SQM - Sociedad Química y Minera de Chile

[perulv]

SQM is the worlds largest producer of lithium. Their balance sheet seems solid (50% ish debt to total assets), and it's reasonably priced (ev/ebitda around 10).

 

The stock price has been going down for a while, probably with good reason :

https://www.bloomberg.com/news/articles/2019-07-28/the-lithium-mine-buildup-is-outpacing-the-electric-car-boom

 

Even with the increased capacity and probably continued lowering prices (I have no idea, but why not.), the demand will surely increase too. Buying a share of the next oil so to speak, while it is relatively unpopular (or just have a negative outlook. Short term, hopefully) seems like a good idea.

 

I might be colored by living in a country where every other new car is an EV, but that EVs are the future is given imho. If that is five or 30 years in the future is up for debate though. And as wind and solar installations continues to increase, and starting to beat other sources in price, electrical storage outside cars is also needed. Not sure if lithium batteries is the long-term solution there, but I see no real alternative being "production ready" yet.

 

To me SQM seems like a good way to get invested in the electrical future. As bullish as I am now, it would probably be helpful if someone points out the other side of this, and why I am wrong and "the market" is right :) "Invert, always invert" etc.

 

Edit : One can probably replace SQM with Albemarle in the above post, and the rest would still be valid. Not sure right now which is the best buy...

[Saluki]

Well, if you're going to invest in mining someplace in the 3rd world, Chile would be a good place.  It's the most prosperous and stable country in latin america (Chileans are the only country in latin america where you don't need a visa to come to the US). And it has a long history of mining (1/3 of all the copper in the world comes from Chile). So they have a competent mining sector and legal framework that respects property rights. 

 

As far as the bear case and what to consider:  some lithium is mined from the rock but a lot of it is mined using water, the same way potash is (pump water in, pump brine out and let it dry on the floor, then collect lithium). If this is mined with the water method and the mines are in the north around the other mining areas (antofagasta), then their ability to get water rights will dictate how much they can produce. The Atacama desert in Chile is the world's dryest place. With current technology, lithium is the best way to make a rechargable battery, but what we know about batteries is mostly the result of trial and error.  We don't know why some batteries work better than others (why does adding cobalt improve battery performance?  Who knows, but it works).  "The Powerhouse" by Steve Levine is a good primer on the race to develop rechargable batteries. Since battery tech is just getting started it's possible that something new could replace Lithium in the same way that Lithium replaced Nickel as the go-to material for rechargeables. 

[Eye4Valu]

According to this article China’s Tianqi Lithium paid 4.1B for a 24% minority stake in SQM last year: https://www.mining.com/chinas-tianqi-lithium-buys-minority-stake-sqm-4-07bn/

 

That values SQM around 16B. SQM has a current market cap of 7.8B.

 

Appears undervalued based on that transaction.

[Tomahawk25]

I have bought a small amount of SQM and ALB around these levels (july 2019) and am not yet sure on buying more.  I would like if possible to buy them at prices "pre lithium hype/boom" and thus get some kind of margin of safety.  Buy thesis on lithium stocks is well known, but let's talk about some possible risks/concerns:

 

1) Future lithium demand still uncertain, EV adoption unknown. Buying SQM & ALB could hopefully be like buying into a RIO & BHP iron ore situation, but might not be similar. 

2) SQM needs to re-apply for license in 2030 to continue mining lithium in Chile

3) Future optimal configuration of batteries still unknown (how much cobalt, lithium, nickel, manganese etc?)  From what I've read in various sources, the price for a car battery also needs to get to around $100 KwH to be economically competitive with ICE engines (see Bloomberg New Energy Finance research for more there). 

4) Will SQM, ALB, Tianqi be competing against all parts of the cost curve, or will they produce large quantities of lithium to keep prices and other competition low?  Crowd out the higher cost suppliers and thus become a lower margin oligopoly? 

5) if the battery value chain is around $20 billion estimated for lithium mined, $43 billion for refined product, and $424 billion plus for batteries, are the miners the best place in the value chain to invest?  (my guess is yes, because of the cost curve advantage and probably intense competition at

the higher battery levels, but worth challenging). 

6) If lithium works out, ALB will lose over time a lot of its 1/3 business providing chemicals for refineries etc (which presumably will suffer as car gasoline demand declines). 

 

Just some thoughts, please add more and challenge these ideas!!

 

*  I'm using some of the numbers from the Bloomberg article https://www.bloomberg.com/news/articles/2019-07-28/the-lithium-mine-buildup-is-outpacing-the-electric-car-boom

[Saluki]

This looked interesting to me, but all the lithium producers have been getting hammered lately, so I did some premilary digging and came up with a few things:

 

https://roskill.com/news/lithium-sqm-to-restrict-2019-production-market-share-not-a-concern/

"Chinese spot prices for battery-grade lithium carbonate have fallen from US$25,000/t (incl. VAT) at the start of 2018 to US$11,500/t at the start of 2019, and this has also impacted Chinese import prices from which SQM was generating much of the aforementioned price premium."

 

Although demand is growing every year, there seem to be a lot of new entrants trying to come into the market and that is affecting the price.

 

 

 

https://www.mining.com/worlds-no-2-lithium-miner-sqm-sees-demand-growing-by-17-this-year/

"SQM last year struck a deal with the government to more than triple production by 2025 in exchange for paying sharply higher royalties and offering discounted lithium to domestic value-added producers of battery components."

 

SQM appears to be the low-cost producer of the stuff, but if you have to pay higher royalties and give discounts to local companies, those margins can erode pretty quickly

 

https://www.reuters.com/article/us-sqm-results/chile-lithium-producer-sqm-delays-atacama-expansion-amid-price-slump-idUSKCN1ST2DX

"He said new royalties put in place by Chilean development agency Corfo last year, considered to be the highest in the world, had hurt profitability in the first quarter.

 

Payments to Corfo nearly quadrupled versus the previous period, from $12 million to $45 million, according to SQM’s earnings statement."

 

Ouch!

 

https://seekingalpha.com/article/4266576-sqm-pain-ahead-lithium

The company estimates that the sales price for its lithium will fall by 20% over the second half of 2019 to $11-12,000/t (from $14,600/t, reported in Q1).

 

I assume this price drop is the result of new supply.  Still, at these prices this company looks interesting (especially since it doesn't look like it has a lot of debt), so I will continue digging until I make up my mind one way or another.  Thanks for bringing this to my attention.

[bizaro86]

I agree this looks interesting. Does anyone have a sense of their excess supply? It seems to me that if they are the low cost supplier the price is unlikely to go below their cost for any appreciable amount of time.

 

But I could see lower lithium prices combined with technology advances and manufacturing expansion increasing demand dramatically. So they might be able to partially make up the lower prices on volume.

[perulv]

Thanks for good comments, all. I've started reading the book "The Powerhouse", very interesting so far.

 

You bring up many good points. Regarding reserves, it seems that almost half the lithium-reserves (not sure about the definition of "reserves") are in Chile (https://en.wikipedia.org/wiki/Lithium#Reserves), and that they are perhaps the most economically viable to extract. Then there are issues like this: https://news.mongabay.com/2018/12/chile-renews-contract-with-lithium-company-criticized-for-damaging-wetland/ :(

 

This pdf btw has a good introduction to the li-ion battery value chain: https://www.austrade.gov.au/ArticleDocuments/5572/Lithium-Ion%20Battery%20Value%20Chain%20report.pdf.aspx

 

While googling, I found this company: https://www.orocobre.com/company/, listed on the Toronto Stock Exchange, and partly owned by Toyota. I haven't had time to look into it yet, but at first glance it looks interesting.  The fact that it extracts lithium in the same general area (https://resourceworld.com/lithium-triangle/) as the two other companies, but from a different country (Argentina), would mean different policies and royalties I assume. But then again, I have not even been able to find the latest balance-sheet yet, and have little knowledge of the risks/rewards of being Argentina-based.

 

Btw, should I create a new thread for this, or is it OK to discuss it in this SQM-thread?

[perulv]

Slightly of-topic, but I am used to always finding earnings, balance sheet and cash flow in proper tables at the end of quarterly reports. Not so for Orocobre, e.g. https://www.orocobre.com/wp/?mdocs-file=5879. Are there other sources for these data (in tabular format, not prose) for TSX-listed companies?

[bizaro86]

Slightly of-topic, but I am used to always finding earnings, balance sheet and cash flow in proper tables at the end of quarterly reports. Not so for Orocobre, e.g. https://www.orocobre.com/wp/?mdocs-file=5879. Are there other sources for these data (in tabular format, not prose) for TSX-listed companies?

 

That must be an Australian thing - that isn't what standard Canadian reports look like. There is a bit more data from the Canadian side, but not a ton. I suspect they might be getting an exemption from Canadian disclosure requirements because of their disclosure in Australia.

 

https://www.investorx.ca/Doc/W7HS4PSV9HB/2019/02/25/orocobre-limited/interim-financial-statementsreport-english