Sociedad Química y Minera de Chile S.A. (SQM) Q3 2023 Earnings Report, Transcript and Summary

Good day, and welcome to the SQM Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Irina Axenova, Head of Investor Relations. Please go ahead.

Thank you, Dave. Good morning. Thank you for joining SQM’s earnings conference call for the third quarter of 2023. 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 to 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, Executive Vice President of Lithium; Felipe Smith, Commercial Vice President of Lithium; Mark Fones, Vice President of Strategy and M&A, Lithium; and Juan Pablo Bellolio, Commercial Vice President of Iodine and Industrial Chemicals will be also available to answer any questions. Before we begin, I would like to remind you that statements made in this conference call regarding our business outlook, future economic performance, anticipated profitability, revenues, expenses and other financial items, along with expected cost synergies and product or service line growth are considered forward-looking statements under federal securities laws. These statements are not historical facts and may be subject to changes due to new information, future developments or other factors. We assume no obligation to update these statements, except as required by law. For a complete forward-looking statement, please refer to our earnings press release and presentations. I now leave you with our Chief Executive Officer, Ricardo Ramos.

Thank you, Irina. Good morning. Thank you for joining the call today. Yesterday, we reported our third quarter 2023 earnings. And on this call, I would like to focus on the key drivers in each of the business behind our performance during this quarter. In the lithium business, we reported close to $1.3 billion in revenues, approximately 10% lower than compared to the previous quarter this year primarily as a result of significant lower realized sales prices, partially offset by record high sales volumes over 43,000 metric tons during the quarter. We will observe a downward price trend that commenced at the beginning of this year and could continue for the remainder of 2023, signs the majority of our sales contracts are linked to price indices which move with the market, our realized sales prices have followed the same trend with a small delay and it is reasonable to expect that they should continue to reflect market price dynamics in the upcoming months. We continue to see strong fundamentals behind long-term growth of lithium demand supported by EV production and sales volume submission reduction targets worldwide. In the short-term, however, the excess of inventories along chemicals and battery material supply chains as well as additional supply, which entered the market this year have been negatively affecting customer purchasing activity. As a result, we expect to see quarter-on-quarter similar or lower sales volumes during the fourth quarter this year. In the iodine business, we reported over $210 million in revenues for the third quarter 2023 driven by a strong pricing environment with sales prices close to $70 per kilogram with year-to-date higher volumes than last year. This is supported by increased demand from x-ray contrast media segment based on reduction in demand coming from other price-sensitive applications. We believe that SQM remains the only iodine producers to increase its supplies this year while we keep on increasing our capacity. Moving to fertilizer business. Our revenues in specialty plant nutrition and potassium business segments reached almost $300 million during the third quarter. as a result of positive demand growth, which began during the third quarter this year and is expected to continue into 2024. In the Industrial Chemicals business, during the third quarter, we completed solar salts delivery to the concentrated solar power plant project in the Middle East with a total of more than 430,000 metric tons of solar salts produces and shipped between 2020 and 2023. This mission proved to be challenging, particularly as the majority of the deliveries occurred amidst the global pandemic, which has changed both our production capabilities and logistical conditions. We are proud of our accomplishments and the successful competition of this contract. I will also like to comment our progress with our expansion plans, both in Chile and abroad. Our lithium carbonate capacity in Chile has reached the 200,000 metric tons per year and we expect to complete the expansion to 210,000 metric tons in the beginning of 2024, almost a year earlier than anticipated. This gives us a space to focus on production costs optimization and to ensure that we remain one of the most cost-efficient lithium producers in the world. In Australia, the first production of spodumene concentrate on Mt Holland is expected during this quarter. While in China, we have started lithium hydroxide production from lithium sulfate. As we continue our progress toward more sustainable operations and other very significant milestone reached last quarter was an international recognition from IRMA of our commitment to becoming the world’s most sustainable source of lithium. Our operations in the Salar de Atacama received the highest score to date of IRMA 75, reflecting our dedication to transparency and community engagement. While, there is a considerable amount of work ahead of us in collaboration with our communities and stakeholders. We will persist in the collective efforts to achieve our sustainable objectives. Thank you, operator, and we will now open for the line to questions.

[Operator Instructions] Our first question comes from Joel Jackson with BMO Capital Markets. Please go ahead.

Good morning, everyone. Ricardo. I’m going to ask a few questions one-by-one. First, you previously said – SQM previously said that you would produce about 185,000 tons – 185,000 tons this year. It looks like your sales on be more 150,000 tons. So am I correct in assuming that, that production number is the same, you’re building inventory this year of 20,000 tons to 30,000 tons? And a follow-up on that is, does SQM feel the need to be disciplined and hold back production in 2024 or for a little while, we’re seeing other producers pull back production? And if you do run at the capacity you say you have in 2024, your sales volume would be up maybe 30% next year we would seem to be above market growth. So do you need to be disciplined? So inventory question – inventory build right now and we’ll be building more inventory next year and we’ll be disciplined?

Hello, Joel. This is Carlos Diaz, the Vice President of the Lithium division. Thank you for your question. Well, first of all, we have to – we have seen this type of distortion in the market in the past, a lot of China in our different divisions, including lithium in the different SQM division. But due to our leadership position in cost, quality and sustainability, our structure has been and will be continuing to be to produce at the maximum capacity in our plant, the mean in Chile, while we are producing in China and Australia. And the idea is to be prepared when inventories return to the normal level and customer purchase are reactivated. Therefore, our production strategy is continue to work producing what I say before, at the maximum capacity. We are not changing that.

Okay. So do you expect to be building inventory in the next bunch of quarters, correct? And have been building inventory? Is that fair?

Yes. What I said before, this is something that we have done in the past, and we are prepared for that. We are building inventory, having in our warehouse in different places, yes, we will be prepared for that.

Okay. My next question is obviously a sensitive one that we need to address. To the extent that you’re able to talk about maybe some potential range of outcomes with your discussions with CODELCO, there has been some numbers on around this week, again, it’s sensitive. Maybe I’d like to ask in any sort of arrangement you may come up to, how fast could Atacama production be pushed to? Can you get us – if there were no constraints, no quotas, nothing with CORFO? Could you get to 300,000 tons? Could you get to 40,000 tons of LCE out of Atacama? How long it would take you to do that? And do those discussions focus very heavily in your discussions with CODELCO for what are reasonable expectations for an SQM down the road.

So Ricardo Ramos speaking. As you know, I’m directly responsible for the negotiation with CODELCO, I think a couple of days ago, we issued statements, SQM, about some news on the press that was not right. It was not correct. It’s very difficult to answer your question because we have to consider all the restrictions, environmental restrictions what our environmental goals in the Salar de Atacama which is the country goals in the Salar. That’s why talking about what is the maximum capacity without any of the restrictions makes no sense because we do have restrictions, and it doesn’t matter who operates the Salar, it will have restrictions. That’s why when you think about the future operation of the Salar de Atacama, you should think about what is the most efficient way to do it from an environmental point of view, from a social responsibility point of view, with the relation with the community, according to all the Chilean restrictions. That’s why – it’s not – there’s nothing that you can have a different answer, just trying to forget about what is the goals, environmental goals. For us, the environmental goals in the Salar de Atacama is a must is a competitive advantage to be a producer, sustainable producer in the Salar. That’s why having a huge amount of production if we affect our sustainability and our environmental goals, of course, we don’t expect to do so. That’s why, as we have said in the future, we don’t expect significant increase in production in the future plans of CODELCO – sorry, in Salar de Atacama. We were very clear in our Salar Futuro presentation, I think, in a couple of years ago that maybe depending on the technology and so on, you can reach close to 300,000 metric tons, but it will depend on the different environmental restrictions, environmental permits and our environmental goals internally. But considering that you are asking about the CODELCO, I want to be very clear about this negotiation process. First, I want to add a couple of things that I think are quite important in this process. First one, in my opinion, and let me give my opinion about that, CODELCO, that is the one we are having the negotiations now the company is a great company. I have a very good opinion about CODELCO. They have an outstanding professional team and of course, like any large company in the mining and natural resources area, of course, CODELCO faces important challenges in the short term in their businesses, like everyone, SQM, like any other large company also facing challenges. We started conversation with CODELCO, as you know, about 6 months ago. I’m not so sure it was 6 or 5, whatever, something close to that. And a significant part of the meetings at the beginning and – we have had so far have been focused on explaining in detail our lithium businesses. The technology we have developed, the production process, the different initiatives we’re working on, it is important to remember that in the – we have the largest lithium production side in the world in the Salar de Atacama, along with the largest integrated lithium refinery capacity in the world located near the city of [indiscernible]. It’s a big, big business. It’s complicated, it’s complex. It’s great. It’s beautiful. It’s the best one in the world, but of course, takes a lot of time to explain to a high professional group of people from CODELCO, all the big – all the main details of our operation. They have to understand that. On top of this, we have spent a significant amount of time sharing visions over the Salar Futuro project. That was your question, of course, discussing the different alternatives we have in order to develop these Salar for the future. The importance in our opinion, and we have an agreement with CODELCO about that, that the successful execution of this project has over the sustainability of the operations in the Salar de Atacama. We both agreed that having a sustainable operation in the long-term is the most important target we face in the Salar de Atacama development. Investment required are significant. We reviewed the investment, all the technologies we are developing to achieve the goal of aiming to reach what we expect to be a hydric neutrality in the Salar de Atacama Basin. Keep in mind that we, as SQM been working probably 2.5 years, maybe close to 3 years. in what we call the Salar Futuro project. We have been working very hard with new technology, new process, new alternatives, and we have been working very hard with CODELCO now trying to explain to them, trying to share with them all the advance of SQM in this project is very, very important to do it during this process. At the same time, it is important also to remember that whatever potential agreement, if we have an agreement in this negotiation, has to be for the benefit of Chile, for the benefit of the Antofagasta region, the local communities, CODELCO and of course, SQM and clearly, an agreement must be based on a shared vision of the challenges and opportunities this operation has for all stakeholders. Please keep rest assured that we will inform the market on a timely manner through our own channels of communication of any significant development in this negotiation. Thank you.

Thank you, Ricardo.

The next question comes from Lucas Ferreira with JPMorgan. Please go ahead.

Hello, everyone. I have two questions. The first one on your lithium production for next year, so, what allowed you guys to anticipate the ramp-up to 210,000 tons a challenge at the Carmon plant level that was overcome? And then you made some comments about the cost. So can you also give us a view of how your costs per ton should evolve once these capacities ramp up? So will you be diluting more fixed costs with the production at 210,000 tons. So could we expect good performance or even a reduction in the cost per ton? And if you can comment about soda ash contracts for next year, so how to think about your cost per ton in 2024? That’s the first question. And the second question, I don’t know how much you’re also going to be able to comment about Azure, but the tender to announce a tender to the Azure shares? What’s your expectations in terms of timing of that to be fully approved? And then what are you guys planning to achieve there in terms of production in the future, size of production, timing for this production, if you can share with us some initial expectations about timing and size of lithium production in LCE terms? Thank you.

Hello, Lucas, this is Carlo Diaz. Thank you for your question. Regarding to the production of lithium, as we mentioned in the press release, sorry, we already reached a total capacity of 200,000 metric ton during the month of October, and this is because we have been working so far in to the bottlenecks all the processes and so on. And at the same time, we have been working hardly in increasing our quality and reducing our carbon and volume footprint. And for the beginning of next year, we expect to reach 210,000 tons. For the others, I have to mention that we have been working hard to produce lithium sulfate in Salar de Atacama that later on is go to China to the conversion. So that gives you an additional capacity in total, all this product coming from the Salar de Atacama. Part of those – the main part of those is converted in our Antofagasta plant near to Antofagasta – sorry, and the other part, the lithium sulfide converted in China. That is the plan that we have for the lithium. Regarding cost…

Regarding – well. Hi, Luca, this is Gerardo. Regarding Azure, unfortunately, given the nature of the transaction and the jurisdiction in which this transaction is happening, at this moment, we cannot share more details on what was informed through a press release a few weeks ago. When we have more information that we can share, let’s assure that you’ll get it along with the rest of the market.

Super clear. Just maybe a quick follow-up on the cost. If it’s fair to assume the cost declining or growing less in inflation next year because of the cost dilution?

So, as soon as we already finished our expansion, now we are focusing obviously on reducing our costs, increasing the yield. I don’t know if you know, but we have been reducing our brine extraction according to our sustainability plan defined in November 2020, so that means we have less brine and will have there for the other side, the challenge to keep producing more. So, that is a huge challenge. But at the same time, we have been increasing the yield in our chemical plant, so that will mean less cost in the coming year, but we still need to analyze that in the coming months for the – when we made the budget for next year.

Perfect. Thank you very much.

The next question comes from Ben Isaacson with Scotiabank. Please go ahead.

Thank you very much. Two questions. One on the market in general, we see that the futures market is showing $16,000 or $17,000 per ton. Can you reflect on that price level, how liquid do you think that market is? Who is actually selling at those prices? And are you concerned that prices will stay in that area for all of 2024? And my second question is the Salar Futuro program that you announced a couple of years ago, how is the DLE tracking? When can we expect the first tons to come out from DLE? And how will that change your cost profile? Thank you.

Hello Ben, this is Felipe Smith. How are you? Let me comment a little bit about the market, first of all. So well, the demand fundamentals remain solid in the long-term. We are convinced about that, with an annual average growth above 20% for the next 5 years, okay. We expect EV sales of around 14 million units this year, which represents still a growth of around 45% compared to last year. So, that is a first as an introduction. Now, we have seen some softening of the demand outside China, which coupled with higher than expected supply has resulted in some excess of inventories accumulated in the whole battery supply chain. And this is what is resulting in prices showing downward pressure today, okay. So, what will happen in the future, well, it’s difficult. Prices are at the end, the result of supply and demand. But as part of our commercial strategy, we will continue to be contracting volumes following market indices. During 2023, we have been able to strengthen further the relationship with our customers. We have entered into several new long-term supply agreements. And that at the end – and those long-term agreements also are based on these indices. So basically, SQM will always follow whatever the market is. And we are very confident on the fact that we are a cost leader. So, our leadership position in cost, quality and sustainability, allow us to be very confident that we will always be there in the market.

Sorry, about DLE, and as you know, we have been working, as I already explained a couple of minutes ago, we are now working in what is going to be the technology and process and everything about Salar Futuro. And of course, if we will reach – if we would reach an agreement with Codelco, and we have a project together with them, of course we will be very clear and very specific about all the technologies and that – and process we expect to implement in the Salar de Atacama. And of course, one of the alternatives, we have many different technical alternatives, technological alternatives with DLE, but so far, we will announce if we have something for clear. But anyway, we have been advancing in the technology point of view in order to have a new technology available to SQM. I will ask Mark, if you can comment what we have been doing in terms of M&A in order to have more DLE knowledge experience.

Thanks Ricardo. So, yes, as you mentioned, we continue to be active in M&A, not only in the resource base, but also in further downstream technologies, both in processing and also in – starting from DLE technologies. So, in the last quarter, so Q3 of this year, we have made an investment to acquire a percentage stake on a French company called Adionics. And this is a French developer on DLE technology. And we are looking forward to continue now working together with them in engineering and developing industrial scaling for this kind of technology into the future. This is in addition also to other ventures and innovations and investments we perform in the SQM Lithium ventures that we also tackle entrepreneurship and innovation in that area.

Great. Thank you very much.

The next question comes from Isabella Simonato with Bank of America. Please go ahead.

Thank you. Good afternoon everyone. My question is on SPN. I think it’s interesting that you guys are calling for the bottom on prices, right? When we look at the potash prices you guys had in the quarter and the spot prices for potash right. It seems that there is downside to potash from now on. But on the other hand, as you are expecting more flattish SPN or some recovery on prices from now on, can we assume that the premium widened from Q3 levels going forward? I mean if you could give us a little bit more color on how are you seeing the dynamics of prices between one and another, I think it could be helpful? Thank you.

Hi, Isabella, Ricardo Ramos speaking. Yes, it is right that MOP prices being in a more stable environment, I think in the last quarter. If you consider the prices of last year was very high in the MOP. Now, we see during third quarter, and we do expect during fourth quarter to have similar price environment in the MOP that seems like we are reaching a stable price environment. That’s quite good in order to have something for sure. You never know fertilizer prices always being quite volatile, but the trend seems to be quite stable in the last, I don’t know, four months to five months. If you go to the Specialty Plant Nutrition, the good news is that starting the year, the demand was very, very affected and was very low, maybe because the prices were too high, coming from 2022 and some of the user and farming especially in Europe, was affected about that and the lack of energy in order to produce. But nowadays, we foresee during the last quarter, and again, in the last two quarters, a positive environment in volumes. We are very positive about fourth quarter. Our first idea about fourth quarter is going to be a record. It means it would be very high in terms of volumes, and we do expect and we are very positive moving forward to the year 2024, in especially the plant nutrition, especially we are talking about potent [ph]. Pricing is always difficult, as I said before, with the MOP to say what is going to be the future price. But today, price is more stable than probably six months ago. We think that keeping pricing at today levels, maybe slightly lower because the volume increase in different areas is a reasonable assumption. But again, fertilizer pricing, it’s volatile. and the fertilizer market being under a lot of pressures moving up and down in the last 2 years, and thus we need to be very careful, having long-term projections about pricing in the fertilizer. But we think that today, the environment is more positive in terms of volumes and probably more stable in terms of pricing.

That’s clear. Thank you.

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

Thank you for joining our call today and we look forward to having you in our next call. Goodbye.

Yes, the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.