Release Date: August 21, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sociedad Quimica Y Minera De Chile SA (SQM, Financial) achieved a significant milestone by entering into a partnership agreement with Codelco to jointly operate the Salar de Atacama until 2060.
- The company reported record sales volumes in lithium and iodine businesses, exceeding 52,000 metric tons and 4,000 metric tons, respectively.
- Strong demand growth in the iodine market is expected to continue, potentially making 2024 a record year with volumes exceeding 14,500 metric tons.
- Sociedad Quimica Y Minera De Chile SA (SQM) formed SQM International Lithium to develop its lithium business outside of Chile, leveraging its expertise in exploration, project development, mining, and chemical operations.
- The company is committed to expanding its lithium portfolio overseas, with significant investments planned in Australia and other regions.
Negative Points
- Lithium prices have declined since the beginning of July, and the company anticipates that average selling prices in the third quarter could be lower than in the previous quarter.
- Despite strong sales volumes, the company faces challenges with the current lithium price environment, which may impact profitability and market attractiveness.
- The company is reassessing the attractiveness of certain market initiatives and capacity expansion projects due to the current price environment.
- There are concerns about the oversupply in the lithium market, and the company is maintaining production targets despite potential market discipline issues.
- The company's net income year-to-date is negative, primarily due to a one-time effect from the lithium mining tax applied in the first quarter.
Q & A Highlights
Q: 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 maybe slightly lower. Shouldn't SQM as the market leader be disciplined in maybe lower volumes?
A: Felipe Smith, Senior Commercial Vice President Lithium: We estimate that the sales in the second semester 2024 will be similar to those reached in the first semester of 2024. Meaning that our annual sales could be around 190,000 tons, with a potential upside should market conditions recover.
Q: 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 in finding buyers for that lithium inventory?
A: Carlos Cesar Diaz Ortiz, Executive Vice President - Lithium: We expect to sell this year around 190,000 metric tons of lithium carbonate, and we expect to produce around 210,000. So it's going to be 20,000, which is approximately what we sell in one month. We had to prepare for next year where we expect to sell a little bit more. So it's a good investment in working capital. We don't see that it's too much; it's healthy inventory.
Q: How should we be thinking about lithium realized pricing in Q3 so far given that quarter-to-date, the index was down with 15% to 20%? Is there any sort of indication as to whether you're baking price floors and ceilings into your contracts?
A: Felipe Smith, Senior Commercial Vice President Lithium: SQM price mechanism is based on price indices in the different geographies with certain lag, which average approximately one month. This means that, in general, our realized average price will always be close to the prevailing average spot price. We are expecting that the average price in Q3 will be lower than in Q2 due to a persistent decline in the index prices, especially in China.
Q: Can you explain why your average cash cost per ton in lithium increased by 8% quarter-over-quarter, driving your gross margin to be reduced?
A: Carlos Cesar Diaz Ortiz, Executive Vice President - Lithium: This is mainly explained because of the inventory adjustment related to the lithium sulfate. The lithium sulfate that we export to China, which is later converted to carbon hydroxide, was exported during the second quarter when prices were higher. The royalty is paid at the moment of export, which affected the costs.
Q: Can you confirm if the legacy quota of the previous contract with CORFO before 2017 is already in place, allowing for a fixed flat rate?
A: Gerardo Illanes Gonzalez, Vice President - Corporate Finance, Chief Financial Officer: Yes, approximately 50,000 metric tons sold this year will pay a fixed rate of 6.8%, while the rest will pay based on the publicly available table.
Q: Are there any discussions with Codelco regarding what could happen to the extra capacity in 2025?
A: Mark Fones, CEO SQM International Lithium Division: We are not having marketing or commercial discussions with Codelco yet because part of the condition precedents are some authorizations. Following antitrust rules, we need to have the agreement ready before starting to talk about its commercial strategy.
Q: How do you expect costs to pan out through the rest of the year in light of electricity price increases announced in Chile? Do you have any cost mitigation program in place?
A: Carlos Cesar Diaz Ortiz, Executive Vice President - Lithium: Our focus is to reduce our costs and to keep increasing the quality and reducing the cost and our carbon footprint. We will continue with our plan to expand in lithium carbonate and hydroxide in Chile.
Q: Regarding the deal with Codelco, could you please elaborate on the main challenges and discussions with local communities?
A: Mark Fones, CEO SQM International Lithium Division: There's a clear process in order to have a relation with the communities for the new agreement, and we are working on it. Our relation with the communities is very good, and we are working to solve any differences.
Q: Is there a scenario where you could be thinking of having contracts with a negotiated price instead of following the indices?
A: Felipe Smith, Senior Commercial Vice President Lithium: We prefer to follow the indices as we are a low-cost producer. We think this is the best way to contract our volumes, which is good both for the customer and for us.
Q: Can you provide an update on the Tianqi situation?
A: Felipe Smith, Senior Commercial Vice President Lithium: Tianqi has a different opinion from the regulator in Chile, CMS, about the transaction. They have appealed to the court with their position. We are participating in the appeal with our opinion. There is nothing new about that; it is a public situation.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
