Chemical & Mining Co Of Chile Inc Q3 FY2025 Earnings Call

Good day, and thank you for joining SQM's earnings conference call for the third quarter of 2025. This call is being recorded and webcast live. Our earnings press release and accompanying results presentation are available on our website, along with a link to the webcast. Today's participants include Mr. Ricardo Ramos, Chief Executive Officer; Mr. Gerardo Illanes, Chief Financial Officer; Mr. Carlos Diaz, CEO of the Lithium Chile division; Mr. Pablo Altimiras, CEO of the Iodine and Plant Nutrition division; and Mr. Mark Fones, CEO of the International Lithium Division. Also joining us today are members of our commercial and business intelligence teams. Mr. Felipe Smith, Commercial Vice President of the Lithium Chile division; Mr. Pablo Hernandez, Vice President of Strategy and Development of the Lithium Chile division; Mr. Juan Pablo Bellolio, Commercial Vice President, Plant Nutrition and Specialty Products; and Mr. Andres Fontannaz, Commercial Vice President of International Lithium Division. Before we begin, please note that statements made during this call regarding our business outlook, future economic performance, anticipated profitability, revenues, expenses and other financial items, along with expected cost synergies and product and service line growth are considered forward-looking statements under U.S. federal securities laws. These statements are not historical facts and are subject to risks and uncertainties that could cause actual results to differ materially. We assume no obligation to update these statements, except as required by law. For a full discussion of forward-looking statements, please refer to our earnings press release and presentation. With that, I will now turn the call over to our Chief Executive Officer, Mr. Ricardo Ramos.

Thank you. Good morning, everyone, and thank you for joining us today. During the third quarter, we experienced a more favorable pricing environment for lithium compared with the previous period. Although the market remains highly volatile, we are cautiously optimistic. Our realized average prices increased. And while we expect this positive trend to continue in the fourth quarter, we remain focused on high-quality production, being a reliable supplier, increasing volumes and continuing to advance our cost reduction initiatives. Demand fundamentals remain strong, not only for electric vehicles but also from energy storage systems, which already account for more than 20% of global lithium demand. Operationally, the quarter was very strong. We delivered the highest lithium sales volumes in SQM history, supported by low cost and strong efficiencies at our Atacama operations. Our Australian operation also continued to progress as planned. Spodumene sales increased significantly. We initiated lithium hydroxide production, and we reached record sales volumes of spodumene concentrate, an important milestone from this project. We expect commercial activity to remain robust in the fourth quarter. Outside the Lithium segment, performance was also solid. In Iodine and Plant Nutrition, results remained strong. Iodine prices continue at high levels with a balanced supply-demand environment. Construction of our seawater pipeline is now more than 80% complete, giving us the ability to bring additional iodine to the market earlier than expected, if required. We are also expanding our iodine production capacity through the development of a third operation in Maria Elena, which will add 1,500 tons of iodine capacity. This further strengthens our long-term supply position and reinforces our reputation as a reliable supplier. In fertilizer, we continue to see healthy demand and stable prices across most key markets. Our Specialty Plant Nutrition business delivered discrete but sustainable growth compared with last year, both in volumes and revenues. The shift toward tailor-made solutions and higher value blends continues to improve our product mix and supports our strategy of allocating products to the most attractive markets. In iodine, revenues increased 5% year-on-year with prices averaging close to $73 per kilogram. The x-ray contrast media segment, the largest end-use application continues to grow steadily and remains a key driver of long-term demand. We also completed a detailed review of our CapEx program for the period 2025 to 2027. Total CapEx is now estimated at $2.7 billion over the 3-year period. Our plan maintains a focus on increasing production capacity, preserving low cost, ensuring high product quality, and upholding strong sustainability standards. While some investment decisions have been delayed, this does not affect our ability to meet the production and sales objectives set for each of our divisions. Finally, as announced last week by SQM and Codelco, we received approval from China's antitrust authority. We look forward to advancing this joint venture before the end of the year. Thank you.

Our first question comes from Joel Jackson at BMO Capital Markets.

I'll ask my questions one by one. Can you talk about what you're seeing right now in lithium demand? Particularly, I wanted to maybe investigate, it seems like inside China, the demand forecast for lithium is a lot higher, like forecasts coming from Chinese forecasters as opposed people outside China in the Western world seem to have lower demand forecasts. Do you see this disconnect? Is it around energy storage in China? Can you talk about that?

Joe, Pablo Hernandez here. So regarding 2025 demand expectations, we have recently improved since our last earnings call, so driven by stronger-than-expected EV sales, particularly in Europe and the sharp increase that you mentioned in BSS shipments. So we expect demand to reach over 1.5 million metric tons this year, representing over 25% growth. In terms of China, it continues to maintain a significant lead in the EV market. We expect 30% year-on-year growth, representing more than 60% of global EV sales. And regarding the other significant EV markets, Europe this year had a very strong first 3 quarters with more than 30% year-over-year growth. In the U.S., they still had a slower growth of 10% year-over-year, while the rest of the world, of course, had strong numbers reaching 40% year-over-year growth.

Okay. On your last quarter, you talked about Chilean production for lithium to be up about 10% for you, and then you have about 20,000 tons for your share at Mt. Holland. Are you still maintaining that 10% year-over-year at Atacama? And then should we now expect something closer to 24,000 to 25,000 tons for the year out of Mt. Holland in spodumene?

Joe, this is Gerardo. Just to be clear, are you asking about production or sales?

You provided guidance last quarter indicating that Atacama production or sales would increase by 10% this year, with an expected 20,000 tons from Mt. Holland. In this quarter's release, you mentioned that Q4 volumes would be similar to Q3 at Mt. Holland, suggesting more than 20,000 tons from there. Can you clarify what you anticipate for Atacama? What production levels do you expect in Chile this year? What about in Australia?

Joe, this is Carlos Diaz. Well, our production in Chile is going according to schedule. We expect to produce this year close to 230,000 tons of lithium coming from the Salar de Atacama. 180,000 of those processed in Chile and 50,000 is going to be processed in China, starting for our lithium sulfate production that we have been very successful with. We'll continue working with the expansion for next year, and we expect to grow next year. We still don't have the final figure, but we continue working to increase the production. That is regarding to the lithium production in Chile.

Joe, this is Mark Fones. To answer the second part of your question, yes, we maintain our production estimation or forecast for this year, which you may recall was between 150,000 to 170,000 tons of spodumene concentrate at 5.5%. So that still holds. And regarding the sales projection, which you were referring to of 20,000 tons LCE for this year, you're also right, we are increasing that to a range between 23,000 and 24,000 tons.

Okay. That's perfect. And then my last question would be, when we look at the different average selling prices for lithium that you get between Chile and international, it's about a $3,000 to $4,000 a ton discount. Should we think of that as that's the conversion costs that are basically embedded because you have to pay a toller to produce spodumene on an LCE basis? And then would we expect that international price discount versus the Chilean price realized to decrease across 2026 as you ramp up the Kwinana hydroxide conversion plant?

Joel, this is Andres Fontannaz. Regarding prices for the SQM International Lithium division, please keep in mind that most of our sales are concentrated on spodumene. So more than 90% of our third-quarter sales were explained by spodumene. And right now, we are reporting all of our sales as lithium carbonate equivalent. So in order to compare those prices with the prices that we are getting in the Chilean operation, you need to take into consideration the conversion factors and also the refining costs. So that would make a more fair comparison.

So my question is, as Kwinana increases production in 2026, shouldn't the international price on an LCE basis move closer to the Chilean price as Kwinana ramps up next year?

Joel, this is Gerardo. Don't worry, next year or starting from next quarter, we're going to report the numbers from Australia as the product is sold. So if it's spodumene or lithium hydroxide, you will see the breakdown. So you will not have this confusion of prices without the conversion cost or not.

Our next question comes from the line of Lucas Ferreira from JPMorgan.

I hope you can hear me well. My first question is to clarify the production situation in China. Are you currently operating at 50,000 tons there? I recall that the capacity was around 30,000 tons, with the possibility of an additional 20,000 tons. I'm curious if there will be further capacity available in China next year if the market remains favorable in terms of pricing. Is China prepared to reach full capacity? Additionally, I have a follow-up question regarding the joint venture with Codelco. If the signing occurs, as Ricardo mentioned, by the end of the year, will SQM need to make any retroactive payments for 2025, considering the delay in finalizing the contract? In other words, when assessing the company’s free cash flow, even though it likely consolidates fully, should we expect any adjustments or cash transfers to be aware of once the contract is signed?

Lucas, Ricardo speaking here. First, you're right in terms that we have to pay a dividend to Codelco during next year. This dividend will be in relation to the tonnage volume that belongs to Codelco according to the joint venture agreement. And we will put in our accounting this value as soon as we finish the agreement. It has been stated very clearly in our financial statements that we have to do it as soon as we have the agreement with Codelco. And it is reflected, and you can calculate the number because it's quite clear in the agreement with SQM and Codelco that is a public agreement.

Lucas, Carlos Diaz again. Regarding your first question about our production in China, we expect to produce approximately 100,000 metric tons of lithium sulfate this year. When compared to lithium carbonate and hydroxide, this is equivalent to around 50,000 tons. Of this total, 20,000 will be produced at our plant in China, while 30,000 will be produced in collaboration with third parties. For the upcoming year, we anticipate continuing to increase lithium sulfate production and are exploring options to expand our capacity at our own plant in China. That is our plan.

Our next question comes from Ben Isaacson from Scotiabank.

This is Lucy on for Ben. And I have 3 questions. With the CapEx plan lower and lithium prices start to rise, how should we think about the need to raise capital in 2026? Is it fair to say that the base case scenario is no capital raise?

Lucy, this is Gerardo. Well, you can see our balance sheet. We have a very strong balance sheet, and we have always had a strong balance sheet. And on these days, even at the current pricing environment, some of our main KPIs are improving. We are deeply committed to maintaining a strong investment grade. And there are several levers we believe can be pulled before pulling the last one, which is raising capital. So we're working on several initiatives. And as long as we keep on having a strong balance sheet, it may not be needed.

For my second question, earlier this week, Ganfeng suggested that lithium demand could grow by 30% to 40% next year. Do you have any initial thoughts on demand growth for next year? Specifically, what is your outlook on the development of demand for ESS next year?

Lucy, Pablo Hernandez here. So regarding Ganfeng, of course, we will need to look into their assumptions. But of course, this looks like a good and optimistic projection for next year. In our case, regarding 2026, we're still assessing demand growth expectations, and we remain relatively conservative with the expectation to reach more than 1.7 million metric tons. The main driver will continue to be the EVs and of course, as you mentioned, the very strong demand that we've seen on the BSS side.

Perfect. And finally, how much R&M production growth do you expect to see in 2026 that is not from SQM? And is it all Chile based?

Pablo Altimiras speaking. Well, regarding third-party production, I mean, with the public information that we have, we believe that most of that will come from Chile, from caliche ore. And we don't have the exact figure, but our expectation is that, that amount will not surpass the growth of the total demand.

Our next question comes from Andres Castanos-Mollor from Berenberg.

Can you please update us on the progress to closing the deal with Codelco and remind us what the milestones are pending? What happens if it doesn't close by 2025? Is there a long stop close there? What will happen?

Sorry, this is Ricardo speaking. As we announced, we have reached an agreement with the antitrust authority in China, which was the last external authorization we needed. Everything is now under review, especially the agreements between CORFO and Codelco, which are being examined by Contraloria in Chile. Contraloria acts as an internal auditing body of the government that must review these kinds of contracts. We expect this review to be positive and completed before the end of the year. There won't be a second review; we will close this year, that’s for sure.

That's great. Another question, if I may. This would be asking on 2026 expected mix out of Australia. What mix of spodumene and hydroxide do you expect to get out of Australia in 2026? If you could indicate something about this.

Andres, this is Mark Fones. We have not yet closed our budget for next year on production for Mt. Holland. What I can tell you is that the mine and concentrator at Mt. Holland, we expect to be producing at capacity. So of course, we will be expecting half of Mt. Holland's capacity in terms of spodumene concentrate. What happens with the ramp-up on the refinery on the other hand, is that we've announced the first product this year, as you well know, and we will be ramping up production until almost reaching nameplate capacity by the end of 2026. What's the exact amount of that lithium hydroxide considering all the good work that has been performed covalently with Wesfarmers and SQM at the refinery in addition to all the challenges as any ramp-up in a capital project will happen next year still remains to be seen, and we will let the market inform in due time.

Our next question comes from Corinne Blanchard from Deutsche Bank.

I would like to get more information on the CapEx reduction. You have reduced it by about 22% compared to last year. However, in the press release, you mentioned that this decision will not impact any capacity or projects. I'm unsure how to interpret this. Could you clarify the reasons behind the CapEx reduction, the business or segment it pertains to, and whether any projects have been deferred beyond 2027? That would be helpful.

Corinne, this is Gerardo. Let me provide you with an overview of our announcement. Yesterday, we shared that our CapEx program for the years 2025 to 2027 is projected to be approximately $2.7 billion. Of this total, around $1.3 billion is allocated for the Lithium Chilean division, primarily focused on completing the expansion of lithium hydroxide production to achieve 100,000 metric tons by early next year. Additionally, we are aiming to expand lithium carbonate capacity to 260,000 metric tons in Chile while also advancing initiatives for lithium sulfate production, which is significant, as Carlos mentioned previously. For the International Lithium division, the CapEx included in the $2.7 billion is roughly $700 million, encompassing about $400 million for the expansion of Mt. Holland and initial steps for Azure. Both projects await approval from our partners, but this is what falls within the designated timeframe. Lastly, in the Iodine and Plant Nutrition business line, the total CapEx is projected to be around $800 million. This includes the seawater pipeline expected to be completed next year, which is crucial for enhancing our iodine production flexibility, as well as the Maria Elena iodine production site that will enable us to increase iodine capacity at this time.

Maybe the second question, coming back to the Codelco agreement. Are you still waiting for the local group to be concerted? And if so, can you provide an update of where you stand with them?

No, no, no. Sorry. Regarding the communities, we had the agreement with the communities that was, I think, a couple of months ago. It was publicly released that we had the final agreement in order to move forward. And the only one that has already explained to you is the internal auditing body of the government that is reviewing the agreements between CORFO and Codelco. After they finish their review and their approval, we will continue with the joint venture start-up.

Thank you. Our next question comes from the line of Marcio Farid from Goldman Sachs.

A quick follow-up from my side, please. You mentioned the demand expectations. I think you mentioned 25% growth to 1.5 million tons. I wasn't sure if that was related to 2025 or 2026 because in the presentation, you mentioned 20% expectations for demand growth for '25. And if you can also detail how you're seeing demand for 2026? And also maybe provide some more details around ESS demand, which has been calling the market potential for the last few weeks would be great. And then I'll have a few follow-ups as well.

Marcio, this is Gerardo. Please hold on for a moment while I respond to your question. I want to clarify my earlier statement regarding lithium production capacity in Chile. I mentioned 260,000 metric tons of lithium carbonate production capacity, but it actually refers to a total of 260,000 metric tons of lithium production overall coming from Chile, including lithium chloride or toll from lithium sulfate in China.

Marcio, this is Pablo Hernandez. Regarding your question, the information I provided about over 1.5 million metric tons with a 25% year-over-year growth pertains to 2025. For 2026, we expect this figure to exceed 1.7 million metric tons. Specifically for BSS, as you noted and as has been addressed during the call, we anticipate strong demand growth in BSS, which we estimate to be between 40% and 50% year-over-year this year, and we expect those figures to remain stable next year as well.

That's great. And maybe another follow-up on the Codelco deal. Can you provide us with the expectations regarding the need for a revision of your offer license if you proceed with the plan to produce nearly 260,000 tons overall with Chilean assets? Ideally, it would be best to defer as much capital expenditure as possible until the joint venture becomes effective in 2030. I'm wondering if there are any capital expenditures related to Salar Futuro that we can expect to be incurred before 2030. Or can you postpone that to after 2030 when the joint venture becomes effective? That would be great.

Okay. First, the agreement will go into effect the same day we signed the agreement that is going to happen in the next few weeks, I hope so. After we sign the agreement with Codelco, the agreement starts. We don't need to wait until 2030. But you are right in terms that Salar Futuro is a great, great project, and we are working very hard on it. We expect to submit the environmental study to the authorities and communities during next year. And it's going to be a complex project, and probably we will reach the final agreement during 2029 or 2030, means that the initial investment in Salar Futuro that is a big project and a very interesting one, will be 2030 or 2031 starting investment. It means that it will not affect the CapEx in the next 3 or 4 years. It will not affect 2026, '27, '28, and we will continue with our current plan of projects in the Salar de Atacama as usual. That's why this project will have a significant impact, yes, and a very positive one starting, I hope, 2030, if not 2031.

That's great. And maybe one last one on iodine. Obviously, the market has been strong for a couple of years now. I think you're going to be adding about 5,000 tons of capacity once the new pipeline and Maria Elena is ready. So can you talk a little bit about overall supply and demand conditions on iodine, if you expect these prices above $70 per ton or $70 per kilo to remain sustainable? Where are the other areas of supply growth that could put some pressure on prices, if at all, in the next couple of years?

Pablo Altimiras is speaking. Supply and demand this year are tight because we are not seeing any additional supply. In fact, demand this year is not growing due to the lack of supply. We expect demand next year to increase by about 3%. The reason for this growth is that we anticipate more capacity entering the market next year, primarily from caliche ore. Therefore, we expect to see an increase in supply next year.

Our next question comes from Mazahir Mammadli from Rothschild & Company, Redburn.

So my first question is, if we assume that lithium hydroxide and spodumene prices stay kind of at the same level as they are today for 2026, would you expect the stand-alone profitability of Kwinana conversion to be positive?

Mazahir, this is Mark Fones. Yes, as we've said before, we continue to see the long-term profitability of Kwinana and the Mt. Holland project to be positive. And we still see ourselves committed with our partners, and we will continue to develop this project. And that's also the reason why we announced that we expect a final investment decision on the expansion for the mining concentrator for somewhere next year.

Okay. And maybe a follow-up on the Codelco deal. So the 201 kilotons of lithium that's attributable to Codelco, do I understand that correctly that will be paid as sort of revenue that's attributable to that amount of lithium? Or is it gross profit? Or is it some other metric?

This is Gerardo. Yes, the amount that is to be paid to Codelco is paid as a function of a certain amount of tonnage per year, which is 33.5, and is paid as a dividend.

Yes. I just want to clarify, is it going to be the revenue that's derived from 33.5 kilotons or gross profit that's derived from that amount of lithium?

It's the profitability that we get from this tonnage, but the exact calculation and the exact way of how you can get to the number, it's described in the contracts that are publicly available on our website.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.