Sociedad Química y Minera de Chile - Q2 2023
August 17, 2023
Transcript
Operator (participant)
Good morning, welcome to the SQM second quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you press star, then one your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference to Irina Axenova, Head of Investor Relations. Please go ahead.
Irina Axenova (Head of Investor Relations)
Thank you. Good morning. Thank you for joining SQM's earnings conference call for the second quarter of 2023. This conference will be recorded and is being webcast live. Our earnings press release and presentation with a summary of the results have been uploaded to our website, where you can also find a link to the webcast. Speaking on the call today will be Ricardo Ramos, our Chief Executive Officer, and Gerardo Illanes, Chief Financial Officer. Carlos Díaz, Executive Vice President of Lithium, Felipe Smith, Commercial Vice President of Lithium, and Pablo Altimiras, Executive Vice President of Nitrates and Iodine, will also be 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 presentation. I now leave you with our Chief Executive Officer, Ricardo Ramos.
Ricardo Ramos (CEO)
Thank you, Irina. Good afternoon, everyone. Thank you, Irina. Good afternoon, everyone, thank you for being on the call today. Yesterday, we published our second quarter 2023 earnings report, I would like to highlight the positive impact of significantly high sales volumes in lithium business and continuous strong performance in iodine business seen during the quarter. Lithium business, we reported record high quarterly sales volumes, which surpassed 43,000 metric tons, driven by strong customer demand recovery and positive market outlook. We expect to deliver higher sales volumes in the second half of this year compared to the sales volumes reported to the first half of the year. Since the majority of our sales contracts are based on price indices which follow market price trends, our realized sales prices move with the market with some lag, depending on the terms of the contracts.
This commercial strategy allow us to capture the price premium seen in the market last year. After first quarter pricing negative trend, we have seen some price recovery during the second quarter and expect our realized price to follow the market for the remainder of the year. We continue to see strong fundamentals behind lithium demand growth, with the global EV sales showing another strong performance during the second quarter, increasing 50% year-over-year. We believe that the total EV sales growth could be close to 30% this year when compared to 2022, and the global lithium demand could increase at least 20% this year compared to the previous year. Signing the long-term agreement with Ford Motor Company and LG Energy Solution was another important milestone of the quarter.
The trust our customers put in SQM's ability to successfully increase production in a sustainable way and deliver high-quality battery material, make us very proud and encourage us to continue with our growth plans in Chile and globally. We expect to produce approximately between 180,000 and 190,000 metric tons of lithium this year from our operations in Chile and China. Our expansions in Chile are progressing on a schedule, and we expect to ramp up our lithium carbonate capacity to 210,000 metric tons by the end of next year. The commissioning of our lithium hydroxide refinery in China has been delayed by a few months, and we expect to see the first production volumes coming to the market in the coming month.
Simultaneously, our attention is directed towards our exploration initiatives in Australia, guided by SQM's team of highly experienced geologists and in collaboration with local partners. We are advancing on securing potential new lithium supply sources. In iodine businesses, we have seen both a strong market performance as well as successful delivery of new capacity from our quality operations. Iodine market continues with record high prices, driven by a growing demand of X-ray contrast media segment. While annual global iodine market demand is expected to be flat, we believe we could deliver higher sales volumes during this year when compared to last year. Despite the record high prices seen in the market in the past quarters, SQM has been the only producer to increase materially its production volumes.
We remain on track to increase our production of iodine by approximately 800 tons this year to support the future growth of iodine market. We are also very proud of our contribution to the Chilean treasury during the first six months of this year, of approximately $1.7 billion, mainly due to the public/private alliances we have with Corfo over the Salar de Atacama operations. Finally, in this quarter, we released our latest sustainable report, outlining the progress we have accomplished in our sustainability journey in the past year, the advances we achieved in pursuing our goals, and the upcoming challenges we have set for ourselves. Thank you, operator, and we will now open for the questions. Thank you.
Operator (participant)
We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Isabella Simonato with Bank of America. You may now go ahead.
Isabella Simonato (Managing Director of Equity Research)
Thank you. Good afternoon, Ricardo, Gerardo. Thank you. Nice talking to you. I have a couple of questions. First of all, on iodine. We saw a big increase, as you pointed out, right, on prices year-over-year. However, on your presentation, you show that the, the contribution to gross profit, right, was only of $30 million, which implies, of course, a significant increase in costs as well. I was wondering if you could give us a little bit more color on the cost of production of iodine, and how do you see that performing going forward? That would be my first question. The second question is, in light of the, the regulatory change in, in Chile, right, how do you see strategically the geographies where you are producing lithium, right?
How do you see the potential of diversification going forward, considering the environment in Chile? Final, very quickly, you guys announced the dividends last night as well. If you could give us an indication of the payout for the year. Thank you.
Pablo Altimiras (EVP of Nitrates and Iodine)
Hello, Isabella, Pablo Altimiras speaking. Regarding to your questions about the iodine, yes, as you see, prices have been growing, explaining mainly, you know, because of lack of supply, situation that we see that will continue in the year. Regarding to cost, it's true, we have been some pressure on cost. I would say that there are several reasons, but the most important one is that it's not any secret that in the whole mining industry, we have some pressure on cost because the cost of energy, raw materials, things like that. Also, we opened our new facility, Pampa Blanca, which at the end is a small facility. That means that has a higher marginal cost.
However, with the recovery of the nitrate industry, and also we hope because of all the efforts that we have been doing to improve our deals, we see that the situation will start, you know, be under control. We see positive results in the coming months.
Ricardo Ramos (CEO)
If I'm not wrong, the second part of the question is regarding the lithium Diversification
diversification outside Chile. As we have commented before, the company is looking for opportunities of lithium outside Chile. We have a lot of expertise in lithium. We know, we have know-how. We're moving forward with our Mount Holland project. We're very proud about it. Yes, we're open for opportunities, and we don't have any specific new project to announce today, but we are working very hard in order to, as we said before, and we have said in the last two years, to find opportunities to do business outside Chile. What was the third question, Isabella? We don't remember.
Isabella Simonato (Managing Director of Equity Research)
Yes, it was just about the dividend and if there's a visibility on the payout for the year.
Gerardo Illanes (CFO)
Hi, Isabella, it's Gerardo. The board yesterday approved an interim dividend of 30%. You know that our dividend policy is, it was presented to the shareholders. It's on our website. The dividend, the interim dividend of the first quarter was 30%, the interim dividend of the second quarter was 30%. We will continue on the rest of the year, or the board will continue assessing the interim dividends, and at the end, in April next year, in the annual shareholders meeting, a final dividend will be decided.
Isabella Simonato (Managing Director of Equity Research)
Okay. Thank you.
Operator (participant)
Our next question will come from Ben Isaacson with Scotiabank. You may now go ahead.
Ben Isaacson (Managing Director of Equity Research)
Thank you very much. Good afternoon, everyone. Three questions for me as well. Number one, on the contracts with Ford and LG, what were the reasons why you need to sign a contract? Can you give us some parameters around those contracts, pricing, volume, how long they're going to be, et cetera? That's the first question. The second question, lithium. Sorry, iodine prices are around $70 or so per kilogram. Why haven't we seen much new supply being announced? Do you expect that to change if iodine prices stay where they are? The final question is, I think, Ricardo, you mentioned, you see EV demand growth of about 30% and lithium at 20%. Why is there a gap between those?
Would you expect those over time to to come together, or is this something that we should expect going forward? Thank you.
Felipe Smith (Commercial VP of Lithium)
Hello, Ben. This is Felipe here. How are you?
Ben Isaacson (Managing Director of Equity Research)
Great.
Felipe Smith (Commercial VP of Lithium)
I will. Yeah, I will comment on the contract. We see signing long-term contracts as very positive because, in a way, I mean, we have a long-term plan of sales that involves volume, and this is a way to secure some volume in the future. At the same time, for the customers, it's also a way to secure supply for in order to fulfill their plans. Okay? Now, you have to bear in mind that these contracts are finally a win-win for both parties, because these are generally a market conformed contracts that will follow indexes. On top of it, it has the advantage that basically pushes us to fulfill other achievements in terms of sustainability, quality. We see it as a positive driving force for us.
Ben Isaacson (Managing Director of Equity Research)
How much volume are we talking about?
Felipe Smith (Commercial VP of Lithium)
I'm sorry, I cannot disclose the details. We only disclose in the case of LG, that it, it is more than 100,000 for the period 2023-2029. That's it. We cannot comment for the rest. Sorry, Ben.
Ben Isaacson (Managing Director of Equity Research)
That's okay. Then next was, on iodine.
Pablo Altimiras (EVP of Nitrates and Iodine)
Yes. Hi, Ben. Pablo Altimiras speaking. Well, that's true. I mean, prices are in a, in a, high range today. Why we don't see supply? Well, I would say that because to produce iodine is not so, so easy. We are talking about, in our case, it's a mining activity where you need to consider different things to get approvals, to have the, the, ready, you know, infrastructure. Actually, today, we see that a greenfield project, you know, in order to be in production from the very beginning when you start starting the project, can last more than five years, you know, to get complete. So it's not so easy, you know, to deliver new capacity. That's, that's the, the, the, the reality. That's why in SQM, we try to work in advance, be ready, you know, for to build new capacity. That's what I, I can say.
Ben Isaacson (Managing Director of Equity Research)
Just on that, if it's hard to bring on new capacity, do you expect high prices to persist?
Felipe Smith (Commercial VP of Lithium)
Well, again, it's a matter of supply and demand. At least in the short term, we don't see more capacity, and that's what I already mentioned it, that despite of the demand, today is not growing. We see lack of capacity, and that's why we expect in the whole year, you know, to see a stable prices, let's say, in the high part of the, of the, of the, of the curve.
Ben Isaacson (Managing Director of Equity Research)
Great, thank you. Then just finally on the EV versus lithium demand growth rates.
Felipe Smith (Commercial VP of Lithium)
Yes. If I understood your question, you're asking, the difference between the EV demand growth and our.
Ben Isaacson (Managing Director of Equity Research)
Yes.
Felipe Smith (Commercial VP of Lithium)
Lithium sales growth?
Ben Isaacson (Managing Director of Equity Research)
Yeah. Why is... I mean, you said EV demand, you expect it to grow at 30%, lithium demand, you expect it to grow by 20%.
Felipe Smith (Commercial VP of Lithium)
Ah!
Ben Isaacson (Managing Director of Equity Research)
Why is there a difference?
Felipe Smith (Commercial VP of Lithium)
The difference is very easy because you know that lithium is used in different applications, and not only EVs. I mean, EV is an important one, of course, but is the fastest growing one and the main one. Still, we are supplying. I mean, the market needs lithium for many other things, like industrial applications, pharmaceuticals, and so on. Though all these other applications do not have the same growth profile as the EVs, that's the reason.
Ben Isaacson (Managing Director of Equity Research)
That's great. Thank you so much.
Operator (participant)
Our next question will come from Rafael Barcellos with Banco Santander. You may now go ahead.
Rafael Barcellos (Senior Research Analyst)
Good morning, thanks for, for taking my questions. Recently, you published a, a press release commenting about the cash offer to acquire the control of Azure Minerals, right? That you submitted in early July. My question is really about your capital location strategy. I mean, should we see the cash offer to Azure as a particular case, especially because SQM is already one of its main shareholders, or should we expect SQM to, to remain active in these type of M&A initiatives? My second question is about the, the National Lithium Strategy in Chile. Could you please give us an update on how conversations are evolving with Chilean authorities? I understand that discussions are still ongoing, but any update here could be helpful to us. Thank you.
Ricardo Ramos (CEO)
First, about Azure. We, we published, if I'm not wrong, yesterday or the day before yesterday, a complete press release about that. I think we have nothing else to add. Is we, as we said before, it's a, it's a junior company in Australia. They have, among others, lithium projects in Western Australia, where we have, as you may know, our Mt Holland project. We today control close to 20% of Azure, and we are the largest shareholder.
We had these confidential negotiations that are now public. Of course, we publish all the information available to the market about this, this negotiation. We have nothing else to comment about this one. Remember that the press release was yesterday or the day before, and you can be sure that as soon as we have information that according to regulation, we need to submit to the public, we will do it. That's the, the, the most important issue that I want to say about Azure. About the, the, the other question, the regarding the conversation with Codelco. As we originally said, these conversations are confidential. Both sides, we decided to do it in very strong confidential basis.
Our intention, as, as you may know, is to announce to the market as soon as we reach an agreement or the negotiations are terminated. Any announcement, will be made at the time and in the manner considered in the current regulation, that's for sure, considering the nature of the conversations. Anyway, what can I add is that the negotiations are being carried out in good faith. We continue to work very hard and with the support of expert advisors in the matters that are discussed, that's for sure. As SQM, we expect that if we reach an agreement, this agreement should be positive for the country, the Antofagasta region, the communities, and of course, for the two companies.
Rafael Barcellos (Senior Research Analyst)
Thanks a lot.
Operator (participant)
Our next question will come from Joel Jackson with BMO Capital Markets. You may now go ahead.
Joel Jackson (Managing Director of Equity Research)
Oh, hi, I have a few questions. I'll ask them one by one. Can we talk about volume in lithium? 180,000-190,000 tons this year, how much is coming out of, you know, carbonate out of Atacama, how much is coming from conversion of lithium sulfate in China? In 2024, you know, when we think about you ramping to 210,000 by the end of the year, then the tons that you're going to do in conversion in China, that's incremental to that 210,000, correct? Up to 210,000.
Carlos Díaz (EVP of Lithium)
Hello, Joel. This is Carlos Díaz. As explained in the press release, our current production is between 180,000, 190,000 metric tons, between both location, amid Chile and China. As you know, the production in China is going to be lithium hydroxide coming from lithium sulfate, that is, is being produced in Chile, and we expect to produce this year around 50,000 metric tons, which, if you convert to lithium hydroxide, is going to be like a 25,000 of those. An idea is to, to convert that in our plant in Sichuan, to do some talking with a third party, the pro- producer. Combination of combination of both production is going to be around 180,000, 190,000 metric tons of this year. Sorry, Was not with.
Joel Jackson (Managing Director of Equity Research)
When you're producing 210.
Carlos Díaz (EVP of Lithium)
Huh? Sorry.
Joel Jackson (Managing Director of Equity Research)
Sorry. When you're producing 210,000 tons. There's an echo. Try again. When you're trying to produce 210,000 tons of carbonate by the end of 2024, do we add 25,000 of our hydroxide, or is there some cannibalization?
Carlos Díaz (EVP of Lithium)
Yes, sir. The, what we're going to produce in China is going to be incremental compared with what we're going to produce in, in Chile.
Joel Jackson (Managing Director of Equity Research)
Right.
Carlos Díaz (EVP of Lithium)
In spite of both are coming from the Salar de Atacama.
Joel Jackson (Managing Director of Equity Research)
That, that was clear, but we've, we've had some questions on it lately. Okay. If I talk about lithium, lithium prices right now, and is it fair to say that your Q3 average selling price will have to be higher than Q2? Just looking what spot prices did across the second quarter into now and the lag. Is it make sense that your Q3 average price will be higher than Q2?
Felipe Smith (Commercial VP of Lithium)
Yes. Well, as we have explained, we have most of our contracts today following indexes. I mean, it's very transparent. Everybody can follow those indexes. We have seen that since the middle of June this year, some negative trend in the Chinese index. Later on followed by also the, the outside China indexes. But at the same time, we have a, you know, different lags in the way we adjust our contracts, the way we follow the indexes. All in all, I hope that we can have a relatively similar price in Q3 compared to Q2.
Joel Jackson (Managing Director of Equity Research)
Okay, that's helpful. My last question is, we're seeing conversion margin start to come down. If you look at spodumene pricing in the 3,500, something a ± range, does that concern you? Do we need to see spodumene prices go lower? As spodumene prices go maybe lower, does that impact maybe any of your desires to pick up some spodumene, more resources or projects, in different parts of the world?
Felipe Smith (Commercial VP of Lithium)
Well, we, you know, we have a, some forecast of, supply and demand, so we do have a new supply coming. We need more new supply coming, actually, to supply the growing demand.
We are, let's say, considering these aspects in our forecast. We do believe that there will be indeed more supply. This is good, we need it.
Joel Jackson (Managing Director of Equity Research)
You're not worried about conversion margins now being quite, quite, quite small, considering where spodumene prices are?
Felipe Smith (Commercial VP of Lithium)
Yeah, I could not confirm that information, Joel, honestly.
Lucas Ferreira (Research Analyst)
Okay, thank you very much.
Operator (participant)
Our next question will come from Corinne Blanchard with Deutsche Bank. You may now go ahead.
Corinne Blanchard (Director)
Hey, good morning, everyone. Thanks for the time to take the question. I want to go back on the China refinery and the timing of the production. This has been delayed by a few months. Could you just walk us through, like, maybe some of the difficulty that you have been facing then? If there is anything you can share in terms of expectation into 2024 for the cadence and the volume coming from China.
Carlos Díaz (EVP of Lithium)
Hello, Corinne, this is Carlos Díaz. Yeah, we have, have some, some delay in China because we have been focusing more in, into get the, the, the best yield in our conversion plant in, in China. You know, there is a new process starting for the lithium sulfate from the Salar de Atacama to the lithium hydroxide. We expect that the commission is so, is already done, and now we expect to, to start producing in the coming months and, and to be full production next year.
Corinne Blanchard (Director)
Hey, sorry, I was on mute. Next year you expect to be at full capacity if everything goes well?
Carlos Díaz (EVP of Lithium)
Yes. That, the idea is to produce in our plant around 25,000 metric tons as a lithium hydroxide, and, and probably to do some more tolling with third parties.
Corinne Blanchard (Director)
Okay. Then maybe two, two quick follow-up. The first one, can you give us an update on Mount Holland? Is it still on track? You know, I think you had mentioned 2024, you would be selling some, some volume module, tolling agreement as well. The other question would be, given where the spot price and pricing are falling down again, is there a point where you would maybe consider holding products and not selling into the market, or are we not there yet? Thank you.
Carlos Díaz (EVP of Lithium)
Yeah, well, our idea is to start. Well, our project of Mount Holland is advancing well and according to the priority for meeting the timeline. We expect first product from the concentration plant by the last quarter of this year. For the refinery, we expect to start producing middle of 2025. We expect to start producing at full capacity as soon as we can. That could be at the end of this year, early next year. You know, nothing regarding with the price. We're just confident that we're going to produce at full capacity as soon as we can.
Corinne Blanchard (Director)
Thank you. I appreciate it.
Operator (participant)
Our next question will come from Lucas Ferreira with JP Morgan. You may now go ahead.
Lucas Ferreira (Research Analyst)
Hi, good afternoon, everyone. My question is about the ramp up to 210,000 in Salar de Atacama. Correct me if I'm wrong, but I had the view that this could be done faster than the end of 2024. If I'm right, are you seeing any bottlenecks in both the Carmen plant or in terms of yields and extraction there in the Salar de Atacama? Are you kind of considering maybe slowing down that depending on the market demands, and so how you see the pace of growth towards 210? My second question is regarding the SPN market.
If you have any views on, on prices going forward, we started to see, sort of a rebound in fertilizer prices, depending on the type of fertilizers. In the case of SPN, if you see already sort of a bottom for prices, if you have any expectation for, for prices in the second half of the year? Thank you.
Carlos Díaz (EVP of Lithium)
Okay, regarding your first question, Lucas, well, we are fully working in to expand our capacity in Chile and to reach as soon as possible the 210,000. We are focusing in different areas, that mean improving our quality, to getting the best product for, for the market, increasing the yields in order to get more production with less resources. We're on schedule on that, and we expect to have that capacity next year. At the same time, we're working to expand our capacity on lithium hydroxide, and we expect to run the full line in the last quarter of this year.
Immediately start to, expanding the, the capacity in, in order to reach the 100,000 metric tons, as we, we have been planning for the year 2025, 2026.
Pablo Altimiras (EVP of Nitrates and Iodine)
Okay, Pablo Altimiras speaking. Regarding to the SPN questions, you know that the 1st semester, the demand, it's been lower than what happened last, last year at the same period. The reason is because uncertainty, high prices of fertilizers and also some weather difficult conditions in some markets. We expect that the demand will start growing in the H2 of, of the, of the year. We will see more demand. However, regarding to prices, we see that we will continue start seeing some price decrease that also will, will help also to the, to the sales increase and demand increase. We expect, you know, to start seeing some decrease on prices.
Lucas Ferreira (Research Analyst)
Perfect. Thank you.
Operator (participant)
That concludes our question and answer session. I would like to turn the conference back over to Irina Axenova for any closing remarks.
Irina Axenova (Head of Investor Relations)
Thank you for joining our call today, and we're looking forward to having you on our next call. Have a great day, everyone. Bye.