Wesfarmers sparks for lithium

We have just entered a new period of global equity turmoil. In simple terms, when Chinese President Xi Jinping was under pressure in the last three months of 2018, he made what he now believes were too many concessions to the US.

President Xi is back trading and President Trump is digging in to hold Xi to his word. That’s a recipe for short-term turmoil, but I still think both need to do a deal.

But behind the headline-grabbing developments in trade, plus our own elections, are some fascinating developments.

When Wesfarmers spun off its Coles business I wondered what on earth the WA conglomerate would choose as the next growth area of its investment strategy. I haven’t had to wait long. 

Wesfarmers has selected the electrification of Australia and the world as a major new growth industry. So far, it has made three major plays and it is fascinating to look at the deals collectively as part of its strategy.

Wesfarmers most recent thrust has been to bid for Kidman Resources and its lithium mines.

Lithium is a vital material for batteries and car electrification, but it is difficult for new mines to gain the financing required because there is no clear market for the metal so you can’t sell it forward. 

That makes bankers very nervous. Of course, Wesfarmers, with its size, is well able to fund lithium mines which gives it a tremendous opportunity to buy the asset at an attractive price — albeit more than 40 per cent above the market.

Wesfarmers’ managing director, Rob Scott, gives a simple explanation for the Kidman acquisition — it will provide an attractive investment in a project which is set to benefit from the global uptake of electric vehicles.

In addition to this, it will draw upon the Wesfarmers Chemicals, Energy & Fertilisers business’ ability to design, construct, commission and operate complex chemical plants.

But that’s only part of the story. At the same time, Wesfarmers is looking to by Lynas and behind that strategy is the same belief — the coming boom in electrification. 

Lynas mines rare earths which are also an essential component in batteries and other high technology goods. 

Lynas did a deal with the former Malaysian government whereby it would process its Australian material in Malaysia and store low-grade nuclear material in the Malaysian state. 

The new Malaysian Prime Minister Mahathir Bin Mohamad has made it clear that he does not want Malaysia as a nuclear waste storage country. 

Wesfarmers thrust for Lynas is based on the fact that it believes that it can store the nuclear waste in Australia and therefore make the Lynas business very profitable indeed. 

Unfortunately, the WA government has blocked the storage and Lynas is unhappy with the way that Wesfarmers has handled the issue so the bid is not certain to go through.

But like Kidman, it is based on the strategy that electrification is the next boom industry. And there is also a twist to the Lynas nuclear waste story. 

China is the major producer of rare earths and its mines also produce nuclear waste. And, like Australia, that waste is dominated by thorium. 

The Chinese are world leaders in the development of new thorium-based power stations which produce very little waste and are cooled with molten salt. 

There are many new sources of power being looked at around the world but thorium is one of the top candidates. 

And while there is no certainty, Wesfarmers can see that instead of the nuclear waste being a long term storage problem it could be a source for power for Australia and other countries in the world. 

I think there will be a state or territory that will buy that story and take the waste on a temporary basis. In the 1940s and the 1950s, the Americans had a choice between developing thorium and uranium nuclear energy. 

They chose uranium because it could be used for bombs and was better for submarines.

Thorium would have been better. 

Wesfarmers have also purchased a bulk quantity of solar energy and clearly sees a market for non-carbon power.

Each of these thrusts is separate and complex but when you look at the three together, plus thorium, you can see where Wesfarmers chairman Michael Chaney and CEO Robert Scott are headed.

The other surprise I had this week was to discover that the National Australia Bank is actually performing well in some of its key areas despite the intense pressure the bank is under. 

It fumbled its housing loan sales via brokers but seems to have fixed the problem. When it comes to business lending, it is growing four times the average of the other big banks. 

Moreover, while there has been an exodus of funds via the MLC, up unto the March 31, it hasn’t been an avalanche. It will be hard work getting the MLC into shape for separation but may be helped by the fact that all the bad publicity was focused on the name 'NAB' even though a big proportion of the bad practices were in the MLC.

The 'MLC' name was rarely mentioned. Those bad practices were going on for a long time and the previous NAB management (before Andrew Thorburn) paid little attention to MLC which actually banked with Westpac. 

When NAB had a good look at MLC they saw problems and thought they could solve them over time which was a horrendous mistake. 

Nevertheless, NAB has taken the essential step of reducing its dividend – other banks may NAB in time have to follow – and is starting to perform in its key banking areas particularly in business. 

It is good long term news for the bank’s shareholders.  

Part of the reason why the NAB is doing well is the fact that the temporary CEO Phil Chronican is a good operator but it also reflects the fact that NAB people have gritted their teeth in adversity. 

Talking about adversity, economists around the country are telling us that the low inflation rate is a precursor to an economic downturn which will become deeper if the ALP wins the election. 

Economists can be wrong but there is certainly a great deal of apprehension out there and the Reserve Bank has quietly been signalling to the market that it is looking to lower the interest rates. 

Lower interest rates will not help a great deal because the real problem is the credit squeeze being imposed by APRA and the other regulators. 

That squeeze was created by the tightening of lending rules. I am not sure that the Reserve Bank fully understands the link between those tightening rules and the economic downturn but  Westpac has warned the Reserve Bank that lower interest rates won’t help much.

I believe that Westpac is correct. But the sad news is that deposit rates may fall further and they are getting to such a level that banks are basically a place to hold your capital and receive very little return. It is a further blow to the retirement community. 

On the lighter side, in years gone by, I regularly travelled with a taxi driver who was brilliant at calling the winner of elections. 

His opinion was often different to the pollsters. Unfortunately, he is no longer in business. 

I tested out a Turkish taxi driver last week and he said that he had previously voted for Labor but this time he will vote for Scott Morrison. 

He doesn’t like Bill Shorten and he has personal values that are different to the ALP. 

I am not in the business of forecasting elections. If it is close or if Morrison wins, it will be the franking credits and the intergenerational war that has affected the ALP.

On the other hand, the ALP vote counters say the young are going to sweep them into power on the back of clean energy, higher wages and lower house prices.