper producer in the world.
Codelco is seen playing a major role in the President’s plan for the lithium sector but seeing it has not been able to maintain (or allowed to) spending on new investment, especially new facilities and refreshed mines, this looks like a disaster in the making.
The shock move would in time transfer control of Chile’s lithium operations from SQM and Albemarle to a separate state-owned company with Codelco as the partner.
But SQM and Albemarle have bolt holes offshore - especially in Australia.
SQM has a joint venture with Wesfarmers in the Mount Holland lithium mine and refinery planned for WA - the mine is well under construction via the joint venture company, Covalent Lithium. SQM has interests in a couple of smaller explorers in WA.
If this plan looks like succeeding, we can expect SQM to launch an aggressive hunt in Australia for new mines and facilities.
Albemarle is one of the giants of the Australian industry - it has a joint venture with Mineral Resources in lithium mines in the Pilbara and has separate interest in the Greenbushes mine in WA’s southwest and a refinery being built at nearby Kemerton. MinRes has bought 50% stakes in two of Albemarle’s Chinese refineries.
Albemarle has ambitious plans for a lithium mine in the US and a refinery. That and its Australian interests, could quite easily be scaled up to provide alternate supplies to Chile, if the nationalisation plan proves to a barrier to future growth.
"This is an opportunity for economic growth that will be difficult to beat in the short term," Boric said in a televised address aired nationwide.
"This is the best chance we have at transitioning to a sustainable and developed economy. We can't afford to waste it."
Boric said future lithium contracts would only be issued as public-private partnerships with state control. He said his government would not terminate current contracts, but hoped companies would be open to state participation before they expire, he said.
Boric also said he would start a dialogue with communities, companies and legislators to create a lithium company owned completely by the state.
The company would need to be approved by Congress. Boric said he would present the plan to the legislature in the second half of the year. That’s when the idea will be tested.
Boric said he has told Corfo, the Chilean state development agency, to task state-owned copper giant, Codelco, with finding the best ways for the government's participation in the extraction of lithium in the Atacama salt flats in the north of the country (the region where much of the copper is also located).
"If a public-private company is created to exploit lithium in the Atacama salt flats, it will be controlled by the state through Codelco,” according to Reuters.
Boric added that the government would reach agreements with companies that currently hold rights to extract lithium in the salt flats but did not mention SQM or Albemarle by name.
Codelco, along with state miner Enami, will be given exploration and extraction contracts in areas where there are now private projects and will be asked to assess if they would benefit from state partnership before the national lithium company is formed, he said.
Boric said that "projects with strategic values for the country, this partnership has to have a majority participation of the state.”
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.