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Chemical and Mining Society of Chile (NYSE: SQM ) is a low-cost lithium producer that is currently benefiting from rising soft metal prices. The company – called SQM – has a massive presence in Chile’s Atacama salt flats, where it extracts lithium from the brine through a process of evaporation and chemical recovery.
The Atacama Desert in Chile is the Saudi Arabia of the electric vehicle (EV) sector, as the highest concentration of lithium on record can be found there. These elements are important ingredients in EV batteries.
SQM’s share price is up 42% over the past 12 months, but remains 22% off its November high of $111.
Soaring demand and profits
Beyond lithium, SQM’s other four business segments are specialty plant nutrients, iodine, potassium, and industrial chemicals. The company is the world’s largest producer of iodine, which is widely used in medicines and disinfectants.
This provides a degree of diversification in earnings, but the jewel in the crown is lithium. This is because the world’s huge demand for EVs and battery storage systems will cause the price of lithium to start rocketing in 2021. This will cause a Cambrian explosion in the company’s earnings reports.
| For the third quarter | ||
| 2022 | 2021 | |
| Revenue from lithium and lithium derivatives | $2.33 billion | $185m |
| Total revenue | $2.95bn | $661 million |
| net income | $1.09 billion | $106m |
| Net income per share | $3.85 | $0.37 |
| For the nine months ending September 30 | ||
| 2022 | 2021 | |
| Revenue from lithium and lithium derivatives | $5.62 billion | $483m |
| Total revenue | $7.57 billion | $1.77 billion |
| net income | $2.75 billion | $263m |
| Net income per share | $9.65 | $0.92 |
Lithium prices have fallen this year, but remain higher than their five-year average. It is no surprise that the company has invested in increasing its lithium production capacity. With many of these now complete, the company expects to increase its market share.
It recently acquired a refinery in China and management is open to more acquisitions. It can certainly be done with more than $3bn of cash on the balance sheet.
the price is low with the risk
The stock currently has a forward price-to-earnings (P/E) ratio of 6.3. That, compared to the sector average of 14, indicates the stock may be in the current bargain territory. The current dividend yield is 9%, covered 1.8 times by earnings.
These high yields are a reward for taking the risk that the price of lithium could fall further as more supply enters the market. Goldman Sachs very bearish for 2024, lithium carbonate price forecasts average $11,000 per ton. That would be more than 75% down from the current price.
Meanwhile, Macquarie Research is calling for an average price of $62,586 per tonne in 2023, and prices to remain unchanged through 2026. The consensus forecast for 2023 is $29,063 per tonne.
This variant means that no one knows. But long-term, EV sales should grow exponentially, driven by the global transition to a greener economy. The International Energy Agency predicts lithium demand will need to grow 26-fold by 2050 to reach net-zero.
This should keep the company’s profits healthy and dividends flowing for years to come. If I hadn’t already bought SQM stock, I would have bought it today at $86 per share.
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