Lithium Stock Investors: SQM's Q3 Profits Skyrocket on Soaring Lithium Prices
Lithium- and other mineral-rich brine evaporation pool at Salar de Atacama, Chile.Image source: SQM.
Sociedad Quimica y Minera de Chile (NYSE: SQM), orSQM, reported third-quarter earnings after the market closed on Nov. 23. The specialty-chemicals company, which is the world's second-largest supplier of lithium, posted year-over-year revenue growth of 13.2%, while earnings per American depositary receipt (ADR) more than quadrupled, driven by booming lithium prices.
SQM is the last of the big lithium companies to report Q3 earnings, as Albemarle Corporationthe world's largest supplier of the metal, and FMC Corp.reported earlier in the month. The stocks of all three companies have been having a great run, thanks largely to rising demand and prices for lithium, which is being powered by the growing popularity of electric vehicles, as they use lithium-ion batteries. Shares of SQM and Albemarle have returned 64% in the one-year period through Nov. 23, while FMC stock has returned 34%. The S&P 500 has returned 8% over this period.
SQM's headline numbers
|
Metric |
Q3 2016 |
Q3 2015 |
Change(YOY) |
|---|---|---|---|
|
Revenue |
$504.0 million |
$445.2 million |
13.2% |
|
Net Income |
$55.8 million |
$13.7 million |
307% |
|
Earnings per ADR |
$0.21 |
$0.05 |
320% |
Data source: SQM.YOY = year over year.
SQM's current net income and earnings per ADR don't make for apples-to-apples comparisons with these metrics from theyear-ago period, as there were one-time write-offs in both quarters. Unlike most companies based in the United States, SQM doesn't strip out the financial impact of one-time occurrences and report what are commonly called "adjusted earnings."
In the current quarter, SQM took a non-cash, before-tax write-off of approximately $33 million in assets related to a train that can no longer be used to transport product from Coya Sur to Tocopilla, Chile, because severe rains in August 2015 damaged the railway. Since then, SQM has been using trucks to transport product. In the third quarter or 2016, engineering studies concluded that it wasn't economical in the short or medium term to repair the railway. In the third quarter of 2015, SQM wrote off $56.3 million in before-tax net income related to stopping the operations of its mines in Pedro de Valdivia, as part of its restructuring.
SQM's results by business
|
Segment |
Q3 2016 Revenue |
Q3 2015 Revenue |
Change (YOY) |
|---|---|---|---|
|
Specialty plant nutrition |
$154.9 million |
$167.1 million |
(12.1%) |
|
Iodine and derivatives |
$56.5 million |
$60.1 million |
(6%) |
|
Lithium and derivatives |
$145.1 million |
$59.7 million |
143% |
|
Potassium chloride and potassium sulfate |
$114.4 million |
$113.4 million |
0.9% |
|
Industrial chemicals |
$12.8 million |
$26.9 million |
(52.4%) |
|
Other commodity fertilizers and other income |
$20.3 million |
not provided |
N/A |
Data source: SQM. YOY = year over year.
SQM's lithium business -- now its second largest -- had another great quarter, with revenue soaring 143%. The jump was due to an 18% increase in sales volume coupled with significantly higher prices. Revenue for this business accounted for 24.4% of SQM's total revenue in the first nine months of the year, yet an outsize 53% of its consolidated gross profit for this period. (SQM doesn't provide quarterly gross profit numbers.)
The company's specialty plant nutrition business, its largest segment (but not for long, given lithium's fast growth), posted a12.1% year-over-year decline in revenue due to a drop in prices. From just the second quarter, prices slumped 7%. Gross profitfor this business accounted for about 29% of SQM's consolidated gross profit for the first nine months of the year.
The 6% year-over-year revenue decline in theiodine business was due to lower prices. During the quarter, average prices decreased almost 6% compared to the second quarter of 2016. Gross profitfor this business accounted for about 7% of SQM's consolidated gross profit for the first nine months of the year.
The potassium chloride and potassium sulfate business posted a very modest year-over-year revenue decline of 0.9%. This decline was due to lower potassium chloride prices, as total sales volumes were up considerably. Average prices in the potassium chloride and potassium sulfate business line fell approximately 26% during the quarter when compared to the third quarter of 2015. Gross profitfor this business accounted for about 7% of SQM's consolidated gross profit for the first nine months of the year.
The industrial chemicals business saw a decline of 52.4% in year-over-year revenue due to lower sales volumes, primarily for solar salts. Prices in the first nine months of 2016 remained flat with the prior year's period.Gross profit in this business accounted for approximately 3% of SQM's consolidated gross profit for the first nine months of the year.
Lithium hydroxide production expansion project
Image source: SQM.
During the third quarter, SQM announced plans to invest approximately $30 million in a lithium hydroxide production expansion project, which would allow it to more than double its lithium hydroxide capacity from 6,000 metric tons per year to 13,500 MT/year. CEO Patricio de Solminihac said in the press release that the company believes this expansion will allow it "to further expand margins" in its lithium business.
According to SQM, lithium hydroxide is increasingly becoming the preferred product used for lithium-ion battery production related to electric vehicles, and it expects lithium hydroxide demand growth to outpace lithium carbonate demand growth in the upcoming years.
Looking ahead
SQM continues to see very strong demand in the lithium market, primarily driven by batteries, and estimates that global volume demand growth for 2016 will be between 12% and 13% when compared to 2015. For upcoming years, it expects lithium volume growth to be between 8% and 10%. The company expects to see some new supply enter the market over the next several months, but said that if demand levels are in line with its expectations, prices will likely remain at current levels at least for the short term.
As for its other businesses, SQM has seen some recent price recovery in its potassium chloride and sulfate business and management said that average prices during the fourth quarter could be higher than average prices in the third quarter. It saidit remains confident in its specialty plant nutrition business, but didn't provide any outlook with respect to pricing. The company maintains itsview that global iodine demand growth will be around 2% for the year.
While the immediate future looks positive for SQM, investors should tread carefully. Its revenue and earnings growth are being driven solely by its lithium business, so a decline in lithium prices would likely significantly negatively impact its overall financials.
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