Sociedad Química y Minera de Chile Q2 2023 Earnings Call Transcript

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August 17, 2023

There are 13 speakers on the call.

Operator

Good morning, and welcome to the SQM Second Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Irina Acinova, Head of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning. Thank you for joining Eskom's earnings conference call for the Q2 of 2023. This conference will be recorded and is being webcast live. Our earnings press release and presentation with a summary of the results have been uploaded to our website, where you can also find a link to the webcast.

Speaker 1

Speaking on the call today will be Ricardo Ramos, our Chief Executive Officer and Gerardo Ioannis, Chief Financial Officer Carlos Diaz, Executive Vice President of Lithium Philippe Smith, Commercial Vice President of Lithium and Pablo Artemiras, Executive Vice President of Nitrates and Iodine will also be available to answer any questions. Before we begin, I would like to remind you that statements made in this conference call regarding our business outlook, future economic performance, Anticipated profitability, revenues, expenses and other financial items, along with expected cost synergies and product or service line growth Are considered forward looking statements under federal securities laws. These statements are not historical facts and may be subject to changes due to new information, Future developments or other factors, we assume no obligation to update these statements except as required by law. For a complete forward looking statement, please refer to our earnings press release and presentation. I now leave you with our Chief Executive Officer, Ricardo Ramos.

Speaker 2

Okay. Sorry. Thank you, Irina.

Speaker 3

Good afternoon, everyone.

Speaker 2

Okay. Sorry. Thank you, Irina. Good afternoon, And everyone and thank you for being on the call today. Yesterday, we published our Q2 2023 earnings report, I would like to highlight the positive impact of significantly high sales volumes in lithium business and continuous Strong performance in iodine business seen during the quarter.

Speaker 2

Lithium business reported record high quarterly sales volumes, We surpassed 43,000 metric tons driven by strong customer demand recovery and positive market outlook. We expect to deliver higher sales volumes in the second half of this year compared to the sales volumes reported to the first half of the year. Since the majority of our sales contracts are based on price indices which follow market price trends, Our realized sales prices move with the market with some lag depending on the terms of the contracts. This commercial strategy allow us to capture the price premium seen in the market last year. After 1st quarter pricing negative trend.

Speaker 2

We have seen some price recovery during the Q2 and expect our realized price to follow the market We continue to see strong fundamentals behind lithium demand growth with the global EV sales Showing another strong performance during the Q2, increasing 50% year over year. We believe that the total EV sales growth Could be close to 30% this year when compared to 2022, and the global lithium demand Could increase at least 20% this year compared to the previous year. Signing the long term agreement with Ford Motor Company and LG Energy Solution was another important milestone of the quarter. The trust our customers put in Eskam's ability to successfully increase production In a sustainable way and deliver high quality battery material make us very proud and encourages To continue with our growth plans in Chile and globally, we expect to produce approximately between 180,000 190,000 metric tons of lithium this year from our operations in Chile and China. Our expansions in Chile are Progressing on a schedule and we expect to ramp up our lithium carbonate capacity to 210,000 metric tons by the end of next year.

Speaker 2

The commissioning of our lithium hydroxide refinery in China has been delayed by few months and we expect to see the 1st production volumes coming to the market in the coming month. Simultaneously, our attention is directed towards Our exploration initiatives in Australia guided by SQM's team of highly experienced geologists and in collaboration with local partners. We are advancing on securing potential new lithium supply sources. In iodine businesses, we have seen both a Strong market performance as well as successful delivery of new capacity from our CALITI operations. Iodine market continues with record high prices driven by a growing demand of X-ray contrast media segment, While annual global iodine market demand is expected to be flat, we believe we could deliver higher sales volumes during this year when compared to last year.

Speaker 2

Despite the record high prices seen in the market in the past quarters, SQM has been the only producer to increase materially its production volumes. We remain on track to increase our production of iodine by approximately 800 tonnes this year to support the future growth of iodine market. We are also very proud of our contribution to the Chilean treasury during the 1st 6 months of this year of approximately $1,700,000,000 mainly due to the public private alliances we have with Corfo over the Salar DATAKAM operations. And finally, in this quarter, we released our latest sustainable report, outlining the progress we have accomplished in our journey in the past year, the advances we achieved in pursuing our goals and the upcoming challenges we have set for ourselves. Thank you, operator.

Speaker 2

And we will now open for the questions. Thank you.

Operator

We will now begin the question and answer session. Our first question will come from Isabela Simonotta with Bank of America. You may now go ahead.

Speaker 4

Thank you. Good afternoon, Ricardo Rejago. Thank you. Nice talking to you. I have a couple of questions.

Speaker 4

First of all, on iodine, we saw a big increase, as you pointed out, right, on prices year over year. However, on your presentation, you showed that the contribution to gross profit, right, was only of $30,000,000 which implies, of course, Significant increase in costs as well. So I was wondering if you could give us a little bit more color On the cost of production of iodine and how do you see that performing going forward? That would be my first question. The second question is In light of the regulatory change in Chile, right?

Speaker 4

How do you see Strategically, the geographies where you are producing lithium, right? And how do you see The potential of diversification going forward considering the environment in Chile. And final, very quickly, you guys announced The dividends last night as well, if you could give us an indication of the payout for the year. Thank you.

Speaker 5

Hello, Isabela. Paolo Timiras speaking. Regarding to your questions about the iodine, yes, as you see prices have been growing, Explaining mainly because of lack of supply, a situation that we see that will continue in the year. Regarding to cost, it's true we have been some pressure on cost. I would say that there are several reasons, but the most important one is that it's not any secret that in the Oil mining industry will have some pressure on cost because of the cost of energy, raw materials, things like that.

Speaker 5

Also, we Open our new facility Pampa Blanca, which at the end is a small facility that means that has a higher margin at cost. However, with the recovery of the nitrate industry and also we hope because of all the efforts that we have been doing to improve our deals, We see that the situation will start be under control. So we see positive results in the coming months.

Speaker 2

If I'm not wrong, the second part of the question is regarding the lithium diversification outside Chile. As we can as we have comment before, the company is looking for opportunities of lithium outside Chile. We have a lot of We have know how. We're moving forward with our Mount Holland project. We're very proud about it.

Speaker 2

Yes, we're open for opportunities. And we don't have any specific New project announced today, but we are working very hard in order to, as we said before and we have said In the last 2 years to find opportunities to do business outside Chile. What was the it was our third question, Isabella? We don't remember.

Speaker 4

Yes. It was just about the dividend and if there is

Speaker 6

Hi, Italo. It's Hincidardo. The Board yesterday approved an interim dividend of 30%. You know that our dividend policy is it was presented to the shareholders. It's on our website.

Speaker 6

The dividend the interim dividend of the Q1 was 30%. The interim dividend of the 2nd quarter was 30%. And we will continue On the rest of the year, the Board will continue assessing the interim dividends. And at the end, in April next year, in the Annual Shareholders' Meeting, a final dividend

Operator

Our next question will come from Ben Isaacson with Scotiabank. You may now go ahead.

Speaker 7

Thank you very much and good afternoon everyone. Three questions for me as well. Number 1, on the contracts with Ford and LG. What were the reasons why you need to sign a contract? And can you give us some parameters around those contracts, Pricing volume, how long they're going to be, etcetera.

Speaker 7

That's the first question. The second question, lithium sorry, ION prices are around $70 or so per kilogram. Why haven't we seen much new supply being announced? And do you expect that to change If iodine prices stay where they are. And then the final question is, I think Ricardo, you mentioned you see EV demand growth of about 30% and lithium 20%.

Speaker 7

Why is there a gap between those? Would you expect those over time to come together? Or is this something that we should expect going forward? Thank you.

Speaker 8

Hello, Ben. This is Felipe here. How are you?

Speaker 3

Great.

Speaker 8

Yes. I will comment on the contacts. We see signing long term contracts as very positive, because in a way, I mean, we have a long term plan of sales that involves volume and this is a way to Secure some volume in the future and at the same time for the customers, it's also a way to secure supply In order to fulfill their plans, okay? Now you have to bear in mind that these contracts are Finally, a win win for both parties because these are generally market confirmed Contracts that will follow indexes. And on top of it, it has the advantage that basically Pushes us to fulfill other achievements in terms of sustainability, quality.

Speaker 8

So, we see it as a positive Driving force for us.

Speaker 7

And how much volume are we talking about?

Speaker 8

I'm sorry, I cannot disclose the details. We only disclosed in the case of LG that it is more than 100,000 For the period 2023, 2029, but that's it. We cannot comment for the rest. Sorry, Ben.

Speaker 7

That's okay. And then next was on Iodine.

Speaker 5

Yes. Hi, Ben. Pablo Tumiras speaking. Well, that's true. I mean, prices are in a high range today.

Speaker 5

Why we don't see supply? Well, I would say that because To produce iron is not so easy. We are talking about, in our case, it's a mining activity where you need to consider different things to get approvals To have the ready infrastructure, actually today, we see that a greenfield project in order to be in production from the very beginning when you Starting the project can last more than 5 years to get complete. So it's not so easy to deliver new That's the reality. And that's why in SQM, we try to work in advance, be ready for the to build new capacity.

Speaker 5

That's what I can say.

Speaker 7

So just on that, if it's hard to bring on new capacity, do you expect high prices to persist?

Speaker 5

Well, again, it's a matter of supply and demand. At least in the short term, we don't see more capacity. That's what I already mentioned it that despite of the demand today is not growing. We see lack of capacity and that's why we expect in the whole year To see stable prices, let's say, in the high part of the curve.

Speaker 3

Great. Thank you. And then

Speaker 7

just finally on the EV versus lithium demand growth rates.

Speaker 8

Yes. So if I understood your question, you're asking The difference between the EV demand growth and our lithium sales growth?

Operator

Yes. Why is I mean,

Speaker 7

you said EV demand you expect it to grow 30%. Lithium demand, you expect it to grow by 20%. Why is

Speaker 3

there a difference?

Speaker 8

The difference is very easy because You know that lithium is used in different applications and not only EVs, I mean, EVs an important one of course, is the fastest growing one and the main one, but still we are supplying I mean, the market needs lithium for many other things Like industrial applications, pharmaceuticals and so on. So all these other applications Do not have the same growth profile as the EVs. That's the reason.

Speaker 7

That's great. Thank you so much.

Operator

Our next question will come from Rafael Barcelos with Banco Santander. You may now go ahead.

Speaker 9

Good morning and thanks for taking my questions. So recently you published a press release commenting About the cash offer to acquire the control of Azure Minerals, right, that you submitted in early July. So my question is really about your capital allocation strategy. I mean, Should we see the cash offer to Azure as a particular case, especially because SQM is already one of its main shareholders? Or should we expect SQM to remain active in these type of M and A initiatives.

Speaker 9

And my second question is about the national lithium policy in Chile. Could you please give us an How conversations are evolving with Chilean authorities? I understand that discussions are still ongoing, but any update here could be helpful to us. Thank you.

Speaker 2

Yes. Ricardo Ramos speaking. First about Azure, we published, if I'm not wrong, yesterday or the day before Today, complete press release about that. I think we have nothing else to add is We as we said before, it's a junior company in Australia. They have among others lithium projects in Western Australia, where we have, as you may know, our Mount Hola project, we today control close to 20% of Assur.

Speaker 2

We are the largest shareholder and we had these confidential negotiations that are now public. And of course, we publish all the information available to the market about this negotiation. We have nothing else to comment about this one. Remember that the press release was yesterday or the day before and you can be sure that as soon as we have information that [SPEAKER JOSE RAFAEL FERNANDEZ:] According to the regulation, we need to submit to the public, we will do it. And that's the most important issue that I want to say about Assurant.

Speaker 2

About the other question regarding the conversation with Codelco, as we originally say, these conversations are confidential. Both sides we decided to do it in very strong confidential basis. Our intention, as you may know, is to announce to the market as soon as we reach an agreement or the negotiations are terminated. Any announcement It will be made at the time and in the manner considering in the current regulation. That's for sure considering the nature of the conversations.

Speaker 2

Anyway, what can I add is that the negotiations are being carried out in good faith? We continue to work very hard And with the support of expert advisers in the matters that are discussed, that's for sure. And as SQM, we expect That if we reach an agreement, this agreement should be positive for the country, the Antofagasta region, the communities and of course for the 2 companies.

Speaker 9

Thanks a lot.

Operator

Our next question will come from Joel Jackson Tien with BMO Capital Markets. You may now go ahead.

Speaker 3

Hi. I have a few questions. I'll ask them 1 by 1. Can we talk about volume in lithium? So 180,000, 190,000 tons this year, How much is coming out of carbonate, atacama?

Speaker 3

How much is coming from conversion of lithium sulfide in China? And then in 2024, When we think about you ramping to 210 by the end of the year, then the tons that you're going to do in conversion in China, that's incremental to that 210, correct?

Speaker 10

Hello, Yaron. This is Carlos Diaz. As explained in the release, our current production is between 180,000, 190,000 metric tonne between both locations, mid Chile and China. And as you know, the production in China is going to be lithium hydroxide coming from lithium sulfate that It's being produced in Chile and we expect to produce this year around 50,000 metric ton, which if you convert to a little on trucks, it's going to be like a 5,000 of those. And an idea is to convert that in our plan in Sichuan and to do some tolling with a 3rd The producer, so combination of both production is going to be around 180,000, 109,000 This year.

Speaker 10

Sorry, it was not where

Speaker 3

So when you're producing 2

Speaker 10

Sorry.

Speaker 11

All right. So when

Speaker 3

you're producing 210,000 tons sorry, it's an echo. Try again. When you're trying to produce 210,000 tons Of carbonate by the end of 2024. Did we add 25,000 of hydroxide or is there some cannibalization?

Speaker 10

Yes, sir. What we're going to produce in China is going to be incremental compared with what we're going to produce in Chile. Right. In spite of both coming from the Salado da Gama.

Speaker 3

That was clear, but we've had some questions on it lately. Okay. If I talk about lithium prices right now, and is it fair to say that your Q3 average selling price We'll have to be higher than Q2. Just looking what spot prices did across the Q2 into now and the lag. So is it Makes sense that your Q3 average price

Speaker 11

will be higher than Q2?

Speaker 8

Yes. Well, as we have explained, we have most of our contracts today following indexes. So I mean, it's very transparent. Everybody can follow those indexes. We have seen that since the middle of June this year, Some negative trend in the Chinese index and later on followed by also the outside China indexes.

Speaker 8

So but at the same time, we have different lags in the way we adjust our contracts, the way we follow the indexes. So All in all, I hope that we can have a relatively similar price in Q3 compared to Q2.

Speaker 3

Okay. That's helpful. So my last question is, we're seeing conversion margin start to come down. If you look Spodgene prices in the 3,500, something in a plusminus range. Does that concern you?

Speaker 3

Do we need to see spodgene prices go lower? And as spodgene prices go maybe lower, Does that impact maybe any of your desires to pick up some spodumene more resource or projects in different parts of the world?

Speaker 8

Well, we have some forecast of Supply and demand, so we do have a new supply coming. We need more new supply coming actually to supply the growing demand. And We are, let's say, considering these aspects in our forecast. So we do believe that there will be indeed more supply and this is good. We need it.

Speaker 3

And you're not worried about conversion margins now being quite small considering where spodging prices are?

Speaker 8

Yes, I could not confirm that information, Joel, honestly.

Speaker 3

Okay. Thank you very much.

Operator

Our next question will come from Corinne Blanchard with Deutsche Bank. You may now go ahead.

Speaker 12

Hey, good morning, everyone. Thanks for the time to take the question. I want to go back on the China Refinery and the timing of the production. So this has been delayed by a few months. Could you just walk us through like maybe some of the difficulty that you have been facing?

Speaker 12

And then if there is anything you can share in terms of expectation into

Speaker 10

Corinne, this is Carlo Diaz. Yes, we have some delay in China because we have been focusing more And to get the best yield in our conversion plan in China, you know there is a new process starting for the lithium sulfate from the Salar adacama to the lithium agroxide. But we expect that the commissioning is already done, and now we expect to start producing in the coming months And to be full production next year.

Speaker 12

Hey, sorry, I was on mute. So next year, you expect to be at full capacity if everything goes away?

Speaker 10

Yes. The idea is to produce in our plan around 25,000 metric ton as a little on albroxide And probably to do some more tolling with third parties.

Speaker 12

Okay. And then maybe Two quick follow ups. The first one, can you give us an update on Mt Holland? Is it still on track? I think you had mentioned 2024, you would be sending Some volume module, sorry, in agreement as well.

Speaker 12

And the other question would be, given where the spot Price and pricing are falling down again. Is there a point where you would maybe consider holding products And not selling into the market? Or are we not there yet? Thank you.

Speaker 10

Yes. Our ideas to start, well, the project of Mogollon is advancing well and according to the priority in 4 minute time line. We expect fresh product from the concentration Plan by the last quarter of this year. So then for the refinery, we expect to start producing middle of 'twenty five, But we expect to start producing at full capacity as soon as we can. And that could be at the end of this year, early next year.

Speaker 10

So No, no. Nothing regarding with the price. We're just full confident that we're going to produce at full capacity as soon as we can.

Speaker 12

Thank you. I appreciate it.

Operator

Our next question will come from Lucas Ferreira with JPMorgan. You may now go ahead.

Speaker 11

Hi. Good afternoon, everyone. So my question is about The ramp up to 210,000 in Slidellar Takama. Correct me if I'm wrong, but I had the views that these could be Certainly the end of 2024. And so if I'm right, are you seeing any bottlenecks in both The Carmen plant or in terms of yields and extraction there in the Esella to Tacoma, Are you kind of considering maybe slowing down that depending on the market demands and so how you see the pace of growth towards 210?

Speaker 11

And then my second question is regarding the SPN market. So if you have any views On prices going forward, we started to see sort of a rebound in fertilizer prices depending on the type of fertilizers. But in the case of SPN, If you see already sort of a bottom for prices, you should have an expectation for prices in the second half of the year. Thank you.

Speaker 10

Okay. Regarding your first question, Lucas, we are fully working to expand our in Chile and to reach as soon as possible the 210,000. We're focusing in different areas, that mean improving our quality, to get the best product for the market, increasing the yields in order to get more production with less resources. And We're on the schedule on that, and we expect to have that capacity next year. At the same time, we're working to expand our capacity And we expect to run the frontline in the last quarter of this year and immediately start to Expanding the capacity in order to reach in the 100,000 metric ton as we have in plan for the year 'twenty five, 'twenty six.

Speaker 5

Okay. Pablo, Altimiras speaking. Well, regarding to the SVN questions, well, you know that the 1st semester, the demand, it's been lower than what happened last year at the same period. The reason is because of all uncertainty, high prices on fertilizers and also Some weather difficult conditions in some markets. We expect that the demand will start growing in the second half Of the year, so we will see more demand.

Speaker 5

So that means that we should be able to increase our volumes. However, regarding to prices, we see that we will continue start seeing some price decrease that also will help also To the sales increase and demand increase, but we expect to start seeing some decrease on prices.

Operator

That concludes our question and answer session. I would like to turn the conference back over to Irina Acsenova for any closing remarks.

Speaker 1

Thank you for joining our call today, and we're looking forward to having you on our next call.

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Key Takeaways

  • SQM reported record Q2 lithium sales of 43,000 MT driven by robust customer demand and expects H2 volumes to exceed H1 as market prices recover.
  • The company secured long-term supply agreements with Ford and LG Energy Solution, underpinned by market-indexed pricing, and plans to produce 180–190 kMT of lithium in 2023, ramping carbonate capacity to 210 kMT by end-2024.
  • Iodine sales saw record prices thanks to strong X-ray contrast media demand and new CALITI capacity, allowing SQM to boost production by 800 tonnes in 2023 and target higher full-year volumes.
  • Expansion initiatives include the imminent commissioning of a lithium hydroxide refinery in China, accelerated exploration in Australia (Mount Holland project) and efforts to secure additional supply sources.
  • In H1 2023 SQM contributed ~$1.7 billion to the Chilean treasury via public-private alliances at Salar de Atacama and released its latest sustainability report outlining past achievements and future challenges.
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Earnings Conference Call
Sociedad Química y Minera de Chile Q2 2023
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