Earnings Call: Q2 2021

Aug 19, 2021

Good day, and welcome to the SQM Second Quarter twenty twenty one Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. 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 XCRM's second quarter twenty twenty one 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 uploaded to our website, where you can also find a link to the webcast. Speaking on the call today will be Ricardo Ramos, CEO Gerardo Yammes, CFO and Cindy Faith Smith, Commercial Vice President, Lithium and Ionide 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 or estimates reflecting the best judgment of SQM based on currently available information 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 United States Security 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 twenty twenty one were over 76% higher than earnings reported 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 twenty twenty one. 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 iron sales volumes this year should surpass 95,000 metric tons and 12,000 metric tons respectively, 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 in the Enceladus Takama at a rate of approximately 110,000 metric tons per year and we remain on target to reach a nameplate capacity of 120,000 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 50,000 metric tons 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 eighteen months. For example, during the first half of this year, we have sold more than double the sales volumes sold during the same period last year. Our average lithium prices during the second quarter twenty twenty one were almost 20% higher compared to the first quarter twenty twenty one. 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 update our twenty twenty five lithium carbonate equivalent estimates to surpass 1,000,000 metric tons, and we are working to strengthen our position in this market. Thank you, operator. We may now go to the Q and A session. We will actually now begin the question and answer session. Our first question will come from Cesar Perez Nova with BTG Pactual. Please go ahead. Thank you. Good afternoon, Kelly, Gerardo, Ricardo, Felipe, and congratulations for your sound performance in I have a couple of questions, if I may. You upgraded twenty twenty one 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 also because of exploration 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 the Salaria Tacama. While most of these statements are political in nature and unfortunately occurring all of this and possibly separate fact from fiction? Those would be my questions, and thank you very much for taking them. Alberto speaking. It's a really long question. A lot of questions. But let me try to start with the lithium first. I would ask Felipe to give you more details about what we are doing with lithium. And after that, some comments about the potash industry. And finally, your about what is the situation in Chile, whatever. Let me go in that order. Okay. Okay. Hello, Feza. 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 three quarters 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. Thank you. Yes. And this is regarding the Porvage. Of course, we are now we have a very unique situation in the market where prices are going up and 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 prices. 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 border prices. There's a lot of research about borders. We can check it on it. And I think there's a lot of 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 volumes. As we put in our press release, we will try to increase our volumes in the second half and we will, getting the benefit of the better price environment. It means that margin from Bottas second half will be significantly higher than first half and significantly higher of anyhow over the last three years maybe. We are very positive about what's going on in the product industry for second half this year. And for me, it's too early now to give you an update about the volumes for next year. As you know, we have this mixed production of lithium and potash in the Salar De La Cama. We are now working in our business plan and operational planning 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 and we're working in our business at Natchez next year. Both prices of potash are going in the right direction. Of course, Natchez is going in the right direction too. As we mentioned before many times, we are 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 twenty nineteen second half this year is going to be significantly higher than price hikes. 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 no problem 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 SG and A and the Salar Del Hammacam operation, very few. The first one or the first one in your opinion regarding what we think is the Celad del Surations and its origins. As you may remember, it's an old story, but the Celad Del Acamab project was opened internationally by COSCO in 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 company in The U. S. At that time, and the Chilean company in San Naram was Monument. The main conditions to operate the Savara Del Taccala was set in that process, 1986. SQM, of course, was not involved by all. But after seven years, more or less seven years of this investment, research and development, whatever in the project, in 1983, I'm sure it was 1983, these companies decided to sell their participation in the project, which is when SGM bought the project. Of course, in raising the same conditions agreed by these companies with Corfo seven years ago. Finally, as you may remember, in 2018, during the previous government, an amendment to the contract was signed between Corfo and SCEEN, mainly decreasing the median quota that was the idea we were looking for, but of course, in exchange of our heavier economic conditions in favor of Corvo. Currently, as you know, the vehicle industry continues to be impacted and delivering resources to the country according to the agreement with Corvo, 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 these margins. That's the real situation of the project today. The second point that I want to be very clear is that we add a lot of value to the minerals in the Salado Da Cama 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 a strictly high quality lithium carbonate lithium hydroxide. We add value in such a way that it can be used directly in high-tech industries such as electric vehicles. As you know, most Australian players extract the mineral and then send the raw material to China, where the value added process of producing refined lithium products is done. In less than two years, we have more than doubled our capacity and are already working to almost doubled 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 of that. Finally, let me tell you, Cesar, that we will keep working on initiatives like this. We are committed to producing lithium in all our products all our products in a sustainable way, adding value to all our stakeholders. All right. Thank you very much, Ricardo, for the thorough explanation and good luck in the subsequent quarters. Our next question will come from PJ Juvekar with Citigroup. Please go ahead. Yes. Hi, good morning. Or I should say good afternoon. 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? Yes. Hello, PJ. How are you? Yes. Good. How are you? Well, yes, I think that indeed as you mentioned, there is a general overall problem with container shipment everywhere and both congestions and so on. Well, as I was saying, PJ, 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 or delays. So from that point of view, we are in a good position. And regarding the what is the cost of a it's a very small percentage of our total cost what has to do with the logistic and transportation. Thank you for that. My second question is, would you like to get bigger into the lithium refining business, getting into hydroxide business and going downstream? Can we just talk about why or why not? And would you look at potential M and A to if you decide to go into it, would you potentially look at M and A in China to get into hydroxide business? Thank you. Hi, P. J, Ricardo Ramos speaking. As you may know, we are integrated today with reduced lithium carbonate 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 to announce what is going to be our target in terms of lithium nitride site capacity. So far it's 30,000, but we are looking forward to increase our capacity. And you're right in terms that we are looking for different alternatives, not only in Chile but outside Chile. We We are a big, big player in the lithium. We are going to be in the short term medium term in the 180,000 megaton capacity. That's a lot of lithium carbon and lithium microsites we have to sell. And of course, we are looking for different synergies around the world. As soon as we have any news regarding that, of course, we will announce the market. Thank you. Our next question will come from Joel Jackson with BMO Capital Markets. Please go ahead. Hi, good afternoon, everybody. I have a few questions. I'm going to ask them one by one. If I listened 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 of the ATM price should average about 30% higher than the first half of the year. Is that the right ballpark? Yes. Hi, Joel. Well, we believe that a good estimation of our pricing in the fourth quarter is to approach the $10,000 per ton average. Okay. That's actually quite helpful. Thank you. So I'll keep going. If I think of 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 look through your expansion. You've obviously got a really big volume growth this year, 30,000 tonnes. 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 tonnes next year? Obviously, you've been lucky that you had a lot of production increases this year, others haven't. Next year, there's more supply coming on. It's also big growth. Do you expect to be building inventory next year? Whether you could sell the full 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 and you're planning to produce 40,000 or 45,000 tonnes 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, the business and our sales will move depending on our strategic actions and priorities. So, yes, the most important thing is that we will have enough capacity to sustain 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 to 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 with price? Yes. Ricardo Ramos speaking, I think that the cost is we expect next year depending of course is energy and exchange rate interior are very important. We need to keep an eye on it. But anyway, we have different initiatives to maintain our cost of time. 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 decrease 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 at the end of 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. Just my last question, if I can be greedy. You've done very well to raise your guidance for merchant potash sales volume this year. Looking at what your brine extraction plans have been in 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? Can you hold roughly this level next year? Yes. As I mentioned before, Joe, it's too early for us to have any guidance about volumes of potash in next year. We're working in our business plan for next year and our operational plan in the cellar. 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 potassium 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. Thank you very much. Our next question will come from Ben Isaacson with Scotiabank. Please go ahead. Thank you 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 an 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 fiftyfifty JV partners indefinitely? Hi, Ben. We're very happy with our partner in Australia. I mean, Westfarmer is by far the best partner you can have in Australia nowadays. I mean, it's a great company. It's probably the number one company as a global company in Western Australia and doing business with them in Western Australia is a dream comes true for us. I mean, I'm very happy being partnered with Fireman 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 twenty nineteen before COVID and then you went to 2,800, two thousand six hundred, two thousand two hundred and then by Q4 of twenty twenty, you were at just over 2,000. Now that we're heading into the 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. Hello, Ben. Well, 2020 was indeed a negative year for IRM 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 twenty nineteen 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 tons and now people are starting to talk about more than 1,000,000 tons in 2025. How do you see the next eighteen to twenty four 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 resupply comes on? Do you think it will basically stay where it is right now? Sorry, I don't mean pricing. I really mean the supplydemand 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 by 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 one or two years. Thank you. Our next question will come from Corrine Blanchard with Deutsche Bank. Please go ahead. Hey, good morning, good afternoon, guys. Again, congrats on the nice quarter. Most of my questions have already been answered. Just probably two more. The first one would be on the solar salt contract. How much of the contract has been pushed to 2022? And is there any time that has been pushed even further to 2023? I believe last quarter you guided sales for 120 kiloton for solar power this year. Now you decreased it by 100. So just trying to get an idea there. Hello? Corin, Ricardo Ramos speaking. Yes, you're right. It means that we have some delay in the volume sale for this year to first half next year. It's mainly due to our client. He had some issues at the beginning of the COVID-nineteen 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 this year to first half next year. There's a delay if I'm not around 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 and probably it's going to be an increase in volumes in this sales, but no reduction. It's just a delay in the shipments. Okay. That's good to know. And just for the segment by itself, Industrial and 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. I was just asking you what the total volume guidance for this year for the entire segment, for the Industrial and Chemical division? Okay. Industrial and Chemical, we have two 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 this 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. Thank you. Just one last question, if I may. And this is a bit broader topic. Could you just give us an update on the license renewal process, the timeline? Where do you stand now? And what can we expect maybe over the next twelve to twenty four months? Okay. As we mentioned before, not only today, but in the last, I don't know, several quarters report, we are very focused in 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 four times what we used to have three years ago. We're increasingly site in our facilities. The quality is incredibly good today. We're really proud of our process. We're working on as fast and as good as we can, and we don't foresee any issue regarding our license or our working activity in the Salar. Of course, as you publicly know, we have a full agreement, you already explained that until the year 02/1930. We're working very hard in order to do the best job we can. Great. Thank you. Thank you so much. 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 quarter quarterly conference call in a few months. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.