Albemarle: salt flats and social responsibility

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In the remote corners of northern Chile lies a geologic marvel and one of the most arid regions on Earth – the Salar de Atacama. This vast salt flat and the rich lithium deposits contained just a few metres under its surface are a testament to the complexity of Earth’s physio-chemical processes. The natural resources also pose a complex challenge to us as investors.

Lithium is a critical element in the energy transition as it cannot be beaten for lightness or its ability to store and dispatch electricity. Increasing demand for lithium-ion batteries forms a key tenet of our investment case in Albemarle. The chemicals producer is the world’s largest lithium producer, and the Salar de Atacama represents one of its biggest operations.

The area is also home to the Atacameño indigenous communities, who have used its scarce surface waters in agriculture for millennia. The lithium industry’s growth in the region has caused concern and led to claims it threatens the Atacameño way of life and local biodiversity.

As responsible long-term investors, we need an in-depth understanding of the hydrogeological processes in the Atacama. Should Albemarle over-exceed water abstraction quotas, insufficiently monitor its impact on the Atacama or not engage transparently with local stakeholders, it risks losing its ‘social licence to operate’ – in other words, if the communities its operations impact and the wider public turn against it, the firm’s prospects could sour.

At Baillie Gifford, we place huge value on our engagements with holdings, and there are many reasons to speak to a company. In some cases, it’s about influence: supporting company leaders to stay focused on the long term in their decision-making. However, as this example illustrates, fact-finding engagements are also important.

Following allegations that the lithium industry was contributing to freshwater challenges in the Atacama, it was critical to look beyond the headlines and company disclosures. We spoke to academics to learn more about the situation’s reality, best practices and Albemarle’s positioning.

Baked batteries

To briefly explain the extraction process: Albemarle pumps lithium-brine solution to the surface, where it bakes in technicolour pools beneath the sun. Due to solar evaporation, the brine concentrates through a network of these pools, giving them their distinctive colour. At its final stages, the lithium concentration reaches a high enough level for conversion to lithium carbonate or hydroxide. Albemarle then refines it for use in batteries to power electric vehicles, smartphones and more.

Given the region’s aridity, the Atacameño and other local stakeholders have long harboured concerns about the impacts of extractive industries, which also include copper, on freshwater availability. They rely on water to grow crops and raise llamas and other livestock. They also use the brine to make potash for fertiliser.

Numerous articles and other reports have reported declines in water availability in the Atacama, linking it to lithium brine pumping. There are also claims that peripheral lagoons are drying up, which the Atacama’s iconic population of flamingos depends on to reproduce and feed. The water contains shrimp and microscopic algae packed with nutrients that give the birds their vivid pink colour.

From an investment standpoint, if these issues cause Albemarle to interrupt its operations, it would damage the company’s earnings significantly and potentially disrupt global supplies of a substance many other businesses can’t do without.

Academic advice

To learn more, we spoke with academic experts from the Department of Geosciences, University of Massachusetts and the British Geological Survey. They brought decades of knowledge drawn from their deep experience studying the Salar’s hydrogeological complexities.

A unique combination of geology, climate, chemistry and – crucially – time has led Salar to have one of the world’s most complex groundwater systems. There are many natural drivers for changes within the ground and surface water systems, which operate over varying timescales.

A lack of comprehensive, historical data has contributed to knowledge gaps. A general lack of understanding of water catchment basin inflows, outflows and temporal cycles associated with these has led to historic over-allocation of water resources – albeit lithium mining has only received approximately 10 per cent of these allocations.

The Atacama region has endured a ‘megadrought’ since 2010, which further confounds issues. Recent scientific evidence points towards drought and changes in precipitation levels being the primary drivers of lower surface water levels on the Salar.

These climatological variations have, therefore, been a key driver in many of the recently reported changes in surface water and vegetation extent, streamflow and basin-scale water storage. This suggests that lower freshwater availability has not been caused solely by the lithium industry.

Due to these factors, attributing hydrological shifts and changes in water availability to a particular cause, such as lithium-brine extraction, is a fiendish task. Evidence points towards the drying of the Atacama and subsequent water scarcity due to factors including climate perturbations, historical overallocation, broader catchment mining extraction and agricultural operations.

Cooperative and transparent

We engaged with Albemarle to understand its water monitoring, the extent to which the company shares this data with local stakeholders and regulators, and its participation in hydrogeological research projects. The company appears to be taking a proactive approach, sharing its well-monitoring data with local authorities and looking to work alongside other industries active in the Salar.

Encouragingly, following a topic of our engagement in late 2020, Albemarle’s mining site on the Salar became the first lithium mining operation to publish a third-party audit in early 2023 under the Initiative for Responsible Mining Assurance (IRMA) – a leading global sustainability assurance standard for the mining industry.

The story of Atacama, its hydrogeology and its lithium resources embody a global challenge: meeting the soaring demand for new metals and minerals needed for the energy transition in an environmentally and socially responsible manner.

Humankind’s extraction of metals and minerals has forever left a visible imprint on Earth, but that is not to say that we cannot learn from the past and use these learnings to encourage our holdings to mine sustainably.

As long-term investors and responsible stewards of holdings on behalf of our clients, we consider our role to do what we can to support this.

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The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in April 2024 and has not been updated subsequently. It represents views held at the time and may not reflect current thinking.

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