Chemical & Mining Co Of Chile Inc Q1 FY2024 Earnings Call

Thank you. Good afternoon, everyone. Thank you for joining SQM's earnings conference call for the first quarter of 2024. This conference 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. Gerardo Illanes, our Chief Financial Officer, will be speaking on the call today. Carlos Diaz, Executive Vice President of Lithium; Mark Fones, Vice President of Lithium Development and M&A; Max Vial, Lithium Market Intelligence Director; Pablo Altimiras, Executive Vice President of Nitrates & Iodine; and Juan Pablo Bellolio, Commercial Vice President of Iodine and Industrial Chemicals, are also available to answer any questions. Our Chief Executive Officer, Ricardo Ramos, unfortunately, couldn't join the call today. 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 Financial Officer, Gerardo Illanes.

Thank you, Irina. Good afternoon, everyone, and thank you for joining us today. As you may know, we reported our first quarter 2024 earnings result yesterday. On this call, we will be discussing the key drivers behind these results and sharing our outlook for the year. Our total revenues for the first 3 months of the year reached almost $1.1 billion with an adjusted EBITDA of over $400 million. Our net profit was impacted by a onetime adjustment related to the accounting treatment of the lithium mining tax in Chile from previous years, adding up to almost $1.1 billion as of March 31, 2024. This is not having a significant cash impact since the majority of this amount, close to $930 million, was paid in prior years. During the first quarter of this year, we delivered strong growth in our sales volume across all of our major business lines, reporting record high quarterly sales volumes in the iodine business, positive sales volume recovery in the fertilizer business, and almost 30% higher lithium sales volumes compared to the same period last year. This growth helped partially offset the impact of lower average prices realized for the first quarter 2024. In our nitrates and iodine business unit, we are proud of the results of the ramp-up of the Pampa Blanca project, which is expected to reach approximately 1,300 metric tons of new iodine capacity this year. Also, a few months ago, we began the construction of a seawater pipeline, which is expected to be completed in 2026. It is an exciting development, but it's also a challenging project, almost 38 kilometers long with a total elevation of over 1,000 meters, running from the Pacific Coast near the City of Iquique to our Nueva Victoria operations. Once completed, the pipeline will have a capacity of 900 liters per second and will allow us to expand our production capacity even further while delivering fresh water to some neighboring communities. We have seen positive demand trends in the iodine and potassium nitrate market since the beginning of the year. Our outlook is that the iodine market demand could grow by approximately 4% this year, approaching 2022 levels. Our iodine sales volumes are projected to increase in 2024 compared to last year with an expected stable average sales price with a possibility of a slight upside. We are similarly optimistic about the potassium nitrate market outlook with expectations of up to a 15% growth in the demand this year. Our sales volumes are also anticipated to follow a similar pattern. Potassium nitrate prices have been relatively stable over several quarters, and we believe this trend could continue for the remainder of the year. In the lithium business unit, having completed expansion of our lithium carbonate capacity in Chile to 210,000 metric tons, we're now focusing on a series of initiatives that should allow us to increase this capacity to 240,000 metric tons by the end of the year, mainly through process improvements, increased quality, and efficiency of the existing production facilities. Our lithium hydroxide capacity in Chile has reached 40,000 metric tons per year, and we expect to complete this expansion to reach 100,000 metric tons per year during 2025. In China, we completed the modification of the Dixin lithium hydroxide conversion facility with a total capacity of 20,000 metric tons per year. This project represents years of innovation and development of a chemical facility to refine lithium sulfate produced in the Salar de Atacama to battery-grade lithium hydroxide. At the same time, we have reached agreements to toll approximately 20,000 metric tons of lithium sulfate coming from the Salar de Atacama into lithium hydroxide in China. All of this, together with the initiatives we're working on in Australia, should let us reach a total production capacity of more than 300,000 metric tons of lithium products by the end of 2025. Turning to the broader lithium market, we have observed some encouraging trends during the first month of this year. Strong demand growth has been driven by the electric vehicle market, mainly in China, which accounts for almost 75% of global lithium demand. We anticipate that the total EV sales could reach 17 million units by 2024, representing a 22% increase from 2023, and total lithium demand could exceed 1.1 million tons in 2024, representing a 20% increase compared to the previous year. Given this demand growth, we have anticipated our sales volumes outlook for this year, expecting to sell close to 200,000 metric tons. The expected growth in global lithium supply this year could be up to 30% compared to 2023. However, given current lithium prices, the expected supply from high-cost producers could be affected, providing some price stability, as has been seen since February this year. Before concluding and opening the line for questions, I would like to ask Mark to share with us some of the recent developments in our lithium initiatives abroad.

Thank you, Gerardo. Good afternoon, everyone. From an Australian and international lithium perspective, for SQM, it has been a very eventful and exciting start to 2024 with spodumene concentrate production commencing at the world-class Mount Holland project, jointly owned with our partner, Wesfarmers, and the completion of the Azure Minerals acquisition with Hancock Prospecting. We are very fortunate to now have access to 2 globally significant lithium deposits, which we are progressing with 2 equally significant Australian partners, Wesfarmers and Hancock Prospecting. Moving first to Mount Holland, last year, we commenced production at the newly constructed mine and concentrator facilities, exporting our first shipment of spodumene concentrate this month to be tolled in China. During this calendar year, we expect to produce a total of between 120,000 and 150,000 metric tons of spodumene concentrate that's SQM's share and to toll close to 5,000 metric tons of lithium hydroxide. However, given the timing of tolling and quality certification requirements, we do not anticipate seeing these volumes on the market until the end of the year. In the meantime, work continues on the Kwinana refinery with construction of our 50,000 tons per year facility at about 75% to 80% complete and expected to be in production by mid-next year, following commissioning later this year. We keep progressing with studies and environmental approvals for the Mount Holland mine and concentrator expansion, which would effectively see Mount Holland doubling its spodumene concentrate production facility after FID is taken. Moving now to the recent acquisition of Azure, which owns 60% of the Andover lithium project in Western Australia, also concluded this month. Together with Hancock Prospecting, we acquired all outstanding shares of Azure Minerals Limited and jointly became owners of 60% of the Andover lithium project. This significant investment by SQM further highlights our belief in Western Australia as one of the world's prominent hard rock lithium mining jurisdictions. We're extremely happy with this acquisition and with our new partner, Hancock, who will provide excellent project development and mining expertise in Australia to complement SQM's market-leading lithium knowledge. We believe our business model of partnering with great local companies to discover and develop Tier 1 lithium assets places SQM in a prominent position in the global hard rock lithium market. In 2024, we will continue to work the good work that Azure has done and work towards a resource estimate for the Andover project, as well as providing additional capabilities, continue with studies and regulatory approvals activities, as well as project definition and project development. While work still needs to be done to finalize this resource estimate, we are certainly looking at a deposit of global significance. Outside of these 2 major projects, as you may have seen in our public announcements, we continue to work on, monitor, and invest in various early-stage exploration projects in Australia with the aim of finding new high-grade lithium prospects with the potential for scale.

Thank you, Mark. Operator, we will now open the lines to questions.

I have 3 questions. I'd like to ask them one by one, if that's okay. First question is, I noticed in your presentation that the plant in China in Sichuan increased by 10,000 tons. It was 30,000 last quarter, and now it's 40,000. Can you just explain that, please?

Ben, this is Carlos Diaz. Yes, our capacity in China is 20,000 metric tons in the Sichuan Dixin plant, and the other 20,000 we are going to produce, starting from lithium sulfate, by working with tollers. So in total, it's going to be 40,000, with 20,000 from our factory and the other 20,000 for tollers, both coming from lithium sulfate.

Yes. Great. Second question is on the Azure acquisition. So you have a 50% stake in 60% of Andover, if that's right. Can you just talk about what next steps are for the project over the next 12 months or so, CapEx spending? And what should we expect to hear from you over the next year?

Thanks for the question. Yes, you're right on the math on the acquisition of the Andover lithium project, it's 50% of the 60%. So regarding next steps, as I mentioned, we are now aiming at 3 main things: a resource maiden estimate, driving more detail into what was already advanced by the Azure team. As you know, Azure issued an exploration target, which was a definition of between 100 million to 240 million tons of mineral at between 1% to 1.5% lithium oxide content. The maiden resource estimate will give us a more detailed view on that. At the same time, we are advancing on regulatory approvals, which usually, in this case of capital investments in the resource industry, is a critical path aimed at those regulatory approvals. So we are advancing on those, as well as starting project definition with our partner, Hancock. So for the future and the short-term future, you won't see any capital requirements emerging from Azure in the next steps of development until we move into the DFS and FID.

Great. For my final question regarding the iodine market, the price was approximately $70 but has dropped to the mid-$60s. It appears that the situation is improving again. Could you provide an overview of what to expect over the next two to three years? It seems there isn't much new supply coming in, and demand growth remains strong, even amid a challenging macroeconomic environment. Will this tightness persist in the coming years?

Ben, this is Juan Pablo. Well, talking about the iodine market, as we mentioned in our release, we are seeing a recovery in the demand compared to last year. Last year went down about 4%. Now we're looking at it growing again this year. That's why we believe the price is going to stabilize. Talking about the next 2 to 3 years, the drivers of the demand are still the growth of the contrast media industry, the LCD market, and other healthy uses of iodine. So we see that demand growing, maybe not at the 4% growth we're expecting this year, but still growing. At the same time, we expect that new supply may arrive in the market. We know that some competitors have made moves for acquisitions of projects that should be online in the next couple of years.

I have three questions to ask, and I'll start with the first one. A few months ago, it was evident that SQM was planning to produce a significant amount of lithium, and there were concerns about whether the market could absorb it, leading to a strategy of building inventory. While that strategy is common for various reasons, sales typically proceed regardless. Given that the lithium price market has remained relatively flat recently, can you clarify the reasoning behind the decision not to build inventory, or to limit inventory levels? Do you anticipate stability in lithium prices, suggesting that holding inventory may not be necessary?

Joel, this is Carlos Diaz again. Well, as always, our strategy is to produce at full capacity and expand in line with the expected market growth to always be prepared to serve the needs of our customers. You know that the lithium price hit bottom levels in China by the end of February '24, after which we observed a quick recovery of almost 10% until mid-April. For several weeks after that, price fluctuations were quite moderate, potentially indicating more stability for the rest of the year. So the outlook for the rest of the year will depend, as always, on the supply and demand balance.

Okay. You talked about capacity reaching 300,000 tons at the end of 2025. Let's call that a production level for 2026, if you choose to produce at full utilization, as you just mentioned. If you can hit capacity of 305,000 at the end of 2025 and you were to run full out, what does that mean for actual production volumes in 2025? Obviously, 305,000 tons is the capacity at the end of the year.

This year, we expect to produce around 210,000, which is according to our capacity in Chile, that Gerardo already mentioned, and the capacity that we have in China and additionally in Australia. But for next year, we're still reviewing that. What was announced was 250,000 this year, 240,000 in Chile, and 40,000 in China, so 280,000 next year. That is going to be the capacity. Yes, that is going to be the capacity, and 310,000 finally in the year '25. How much we're going to produce? Well, we'll have to see, obviously, how the market is, how the customer needs, and so on. But I will always expect to sell according to our capacity. It should be close to that.

My last question needs to be asked. It's a two-part question. What is the remaining issue with finalizing the MOU with Codelco, which you mentioned is expected to happen within a week by the end of May? Additionally, Gerardo and team, how concerned are you that Tianqi might pursue legal avenues to initiate a shareholder vote? Are you preparing for the possibility that, in the event of a complicated outcome, you may need to acquire Tianqi's stake? How are you planning to manage this situation financially?

Joel, this is Gerardo. As you can imagine, the deal with Codelco is quite a complicated deal with a lot of details. We have been working really, really hard to meet the deadline. Last year, we had a deadline to issue something by the end of the year. At the end of December, we issued this MOU. Now, we're working to make sure we have all the contracts finalized by the end of the month, and we keep on working on that. There is no particular sticking point as you ask. It's just that it's a complicated transaction.

And on the Tianqi shareholder vote, are you preparing financially to be able to protect yourselves in the chance that in a very complicated legal situation, Tianqi puts its shares to you?

The transaction, as it was requested at the beginning of this year to the CMF, must be approved by the Board. We are planning that it will happen this way. Once the contracts are signed, we will proceed with all the details to have the joint venture ready by the beginning of next year. But we're not planning for anything else as the process should go as the regulator instructed.

So, my first question will be on the lithium expansion. Given the increased capacity guidance that you provided for 2025, we'd like to understand where these investments will be made. You already mentioned the 10,000 tons additional in tolling in China. But we'd like to understand what it would take for you to reach the increased 30,000-ton capacity in Chile. Does it only need improvement in terms of efficiency, or does it require investment in more refining capacity as well? Just to understand how close you are already to your capacity in terms of refining and in terms of brine extraction.

Okay, Gabriel, thank you for your question. It was already explained a little bit by Gerardo, but in the last year, we have been focused on increasing the capacity in Chile as lithium carbonate. Now, we are focusing on increasing lithium hydroxide. We have already reached a capacity of 210,000 in lithium carbonate. Now, we're working to increase the bottleneck area of the carbonate line and increasing lithium recovery. This initially has a lower capital expenditure intensity compared with the new production line. So, it's not as significant as it was when we were building new lines, because our focus is on debottlenecking. We are working, obviously, to keep increasing in the future, focusing now on lithium hydroxide, aiming to reach the 100,000 metric tons by the last quarter of next year. I hope that answered your question.

It does. Thank you. And I have just one more question on the lithium cost. A few quarters ago, you mentioned that you'd start focusing on increasing efficiency in production, not only to increase production but also in terms of costs. In this quarter, the cost you reported was already better than our estimate. But we would just like to understand what is the sustainable level of production cost that we should see for SQM's lithium production in the future, particularly in the Salar de Atacama, and when you would expect to get there, given the initiatives you are making right now.

We expect future costs to remain stable or at the same level as today. We expect to reduce, obviously, because we are increasing capacity and gaining synergy. However, on the other side, we may have higher costs because we are focusing on producing higher quality. So, as a summary, I would say it's going to be a stable cost compared to what it's been this year and last year.

I have 2 questions. The first one, to come back on the MOU and Tianqi situation. So, let's say you get the MOU finalized and signed by the end of next week. Basically, can Tianqi still continue creating some issues around this? Or if you sign the deal next week, would that just seal the deal and basically all the regulatory affairs that you have had issues with would go away?

Corinne, this is Gerardo. We are working on the final documents for the agreement with Codelco that was described in the MOU published at the end of last year. The approval process on our end was discussed or was requested from the regulator in Chile, the CMF, at the beginning of the year. The regulator was quite clear on the way this has to be approved, which is at the Board level. Once the contracts are ready, the Board will meet, review the details of the contracts, and take a decision. On the Codelco side, to be quite honest, I'm not that familiar with how the process goes on their end to get the approval steps. But this is what should happen on our end.

And the second question would be, what do you see industry-wise in the channel, in terms of inventory? Are you seeing a restocking move happening again, or is it still a steady course?

Corinne, we have a healthy inventory. If you see, this year, we expect to produce 210,000 and to sell 200,000. So already, we will have more inventory in the chain because we are increasing the sales. We want to have enough inventory to supply to our customers. We have inventory in Chile, in China, and a lot of inventory there because, obviously, our main sales, more than 70% of our sales, are done in China. We have different warehouses. And in Korea, as you know, I would say that that's the most important place where we have inventory. We are in a healthy position regarding inventory, and we want to keep it that way. We are not speculating with the price and so on; we just sell what the customer needs according to our production.

Yes. Regarding the $1.1 billion tax impact booked in the first quarter of 2024, must we now assume that going forward, our estimates must now include a higher mining tax? Is this reasonable to assume for the quarters ahead? And my second question is actually more clarification for the incremental 30,000 that you plan to increase in the Carmen complex by 2025. You just mentioned that you will manage to achieve this via higher recovery, which is less capital intensive. Can you comment on how much less intensive this is on a per ton basis? And is this already included in the $1.3 billion CapEx you reiterated in your press release for 2024?

Cesar, this is Gerardo. Regarding the onetime tax hit in the first quarter, it's related to the interpretation that the tax authorities have on the lithium mining tax, where they understand that lithium is subject to mining tax, and we are of the understanding that it's not. We have had this dispute for a few years. It has been described in detail in our financial statements. Because of the ruling of the appeals court in April, we have changed the accounting treatment of this tax, which, by the way, has been paid by the company every time we have been invoiced by the tax authority. So that's why it doesn't have a significant cash impact on our balance sheet. Going forward, the treatment of these tax payments should continue to be exactly the same as it is today or as it was reflected in the first quarter financial statement, as a function of the mining tax in Chile. To give you an idea, the impact in the first quarter, which is again, a function of the price of lithium and the profitability of the business, was approximately $8 million. Going forward, we will continue to book that as tax expenses, depending on, of course, how the legal case continues.

Cesar, Carlos Diaz again. As I mentioned before, at the beginning, we were focusing on increasing the capacity, adding the new lines. After we finished that, now we are focusing on debottlenecking the area, where we expect if we increase those equipment or unit, we can easily increase the total capacity of the same plant. There will be no new lines. We're just doing the debottlenecking of those areas. So, that is why we estimate, let's say, $70 million could be a little bit more, but around that range. To gain another 30,000 metric tons, if you do the math, it's around $2,300 per ton. But just because it's a debottlenecking asset, you cannot expect the same production increase at the same cost.

Thank you, everyone, for joining today. We look forward to having you on our next call. Goodbye.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.