智利化工礦業 (SQM) 2018 Q3 法說會逐字稿

Good morning, and welcome to the SQM Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Gerardo Illanes. Please go ahead.

Thank you. Good morning, everyone, and welcome to SQM's Third Quarter 2018 Earnings Conference Call. For your information, this conference call will be recorded and is being webcast live. You may access the webcast later on at our website, www.sqm.com. Joining me today, our speaker is Patricio Solminihac, Chief Executive Officer.

Before we begin, let me remind you that statements in this conference concerning the company's business outlook, future economic performance, 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 that term is defined under federal securities laws. Any forward-looking statements are estimates reflecting the best judgment of SQM based on currently available information and involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those stated in such statements. Risks, uncertainties and factors that could affect the accuracy of such forward-looking statements are identified in the public filings made with the Securities and Exchange Commission and any forward-looking statements should be considered in light of those factors.

I now leave you with our Chief Executive Officer, Patricio Solminihac, for brief comments before we move to Q&A.

Thank you, Gerardo. Good morning, everyone.

We post our results for the third quarter. Our net income reached $83.5 million. This is a decrease compared to the same period last year. And as anticipated, was mainly due to lower lithium sales volume from production and logistic issues in Chile.

As mentioned in the press release published last night, the first stage of our major lithium expansion is allowing us to increase lithium capacity in Chile by almost 50%. This project was planned with a quick time frame and a very low CapEx. The ramp-up of the overall and expansion of the lithium carbonate plant has confronted difficulties. This has led to a production shortfall and impacted our sales volumes in the third quarter. We continue to work diligently and are advancing toward a solution for these production issues. We will solve this problem, and we will reach the 70,000 metric ton per year nameplate capacity in near term. We believe fourth quarter sales volume will be significantly higher than third quarter but less than originally expected, letting us reach approximately 45,000 tonnes this year.

The markets in which we participate remain strong. We reiterate that 2018 lithium market demand is exceeding expectations and believe it will surpass 25% growth this year. Along with this stronger demand, various lithium projects have seen delays in recent months. These 2 factors have contributed to flat price in the third quarter when compared to the previous quarter of this year.

In the iodine market, price increased to almost $25 per kilo in the third quarter, exceeding expectations. And we are on track to report record sales volumes for the year.

Finally, in the potassium nitrate market, we believe market growth will surpass 6% this year. This was reflected in our strong sales volume reported for the first 9 months of the year.

We thank you for joining our call today, and I will open now the lines for questions.

(Operator Instructions) And your first question is from the line of Joel Jackson with BMO Capital Markets.

This is Robin on for Joel. So with Q3 and now guided Q4 volumes lower than originally expected yet second half pricing seems to be stronger than previously indicated at the Investor Day in September, so my question is, how much of the pricing strength is due to higher hydroxide mix from shipping less carbonate, given the production issues? And I guess put another way, would pricing be at these levels if you had met original volume targets?

Thank you, Rob. Basically, the prices that we have seen, as we indicated in our press release, is a result of a very strong demand, demand being stronger than we originally anticipated. And also, there has been delays in some of the production promises. So that's why we have seen price keeping in the levels that we had at the beginning of the year. What would have been happened if we have been producing more, we don't know. I mean, there -- always the price will deflate the equilibrium between the demand and supply that is happening at any time. But regarding your question of effect of hydroxide and carbonate, we have not seen a different effect on that. Prices of hydroxide as well as of carbonate both remain in the similar levels.

Okay, that's helpful. And just a follow-up to that. Some of your more contract-focused lithium peers have guided to about flat pricing in 2019. What is your early expectation for lithium price in 2019? And related to that, are you reconsidering policy against lithium long-term contracts?

We are, at this very moment, working with our customers for the closure of contract for next year. And so we don't know yet what the situation of prices will be next year. We are in the middle of that process now. And regarding contract -- longer-term contract, we have been working with some of our customers to have volume contract, and we are finding ways of how to handle the variabilities of prices for the future. But we do -- are now working with some of our customer to have longer-term contracts, but not at fixed prices.

Next question comes from the line of Ben Isaacson with Scotiabank.

It's Oliver on for Ben. So how should we think about lithium volumes next year? Will those be closer to the 70,000 metric ton run rate that you exit 2018 at? Or how much additional production from the expansion to 120,000 metric tons will you see? And will that ramp-up process result in lower volumes similar to what we're seeing with the current ramp-up?

Thank you. Basically, we expect that all the issues that we face in the ramp-up will be solved and we will not have any issues 2019. That's our expectation. We plan to try to recover our inventories. Now how much we will sell -- we will be selling next year, of course, we are expecting to sell more than where we are selling this year, but we don't have yet a specific target number. We are in the middle of discussion with our customers today.

Right, that makes sense. So on the potash business, we've seen pretty significant declines in volumes as you're ramping up lithium and NOP as well. So how does this trend develop when you double and then triple your lithium capacity over the next several years? How low could those potash volumes actually end up going long term?

We have to divide this in shorter term, near term and longer term. Longer term, we are working in a couple of projects to be able to recover more potash in our operations. So we expect to recover some of the volume in the longer-term period. Shorter term, we expect to continue diminishing a little bit more, and also we will be using more of our potassium chloride in order to support the increasing volume in our potassium nitrate production. So finally, when you look at what we sell in the market as potassium chloride, there are 2 effects. One, that we have less availability because we use more for potassium nitrate, given the growth in potassium nitrate because of growth in the specialty plant nutrition as well as growth in solar salts. And at the same time, lower availability, so probably, we will be lowering 200,000 or 300,000 tonnes more of our sales with sales of potassium chloride in the short term.

Great. And last one from me. So the results in iodine have been very strong, especially compared to where they were even last year, where gross margins are now, I think, up 10% year-over-year. And assuming that we're close to run rate, they could actually be sort of double where they were 3 years ago. So my question is, how sustainable is current pricing in iodine? At what point do we trigger new capacity? And I think there's been some closures in iodine or at least some curtailments by other producers. So is that capacity able to restart? And sort of what prices does that come back on?

We are -- as we indicated in the press release, we are in the levels of $25. We believe that there is still space to grow some on the prices next year. And still with those additional growth, we will not see restart of high-cost production base.

Next question is from the line of Lucas Ferreira with JPMorgan.

My first question is a follow-up on the 2019 sales volumes. If you can -- I know you are still not giving guidance on the number, but I remember you spoke on previous calls mentioning you were expecting to sell about 80,000 tonnes of carbonate equivalent. With these changes and if you also can quickly comment on the Phase 2 progress, when that should start? If you still expect to sell that 80,000 tonnes? Still on the carbonate side, I wanted to ask, you mentioned and we've been seeing that the hydroxide demand has been outpacing the overall market, and your expansion volumes and your projects are pretty much focused on the carbonate. So my question is, if at some point the company may reassess all the plan in expansion in carbonate and maybe start investing a little more in hydroxide, that could be either in Chile or outside Chile, if that's something that you guys consider doing? And sorry, my final question is regarding the production costs. Of course, I was expecting the production cost for lithium to increase because of the, let's say, a full quarter impact of the higher lease fees. But the cost came above expectation. And I suppose it's regarding the, let's say, lower fixed cost dilution or maybe some extra cost and some impacts from these shortfall in volumes we had during the quarter. So if you can comment on any sort of a one-off impact on the cost during the quarter would be great.

Thank you, Lucas. I will try to remember the questions. Well, first regarding lithium hydroxide, the good news is that the expansion of our lithium hydroxide plant at stronger 6,000 to 13,500 is working well. We start up that plant, and we have not had any issues like the ones that we had in the carbonate plant. So lithium hydroxide plant is going well. We do have a plan, and we have indicated that we have already some approval for additional expansion in Chile with the traditional technology. And at the same time, I also reported that we are working in trying to find development for a new technology that will allow us to reduce -- or would allow us to reduce lithium hydroxide directly from grind and not through the route of lithium carbonate. And the third point on this is that we defined that our trade in Australia will be 100% lithium hydroxide. So we already have been taking care in our opinion of the mix of demand for lithium hydroxide and lithium carbonate. That is regarding that. Regarding our -- what I indicated that we probably will be able to produce 80,000 tonnes, I always have been indicated that one thing -- in 2019. One thing is to have the capacity, then to produce and then to sell. Each decisions is differently depending on the condition. We decided that we want to have the capacity for sure because our low CapEx and what we see on the growth. So we already finished, and we are in the final ramp-up or starting of our lithium carbonate going to 70,000. And we continue working in order to have the second stage will be to get to 110,000. And we will continue to do that. Then, we -- given that we have a very, very low inventory rate, probably we will try to produce as much as we can originally at the beginning of next year in order to recover the inventory. Now how much we will sell? As I indicated before, we plan to sell much more than what we sell this year, but the exact number will depend on how we see the market and how we see that we optimize the value for the company in the long term.

Regarding the production cost, yes, you are right. The main issue here is our rent that we pay to CORFO. That is, as you know, tied to the price. So at the actual level of price of lithium product, we end up paying close to 23% of the sales, meaning that today it's $4,000. Besides that, we have some fixed payment to CORFO which go to the communities, money that we give for research and development in Chile. Those 2 have affected the cost this quarter also because the lower volume. So that unit cost should go down in the future. And regarding the cost itself, production cost in the quarter, we have special additional cost of close to $300.

Next question is from the line of Laurence Alexander with Jefferies.

I guess, can you give a little bit more detail on the ramp delays at your -- the production delays that you have this year? And specifically, what I'm interested in is, have you learned anything from these that would make future delays on the next expansion avoidable at perhaps a higher CapEx cost? Or were there any other learnings from these delays? Or were these just normal kind of delays that you would expect?

Sorry, your question was not clear. If you can try to repeat your question, so we can understand.

Sorry. So I guess, what I'm asking about is, with the delays, the production delays that you've indicated, can you apply to what extent you have learned things from this that might affect how you approach delays or how you approach capacity expansions in the future? And perhaps this might change project design, it might change CapEx. But I mean, have you learned anything from this that makes that avoidable? Or shall we just assume that this is within the normal lumpiness that will repeat on future projects?

Clearly, it's something that we have studied a lot. And of course, we'll continue to analyze in detail to learn from this. Of course, we did not expected this and we didn't like it. Basically, we have to remember that this project was designed to be very rapid, very quickly implementation. That was because the market needed the volume very quickly and at a very low CapEx. And to give it, this was an intervention of our actual plant operating at full capacity. So was very difficult and very complex, and we knew that, that will be difficult and complex to have a quick implementation of the project at the low CapEx and intervening a plant that was operating at full capacity. We had some issues in some of the connection between the new equipment and the old equipment, we have some issues that we didn't expected on some of the old equipment, equipment that will be out of the new plant. And then also some of the new equipment took a little bit more time to fine-tune their operations. We have [installation] products, but some of the products have been out of spec that we need to reprocess. So this is something that, of course, we are learning and we are using all this learning experience for our future expansions. Have to remember that this is not new for us. We have been producing lithium carbonate for most than 20 years. We do have experience, and that's why we feel comfortable that we will be solving this the right way.

This was our last question for today. This concludes our question-and-answer session. I would like to turn the conference back to our host for any closing remarks.

Thank you all very much for joining us today. And we hope to have you -- to have you with us in the next conference call. Goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.