Sociedad Química y Minera de Chile S.A. (SQM) Q2 2021 Earnings Report, Transcript and Summary

Good day, and welcome to the SQM Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kelly O'Brien, Head of Investor Relations. Please go ahead.

Good morning. Thank you for joining SQM Second Quarter 2021 Earnings Conference Call. This conference call will be recorded and is being webcast live. Following this call, you will be able to access the webcast at our website, www.sqm.com. Our earnings press release and a presentation with a summary of the results have been outdated to our website where you can also find a link to the webcast. Speaking on the call today will be Ricardo Ramos, CEO; Gerardo Illanes, CFO; and Felipe Smith, Commercial Vice President, lithium and iodine Asia Pacific. They will all be available to help answer questions after the prepared remarks. Before we begin, let me remind you that statements in this conference concerning the company's business outlook, future economic performances, anticipated profitability, revenues, expenses or other financial items, anticipated cost synergies and product or service line growth, together with other statements that are not historical facts are forward-looking statements as the term is defined under the federal securities laws. Any forward-looking statements are estimates reflecting the best judgment of SQM based on currently available information and involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those stated in such statements, including our ability to successfully implement the sustainable development plan. Risks, uncertainties and factors that could affect the accuracy of such forward-looking statements are identified in our public filings made with the U.S. -- United States Securities and Exchange Commission and in our earnings release issued today. And these forward-looking statements should be considered in light of those factors. We assume no obligation to update such statements, whether as a result of new information, future developments or otherwise, except as required by law. I now leave you with Ricardo Ramos, our Chief Executive Officer.

Thank you, Kelly. Good morning. We thank you for joining the call today. Our earnings during the second quarter 2021 were over 76% higher than earnings recorded during the same period last year. This was a result of significantly higher sales volumes and prices across almost all our business lines when compared to the first quarter of 2021. We are seeing positive market conditions in all our major markets in which we participate and expect to see demand growth of over 40% in the lithium market and over 10% in the iodine market. Our sales volumes will reflect the strong market momentum. As we mentioned in our earnings release, lithium and iodine sales volumes this year should surpass 95,000 metric tons and 12,000 metric tons or versus higher than our original estimates. Additionally, we believe potassium chloride annual sales volumes will surpass 800,000 metric tons this year, an increase of approximately 10% compared to last year. In addition, we expect prices in the potash market to increase significantly. Our strategy in the lithium market is focused on the long term. Currently, we're producing lithium carbonate at Sociedad Química at a rate of approximately 110,000 metric tons per year, and we remain on target to reach a nameplate capacity of 130,000 metric tons during the fourth quarter this year. As we mentioned in May, the completion of the next stage of our lithium carbonate expansion in Chile has been moved forward to 2022, and this remains true. We expect to produce approximately 140,000 metric tons next year. In Australia, the development of our 53,000 metric tons of lithium hydroxide plant is on track, and we expect to be operating in 2024. In terms of sales volumes, we plan to continue growing with the market as we have done successfully over the past 18 months. For example, during the first half of this year, we have sold more than double the sales volume sold during the same period last year. Our average lithium prices during the second quarter of 2021 were almost 20% higher compared to the first quarter 2021. Our sales contracts signed last year are expiring and higher percentage of our sales are invoiced based on the current pricing scenario. Our average prices during the second half of the year are expected to increase further as the market continues to tighten and the 2020 contracts continue to expire. The fundamentals in the lithium market are stronger than ever, and we recently updated our 2025 lithium carbonate equivalent estimates to surpass 1 million metric tons, and we are working to strengthen our position in this market. Thank you. Operator, we may now go to the Q&A session.

[Technical Difficulty] [Operator Instructions] Our first question will come from Cesar Perez-Novoa with BTG Pactual.

And congratulations for your sound performance in the first half of 2021. I have a couple of questions, if I may. You upgraded 2021 lithium volumes to 95,000 tons, and are projecting significantly higher prices in the second half of the year, in part because of sound market dynamics, but because of expiration of old contracts that had lower prices. Could you please provide what percent of the old contracts are set to expire, or how much of the newly priced contracts should we expect in the second half of the year? On potash, a similar question, you upgraded volumes by an incremental 100,000 tons and seen higher prices. If you could assess what is driving this market and also give a glimpse of what we should look in 2022 for SQM's volumes? And hopefully, you can shed a little bit more light about the long-term outlook for that market? Finally, I have a qualitative question perhaps for Ricardo regarding the political environment in Chile and comments by some lawmakers and media related to lithium royalties and Salar de Atacama. While most of these statements are political in nature and unfortunately occurring during an electoral year, I would like to hear your thoughts on a very broad level and perhaps tell us where SQM is positioned in all of this and possibly separate fact from fiction. Those would be my questions, and thank you very much for taking them.

Ricardo speaking, it's a really long question. A lot of questions. But let me start with the lithium first. I would ask Felipe to give you more details about what we are doing to lithium after that, some comments about the potash industry. Finally, your -- just about what is the situation in Chile or whatever. Let me cover in that order. Felipe.

Well, regarding your question, let me start with a small introduction. So as part of our strategy of growth, during the second semester last year, we indeed contracted volumes for 2021. If you look at the total volume of 2021, during the first semester, more than 3/4 of the volumes were contracted at prices which were prevailing at that time. And for the second semester, it's less than 50%. So we are now more and more exposed to the new price environment. And all these contracts are expiring in December.

Yes. And this is regarding the potash. Of course, we are -- now we have a very unique situation in the market where prices are going up very high. You can expect prices probably during second semester this year, especially fourth quarter, probably as an average close to double than the prices -- average prices of second half last year. It means it's a significant increase in pricing. We don't know and we don't have enough information today, as we speak, to have long-term projections about what's going on with the potash prices. There's a lot of researchable potash, we can check it on it. And see -- I think there's a lot of these uncertainties regarding what's going on in the long term, but in the short term, prices are very, very good in the potash. We are pushing our volume. As we put in our press release, we will try to increase our volumes in the second half and we will, and getting the benefit of the better price environment. It means that margins from potash second half will be significantly higher than first half and significantly higher of any half for the last 3 years maybe. We are very positive about what's going on in the potash industry for second half this year. And for me, it's too early now to give you an outlook about the volume for next year. As you know, we have this mixed production of lithium and potash in the Salar de Atacama. We are now working on our business plan and operational planning in the Salar in order to know what is going to be the total volume of available potash for sale next year. Keep in mind that the main use of our potash and the most important one is to be raw material of potassium nitrate, we're working in our business plan [indiscernible] next year. Both prices of potash are going in the right direction. Of course, potassium nitrate is going in the right direction, too. As we mentioned before many times, we're not as volatile as potash. It means when potash goes down, we don't go down in the same level, and we don't go up in the same level. But anyway, prices of potassium nitrate in the second half of this year is going to be significantly higher than first half, that's very good news. But I expect to have more information or more data regarding what we expect for next year in the next conference call after September. Regarding your last question, that is not an easy question, the political situation. As you mentioned, we are in the middle of an electoral year in Chile. So it is reasonable to hear many statements on many different issues. In my opinion, it's not prudent for companies to get involved in political discussions, of course, not. However, I think it's important to remember some key facts, in my opinion, about SQM and the Salar de Atacama operation, very few. The first one or the first point in our opinion regarding what we think is the Salar operation's, I mean, story is. As you may remember, it's an old story but Salar del Atacama project was better internationally by CORFO the mid-80s, if I'm not wrong, it was in 1986 or 1985, something like that. And was awarded by an American and Chilean company at that time. The American company, if you remember, was Amax. Amax was, I remember, one of the largest mining companies in the U.S. at that time, and the Chilean company, if I'm not wrong, was Molymet. The main conditions to operate Salar de Atacama were set in that process in 1986. SQM, of course, was not involved by role. But after 7 years, more or less 7 years, so this investment, research and development, whatever, in the project in 1983, I'm sure it was 1983. These companies decided to sell the participation in the project, which is when SQM bought the project. Of course, inheriting the same conditions agreed by these companies with CORFO 7 years ago. Finally, as you may remember, in 2018, during the previous government, an amendment to the contract was signed between CORFO and SQM, mainly decreasing the lithium project that was the area we were looking for. But of course, in exchange of a healthier economic conditions in favor of CORFO. Currently, as you know, the lithium industry in Chile and prices and delivering resources to the country according to the agreement with CORFO, which are close to 50% of the gross margin generated by this business. It means, to be clear, there are no other economic activity in Chile that pays more taxes and contributes with higher resources as a percentage of its margins. That's a real situation of the project today. The second point I want to -- to be very clear is that we add a lot of value to the minerals in the Salar del Atacama on a sustainable way. As everyone knows, we are one of the few lithium producers in the world that is integrated in the mining instruction and subsequent refinement of the product into extremely high-quality lithium carbonate and lithium hydroxide. We add value in such a way that it can be used directly in high-tech industry, such as electric vehicles. As we know, most Australian players extract the mineral and then sell the raw material to China, where the value-added process of producing refined lithium products is done. In less than 2 years, we have more than doubled our capacity and are already working to almost double in just a few years at the same time. But at the same time, we're reducing our brine structures, increasing yields in what is an unprecedented way. We are very, very proud about it. Finally, let me tell, Cesar, that we will keep working on initiatives like this. We're committed to producing lithium and all our products -- and all of our products in a sustainable way, adding value to all our stakeholders.

Our next question will come from P.J. Juvekar with Citigroup.

Your majority of lithium and other lithium goes to Asia, mainly to China. And how has the shipping tightness impacted you? And what is shipping and transportation as a part of your COGS?

I think that, indeed, as you mentioned, there is a general overall problem with a container shipment everywhere and port congestions and so on...

Ladies and gentlemen, it appears that we have lost connection to our speaker line. Please stand by while we reconnect. Thank you for your patience. [Technical Difficulty] Ladies and gentlemen, it appears that we have reconnected our speaker line. Speakers, please continue answering the question.

Okay. Well, as I was saying, P.J., we recognize that there is indeed an overall problem with the supply chain. But as part of our strategy, we have established local warehouses and storage points in the main markets. So that gives us good flexibility to supply our customers and to absorb part of these possible interruptions, so -- or delays. So from that point of view, we are in a good position. And regarding the -- what is the cost of -- it's a very small percentage of our total cost, what has to do with logistics and transportation.

And my second question is, would you like to get bigger into the lithium refining business, getting into hydroxide business and going downstream? Can you just talk about why or why not? And would you look at potential M&A to -- if you decide to go into it, would you potentially look at M&A in China to get into hydroxide business?

Ricardo Ramos speaking. As you may know, we are integrated today, we produce lithium carbon and lithium hydroxide. But of course, we are looking forward for doing much better than today. And yes, we are looking for different alternatives to increase our lithium hydroxide, for example, capacity. As I mentioned in the previous conference call, I expect during this year, I hope it's going to be during the conference call of September to announce what is going to be our target in terms of lithium hydroxide capacity, so 30,000, but we are looking forward to increase our capacity. And you are right in terms that we are looking for different alternatives, not only in Chile but outside Chile. We are a big, big player in the lithium. We are going to be in the short term -- medium term, in the 180,000 metric tons capacity, that's a lot of lithium carbonate and lithium hydroxide we have to sell. And of course, we are looking for different alternatives around the world. As soon as we have any news regarding that, of course, we'll announce the market.

Our next question will come from Joel Jackson with BMO Capital Markets.

I have a few questions. I'm going to ask them one by one. If I listen to your commentary earlier about half of the second half of your volume for lithium this year being still contracted from last year's prices, would that seem to imply that your spot prices hold here, your second half lithium price should average about 30% higher than the first half of the year. Is that the right ballpark?

Well, we believe that a good estimation of our price in the fourth quarter is to approach the $10,000 per ton average.

Okay. That's actually quite helpful. So I'll keep going. If I think -- I think you said earlier on this call that you expect to be able to produce about 140,000 tons LCE next year as you work through your expansion. You've obviously got a really big volume growth this year, 30,000 tons, you've been able to increase your sales guidance throughout the year. Do you think right now, early stage or you can place 45,000 tons next year? Obviously, you've been lucky that you had a lot of production increases this year, others haven't. Next year as more supply coming on, so also a big growth. Do you expect to be building inventory next year, whether you could sell the 45,000, any early thoughts would be helpful?

Yes. Regarding this question, I think that our idea or target is to grow at least same as the general or the overall market. okay? So our best estimation for that today with the information we have today is that the market will grow around 20% next year. So this should be our minimum growth in sales as well.

Okay. So if that's what you think is going to happen, if the market goes 20%, then you're planning to produce 40,000 or 45,000 tons more next year, half for incremental sales and half for inventory build. Is that correct?

Yes. I mean, the extra capacity that we will have will allow us to have flexibility, Joel. So I mean we -- the business and our sales will move depending on our strategic and priorities -- strategic actions and priorities. So yes. The most important thing is that we will have enough capacity to sustain a growth in sales, but also to give us flexibility to move in the market.

This is helpful. If I look at in the iodine business now, you've done great to recover volume, you've been holding price, your iodine costs have also gone up a fair bit. As we look into the next year, will these iodine costs stay roughly the same and your goal is try to balance price with growing back volume to where you were a couple of years ago? So are you able to offset the higher cost of price?

Yes, Ricardo Ramos speaking. I think that the cost is -- we expect next year, depending, of course, energy and the exchange rate in Chile are very important, we need to keep an eye on it. But anyway, we have different initiatives to maintain our cost of trying, we are trying to reduce our cost next year in the iodine business. And the price is the market condition pricing. Today, iodine, as you know, is a very good trend, means the increase in demand is very strong. The clients are recovering. Our customers are recovering their inventories that they decreased in the past. During the second quarter this year, we think we are going to have a strong second half this year, means that if we continue that way, of course, pricing is going to be positive, but it's too early to give a price guidance of iodine for next year. But of course, in the cost area, we are working forward to move in the right direction to reduce some of the costs.

And just my last question, if I can be greedy. You've done very well to raise your guidance for merchant potash sales volumes this year. Looking at what your brine extraction plans have been which you've announced about in the past couple of years, should we expect a decent drop off like a large drop-off in your merchant potash sales well below 800,000 tons next year? Or can you hold roughly this level next year?

Yes. As I mentioned before, Joel, it's too early for us to have a guidance about volumes of potash in next year. We're working in our business plan for next year and our operational plan in the Salar. As you know, lithium is a very important priority for us. It's a very good long-term business for us. And second, most of the use of the potash for us is a raw material for potash nitrate. That's why we cannot -- we don't have today a guidance of potash next year, but it is reasonable to expect that the volumes we're going to sell this next year is going to be slightly lower or lower than this year. But I don't have the numbers so far. Of course, considering what is the market condition during the second half of this year, I'm trying to increase as much as we can the volumes because we think that the price is -- very, very interesting pricing environment in the potash industry so far. But it's very difficult now to have a guidance. I think I have to wait until September.

Our next question will come from Ben Isaacson with Scotiabank.

And congrats on the great quarter. First question, Ricardo, you talked about looking at different alternatives, both within and outside of Chile for lithium. Is the Mount St. Holland project and alternative for you, the 50% that you don't own? How is that structured? Is that possible for you to buy that 50%? Or do you foresee yourself being 50-50 JV partners indefinitely?

We're very happy with our partner in Australia. It means Wesfarmers is by far the best partner you can have in Australia nowadays. I mean, it's a great company. It's probably the #1 company as a global company in Western Australia and doing business with them in Western Australia is a dream come true for us. I mean, I'm very happy being partner with Wesfarmers, and we will continue to do business together in Australia. I have no single doubt about it.

Second question. When you look at the impact that COVID had on iodine volumes, it seems that there was quite a bit of a lag. You did 3,000 tons in Q4 '19 before COVID and then you went to 2,800, 2,600, 2,200. And then by Q4 of 2020, you were just over 2,000. Now that we're heading into the fourth wave with the Delta variant, you guys just did really, really well in Q2 with respect to your iodine volume. Is there a risk now that we start to see declines to your sales volume over the next several quarters as it relates to the Delta variant?

Yes. Well, 2020 was indeed a negative year for iodine because the pandemic was hitting strongly certain applications. But this year, 2021, we have seen recoveries. As a matter of fact, we believe that the total demand will even surpass 2019 total demand, which is good news. And we are expecting that looking ahead in the coming months, this growth or this recovery will be maintained, okay? So during the second quarter, we had very good sales volume, part of it explained by the demand, but also customers feeling more confident about the future, they started to recover or rebuild stocks, okay? So we will have to see how this goes in the coming quarters, but at least we are positive.

My last question is, when you look at the supply-demand balance for lithium right now, it's quite tight. You talked about lithium demand maybe growing a little bit better than you expected through 2025. I think a lot of consultants are looking at 800,000 tons, 900,000, and now people are starting to talk about more than 1 million tons in 2025. How do you see the next 18 to 24 months playing out versus the tightness right now? Do you think things are going to get tighter? Or are there going to be pockets of softness when new supply comes on? Do you think it will basically stay where it is right now? And sorry, just I don't mean pricing. I really mean the supply-demand imbalance.

Yes. Well, regarding the demand forecast, as I mentioned in a question before, we believe that for next year, it should be at least 20%. Now being retroactively, we were also thinking that the growth this year would be around 20%, and we were all surprised, but the very good growth. So we have to monitor that development, and we hope that our estimation is on the low side and that we can see a much solid market in the next 1 or 2 years.

Our next question will come from Corinne Blanchard with Deutsche Bank.

Again, congrats on the nice quarter. Most of my questions have already been answered. Just probably 2 more. The first one would be on the solar salt contract. How much of the contract have been pushed to 2022? And is there any target that has been pushed even further to 2023? I believe last quarter, you guided sales for 120 kiloton for solar salt this year, now you decrease it by 100, so just trying to get an idea there.

Corinne, Ricardo Ramos speaking. Yes, you're right. It means that we have some delay in the volume sales for this year to first half next year, it's mainly due to the -- our client, he had some issues at the beginning of the COVID-19 with the workforce. They solved the issue of the workforce. Now they are moving ahead as fast as they can. That's why we moved some of the schedule of the shipping from second half of this year to first half next year. There's a delay, if I'm not wrong, close to 100,000 metric tons from this year to next year, plus, of course, the sales that were originally estimated for 2022. But the real delay from this year to next year is close to 80,000 to 100,000 metric tons. Total volumes this year is going to be close to 100,000 metric tons instead of being 180,000 something like that, that was the original schedule. But the total volume will be just a reschedule of the shipments to the first half. There's no reduction, probably it's going to be an increase in volumes in these sales, but no reductions, just a delay in the shipments.

Okay. That's good to know. And just for the segment by itself, industrial chemical, what's your guidance again for the entire year in terms of volume?

Sorry, we have a problem with the communication. Can you repeat the question? We have very bad noise here.

Sure. Sure, sure. I was just asking you what the total volume guidance for this year for the entire segment for the industrial chemical division?

Okay. Industrial chemical, we have 2 main business in industrial chemical. The first one is the solar salt business, as I mentioned to you before, it's like 100,000 metric tons expected for the year. And the second one is the traditional use of industrial chemical, and this is close to 65,000 metric tons per year. And we expect to have this year between 65,000 to 70,000 metric tons of what we call the traditional industrial chemical.

Great. Just one last question, if I may. This is a little bit broader topic. Could you just give us an update on the license renewal process, the time line? Where do you stand now? And what can we expect maybe over the next 12 to 24 months?

Okay. As we mentioned before in -- not only today, but in the last, I don't know, several quarters report. We are very focused on increasing capacity, increasing our productivity, increasing deals and doing a great job in sustainability in the Salar. We are going to reach the 180,000 metric tons. That is more than 4x what we used to have 3 years ago, we're increasing lithium hydroxide in our facilities and the quality is incredibly good today. We're really proud of our process. That we're working on as fast and as good as we can, and we don't foresee any issue regarding our license or working activity in the Salar. Of course, as you publicly known, we have a full agreement, I already explained that until the year 2030. We are working very hard in order to do the best job we can.

This concludes our question-and-answer session. I would like to turn the conference back over to Kelly O'Brien for any closing remarks.

Thank you for joining our call. We look forward to you joining our next quarterly conference call in a few months.

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