Sociedad Química y Minera de Chile Q2 2024 Earnings Call Transcript

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August 21, 2024

There are 16 speakers on the call.

Operator

Good afternoon, and welcome to the SQM Second Quarter 20 24 Earnings Conference Call. All participants will be in listen only mode. Please note, this event is being recorded. I would now like to turn the conference over to Irina Axanova, Head of Investor Relations. Please go ahead.

Speaker 1

Thank you. Good afternoon. Thank you for joining SKM's earnings conference call for the Q2 of 2024. This conference call will be recorded and is being webcast live. Our earnings press release and a 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

Ricardo Ramos, our Chief Executive Officer will be speaking on the call today Hirago Liannis, our Chief Financial Officer Carlos Diehl, CEO of SQM Salar Mark Fons, CEO of SQM International Lithium Felipe Smith, Commercial Vice President of SQM Solar Pablo Hernandez, Senior Director of Business Strategy and Development, SQM Solar Pablo Altimiras, CEO of Iodine Nitrates and Juan Pablo Billoglio, Commercial Vice President of Iodine and Industrial Chemicals are also available to answer any questions. Before we begin, I would like to remind you that some statements made during this conference call regarding our business outlook, future economic performance, anticipated profitability, revenues, expenses and other financial items are considered forward looking statements. Please note that the same cautionary language used in our press release and presentation also applies to this call. And now I will leave you with our Chief Executive Officer, Ricardo Ramos.

Speaker 2

Thank you, Irina. Good afternoon, everyone, and thank you for joining us today. Before diving into the key drivers behind our results, I would like to highlight an important milestone we achieved last quarter. As mentioned in our earnings release, we're very pleased to have entered into a partnership agreement with Codelco to jointly operate the Celad del Dacama until 2,060. Based on the principle of private public alliance, we believe this agreement is a pivotal moment for both SQM and for the future of the lithium industry in Chile.

Speaker 2

While there are several conditions precedent for the partnership to become effective, together with Codelco, we're committed to ensure that these conditions are met by the first half of twenty twenty five. We're looking forward to working together with Codelco to operate the most sustainable lithium operation in the world based in the Celad del Tacama. Our second quarter results were positively impacted by strong volume growth in all our major businesses, supported by a strong demand growth in their respective markets. We reported record sales volumes in lithium and ILM businesses exceeding 52,000 metric tons and 4,000 metric tons respectively. We anticipated solid growth in the lithium market this year driven by a strong EV performance mainly in China.

Speaker 2

Demand growth in the iodine market this year exceed our expectations. We expect this trend to continue for the remaining of the year and believe that our iodine volumes could exceed 14,500 metric tons this year marking 2024 a record year. While our average realized price in the lithium business improved slightly in the Q2 compared to the previous quarter, we have seen lithium prices decline since the beginning of July, As most of our contracts are linked to price indices and our average prices follow the prevailing market prices, we believe that our average selling prices in the Q3 will be lower than in the previous quarter, given the current price environment. We are convinced that most of our of the greenfield projects are not profitable, while we continue with our previously announced capacity expansion projects, we're also reassessing the attractiveness of certain market and initiatives in the current price environment. We believe our lithium sales volumes in the second half of the year could be similar to those reported for the first half of the year with a potential upside should the market conditions improve.

Speaker 2

We recently formed SQM International Lithium to develop our lithium business outside of Chile. Its primary objective is to leverage the lithium assets and expertise we have in exploration, project development, mining and chemical operations to expand our lithium portfolios overseas. Thank you, operator. We'll now go open to the line of questions.

Operator

We will now begin the question and answer session. Our first question today is from Joel Jackson with BMO Capital Markets. Please go ahead.

Speaker 3

Good afternoon. This is Anthony on for Joel. So you indicated in the press release that in the current lithium price environment peers may take production out of the market. Yes, SQM is maintaining 24 production targets with sales volume maybe slightly lower. Obviously, SQM has a unique quota system with Corfo and the lease that was previously expiring, which encourages maximizing production.

Speaker 3

But, shouldn't SQM as a market leader be disciplined and maybe lower volumes?

Speaker 4

Hello, this is Felipe Smith here. How are you? I'm not sure if I understood correctly your question, but let me rephrase that we estimate that the sales in the 2nd semester 2024 will be similar to those reached in the 1st semester of 2024, meaning that our annual sales could be around 190,000 ton with a potential upside should market conditions recover.

Speaker 3

Just to follow-up on that. The question was I guess around whether SQM as a market leader should be disciplined if we start needing to see production come out of the market?

Speaker 5

Yes. Hello, this is Carlos Diaz. How are you? Well, let me tell you a little bit at our capacity in Chile. That is now is according to our schedule.

Speaker 5

And so we expect this year to produce 210,000 as a lithium carbonate equivalent in the different quality, let's say, carbonate, hydroxide or sulfate. At which of those, 30,000 are converted in China. So we're still reviewing the volume to be converted in China for lithium sulphate to hydroxide or carbonate during the 2nd semester. So the total volume converted in China obviously will depend on the specific market segment and following the current price environment. So finally, it's good depending on how the price is coming in the next month.

Speaker 5

So I don't know if I answered your question.

Speaker 3

Great. Just a follow-up. So maybe weighing strategic priorities, how would SQM rank delaying future times out of Chile versus investments in places like Australia or other opportunities moving forward?

Speaker 2

Moving forward as it's clear, we are going to develop a huge project that is called Salar Futuro together with Codelco. That's why our investment together with Codelco in the next 10 years in Chile is going to be significant. If you consider the Salar Foduro project we will develop together, we expect to increase some production in Salar de Cama with the project of course but this is mainly Chile is mainly oriented to the Salar Futuro project. Of course, we want to grow outside Chile, if we find good opportunities as you know we have been active, we have investment today in Australia, we continue to have geologists looking for new alternatives and probably we will announce investment or new projects in Australia in the medium term, I don't know but we are working very hard in order to do it.

Operator

The next question is from Ben Isaacson with Scotiabank. Please go ahead.

Speaker 6

Hi, everyone. This is Apurva on for Ben. I might just piggyback off of the last question a little bit. But given that the market is currently oversupplied and you've previously shared and based on your 210,000 tons of production versus about 190,000 of sales, is the expectation still that you'll be able to work through these inventories? Are you finding any challenges seeing any challenges in finding buyers for that lithium inventory?

Speaker 6

Are you holding in anticipation of demand and pricing picking up in the near term?

Speaker 5

Well, we're already coming. I don't know if we're going we expect to sell this year around to 190,000 metric tonne of lithium carbonate And we expect to produce around the 210,000. So it's going to be 20,000 exceed, approximately what we sell in 1 month. So for the other side, we have to prepare for next year whether we expect to sell a little bit more. So it's a good investment in capital working capital.

Speaker 5

We don't see that it's too much. It's healthy inventory.

Speaker 6

All right. And then as a follow-up, the production volumes for 2024 were contracted with kind of a 1 month like this thought. How should we be thinking about lithium realized pricing in Q3 so far given that quarter to date the index is down what 15% to 20%. Is there any sort of indication as to whether you're baking price floors and ceilings into your contracts?

Speaker 4

Yes. Hello, Felipe again. So indeed SQM price mechanism is based on price indices in the different geographies with certain lag, which average approximately 1 month. This means that in general, our realized average price will always be close to the prevailing average spot price. Now during the beginning of Q2, we observed a certain price recovery, which unfortunately lasted until mid April, then we saw price fluctuations that were quite moderate.

Speaker 4

But over the last 3 months, we have seen a persistent decline in the index prices, especially in China. So that is why we are expecting that the average price in Q3 will be lower than in Q2.

Speaker 6

Thank you. And if I may sneak in

Operator

Pardon me, ma'am. We seem to have lost audio from your location.

Speaker 1

Hello. Can you hear us?

Operator

And can you hear the main speaker? We can't hear the questioner.

Speaker 1

Can we go to the next question, please?

Operator

The next question will come from Isabella Simonato with Bank of America. Please go ahead.

Speaker 7

Thank you. Good afternoon, everyone. So I have a couple of questions. First of all, on lithium, when you say, right, the SUM is looking for revaluation, is it revaluating the markets and what's attractive at these levels. I wonder what exactly do you mean by that and what are things that are being taken into consideration here?

Speaker 7

And also on the international expansion here and you mentioned 100,000 tons by 2,030. If you could give us a sense what are the main regions of focus, the main raw materials and eventually what type of costs or production should we be thinking about for these 100,000 tons? Thank you.

Speaker 5

As we come in, we expect to produce a little bit more than 200,000 in Chile, 30,000 or 40,000 of those is produced as a lithium sulfate in Salada de Cama that is slated to China to convert to lithium carbonate hydroxide. So that is something that we could reevaluate according to the market condition, the production that we're going to expect to produce in China in the 2nd quarter in the 2nd semester. That's the

Speaker 8

point.

Speaker 9

Regarding the future projects hi, Mark Fonds here speaking. Regarding the future projects in Australia and what was mentioned in the press release regarding the one 100,000 tons per year of lithium carbon equivalent production into looking into 2,030. As you know, we've been pretty active in Australia. We now have gained access to 2 world class lithium deposits, namely the Andover project and the Mont Hollan lithium project, both of which were expected not only to have a significant scale, but also we are already discussing the expansion for Montaland Lithium project. In addition to that, we continue to work on monitor and invest in various early exploration projects, not only in Australia but also across the world.

Speaker 9

We have just recently announced a new partnership in Sweden with Talaga Group. All of them developed to or aimed to develop early stage innovative and marginal cost effective products into the long term. We intend to be lithium chemical processor not only Chile but also outside and leveraging on SQM's knowledge and also technology innovative process to be in the lower part of the marginal cost of production.

Speaker 10

Thank you.

Operator

The next question is from Lucas Ferreira with JPMorgan. Please go ahead.

Speaker 8

Hi, guys. Can you hear me? Yes. Yes. Okay.

Speaker 8

Thank you. So two questions. The first one, can you explain and correct me if I'm wrong, but I'm seeing your average cost, cash cost per ton in lithium increasing like 8% quarter over quarter. That's driving your gross margin to be reduced. So can you explain the reason why?

Speaker 8

I was expecting actually the opposite things. I would imagine lease payments allocations will be lower given the lower prices. And also higher volumes would imply maybe fixed cost dilution, the depreciation on the peso maybe helps you as well. So can you explain why this quarter specifically cost was higher? And the second question to Ricardo Ramos, just to confirm, so obviously you signed already the contract with Codelco for the JV, but you mentioned that certain conditions must be met.

Speaker 8

So just wanted to clarify that. So apart from the signing of the contract, what are the next steps for the JV to be actually formed and run smoothly? So and how long that could take? If you can explain, that would be great. Thank you.

Speaker 2

Hi, Ricardo Balamo speaking. We published the agreement with Codelco. It's available for everyone in our web page and there's a list of condition presence that are included in the contract. You can check it. But are mainly legal ones that we have to follow some steps in the companies and so on in the by law whatever.

Speaker 2

But we are working on that and we are going to be ready as we speak in the Q1 of next year. But if you want to review in detail this condition present, those are included in the contract that are public.

Speaker 5

Hi, Lucas. This is Carlos Diaz speaking. Well, I respect your first question about the cash cost of the lithium. This is mainly explained because of the inventory adjustment related to lithium sulfate. The lithium sulfate that we export to China

Speaker 8

5,000, is this something we can work with?

Speaker 5

Our cost is stable during this period. I mean, we don't see a significant change. On whatever I comment before, it was most related with the priority that we pay as we pay in the moment that we export and not we pay well in the moment that we sell. And you know there is a lag because we have to export from Chile to China and we keep inventory there and so on. And that is the main effects that is in the lithium sulfate.

Speaker 8

Perfect. And apologies one final in this topic of the royalties if I may. Can you confirm if that quota, that quota legacy quota of the previous contract with Corfo before 2017. So if not mistaken, as of this year, you should be already exploring part of the quota something like 50,000 tons a year with that fixed flat rates. Is this already in place?

Speaker 8

So eventually that comes to sort of flow into the P and L in future sales, if you can confirm this, please?

Speaker 11

Hi, Lucas, this is Gerardo. Yes, what you're saying is right. And for the ones that are not familiar, what we when we signed the new contract in 2018, we had a balance under the previous contract at a fixed rate of 6.8% with Corfo. And according to the new contract, this the balance that we had could be used from 2024 onwards and it's approximately 50,000 metric tons per year. So approximately 50,000 metric tons sold this year will pay a fixed rate of 6.8, while the rest will pay based on the table that is publicly available.

Speaker 8

Perfect. Thank you very much everyone.

Operator

The next question is from Alejandro Miikelas from Jefferies. Please go ahead.

Speaker 12

Yes, good morning. Thank you very much for taking my question. Just one question on the Coelco agreement. If you as you said, you get the condition of presence in the first half of twenty twenty five, then my understanding is there is a kickoff of extra capacity there. Are there any discussions with Codelco regarding what could happen to that extra capacity in 2025?

Speaker 2

No, we are not having marketing or commercial discussion with Codelco yet because part of the condition presence are some authorization and then following antitrust rules we need to have the agreement ready before starting to talk about commercial strategy.

Speaker 12

So if the current lithium market pricing conditions continue, is there a chance that the extra capacity for next year may not become available or you may choose to delay that?

Speaker 2

[SPEAKER JEAN FRANCOIS PRUNEAU:] As someone said before, we're a very disciplined company. It means that we will increase the capacity anyway and we will sell more lithium carbonate next year as compared to this year. That's for sure.

Speaker 12

Okay, that's very clear. Thank you.

Operator

The next question is from Santhosh Seshadri, excuse me, HSBC. Please go ahead.

Speaker 13

It's relatively higher cost base or maybe by slowing down ramp up at more full end projects? Thank you.

Speaker 5

So this is Carlos Diaz. Always our focus is to use our cost and to look at alternative to keeping increasing the quality of reducing the cost and our carbon footprint and so on. So but we're not thinking at least to reduce our capacity of lithium hydroxide. I don't know if it was your question, but no. We continue with our plan to expand in the lithium carbon hydroxide in Chile.

Speaker 13

Thank you. And just a question on your Mont Hole iron project. Are you planning to slow down ramp up given the adverse economics? And what would this mean for the sales contribution in 2024 2025?

Speaker 9

Hi, Mark Fons here. Thanks for your question. No, we continue full throttle managing the Montreal Amgen project. We as you know are already producing sediment concentrate from the minor concentrator. We have already produced more than 100,000 tons of sediment concentrate.

Speaker 9

We will continue to increase productivity, reduce costs and maintain quality into the future. On the refinery side, we have already above 80% construction completion. We're starting commissioning at the refinery which we expect to have first product mid-twenty 25, so mid next year. Once completed, we expect the project to be fully profitable to increase and add value to SQM's full expect of projects.

Speaker 13

Got it. And just a follow-up on that. So until commissioning of your refinery, are you looking at the tolling opportunities or selling spodumene directly into the market or maybe just holding on to your spodumene inventories until you commission the refinery? [SPEAKER SABRINA MARTUCCI

Speaker 9

JOHNSON:] Yes, we do have tolling commitments. We are tolling spodumene concentrate and we are also open to additional alternatives in that respect.

Operator

The next question is from Marcio Saio with Goldman Sachs. Please go ahead.

Speaker 14

Thanks, everyone. Thanks for the opportunity. A couple of questions on my side. Obviously, when you look at net income year to date, still negative by about $650,000,000 I understand that has been mainly explained by $1,100,000,000 in terms of that you did earlier in the year, but just trying to understand how should we think about this? Marco,

Speaker 11

Mario, sorry to interrupt you, but there is a problem with your microphone. So we will go to the next question and then we can come back with you, but please try

Speaker 5

to answer the microphone.

Speaker 14

Is it that alone?

Speaker 11

Please try to change to another microphone because there is a problem we cannot hear anything of what you're saying.

Operator

The next question is from Cesar Perez Novo with BTG Pactual. Please go ahead.

Speaker 14

Yes, good morning good afternoon, I'm sorry. In the press release, I see that management reaffirmed their previously announced expansion plan for this year, but at the same time, you also suggested some certain reassessment of specific market and initiatives that may be less attractive in the short term. Could you please provide further detail on that specific assessment and potential near term impact? Thank you.

Speaker 13

[SPEAKER ARI DE SA CAVALCANTE

Speaker 5

NETO:] Sorry, there is I think 2 differences are probably connected, but we have all our long term strategies to keep it increasing our capacity in Chile, what I said before, as a lithium carbon hydroxide and to keep it growing at the same pace that the demand is doing. And but it's a tactic in the short term if we have to reduce the comparison, what I said before, in China because of the price are not a convenient for us to do the business we're doing. I mean, it's something that we would do in the short term, but it's a little bit different than we are planning for the long term because we still think that this market is going to keep growing in the future.

Operator

The next question is from Corrine Blincher with Deutsche Bank. Please go ahead.

Speaker 10

Hi, good afternoon. The first question just related to the pricing, is there a scenario or is there a certain price like spot price at some point that you could be thinking actually of having contract with a negotiated price? So basically the question is like are you considering at some point moving back was like maybe like fixed price contract or was having like a stronger like flow in selling price?

Speaker 4

Hello, Corinne. This is Felipe. As we have been doing already in the past years and we want to continue like this, we are a low cost producer, so we prefer to follow the indices. We think that this is the best way to contract our volumes. Is good both for the customer and for us.

Speaker 10

Okay. The second question, can you please give an update on the T and C situation? I mean, we saw a lot of filing since there is not a lot of further option for them to do anything, but just trying to understand the view here that would be very helpful.

Speaker 2

Okay. What you call T and T situation is a public situation. We don't have different information than the one that is on the press and it means that T and T they have a different opinion of the regulatory in Chile, the CMF that is the regulator, they have an opinion about the transaction and TNT has a different opinion and they appeal to the court with their position. We are participating in the appealing also with our opinion and there's nothing new about that. It means it's public.

Speaker 2

TNC has been very public about their statements, their opinion and the company has been also very public about what is our opinion on the situation. And the regulators, CMF also being very clear about their opinion about this specific situation.

Speaker 10

So maybe differently, can they do is there any other step that it can be taken? So we're just trying to understand what can further happen or this is just a static code at this point?

Speaker 2

[SPEAKER CARLOS ALBERTO PEREIRA DE OLIVEIRA:] Okay. Probably you have to ask Canty about the potential future steps. I really don't know. But of course in this specific situation we expect that after the court decision that we are very optimistic about the court decision, I hope it's going to be over. But again, if they are thinking something else, you have to ask, Kente, I don't have the answer.

Speaker 10

All right. Thank you.

Operator

The next question is from Camilla Barter with Bradesco. Please go ahead.

Speaker 15

Hi. Good afternoon. Thank you for taking my questions. So just quick questions on my side. Regarding the deal with Cotejo, could you please elaborate on the main challenges in discussions with local communities?

Speaker 15

And the second question is on CapEx. In case the market gets worse, would you consider flexibilizing CapEx? And if so, how much would it be? Thank you.

Speaker 2

Okay. About the deal with Coelco, there's a clear process in order to have a relation with the communities for the new agreement and we're working on it. You have to go to the communities ask their opinion that is not binding but it's a very important opinion for Corfo in the for the companies. And for them we're working very hard in order to do it as soon as we can. And our relation with the communities I will say that is are very good.

Speaker 2

We are open with them, they are open with us and we are working in order to solve any difference that we may have. No, no, the CapEx sorry regarding the CapEx, the CapEx informed by the company it will continue. We are we think that the CapEx we have today in the lithium industry is very good in the iodine nitrates is the right one and the projects that we have in Australia are the right one. As mentioned before, we don't think that the long term really we don't think that the long term pricing of lithium is the today price environment, there is a specific situation today of the price environment, but we are very clear that the price will be different in the future. That's why we have a clear plan of investment in the lithium.

Speaker 2

We are really committed about that. And we are very low cost producer. That's why we will continue to do our investment.

Speaker 15

Okay. Thank you very much.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Irina Exnova.

Speaker 1

Just before we close, we had a question from Marcio who couldn't connect. If there's any dividend potential in the view of negative net income so far? I don't know, Gerardo, you would like to take it.

Speaker 11

The company has a dividend policy that has been approved by the Board and informed to the shareholders. And that dividend policy established that we will distribute the dividend as a function of the net income if certain conditions are met on our balance sheet. Since the net income is negative because of a one time effect that hit the results because of the lithium mining tax that was applied in the Q1, I mean, the result is negative and because of that the net income that the Board has approved as interim dividend has been 0. So it depends on what will happen in the rest of the year, but the policy is quite clear in that regard.

Speaker 1

Thank you, Gerardo. And this concludes our call today. Thank you for joining us and we look forward to having you on our next call. Have a great day everyone. Bye.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Key Takeaways

  • Entered a partnership with Codelco to jointly operate the Salar de Atacama until 2060 under a private-public alliance, aiming for effectiveness in H1 2025 pending customary conditions precedent.
  • Reported record Q2 volumes, with lithium sales exceeding 52,000 t and ILM sales over 4,000 t, driven by strong EV demand in China and robust iodine market growth.
  • Average realized lithium prices improved slightly in Q2 but have declined since July, prompting an expectation of lower Q3 ASPs due to index-linked contracts with a one-month lag.
  • While proceeding with capacity expansions in Chile, the company is reassessing greenfield projects in the current price environment and has formed SQM International Lithium to target ~100,000 t of overseas production by 2030.
  • Iodine demand has exceeded expectations, with 2024 volumes forecast to top 14,500 t, setting the stage for a record year in that segment.
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Earnings Conference Call
Sociedad Química y Minera de Chile Q2 2024
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