Chemical & Mining Co Of Chile Inc Q2 FY2024 Earnings Call

Thank you. Good afternoon. Thank you for joining SQM's earnings conference call for the second quarter of 2024. This conference call will be recorded and is being webcast live. Our earnings press release and the presentation with a summary of the results have been uploaded onto our website where you can also find a link to the webcast. Ricardo Ramos, our Chief Executive Officer, will be speaking on the call today; Gerardo Illanes, our Chief Financial Officer; Carlos Diaz, CEO of SQM Salar; Mark Fones, CEO of SQM International Lithium; Felipe Smith, Commercial Vice President of SQM Salar; Pablo Hernandez, Senior Director of Business Strategy and Development, SQM Salar; Pablo Altimiras, CEO of Iodine & Nitrates; and Juan Pablo Bellolio, 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.

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 are very pleased to have entered into a partnership agreement with Codelco to jointly operate the Salar de Atacama until 2060. Based on the principle of private-public alliance, we believe this agreement is a pivotal moment for both SQM and the future of the lithium industry in Chile. While there are several conditions precedent for the partnership to become effective, together with Codelco, we are committed to ensuring that these conditions are met by the first half of 2025. We are looking forward to working together with Codelco to operate the most sustainable lithium operation in the world, based in the Salar de Atacama. Our second quarter results were positively impacted by a strong volume flow in all our major businesses, supported by a strong demand growth in their respective markets. We reported record sales volumes in lithium and iodine businesses, exceeding 52,000 metric tons and 4,000 metric tons, respectively. We anticipate solid growth in the lithium market this year, driven by a strong EV performance mainly in China. Demand growth in the iodine market this year exceeds our expectations. We expect this trend to continue for the remainder of the year and believe that our iodine volumes could exceed 14,500 metric tons this year, marking 2024 as a record year. While our average realized price in the lithium business improved slightly in the second quarter 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 third quarter could be lower than in the previous quarter, given the current price environment. We are convinced that most of the greenfield projects are not profitable. While we continue with our previously announced capacity expansion projects, we are also reassessing the attractiveness of certain markets 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. We recently formed SQM International Lithium to develop our lithium business outside of Chile. This 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 open to the line of questions.

Our first question today is from Joel Jackson with BMO Capital Markets.

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. Yet, SQM is maintaining 24 production targets with sales volume possibly slightly lower. Obviously, SQM has a unique quota system with CORFO and the lease that was previously expiring, which encourages maximizing production. But shouldn't SQM, as the market leader, be disciplined and maybe lower volumes?

This is Felipe Smith here. I'm not sure if I understood correctly your question, but let me rephrase that we estimate that the sales in the second half of 2024 will be similar to those reached in the first half of 2024. Meaning that our annual sales could be around 190,000 tons, with a potential upside should market conditions recover.

Just a 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.

This is Carlos Diaz. I’d like to share some information about our capacity in Chile. According to our schedule, we expect to produce 210,000 tons of lithium carbonate equivalent this year, which includes different qualities of carbonate, hydroxide, and sulfate. We also expect to convert 30,000 tons in China. We are still evaluating the volume to be converted in China for lithium sulfate into hydroxide or carbonate during the second half of the year. The total volume converted in China will depend on the specific market segment and the current price environment. Ultimately, it will rely on how prices trend in the coming months. I'm not sure if I fully addressed your question.

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

Moving forward, 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 Futuro project we will develop together, we expect to increase some production in Salar de Atacama with the project, of course. But this is mainly Chile, it's 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 in new projects in Australia in the medium term. I don't know, but we are working very hard in order to do it.

The next question is from Ben Isaacson with Scotiabank.

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 seeing any challenges in finding buyers for that lithium inventory? Are you holding an anticipation of demand and pricing picking up in the near term?

We anticipate selling approximately 190,000 metric tons of lithium carbonate this year and producing around 210,000 metric tons. This translates to about 20,000 metric tons sold in a month. We are also preparing for next year, where we expect slightly higher sales. This is a solid investment in working capital, and we believe our inventory levels are healthy.

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

Felipe again. So indeed, SQM's price mechanism is based on price indices in the different geographies with a certain lag, which averages approximately one 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 the second quarter, we observed a certain price recovery, which unfortunately lasted until mid-April. Then we saw price fluctuations that were quite moderate. But over the last three 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.

And if I may sneak in...

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

Hello, can you hear us?

We can hear the main speaker, but we can't hear the questioner.

Let's go to the next question, please.

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

So I have a couple of questions. First of all, on lithium. When you say SQM is looking for good valuation, are you evaluating the markets and what's attractive at these levels? I wonder what exactly you mean by that, and what things are being taken into consideration here. And also, on the international expansion, if you mentioned 100,000 tons by 2030, could you give us a sense of what the main regions are focused on, what the main raw materials are, and what type of cost production should we be thinking about for these 100,000 tons?

We expect to produce slightly over 200,000 tons in Chile, with 30,000 to 40,000 tons coming from lithium sulfate in Salar de Atacama, which will then be sent to China for conversion into lithium carbonate and hydroxide. We may reassess this based on market conditions and the anticipated production in China in the latter half of the year.

Mark Fones here speaking. Regarding future projects in Australia and what was mentioned in the press release about achieving 100,000 tons per year of lithium carbonate equivalent production by 2030. As you know, we've been quite active in Australia. We have gained access to two world-class lithium deposits, the Andover project and the Mt. Holland project, both of which are expected to be significant in scale, and we are already discussing expanding the Mt. Holland project. Additionally, we are continuing to work on, monitor, and invest in various early exploration projects not just in Australia but also globally. We recently announced a new partnership in Sweden with Talga Group, all aimed at developing innovative and cost-effective early-stage products in the long term. We plan to be a lithium chemical processor, not only in Chile but also internationally, leveraging SQM's expertise and technology to reduce production costs.

The next question is from Lucas Ferreira with JPMorgan.

I have two questions. First, could you clarify that I'm observing an 8% increase in your average cash cost per ton of lithium quarter-over-quarter, which seems to be impacting your gross margin negatively? I was expecting the opposite, as I thought the lease payment allocations would decrease with lower prices, and higher volumes might lead to fixed cost dilution. Additionally, the depreciation of the peso should be beneficial as well. Can you explain why costs were higher this quarter specifically? Secondly, regarding Ricardo Ramos, just to confirm, have you signed the contract with Codelco for the joint venture? You mentioned that certain conditions must be fulfilled. Can you outline what the next steps are for the joint venture to be established and operate smoothly, and how long that process might take?

Ricardo Ramos speaking. We published the agreement with Codelco is available for everyone on our web page, and there's a list of conditions precedent included in the contract. You can check it, but they are mainly legal ones that we have to follow, some steps in the companies, and so on in the bylaws. But we're working on that, and we are going to be ready as we speak in the first quarter of next year. But if you want to review in detail these conditions precedent, those are included in the contract that is public.

Lucas, this is Carlos Diaz speaking. Well, with respect to your first question about the cash cost of lithium, this is mainly explained because of the inventory adjustment related to the lithium sulfate. The lithium sulfide that we export to China that we later convert to carbonate hydroxide was exported during the second quarter, where the prices were higher. The royalty is paid at the moment we export. So we had an effect mainly related to that, the royalty that we paid to CORFO sold in Chile.

So if I may, just a quick follow-up. What's your lithium cash cost today? Is it around 5,000? Is this something we can work with?

Our cost is stable during this period. I mean, we don't see a significant change. What I commented before was mostly related to the royalty that we pay, as we pay at the moment we export and not when we pay at the moment we sell. 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 effect that is in the lithium sulfate.

I apologize, but I have one last question regarding the royalty. Can you confirm if the quota from the previous contract with CORFO before 2017 is in place? As of this year, should you be exploring part of that quota, approximately 50,000 tons a year at fixed flat rates? Is this already implemented? Eventually, this would flow into the P&L in future sales. Please confirm.

Lucas, this is Gerardo. Yes, what you're saying is right. And for those who are not familiar, when we signed a new contract in 2018, we had a balance under the previous contract at a fixed rate of 6.8% with CORFO. According to the new contract, 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.

The next question is from Alejandro Demichelis from Jefferies.

Yes. I have a question about the Codelco agreement. You mentioned that you will meet the condition of preference in the first half of 2025. My understanding is that this will lead to an increase in capacity. Are there any discussions with Codelco about what might happen with that increased capacity in 2025?

No. We are not having marketing or commercial discussions with Codelco yet because part of the conditions precedent are some authorizations and following the antitrust rules. We need to have the agreement ready before starting to talk about its commercial strategy.

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?

As someone said before, we're a very disciplined company. This 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.

The next question is from Santhosh Seshadri with HSBC.

Just a follow-up on cost. So how do you expect costs to pan out through the rest of the year in light of electricity price increases announced in Chile? And do you have any cost mitigation program in place, possibly by reducing production of your hydroxide volumes in Chile, which has a relatively higher cost base? Or maybe by slowing down ramp-up at the Mt. Holland project?

This is Carlos Diaz. Always, our focus is to reduce our cost and to look for our tendency to keep increasing the quality and reducing the cost and our carbon footprint and so on. But we're not really thinking of reducing our capacity in hydroxide. I don't know if that was your question, but no, we continue with our plan to expand in lithium carbonate and hydroxide in Chile.

And just a question on your Mt. Holland project. Are you planning to slow down ramp-up given the adjusted economics? And what would this mean for the sales contribution in 2024 and 2025?

Mark Fones here. Thanks for your question. No, we continue full throttle managing the Mt. Holland project. We, as you know, are already producing spodumene concentrate from the mine and concentrator. We have already produced more than 100,000 tons of spodumene concentrate. We will continue to increase productivity, reduce costs, and maintain quality in the future. On the refinery side, we have already above 80% construction completion. We are starting commissioning at the refinery, which we expect to have the first product in mid-2025, so mid next year. Once completed, we expect the plant to be fully profitable and to increase and add value to SQM with respect to freight.

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

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

The next question is from Marcio Filho with Goldman Sachs.

I have a couple of questions. When you look at net income year-to-date, it's still negative by about $650 million. I understand this is primarily due to $1.1 billion incurred early in the year. I'm trying to get a better understanding of the situation.

Marcio, I apologize for interrupting, but there seems to be an issue with your microphone. Let's move on to the next question, and we can return to you later.

The next question is from Cesar Perez-Novoa with BTG Pactual.

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 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?

There are two different projects connected, but our long-term strategy is to continue increasing our capacity in Chile. As I mentioned before, we aim to grow lithium carbonate and hydroxide at the same rate as demand. In the short term, we may need to reduce conversion in China due to unfavorable prices for the bids we are pursuing. This is something we might have to do in the short term, but it differs from our long-term plans because we believe the market will continue to grow in the future.

The next question is from Corinne Blanchard with Deutsche Bank.

The first question is just related to the pricing. Is there a scenario or are there certain prices, like spot prices, at some point that you could be thinking about having contracts with a negotiated price? So basically, the question is that are you considering at some point moving back to fixed price contracts or having a stronger flow with selling prices?

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.

Fair enough. The second question, can you please give an update on the Tianqi situation? I mean, we saw a lot of filings since there are not a lot of further options for them to do anything. But just trying to understand the view here would be very helpful.

The Tianqi situation is a public matter. We have the same information that is available in the press. This indicates that Tianqi has a differing viewpoint compared to the Chilean regulator, the CMF, regarding the transaction. They have appealed to the court with their perspective, and we are also involved in the appeal, sharing our opinion. This situation is not new and has been publicly discussed. Tianqi has openly communicated their statements and viewpoint, and our company has likewise been transparent about our stance. The regulator, CMF, has also clearly expressed their opinion on this specific issue.

Can they take any additional steps? We're just trying to understand what might happen next, or if this is simply a fixed cost at this point.

You should ask Tianqi about their potential future actions, as I really don't know. However, in this situation, we are very optimistic about the court's decision and hope it will conclude soon. If Tianqi has other plans, you would need to inquire with them, as I don't have that information.

The next question is from Camilla Barder with Bradesco.

So just a quick question on my side. Regarding the deal with Codelco, could you please elaborate on the main challenges and discussions with local communities? 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?

Regarding the deal with Codelco, we are actively engaging with the local communities as part of the new agreement. It's essential to seek their input, although it isn't binding, it holds significant weight for CORFO and the companies involved. We are focused on completing this process as swiftly as possible. Our relationship with the communities is progressing well; there is a mutual openness, and we aim to address any differences that arise. Concerning our capital expenditures, we believe that our current investments in the lithium sector are appropriate, and we view our projects in Australia positively. We do not anticipate that the current pricing of lithium reflects the long-term market trends. The current pricing environment is unique, but we are confident that prices will change in the future. Thus, we have a definitive investment plan for lithium, backed by our commitment and our position as a low-cost producer, which leads us to continue investing.

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

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

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 fraction 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 first quarter, the result is negative. And because of that, the net income that the Board has approved as an interim dividend has been zero. So it depends on what will happen in the rest of the year, but the policy is quite clear in that regard.

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

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