智利化工礦業 (SQM) 2021 Q3 法說會逐字稿

Good morning, and welcome to the SQM Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Irina Axenova, Investor Relations. Please go ahead.

Thank you, Graham. Good morning. Thank you for joining SQM's first (sic) [third] quarter 2021 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, Chief Executive Officer; Gerardo Illanes, Chief Financial Officer; and Pablo Altimiras, Commercial Vice President, Lithium and Iodine business. He will be available to help answer any questions following the prepared remarks.

Before we begin, let me remind you that statements in this conference concerning the company's business outlook, future economic performances, its 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 law. 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, including our ability to successfully implement the sustainable development plan. Risks, uncertainties and factors that could affect accuracy of such forward-looking statements are identified in our public filings made with the U.S. Securities and Exchange Commission and in our earnings release issued yesterday, 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 our Chief Executive Officer, Ricardo Ramos.

Thank you, Irina, and good morning, and thank you for joining the call today. Our earnings during the third quarter of 2021 were significantly higher than earnings reported during the same period last year. These results were driven by considerably higher sales volumes and prices across almost all our business lines.

We continue seeing very positive market conditions in all of the markets in which we participate. Demand in lithium market is exceeding our previous expectations. The iodine market has recovered from the pandemic faster than anticipated, while we are also seeing a positive trend in the fertilizer markets.

We are now expecting that the lithium market demand should grow close to 50% this year, driven by strong sales of electric vehicles in all relevant markets, especially in China and Europe. The capacity expansions we have been working on are allowing us to grow even more than the market, letting us reach close to 100,000 metric tons in sales volumes this year. By the middle of next year, our expansion to 180,000 metric tons should be ready, allowing us to keep on growing our sales volumes. This accelerated lithium market growth is pressuring prices. At the same time, the contracts we signed last year are expiring. This allow us to expect an average sales price higher than $12,000 per metric ton during the fourth quarter and probably even higher during the first quarter next year.

In the meanwhile, the iodine market demand has already reached the pre-pandemic levels. This quick recovery has had a positive impact on prices, as supply has not been able to respond. We are now expecting total sales in 2021, around 12,500 metric tons with average sales prices increasing from prices seen over past few quarters. As we are working on expanding our iodine capacity, we expect to ramp up additional 1,000 metric tons in the beginning of 2023, followed by approximately 2,500 metric tons in 2024, all part of our early announced growth plan.

We have seen some very interesting developments in the fertilizer markets globally. Supply has been impacted by export restrictions and logistics interruption. The spot prices for both potash and potassium nitrate fertilizer have reached levels not seen in more than a decade. We now expect our potassium and potassium nitrate average prices to reach almost $700 and over $1,000 per metric ton, respectively, during the fourth quarter this year.

Considering all the positive factors, we now anticipate a record performance during the fourth quarter this year with a significantly higher EBITDA. We remain confident in our ability to deliver future growth, while continuing to operate in a sustainable way, creating value for our customers, communities and all our stockholders.

We'll now open the line for questions.

(Operator Instructions) Our first question today comes from Joel Jackson with BMO Capital Markets.

I'm going to ask a few questions one by one. When we look into your production for next year for lithium, you've got to 120,000 tons already, LCE. You will get to 180 some point next year. What do you think will be your ability for production next year? And what do you think your level of sales? Presumably, you want to build some inventory, but what could be your maximum production or maximum sales next year?

Joel, about production, as the total production, considering that we are ramped up to the 180,000 tons, during next year, we think it's reasonable to expect a production in the 140,000 metric tons next year. Maybe it's going to be just a little bit higher than that, but 140,000 tons is my best estimate today of the total lithium and lithium hydroxide total production in Chile.

About sales volumes, Pablo, what's your opinion?

Yes. Joel, our idea is to continue growing according to the demand. If we consider that we're expecting a growth for the next year, demand between 20% or 30%, we expect to grow our sales in that same percentage.

Okay. Now I appreciate your pricing guidance. Now when I look at October, Chilean customs data, your pricing in October seems well less than $12,000. You're going to average about $12,000, you say, for the quarter. So I want to know if you expect to play so much more volume next year and presumably, you're now pricing volumes now for next year, like your pricing volume pricing ahead for next year, how much of your pricing, how much of your volume in 2022 are you locking in now or we expect to lock in by Christmas, let's say? And would you expect that pricing, that any pricing you're locking in now for '22, is that all of $12,000?

Okay. Well, you know that today, we are in the middle of the negotiation for volumes for the next year. However, what I can say because you already know that we have secured some long-term contracts. But still for the next year, we have -- and we need to negotiate closely to the 80% of our total sales for the next year is open to discussions with our customers. So that's the percentage of the total volumes that is offered for the next year.

So right now today, 80% of your anticipated volume next year is open, is that what you're saying?

Today, for the next year, okay, 20% is already negotiated and then different kind of contract with our customers? And 80% is still open to the conditions that we are -- that we need to discuss with our customers.

Okay. And I appreciate that. And we can all see spot pricing from different Chinese and Asian benchmarks, be it $20,000 on carbon, [$20,000 -- $25,000 on carbonate]. Are those real prices that you can achieve at scale in the market for 2022? Or is the answer, it's much less than $25,000, but it's much more than $12,000? Like help us understand how real some of those prices are we see in the 20s for real volume, real large volume that you offer?

You know that always this is a noisy question regarding prices, but what we need to remember is that depending on what we negotiate with your customers, it means shorter contracts, longer contract, depending on the quality of the product, if they go to battery applications, industrial applications, then you have different prices. What I comment today is that because of the huge demand in lithium and lack of supply, the spot prices is too very high. But it doesn't mean that we will see these kind of prices for the average price because, again, it's depending on the conditions that we negotiate with each customer.

Our next question comes from Ben Isaacson with Scotiabank.

I'll ask a few questions one by one, if that's okay. I guess the first question is just to extend off of Joel's question. You talked about 20% of 2022 volume is negotiated already, and 80% is open. Can you just talk about the shape of that 80%? How much of that 80% should be contracted by the end of this year? And how do those contracts get renegotiated in each of the next kind of 4 or 5 quarters? Are they all calendar 2022 contracts that will be negotiated before January 1? Or is it on a kind of continuous basis, some are short term, some are long term? Can you just give some more color in terms of when we expect that 80% to be contracted?

Okay. Well, it is a difficult question because we are under negotiation. For sure that, we know that when you are selling this amount of lithium, we need to secure that amount. But again, also, it's up to it, I mean, every customer. Some customer -- I mean, the rest of the 80% then will be a combination of closed short contracts. And for sure, something that we are looking for, if we are able to do sign good projects, we're also thinking to sign long term contracts. And normally, when you sign a long-term contract, the negotiation process is longer than we do negotiate shorter contracts. So that -- everything will depend how fast we can do that with our customers. So today, I cannot really give you a fact a number of how much of those contracts will be ready. Anyhow, we are very close to the end of the year. So for sure, that I expect that by the end of the year, at least the first quarter should be already negotiated with our customers.

Will 100% be finished by the end of Q1?

I cannot say 100%.

But most of it should be finished by the end of Q1. Is that right? I mean, just based on the timing of the previous contracts and when they expire. Is that fair to say?

Well, again, I mean, it depends. It's a dynamic market. But for sure, because of the period of the year that we have today, by the end of the year, we should have an important percentage already negotiated for Q1.

That's helpful. Next question is on iodine. You guys have tried different strategies over the years. Sometimes volume, sometimes price with mixed success on the price side, and the volume side has been very successful. Now we're getting above $35, or that's the direction that we're going per kilogram. And if I remember correctly, that's kind of the point in which you start to see the economics look attractive for marginal producers in Chile to come online. Is that what you want? Do you want to see higher prices? Or is that getting a little bit dangerous that you could see new capacity coming on? Can you kind of run us through what that debate looks like and kind of what your opinion is?

Okay. Well, you know that -- I mean, in the industry, we need to consider different things. So one of them is the demand. You know that this year, the recovery of the demand will be higher than expected, close to 12%. Then we need to consider the answer of the supply. So at the end, everything will depend on the behavior of the recent players in the supply side. In that regard, what we have seen is not a -- I mean, we have not seen enough response of the supplier in order to be able to supply all the demand that is today in the market. So price is a result of the supply and demand and everything will depend about how the different players react with the supply plans in order to accomplish the demand that we have.

Just 2 more quick ones for me. When you look at each of your business segments, can you talk about cost of production, whether it's iodine or NOP or potash or whatever it may be, and how that's been impacted by inflation -- cost inflation of raw materials of labor or energy? Are you seeing that already? Or is that something that we should expect and be modeling for over the next few quarters?

Ben, Ricardo Ramos speaking. As you -- if you review our numbers during the first 3 quarters of this year, you see cost is slightly higher during the third quarter than compared to the previous quarters. I think that our cost today are affected by the exchange rate, for example, exchange rate in Chile, are affected by the increased cost of raw material, a significant increase in cost of raw materials on our production process, the additional cost of the energy, as you may know. Contractors, of course, the contractors we have, they reflect the exchange rate, increased cost of raw materials, the energy, everything. Plus, we have some extraordinary costs in the last, I don't know, 18 months, related to the COVID-19 pandemic that affects in some way our cost. I think that it's already reflected. Some of it, yes, it will be some additional probably costs if situation of the raw materials and energy continue during the next few quarters, yes. But I think that we are doing the right thing in order to increase productivity, to increase the deals of our process, in order to control the cost allocation. But so far, we are seeing every single product producer in the world has increased cost that has been affecting our production in the last 2 or 3 quarters.

Great. And then very last question, if I may. Last quarter, you said that lithium demand was looking like it was going to be up 40%, and next year was -- you were thinking around 20%. Now you're saying lithium demand is going to be up 50% this year, and that makes sense. But the question is, is that 50%, is that taking away some of the demand? Are we seeing some demand acceleration getting pulled from 2022? Or do you think 2022 will still be 20% or potentially even stronger? And then maybe as a follow-up, how do you think '25 will look? Are we still looking like it will exceed 1 million tons? Or could it be a little bit higher?

Okay, Ben, first of all, we need to remember that it's important, the base. From where we are starting in 2020, we know that the demand was lower because of the crisis. So that explains why we have this big growth this year. And we are growing from 40% to 50% because what we have seen with electric vehicles sales, it's been very good and very positive. Actually, today, our forecast is that total sales EV of the year, sales will be between 6.3 million or 6.6 million, which is bigger than what one expected. That's the thing. And the other thing, because we need to consider that some part of the reason that we see demand today is for the cash that we produce next year. Also, we are -- we have a more positive view from the growth of the next year, when I said to you between 20%, 20% or 30%. That view is a little bit bigger than the view that we have before. So we have some very positive outcome at least in the short term.

Regarding to 2025, well, we have different scenarios. Our base scenario is 1 million tons in terms of LCE, which is bigger to some indications that we gave -- signed a month ago. And still, we are working, and of course, that we are following up the market. And potentially, we could see better results. But today, we remain our view of the 1 million tons.

Our next question comes from [Gagan Paharni] with Bank of America.

There 2 questions actually. The first one on the iodine business. If you could share a bit of the impact of the fire that took place in one of your plants? And what was the impact in terms of costs during this quarter? And the second question on the fertilizer business. If you could share a bit in terms of the pricing that we are seeing on the marketplace? And what do you expect going forward for the next year as well?

First about the fire we had in our facilities in the north, 3 months ago, I think. The impact in production was not more than 40 tons, because most of the production work has been covered in the next month. Finally, about the cost. Yes, we had some additional cost, probably in the range of $200,000. That arrangement means the improvement of the facility, replacement of equipment. But in the $200,000, $250,000 total cost involved in the fire. That's why it was not so relevant. And we are taking all the measures that this kind of situation wouldn't happen again. It's very important. It's a significant issue for us, having a fire in the facility. That's why we really detailed the situation, and now we are better prepared for this kind of situation.

About the fertilizer, it's difficult to give you an outlook after the fourth quarter. We know now that fourth quarter is very unusual, price levels that -- we are observing price levels that have not been recorded in previous years. As I mentioned to you, we are reaching $700 per ton in the potash, close to $1,000 in the potassium nitrate. I do not have a long-term view. It's important today, it's important to consider that in the potash industry, we are relatively small. Current prices that we observed, we have today reflect, I think, a temporary supply and demand situation.

One good news, in my opinion, is that the demand of the potash industry remained very strong, and that is associated with better prices of agriculture products. On the other hand, these logistical difficulties of shipments push the prices up. It is very difficult for us to project prices for next year. Definitely, prices for fourth quarter are going to be very strong and the situation is very difficult to predict in the long term. Anyway, it's important to consider that the case of potassium nitrate is different from the case of potassium chloride. All the specialty fertilizers are less volatile. However, although with less volatility, they follow in some way the churn of product prices.

Our next question comes from Corinne Blanchard with Deutsche Bank.

Most of my question have been answered, but I just have a few, probably 2 follow-up question. The first one on potassium. So you raised 2021 volume guidance to close to 900 kiloton, which imply a significant catch up in 4Q. So if you could just comment on that catch-up for 4Q? And also, how should we be thinking in terms of volume for 2022? Like, given the market conditions, do you still expect volume to decrease? Or would you expect maybe volume to stay close to 800 kiloton or 900 kiloton for next year?

Corinne, of course, due to the fact that the prices are extremely good in that, as our price is very unique price environment today. We are doing our best in order to increase the volumes during fourth quarter. We're using some inventories and so on in order to increase the volume during the fourth quarter. That's why probably if you put the numbers together, fourth quarter total volumes is close to 300,000 metric tons. It's a very strong number we expect to deliver during one quarter, just a little bit lower probably, depending the shipments. Sometimes you have a delay of 1 or 2 shipments from fourth quarter to first quarter. You don't know yet, because it will be decided at the end of the month, depending the conditions at the port. But anyway, it's going to be a really strong quarter because the price condition, we try to push everything forward.

About next year, I don't have now a forecast of volumes. Potash, remember that we have a total production in the Salar del Carmen, and we use of some of the potash -- most of the potash in the production of potassium nitrate, either for fertilizer or solar salt business. That's why depending what's going to be our study in specialty fertilizer and solar salt next year and the total production from the Salar del Carmen, at the end, you have -- at the end, the remaining is going to be the potash we will sell to the market.

Anyway, as you may know, we are reducing our commitment from the company to reduce the funding of solutions at the Salar. The most important reduction will be in 2022 as compared to 2021. '23, '24, 25, we will have a small reductions every year, but the most important one is going to be next year. Probably, total production of potash at the Salar del Carmen will be between 100,000 tons and 150,000 tons lower. It means from a total level close to 1.25 million tons. We will move to 1.1 million tons probably production for next year.

If you move forward, probably reductions because the reduction in pumping will be in the range of 20,000 metric tons per year. But the first year is an important one, is the 150,000 tons. 100,000 tons and 150,000 tons. We don't know yet exactly. We're improving a lot of the deals at the Salar level. That's why we expect it's going to be closer to 200,000 tons reduction. Most of it, of course, will be reflected in the potash industry because our first priority is to supply the potash for our nitrate -- potassium nitrate and solar salt business.

Great. And just to come back, maybe I say a bit on leasing pricing. What's your expectation still going forward? And maybe '22, but maybe even beyond that time, in terms of considering maybe using a little bit of contract like short term, a little bit of long-term and maybe switching to some sales on spot. Do you consider maybe switching at some point to a more hybrid model for pricing like some of your peers are doing that? Or do you rather stick more to contract and offtake agreement for most of the volume?

Okay. Well, regarding to the expectation of prices for the next year, we see a strong demand, as we already said. However, you know that the prices act over supply and demand. So everything also will depend on the reaction of the supply. We know that there are other projects under development. So everything at the end will depend on how the supply can react to the demand. Anyhow, we are really positive on the demand side, but we need to see what happen in the next year, but we should expect a positive trend.

Regarding to the strategy of contracts and mixes, and it's something that we have said before, we are open to consider different alternatives with our customers. Our idea always is to give to our customers the solutions that they need. In the past, we have announced some note agreements, we are under discussions of different contracts with our customers. But at the end, what we are looking for always is to have good contract for both sides. So we are open finally to have a mixed strategy between short and long trends and long-term contracts.

Okay. That's helpful. And then the last one, if you -- do you have any update on the cost structure? Or like any update for the Mt. Holland project in Australia?

Yes. Well, as you know, at the beginning of the year, we announced the final investment position. So from there, we are doing a good progress. We have started the early construction stage in both sides. That means the refinery in Kwinana and the Mt. Holland site, where will be the mine and the concentrator plant. And so far, so good according to the plan. So everything is going well.

Our last question today will come from Cesar Perez-Novoa with BTG Pactual.

Yes. Some of my questions have already been answered. Perhaps I have a weak connectivity here. But my questions would be, what supply conditions does SQM see in the lithium market in general for next year, considering that new volume will come on stream for several producers, including yourself? Second, I am fully aware management provides no pricing outlook. However, most lithium benchmarks are hovering around 2x SQM's indicated fourth quarter price. The question being, in terms of direction, where would your realized price be or if that should come closer to that already embedded in the spot market, considering that if I heard correctly, 80% of your contracts are yet to be closed possibly in the first quarter of next year? Any qualitative assessment there would be greatly appreciated.

Yes. Regarding to your question about conditions in lithium market, as I said before, we are really positive about that. As I told you, we see growth for the next year between 20% and 30%, and that is mainly explained for the electric vehicle penetration. As I said before, the sales of electric vehicles for the year, we expect that it will be between 6.3 million and 6.6 million. For the next year, we see that, that number will be close to 9 million. So we see that the demand in electric vehicles will continue to grow. So we are really positive about the market. And we don't have any thoughts about that. We see strong fundamentals of the lithium demand.

Regarding to the new supply, well, I think that it's good to see that new projects are coming in the sense that in order to be able to supply this amount, this huge amount of demand is on for the industry. So we expect that the important players will continue with the expansion plans that they also have announced, like us. So that's what we see.

And finally, regarding to the prices, well, it's really -- again, it's really difficult to do any forecast about that because you see that the market is moving so fast. It changed so fast that any price prediction, I would say, that is difficult to do. What we're going to do is to try and again to secure volumes with our customers, negotiating good conditions from each party in order to secure a long-term offer to our customers.

All right. And then if I may squeeze one more question there. Maybe you answered this before, but have you given any CapEx guidance for 2022?

Cesar, if I'm not wrong, the CapEx for next year, certainly is the same. We didn't update the CapEx in the last 30 days. So 60 days is the same forecast we had at the beginning of the year. And if I'm not wrong, it's close to $500 million gross for 2022. And remember, that our CapEx for full year that was previously announced.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Irina Axenova, Investor Relations, for any closing remarks.

Thank you for joining us today, and we look forward to having you on our next call. Have a great day, everyone. Goodbye.

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