4 Key Things About SQM's Lithium Business and Outlook That Investors Should Know

Sociedad Quimica y Minera de Chile (NYSE: SQM), or SQM, recently reported strong fourth-quarter and full-year 2017 results. Quarterly revenue increased 3.8% to $574.8 million and earnings per American depositary receipt (ADR) jumped 36% year over year to $0.42. For the year, revenue grew 11.2% to $2.16 billion and earnings per ADR soared 54% to $1.63.

The Chilean specialty chemical company's lithium business, which is the second-largest in the world behind Albemarle's, remains its main growth driver. Demand for the silvery-white mineral has been booming due to the rising popularity of electric vehicles (EVs), which are powered by lithium-ion batteries.

This dynamic propelled lithium stocks much higher in 2016 and 2017. They've pulled back in 2018, however, on concerns among some market participants about a lithium glut arising because the major lithium miners are significantly ramping up production, with some of them also in the process of developing new lithium sources.

Below are four key things investors should know from SQM's Q4 earnings call.

1. Higher lithium prices were the "most important" growth driver in Q4

From CEO Patricio Solminihac's remarks:

In the fourth quarter, lithium sales increased 2.6% year over year to $179.4 million, accounting for 31.2% of SQM's total revenue. Sales volumes declined 9.8% to 13.2 lithium carbonate equivalent (LCE) metric tons (MT), but price increases more than made up for lower sales volumes. For full-year 2017, lithium prices increased 25% with the average price reaching more than $13,500 per LCE MT in the fourth quarter. SQM doesn't provide stats on its quarterly segment profitability, but it's a sure thing the segment's profitability growth was substantial due to lithium prices increasing. For the full year, the lithium business' revenue jumped 25% year over year to $644.6 million, while its profit soared 34.3% to $455.3 million, accounting for nearly 60% of total segment gross profit.

2. The company is aggressively expanding lithium production capacity

From Solminihac's remarks:

SQM's current lithium production capacity is 48,000 LCE MT. By the end of 2018, it expects to reach a production capacity of 70,000 LCE MT before hitting the 100,000 MT mark by 2019. The $170 million total capital expenditure for this expansion is relatively low, on a cost per MT basis, partly because the company doesn't have to increase its pumping of brine from the underground reservoir at the Atacama salt flat in Chile -- currently its sole source of lithium -- in order to achieve this additional capacity. It just needs to add more processing capacity where the lithium obtained from brine is processed into lithium carbonate, lithium hydroxide, and other downstream lithium products the company sells.

3. Lithium pricing remains strong for 2018

From Solminihac's remarks:

This one speaks for itself, with robust lithium price increases reflecting a market where lithium producers are having a challenging time keeping up with demand.

4. SQM's strategy involves jurisdiction and geographic diversification

From Solminihac's remarks:

This comment was in response to an analyst's question as to why SQM doesn't immediately increase its production capacity expansion plans at Atacama and forget about its plans to bring two new sources -- a brine project in Argentina and a hard-rock mining project in Australia -- on line, given the relatively low cost of expanding production capacity at Atacama and the fact that SQM has room for higher production capacity in Chile, per its lease with the Chilean government. The reason seems obvious: SQM now has all its lithium eggs in one basket, which presents a substantial risk to the company from both a business interruption and profitability standpoint stemming from various factors, several of which Solminihac mentioned.

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