Equity Research
Chile
Oil, Gas & Petrochemicals
Company Note
20 June 2014
SQM
Moving SQM to Neutral, as global scene changes
Rating
Challenging competitive environment; no triggers – cutting TP to US$34.4/ADR
12m Price Target
US$34.40
We are downgrading SQM to a Neutral rating – after a good start in 2014 – on our
Price
US$30.83
perception of limited room for improvement in its main business lines in the medium
RIC: SQM/B.SA, BBG: SQM US
term. On our new estimates, the stock is trading at 2014 P/E of 27.0x and EV/Ebitda
of 12.6x – these are multiples which, although in line with SQM’s trading history,
place it well above its non-lithium peers, providing little room for re-rating.
Accordingly, we are cutting our target price to US$34.4/ADR from US$45/ADR.
Prices: still a supply side story
After being centered on potash prices in 2013 – following the breakup of the BPC
cartel – market attention in 2014 has centered on iodine. The spike in iodine prices in
2H11 (after the Fukushima accident boosted demand in Japan), led several
companies to start investing in iodine facilities, and this capacity is now coming on
stream. We expect this to pressure both volumes and prices in 2014 – though we do
think SQM will continue to enjoy a better cost structure, thanks to its integration in
Neutral
Trading Data and Return Forecasts
52-wk range
Market cap.
Shares o/s (m)
ADR ratio
Free float
Avg. daily volume('000 Shares)
Avg. daily value (US$ m)
Forecast price appreciation
Forecast dividend yield
Forecast stock return
US$40.26-22.72
US$8,114m
263.2
1 ADR: 1 LOCAL
36%
598
18.2
+11.6%
1.5%
+13.1%
Stock Performance (US$)
80.0
120
60.0
90
Some silver linings
40.0
60
On the other hand we expect some recovery in potash. Prices started to improve in
20.0
30
we are now more positive: the market is pricing a pickup in demand, and the low cost
Price Target (US$)
Stock Price (US$)
Rel. IPSA
of SQM’s operation puts it in a privileged position to supply extra volumes.
Cash flow will be aided by low capex in 2014
We forecast SQM’s capex at US$135mn for this year, well below the annual US$400500mn of the last three years: this will clearly greatly swell cash flow, enabling cash to
be used to reduce debt, or to increase dividends to stockholders. We expect this lowcapex scenario only to be reversed when volumes pick up, and SQM starts using its
current spare capacity. While industry overcapacity continues, we estimate SQM’s
capex not to exceed US$150mn in either 2015 or 2016.
Valuation
RoIC (EBIT) %
EV/EBITDA
P/E
Net dividend yield %
12/2012
32.6
14.5
23.4
2.2
12/2013
19.5
9.3
14.6
4.1
12/2014E
15.2
12.6
27.0
1.5
12/2015E
18.6
11.1
22.3
2.1
12/2016E
21.9
10.0
18.7
3.5
Financials (US$mn)
Revenues
EBITDA
Net Income
EPS (US$)
Net DPS (US$)
Net (debt) / cash
12/2012
2,429
1,118
649
2.47
1.27
(959)
12/2013
2,203
833
467
1.77
1.06
(882)
12/2014E
2,087
689
301
1.14
0.47
(516)
12/2015E
2,257
750
364
1.38
0.64
(160)
12/2016E
2,455
824
434
1.65
1.07
(43)
Cesar Perez-Novoa
Chile - BTG Pactual
[email protected]
+562 2587 5012
Alex Sadzawka
Chile - BTG Pactual
[email protected]
+562 2587 5448
Source: Company reports, Bovespa, BTG Pactual S.A. estimates. / Valuations: based on the last share price
of the year; (E) based on a share price of US$30.83, on 18 June 2014.
ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 27
Banco BTG Pactual S.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
20-Jun-14
20-Mar-14
20-Dec-13
20-Jun-13
20-Sep-13
20-Mar-13
20-Dec-12
20-Jun-12
0
20-Sep-12
0.0
20-Mar-12
the competitiveness of the market could once again exert some pressure. For lithium
20-Dec-11
1Q14, on higher demand, which also boosted prices for potassium nitrate, though
20-Jun-11
specialty fertilizers).
20-Sep-11
caliche mining (which not only provides for its production of iodine but also for
SQM
20 June 2014
Stable future stock price likely – but no growth triggers
In 2013 SQM’s stock price was hit by two negative factors:
1.
The breakup of the BPC cartel: This exerted downward pressure on potash
prices. It affected nearly 50% of SQM’s revenues, not only through its potash
but also through its specialty fertilizers lines. Prices have recovered some
ground, but they are still below the levels prior to the breakup.
2.
Local market controversy: The other event was a non-fundamentals, nonvalue dispute about the nature and practice of the ‘cascade’ structure of SQM’s
stockholding control (known as the ‘Cascadas’ case). Accusations against Julio
Ponce Lerou (chairman of the board), and four of his colleagues, affected the
stock price by association, even though the issues were not in any way
connected with the fundamentals of the stock, nor prospects for the shares, on
mathematics or otherwise. This ‘story’ is still in the news – but in keeping with
the underlying reality, the more recent developments have not affected the stock
price.
In 2014 we have two new and potentially significant developments:
(1)
Prices of iodine are lower, directly due to the new capacity coming on stream,
and are being integrated into components of the consensus forecast; and
(2)
The prospects for lithium are improving, as electric and hybrid vehicles gain
share-of-mind among investors.
In our view these factors – with the announcement by SQM of lower capex in 2014
(mostly maintenance) – tend to signal that this year will have lower profitability
indicators, but stronger overall cash flow. We see this as cash that could be directed
to reducing leverage, or distributed to the stockholders.
What does this mean for the shares?
We see upside as now limited by valuation – even though we expect stock
performance in the medium term to be on balance positive, boosted by improving
financials and better cash generation. This is because we basically do not foresee
investors paying higher multiples for a company that is not in a growth phase, in spite
of the valuations ascribed to the stock in the past.
The main risk to our Neutral call comes from the supply side, in the form of an upside
risk. Suspension of production from any one of the key producers in any one of three
markets – potash, SPN or iodine – would have a strong upward effect on prices.
Meanwhile on the other hand it is still true that any new production coming on stream
would press prices down.
We are not expecting any regulatory setbacks for SQM. We acknowledge that
potential problems have earned news coverage in recent months; but we do not
expect any effect in terms of restraint on production. There might be some regulatory
resistance to any plans for expansion, but the fact is we are not anticipating any
capacity expansions – or plans for them – in the medium term.
page 2
SQM
20 June 2014
There is one more area of possible upside: we see some potential from discovery or
development of metal deposits on SQM’s mining properties. While SQM does not
practice or seek to practice mining of metals, we see a possibility of other operators
making deals to do so in SQM’s areas, possibly through a royalty agreement or a
lump sum arrangement. The company has entered into MoU’s, option agreements
and similar arrangements relating to metallic minerals with other mining companies.
In all these agreements, SQM retains the rights to non-metallic minerals such as
nitrate, iodine, potassium, lithium and their respective derivatives.
SQM has identified 47 areas of interest in its concessions, ranging from superficial
anomalies to mineralization. Fiel Rosita, a copper-gold deposit located close to the
city of Vallenar, is its most advanced prospect.
Figure 1: Property map of Fiel Rosita
Source: SQM.
A new development: state intervention in the Chilean lithium market
Chile’s President Michelle Bachelet, together with Mining Minister Aurora Williams,
recently signed a decree creating a 20-member National Lithium Commission. This
panel – which includes geologists, environmental specialists, natural resources and
energy economists, engineers, and attorneys specialized in mining law – has a remit
to recommend a new State Policy for exploitation of Chile’s lithium, and for promotion
and development of new projects, by October or November of this year. In our view,
the market will indeed open up sometime in the future, and we expect the future
environment to foster new entrants. That said, at the present moment there are only
two companies that have the relevant technical know-how: SQM and Rockwood.
page 3
SQM
20 June 2014
page 4
Financials in a nutshell
Table 1: Projected consolidated revenue in US$mn
Segment
2011 2012 2013 2014 2015
216
SPN
722
675
687
716
744
774
Iodine
454
578
461
374
399
419
Lithium
183
222
196
203
239
265
Potash
556
605
606
589
655
702
Industrial chemicals
140
245
154
105
118
190
Other fertilizers
90
103
98
99
102
105
Revenue
2,145 2,429 2,203 2,087 2,257 2,455
Table 2: Projected consolidated Ebitda in US$mn
Segment
2011 2012 2013
SPN
263
243
186
Iodine
284
384
282
Lithium
94
119
107
Potash
245
268
193
Industrial chemicals
63
92
51
Other fertilizers
10
12
14
Ebitda
959 1,118
833
Source: BTG Pactual.
Source: BTG Pactual.
Chart 1: Revenue contribution by division – 2013
Chart 2: Revenue contribution by division – 2014
2015
222
210
126
141
40
11
750
10%
9%
28%
28%
18%
21%
7%
5%
5%
4%
31%
Iodine
Industrial chemicals
SPN
Potash
2014
205
194
105
135
37
12
689
Lithium
Other fertilizers
34%
Iodine
Industrial chemicals
SPN
Potash
Source: BTG Pactual.
Source: BTG Pactual.
Chart 3: Ebitda contribution by division – 2013
Chart 4: Ebitda contribution by division – 2014
13%
28%
Lithium
Other fertilizers
15%
34%
23%
20%
22%
SPN
Potash
Source: BTG Pactual.
2%
30%
6%
Iodine
Industrial chemicals
Lithium
Other fertilizers
SPN
Potash
Source: BTG Pactual.
2% 5%
Iodine
Industrial chemicals
Lithium
Other fertilizers
2016
226
220
140
162
65
12
824
SQM
20 June 2014
page 5
Global counterpart valuations
Table 3: Financial summary comp-sheet for fertilizer, lithium and iodine producers
Price
LCY
MCap
US$mn
Price to earnings (x)
2014
2015
2016
2014
37.9
93.3
50.5
17.4
309.1
24.8
152.6
2,980.0
26.8
1.0
1.4
32,018
13,414
19,363
1,324
14,085
6,459
13,051
11,019
3,154
888
69
22.8
14.6
18.6
155.4
12.8
17.2
15.0
13.8
24.0
19.2
17.9
18.5
10.7
14.2
45.0
12.5
16.4
13.2
11.4
19.6
9.5
11.8
13.2
16.8
9.8
12.9
33.5
12.0
15.2
12.6
10.3
14.3
14.9
13.6
12.6
8.4
9.2
16.5
6.9
6.8
10.5
9.6
14.7
8.5
9.4
11.1
6.9
7.8
11.9
6.8
6.4
9.9
8.3
12.8
7.4
8.1
10.2
6.5
7.4
10.4
6.7
6.0
9.0
7.5
10.2
14.1
8.2
3.4
1.8
1.8
1.4
1.5
1.3
1.8
3.2
2.3
0.4
1.8
3.3
1.6
1.6
1.3
1.4
1.2
1.6
2.9
2.2
0.4
1.6
3.0
1.5
1.4
1.3
1.3
1.2
1.5
2.7
1.4
Lithium producers
FMC
Rockwood
Orocobre
Galaxy Resources
Sichuan Tianqi
Median
75.3
74.3
2.2
0.1
-
10,023
5,387
267
60
-
17.0
35.0
26.0
14.0
25.0
19.5
12.1
21.7
18.9
18.9
11.7
15.5
38.0
15.5
10.1
13.4
53.7
13.7
13.6
9.0
12.3
11.1
11.1
6.6
1.8
1.4
0.6
1.6
4.5
1.9
1.7
0.7
1.8
3.6
2.2
1.7
2.2
Iodine producers
Iofina
RB Energy
ISE Chemicals
Median
50.8
0.7
719.0
110
165
181
45.3
7.6
26.5
12.7
8.0
7.3
8.0
0.7
4.5
7.1
4.5
66.9
10.9
38.9
11.0
4.6
7.8
13.9
3.8
8.9
0.6
0.6
0.6
0.6
0.5
0.5
17.9
13.0
12.8
10.9
10.0
9.0
1.8
1.6
1.5
27.0
22.3
18.7
12.6
11.1
10.0
3.2
3.0
2.8
Company
Fertilizer producers
PotashCorp
Agrium
Mosaic
Intrepid
Yara
K+S
Uralkali
Israel Chemicals
Arab Potash
Sinofert
Migao
Median
Blended average
SQM
Source: Bloomberg, BTG Pactual.
30.8
8,114
EV to Ebitda (x)
2015
2016
Price to book (x)
2014
2015
2016
SQM
20 June 2014
page 6
SQM: Absolute valuations
Chart 5: Price to earnings (x)
Chart 6: Price to gross cash flow (x)
41.0
30.0
24.0
17.0
7.0
Jan-95
Sep-04
May-14
4.0
Jan-95
Source: BTG Pactual.
Source: BTG Pactual.
Chart 7: EV to Ebitda (x)
Chart 8: Price to book (x)
24.0
10.0
14.5
5.3
5.0
Jan-95
Source: BTG Pactual.
Sep-04
May-14
0.5
Jan-95
Source: BTG Pactual.
Sep-04
May-14
Sep-04
May-14
SQM
20 June 2014
page 7
Iodine
SQM is the world’s largest producer of iodine, with a dominant 28% world market
share. The iodine-rich caliche ore that it works in Chile also contains other
commercially exploitable minerals – their presence in this ore provides a clear cost
allocation advantage.
Uses: Iodine and iodine derivatives are used in a wide range of medical, agricultural
and industrial applications. Most sales are to companies which use them as raw
material in their own products, including x-ray contrast media, biocides, antiseptics
and disinfectants, pharmaceuticals, chemicals, herbicides, organic compounds,
catalysts, pigment and ink dyes. Another growing application is in polarizing film, one
of the main components of LCD (liquid-crystal display) screens. We estimate that
80% of sales go to end markets that are not GDP-cyclical, and 20% go to markets
that are GDP-cyclical.
Chart 9: Iodine end-use, by market (%)
8%
Chart 10: SQM’s revenue from iodine, by region (%)
6%
12%
50
11%
6%
12%
20%
X-ray
Animal nutrition
Fluoro derivatives
0
25%
Pharmaceutical
Biocides
Other
25
1997
Iodophors
LCD
Source: BTG Pactual.
2001
Americas
Sources: SQM, BTG Pactual.
Industrial assets: SQM produces iodine at its Pedro de Valdivia, Maria Elena and
Nueva Victoria facilities, by extraction from solution acquired by leaching from caliche
ores. SQM’s current iodine production capacity is approximately 12,500 metric tons
per year. Its facilities have the flexibility to adjust output as market conditions require.
The product is processed, bagged and stored exclusively in the facilities of Pedro de
Valdivia and Nueva Victoria, and then shipped by truck to Antofagasta for transport
by container shipping, or to Iquique for transport by truck to Santiago, where iodine
derivatives are produced.
100% exported – customers diversified: In 2013, we estimate that SQM sold its
iodine products to around 300 customers in 70 countries. Output was 100% exported:
37% to customers in Europe, 36% to North America, 11% to Central and South
America, 16% to other regions. Excluding related parties, no single customer
accounted for more than 13% of SQM’s iodine sales, and the ten largest customers
took less than 50% of total sales. To give customers faster access to the product,
SQM holds inventories of iodine at facilities throughout the world.
2005
2009
North America
Europe
2013
Other
SQM
20 June 2014
page 8
Size of the iodine market: Total worldwide consumption approached 31,000 tons in
2013, of which SQM’s share was 28%. We expect iodine demand to grow by 6% per
year in the next decade, sustained by industrial, pharmaceutical and agricultural use.
Forecast: In 2013, SQM sold 9,300 tons of iodine and derivative products, for
revenues of US$461mn. We expect 2014 sales of 9,200 tons, for revenue of
US$374mn, with sales volume rising to 9,700 tons in 2015, for sales revenue of
US$399mn – or 18% of SQM’s total revenues, contributing US$210mn to 2015
consolidated Ebitda. On pricing, we are expecting a lower range than currently
evidenced by the spot market – which is above US$42/kg. In our models, we assume
realization averages for iodine of US$41/kg for 2014 and US$41/kg in 2015.
Chart 11: SQM – iodine sales volume, vs. price
Chart 12: World iodine sales – ’000 tons
54.0
14.0
32
27.0
7.0
16
0.0
0
0.0
1992
1998
2004
2010
Sales volume ('000 tons)
2016
1992
1999
2006
2013
Iodine price (US$/kg)
Source: BTG Pactual.
Source: BTG Pactual.
Chilean competitive landscape: Who is producing what?
Chile is the largest producer of iodine from nitrate deposits – known in Chile as
caliche. The ore is leached with water, and the iodide in the resulting solution is
treated for transformation into elemental iodine in the form of spherules (‘prill’ or
‘pearl’). Some operators co-produce sodium nitrate simultaneously.
Chart 13: Chilean domestic market share (%)
Chart 14: World market share, by player (%)
28%
2%
Chart 15: World iodine reserves, mn tons (%)
19%
24%
52%
22%
3%
17%
3%
2%
5%
66%
7%
ACF
SQM
5%
Source: BTG Pactual.
12%
Atacama
Bullmine
28%
RB-E
Algorta Norte
SQM
Japan
Source: BTG Pactual.
5%
Other
Recycling
Chile
USA
Japan
Source: USGS.
Chile
US
Azerbaijan
Other
SQM
20 June 2014
■
SQM’s operation: SQM has an installed production capacity of 12,500 tpy
of iodine, in three facilities located in the Antofagasta Region, plus another
plant (Nueva Victoria) in the Tarapacá Region, where sodium nitrate is coproduced. It also operates iodide facilities (Inquim) in Santiago, and certain
other plants outside Chile, for derivatives and recycling. SQM had plans to
expand capacity at New Victoria to reach total output of 15,000 tpy of iodine,
but those plans were delayed in response to expansions by domestic
competitors.
■
Cosayach, owned by the Errazuriz family, has installed capacity for 7,500
tpy of iodine, at three sites (Cala-Cala, Negreiros and Soledad) in the
Region of Tarapacá. Cala-Cala has capacity to co-produce sodium nitrate.
Currently, their aggregate utilization rate has dropped 67% to 2,500 tpy, due
to inadequate availability of water (the company was accused of illegal
appropriation of water). To return to operating at its design level, the
company will need to use seawater in processes – a technical achievement
that it has not yet managed to implement.
■
Algorta Norte: This operation (owned by the Urruticochea family and
Toyota Tsusho) is 28km northwest of Baquedano (in the Antofagasta
Region). The company started operations in July 2012, with initial capacity
for 2,000 tpy, then upgrading to nominal production capacity of 4,000 tpy by
2013. This is the only operation that uses seawater in its leaching process
(in piles). Water is pumped from Mejillones by a piping system that runs
75km to the mine site at an average rate of 120 lts/sec. The property has
reserves for 40 years of operation. The nitrate obtained from this operation
is stacked for future production of sodium nitrate.
■
ACF: This company (also controlled by the Urruticochea family) owns 74.5%
of Algorta Norte, and itself has installed capacity for 3,000 tpy of iodine
located in the Tarapacá Region (at Laguna), with additional capacity to coproduce sodium nitrate. We expect the production at Laguna to be
decommissioned when reserves deplete, and be replaced by the Algorta
Norte output.
■
RB Energy: This merger of Canadian companies Sirocco Mining and
Canada Lithium has installed capacity of 1,300 tpy of iodine in the
Antofagasta Region (at Aguas Blancas) – which it is seeking to expand to
2,300 tpy.
■
Bullmine: This company has a newly installed production capacity of 1,000
tpy of iodine in the Region of Tarapacá at the Planta Bullmine, at Huara. It
has plans to expand the capacity to 2,000 tpy.
Where can new supply be sourced?
Chilean iodine output provided 56% of global supply in 2013. As a source, the
country is doubly important in the international market, not only for its volume but
because this output is the lowest-cost worldwide, while at the same time having
greater flexibility to respond to changes in demand relative to other sources of iodine.
page 9
SQM
20 June 2014
page 10
SQM is the world’s largest iodine producer, and has a long-standing presence in
the international market, as heir to the centuries-old salt industry. While its main
operational base is in Antofagasta, most iodine production is sourced from the
Tarapacá Region (Nueva Victoria).
Another significant increase in Chilean supply of iodine comes from the recent launch
of two new operations: Algorta Norte in the region of Antofagasta, with capacity for
4,000 tpy, and Bullmine in the region of Tarapacá (Huara), with capacity of 1,000
tpy, which it is in the process of duplicating. Conversely, water problems have cut the
production capacity of Cosayach to a third of its 7,500-tpy design level (though it
could recover this capacity if it created an alternative supply system for seawater).
Summing the numbers, we estimate Chilean output of iodine at 20,656 tons in 2013,
with a current capacity of 21,300 tpy, but with potential to increase output to 30,800
tpy this decade. A small fraction becomes iodized salts, which are also exported.
World market trends and prices: The resulting total export revenue from iodine in
2013 was US$839mn. As both output and FOB export unit value have grown, iodine
has become Chile’s principal non-metallic mineral product. The FOB value rose from
US$12/kg in 2003, stabilized between US$22/kg and US$26/kg in 2006–10, and then
grew significantly over 2011–13, to over US$52/kg.
The 4x growth in ten years reflects a tight market and strong demand. A major cause
of the recent growth has been explosive demand in Japan, where the government
was forced to supply potassium iodide tablets to the population for prevention of
thyroid complications from radiation from the Fukushima nuclear plant / tsunami
disaster (March 2011). Moreover, this also increased the volume of medical
examinations required using X-rays – the main application of iodine.
Chart 16: Chilean iodine production, ’000 metric tons
Chart 17: Chilean iodine exports, US$mn
20.7
22.0
15.6 14.9 15.3
16.5
17.4
15.5 15.5
15.8 16.0
1,000
906
17.5
839
660
500
11.0
251 277
323
373 354
2007
2009
415
144 177
0
0.0
2003
2005
Sources: Cochilco, BTG Pactual.
2007
2009
2011
2013
2003
2005
Sources: Cochilco, BTG Pactual.
2011
2013
SQM
20 June 2014
page 11
Lithium
SQM is the world’s largest producer of lithium compounds, with a remarkable
27% global market share.
■
Lithium carbonate (a key element in development of many new
technologies) is used in a wide variety of applications, including
electrochemical materials for batteries, primary smelting of aluminum,
continuous casting powders for steel extrusion, heat-resistant glass (ceramic
glass), ceramic and enamel frits, air-conditioning chemicals, synthesis of
pharmaceuticals, and lithium derivatives in general.
■
Lithium hydroxide is primarily used as a raw material in the lubricating
grease business, as well as in dyes and the battery industry.
Lithium is traded internationally, but not, currently, on a public market – transactions
and price per ton are negotiated directly with end users.
Chart 18: Lithium end-use, by market (%)
11%
Chart 19: SQM’s revenue from lithium, by region (%)
10%
66
4%
5%
16%
3%
33
18%
0
1997
33%
Batteries
Casting
Glass
A/C
Greases
Polymers
Glazes
Other
Source: BTG Pactual.
2001
2005
North America
Europe
Sources: SQM, BTG Pactual.
Industrial assets: SQM produces lithium carbonate at its facilities at the Salar del
Carmen, near Antofagasta, Chile, from solutions with high concentrations of lithium,
sourced from the potassium chloride production at the Atacama Salar. SQM currently
has production capacity of 48,000 tons. SQM also produces lithium hydroxide at the
Salar del Carmen, adjacent to the lithium carbonate facility, with production capacity
of 6,000tpy. The technologies used, together with the high concentrations of lithium
obtained from the Atacama Salar, enable SQM to be one of the lowest-cost
producers worldwide.
Exports diversified worldwide: SQM sells lithium products to some 300 customers,
in over 50 countries, exporting almost 100% of production: 30% to Europe, 13% to
North America, and 57% to Asia. No customer is bigger than 10% of the unit’s sales.
The ten largest customers account for an aggregate 50%.
Size of the lithium market: Worldwide sales of lithium chemicals (products from
lithium minerals) – expressed as lithium carbonate equivalent (LCE) – totaled a
projected 130,000 metric tons in 2013, of which SQM’s share was 27%. We estimate
2009
2013
Asia, Oceania & other
SQM
20 June 2014
page 12
that worldwide sales of lithium chemicals will continue to grow at 7% per annum after
2014. This projection does not include new developments, nor the effect of hybrid
electric vehicles on the market.
Forecast: We expect SQM, after selling 36,100 tons in 2013, to sell 38,000 tons of
lithium carbonate in 2014. Thus we are forecasting flat sales revenue from its lithium
business, totaling US$203mn (10% of its total revenues) in 2014. We expect 2014
Ebitda of US$105mn, marginally down from US$107mn in 2013.
Chart 20: SQM – lithium sales volume, vs. price
Chart 21: World lithium sales, in ‘000 tons
6,400
50.0
150.0
3,200
25.0
75.0
0.0
0.0
0
2000
2004
2008
Lithium ('000 tons)
2012
2016
1999
2006
2013
Lithium price (US$/ton)
Source: BTG Pactual.
Source: BTG Pactual.
Chilean competitive landscape: Who’s doing what?
Only two companies exploit the brines of the Salar de Atacama, with co-production of potassium
salts.
Chart 22: Lithium carbonate producers – global market share (%)
Chart 23: World lithium reserves, mn tons (%)
17%
19%
27%
5%
3%
58%
1%
6%
28%
28%
SQM
Other Chile
Source: BTG Pactual.
■
Japan
Recycling
8%
US
Other
Argentina
Source: USGS.
SQM: In 1996, SQM started producing lithium carbonate as a by-product
of the recovery of potassium chloride from brines of the Salar (where the
area was leased to SQM by the state investment agency Corfo). The rights
expire as soon as 180,100 tons of lithium equivalent have been produced, or
no later than 2030.
Australia
Chile
China
Other
SQM
20 June 2014
The first stage is the pumping of brine into large solar evaporation
concentration ponds. After this, crystallization of sodium, magnesium and
potassium takes place, to produce a final solution of lithium chloride at 6%.
This solution is transported to a plant in Antofagasta for conversion into
lithium carbonate. Some of the carbonate produced is converted into lithium
hydroxide. After successive expansions, SQM now has capacity to produce
48,000 tpy of lithium carbonate, and 6,000 tpy of lithium hydroxide, per year.
■
Sociedad Chilena del Litio (‘SCL’): This company is currently owned by
Rockwood Lithium, a subsidiary of Rockwood Specialties, a chemicals
group of the US. SCL began production of lithium in 1984 in the Salar de
Atacama, to extract lithium content from brines, with a secondary interest in
obtaining potassium chloride, under a venture led by Cyprus Foote and the
Chilean development agency Corfo, owner of the concession. While Corfo
has sold its equity in the company, the agreement for the operation remains
in effect until SCL reaches total output of 200,000 tons of lithium equivalent,
without a time limit. The production process is similar to that of SQM, with
the exception that the configuration of solar ponds is set up to privilege
lithium concentration and not the recovery of salts. SCL also has a plant in
Antofagasta to treat its 6% lithium chloride solution – with most of the
product destined for production of lithium carbonate. Meanwhile, part of the
carbonate produced is converted into lithium chloride. A fraction of
unconverted carbonate solution is purified and treated to directly crystallize
commercial grade lithium chloride. SCL currently has production capacity for
30,000 tpy of lithium carbonate and 4,500 tpy of lithium chloride.
Lithium consumption – led by batteries, and glass
The highest quantity of product is consumed by the battery-related industries (a total
of 33% in 2013), followed by the glass industry (16%).
The glass industry consumes lithium concentrate in direct-application processes, but
we see these uses as having the lowest growth prospects. Over the next decade, we
see the highest growth prospects in the more complex applications, especially in the
battery-related uses, and in particular rechargeable batteries, sustaining development
of hybrid and fully electric cars: we expect these uses to account for half the demand
for lithium within a decade.
The world lithium market experienced significant pressure from strong consumption
of batteries, and the structure of the market strengthened further with sustained
increases in production, accompanied by increases in prices – which peaked in 2008.
These fundamentals weakened greatly in 2009, with a sharp decline in production,
consumption and prices. All these have subsequently shown signs of recovery, but to
levels still lower than those of 2008.
Where can new supply be sourced?
A few years after its appearance in the world market for lithium, SQM managed to
become one of the lower-cost production operations, and rapidly increased its market
share, becoming the world’s largest producer. This also led Chile – including the
page 13
SQM
20 June 2014
page 14
output of SCL – to become the leading supplier for the industry. This position is
currently being challenged by Australia, thanks to increased production of lithium ore
there.
In Australia, Talison is the leading producer, and was recently acquired in a joint
transaction by Rockwood and Sichuan Tianqi of China. China is currently the
largest market, so this new structure offers promising potential. Conversion of lithium
ore is more expensive in China than in Australia, and in our view the likely
interpretation would be that China seeks strategic control of the mineral. Note that
China has tripled its domestic production, to be close to the production level of
Argentina – which has remained stable.
The company with the most immediate expansion of capacity in progress in Chile is
SCL (controlled by Rockwood Lithium) – which expects expansion of the capacity
of its lithium carbonate plant at La Negra, to 50,000 tpy, to be operational in 2H14.
SQM had plans to expand its capacity at Salar del Carmen, to 60,000 tpy, but
suspended those plans (temporarily) when high volumes from competitors entered
the market.
There are two projects with potential to be developed in the Salar de Maricunga:
Simbalik has a project for 35,000 tpy, hoping to start in 2016); and Li3 Energy has
reported feasibility for 30,000 tpy, but requires a special operating agreement.
The world’s total production capacity of lithium carbonate equivalents is currently
300,000 tpy, of which 43% is currently being used. Our assessment is that there is a
possibility of new volumes hitting the market, mainly from salt flats in Argentina, and
mineral deposits in Canada and China – and that these could double world
production capacity by sometime in the next 10 years.
Chart 24: Chilean lithium production, ’000 metric tons
59.9 62.0
66.0
55.5
50.0
Chart 25: Chilean lithium exports, value (US$mn)
52.5
247
260
52.4
33.0
123
130
25.2
204
189
44.0
41.7 44.0 43.6
226
219
113
94
65
174
75
0
0.0
2003
2005
Sources: Cochilco, BTG Pactual.
2007
2009
2011
2013
2003
2005
Sources: Cochilco, BTG Pactual.
2007
2009
2011
2013
SQM
20 June 2014
page 15
Specialty plant nutrition (SPN) products
SQM is the world’s major producer of natural specialty plant nutrients (SPNs),
focusing on four types:
(1) potassium nitrate,
(2) sodium nitrate,
(3) sodium potassium nitrate and
(4) specialty blends.
These are used in solid or liquid form, mainly on high-value crops, and are
appropriate for high-yield agricultural techniques. High-value-crop farms prefer to use
specialty plant nutrients rather than commodity fertilizers, for their advantages in
absorption and solubility, which provide crops with higher yields and better quality.
Chart 26: Global end-uses of agricultural-grade potassium nitrate (%)
Chart 27: SQM’s revenue from SPN, by region (%)
35
22%
20
41%
9%
5
1997
2001
2005
2009
2013
28%
Industrial crops
Vegetables
Fruits
Source: BTG Pactual.
Other
C/S America
Sources: SQM, BTG Pactual.
Industrial assets: SQM currently has potassium nitrate production capacity of
approximately 950,000 metric tons per year at Coya Sur, including 300,000MT/year
of technical grade potassium nitrate. The facility depends on availability of nitrate
salts. Some of the potassium nitrate is used to produce the high-purity technical
grade product.
Sodium potassium nitrate is a mixture of approximately two parts sodium nitrate to
one part potassium nitrate. SQM produces it at its Maria Elena facilities, using
standard, non-patented production methods.
SQM’s current aggregate production capacity for all nitrate salts is 1.2mn MT/y.
Geographical segmentation: We estimate that 75% of SQM’s sales of specialty
plant nutrients in 2013 were exports: approximately 14% to Central and South
America, 25% to North America, 16% to Europe and 20% to other regions. Excluding
sales to related parties, no single customer represented more than 10% of SQM’s
sales of specialty fertilizers; and its 10 largest customers accounted for less than
23%.
The global potassium nitrate market in 2013 totaled approximately 1.0mn tons.
N. America
Europe
Other
Chile
SQM
20 June 2014
page 16
Of this, SQM’s global market share was approximately 48%, or 480,000 tons.
Forecasts: Following its sales of 847,700 tons of SPN products in 2013, for revenue
of US$687mn – or 31% of its total revenues in the year, contributing US$186mn to
2013 consolidated Ebitda – we expect SQM to sell 850,000 tons in 2014, for revenue
of US$716mn; and 849,000 tons in 2015, for revenue of US$744mn. In our models,
we use realization averages for the whole product mix of US$860/ton for 2014 and
US$877/ton in 2015.
Chart 28: SQM – SPN sales volume and price
Chart 29: World potassium nitrate sales, in ‘000 tons
1,000
1,300
500
1,500
950
750
0
600
2000
2008
SPN sales volume ('000 tons)
2016
0
1989
SPN price (US$/ton)
Source: BTG Pactual.
2001
2013
Source: BTG Pactual.
Chilean competitive landscape: Who is doing what?
Nitrates and iodine are obtained in Chile from nitrate fields in a strip 700km long and
30-50km wide in northern Chile, East of the Cordillera de la Costa, in the regions of
Tarapacá and Antofagasta. This is the only area in the world where nitrate deposits
have reserves with economic content, and where it is possible to obtain a range of
different products such as sodium nitrate, potassium nitrate, iodine and sodium
sulfate. The ore, known as caliche, presents as a hard, surface, layer of dense sand
and gravel cemented with salts, with thickness varying between 0.5 and 5 meters.
Chart 30: Potassium nitrate producers – % share of global supply
1,100
6%
33%
Chart 31: Potassium nitrate, average annual price (US$/ton)
650
13%
48%
SQM
Source: BTG Pactual.
Kemapco
Haifa
Cosayach/ACF
200
1991
Source: BTG Pactual.
2002
2013
SQM
20 June 2014
Chile’s National Geology and Mining Service (Sernageomin) estimates the country’s
total caliche resources and reserves at 2.46mn tons, grading 6.3% nitrate. SQM
reports its total reserves at 1.46mn MT of caliche – in other words, 56% of the
Chilean total – also with average nitrate grade of 6.3%.
Nitrates are generally considered to be specialty fertilizers that are applied in a
relatively narrow range of crops, for which they enable higher yields and better
products than mass fertilizers (urea and other substances). Potassium nitrate, made
by combination of two primary nutrients – N (nitrogen) and K (potassium) – is
considered to be the main nitrogen-bearing fertilizer. Others are sodium nitrate,
ammonium nitrate and calcium nitrate. In total, nitrates account for less than 1% of
the global nitrogen fertilizer market.
The most important markets for potassium nitrate crops are fruits, vines, citrus,
tobacco, cotton and vegetables, where higher yields and specific characteristics such
as color, taste, skin strength, and disease endurance are required. In niche markets
potassium nitrate competes successfully with ammonium fertilizers. Its main
advantage is solubility, and rapid assimilation by plants. These have been key
properties for its strong position in application of drip irrigation, and foliar fertilization,
applied in specialty and high-value crops, i.e. for producers that can pay and have the
infrastructure to invest in this product. Nitrates can also be blended with other
products such as sulfur, boron, magnesium and more.
Sodium nitrate and potassium compounds also have industrial applications. Alkali
oxides of sodium and potassium (Na2O and K2O) provide heating properties required
in the specialty glass industry. The nitrate ion (rich in oxygen) strengthens oxidizing
properties. The main industrial applications are in high-resolution TV screens,
computers, ceramics, explosives, charcoal briquettes, metal processing, and in many
chemical processes as an industrial oxidant.
Nitrates play a role in solar thermal plants, storing heat for release at night. The most
efficient salt for this purpose is a 60%/40% mixture by weight of sodium nitrate and
potassium nitrate. SQM produces nitrates with the required technical grades, sold by
its industrial chemicals division.
Where can new supply be sourced?
■
SQM has installed capacity for 950,000 tpy of nitrates. It mines the ores at
three facilities in the Region of Antofagasta (Pedro de Valdivia, Maria Elena
and Pampa Blanca), and in Tarapacá, at its Nueva Victoria plant. At Pedro
de Valdivia and Maria Elena, caliche is leached in vats. There are specific
facilities for crystallizing sodium nitrate; resulting solutions go to the iodine
facilities. At Pampa Blanca and Nueva Victoria, ore is leached in piles,
nitrate is crystallized in solar evaporation ponds, and the remaining solutions
go to production of iodine. Blending for potassium nitrate fertilizer is carried
out at the Coya Sur facility.
■
Cosayach: The Cala-Cala plant was built in 2002, with production capacity
for 200,000 tpy of potassium nitrate, derived from crystallized sodium nitrate
produced at three facilities which also co-produce iodine in the Tarapacá
page 17
SQM
20 June 2014
page 18
Region (Cala, Negreiros and Soledad). The effective capacity of these three
facilities has been reduced to 60,000 to 80,000 tpy by water limitations.
■
ACF: Since 2005, ACF has had installed capacity for 20,000 tpy of sodium
nitrate at its Laguna plant, which co-produces iodine.
Nitrates have been losing relative importance within the mix of salt products, since
operational problems at Cosayach in the last two years have reduced production of
crystallized nitrate, a key ingredient.
Just over 80% of Chile’s output of nitrates is exported. Chile is estimated to have
nearly 50% global market share in potassium nitrate – nearly all supplied by SQM.
Note that although Chilean nitrates are unique in nature, in the international market
they compete with similar products of synthetic origin, produced mainly in Israel,
Jordan and China. Particularly in specialty fertilizers, natural nitrates must compete
with synthetic products such as calcium nitrate, ammonium nitrate and urea, which
have materially lower prices. On the other hand, producers focusing on high quality
crops can usually pay the higher price, as they are often selling internationally and
need the quality factor.
From 2003 to 2013, prices of potassium nitrate escalated by 352%. The peak annual
average was in 2008: US$1,026/ton FOB.
It is estimated that between 20% and 30% of global production of sodium and
potassium nitrates is used, currently, for industrial applications. An interesting market
for these salts that is growing worldwide is for use in solar thermal power plants.
Chart 32: Chilean potassium nitrate export volumes, ’000 metric tons
580
Chart 33: Chilean potassium nitrate exports, value (US$mn)
478
500
532
447 454
395
441
440 432
402
424
362 363
354
290
303
296
250
229
133 133
162 156 177
174
2005
2009
0
0
2003
2005
Sources: Cochilco, BTG Pactual.
2007
2009
2011
2013
2003
Sources: Cochilco, BTG Pactual.
2007
2011
2013
SQM
20 June 2014
page 19
Potash
SQM produces granular-grade potassium chloride, standard-grade potash, and
potassium sulfate. In the past, SQM has used potash to derive value-added SPN
products. In the future, we expect it gradually to become a larger player in potash (the
product) itself. On the other hand we continue to expect SQM to use most of its
supply to produce value-added products such as potassium nitrate.
Chart 34: Potassium chloride demand in 2013
Chart 35: SQM’s revenue from potassium chloride/sulfate, by region (%)
19%
86
16%
43
20%
14%
0
21%
LatAm
China
4%
2004
6%
Europe North America SEA
India
Other
Sources: SQM, IFA, BTG Pactual.
2007
Chile
LatAm
2010
Africa
2013
North America
Other
Sources: SQM, BTG Pactual.
Size of the potash market: The estimated size of the world market for potash in
2013 was 54mn tons, of which SQM’s share was 3%; thus it is a small player in
relative terms. The global potash industry is consolidated, owing to limited geographic
distribution of potassium deposits. Germany, the Middle East, Canada, and the
former Soviet Union provide the bulk of global supply. Largest potash-consuming
countries are the US, China, Brazil, and India – all of which have limited potash
reserves. Given that the industry is consolidated (i.e., two regions control 80% of
global supply), supply may be balanced to meet demand.
Chart 36: Supply and demand dynamics vs. operating rates
Chart 37: Suppliers’ market shares in global potash export
80
3%
100
29%
23%
40
50
0
0
2004
Demand (mn MT)
Sources: SQM, IFA, BTG Pactual.
2009
Capacity (mn MT)
18%
27%
2014
Utilization (%)
Canpotex
K+S / ICL / APC
Sources: SQM, BTG Pactual.
Forecast: Following SQM’s 2013 sales of 1.4mn tons of potassium products, for
revenues of US$606mn, we expect sales of 1.6mn tons in 2014 – or 28% of SQM’s
SQM
Uralkali
Belaruskali
SQM
20 June 2014
page 20
total revenues, contributing US$135mn to consolidated Ebitda. In 2015, we expect
physical volume to increase to 1.8mn tons, for revenues of US$655mn.
In our models, we assume realization averages, for the entire product mix, of
US$350/ton for 2014 and US$364/ton for 2015.
Chart 38: MOP and SOP sales volume (’000 tons) vs. price
Chart 39: Muriate of potash price, std-grade, at key markets in US$/MT
1,900
600
530
950
475
405
350
280
Apr-11
0
2009 2010 2011 2012 2013 2014 2015 2016
Potash sales volume ('000 tons)
Price (US$/ton)
Source: SQM, BTG Pactual.
Std-grd MOP, FOB Vancouver
Source: World Bank, CNCIC, BTG Pactual.
Consumption
Potassium salts fertilize plants by giving them potassium – one of the three primary
nutrients for plant life, along with nitrogen and phosphate.
The product most used is potassium chloride (KCl), also known as muriate of
potash (MOP), which is used in massive harvests that can withstand chlorine content,
such as wheat, corn, soy, etc.
For less chlorine-resistant crops, potassium sulfate (K2SO4 – containing sulfur, a
secondary nutrient) is applied.
Potassium nitrate is used for higher-quality crops – it contains two of the primary
nutrients, nitrogen and potassium.
There are particular markets for fertilizer mixtures, such as ‘potassium salt’ (a
mixture of sodium nitrate and potassium nitrate), and other mixtures of potassium
salts with additions of magnesium, phosphate, borates and other micronutrients
specially formulated for specific crops.
Chilean competitive landscape: Who is doing what?
Chile has potassium resources in the form of brine from salt flats in the regions of
Tarapacá, Antofagasta and Atacama, and, to a lesser extent, from nitrate deposits.
The only current operations, however, are in the Salar de Atacama, where brines are
crystallized in solar evaporation ponds (the same process that extracts lithium). The
crystallized salts are purified, providing potassium chloride and/or potassium sulfate
in commercial volumes.
Nov-12
Jun-14
China – MOP, ex-warehouse
SQM
20 June 2014
Chile’s potassium reserves are estimated as 150mn MT of potash, 2.5% of the
world’s total known reserves of potash (6.0bn MT). Belarus has reserves of 3.3bn
tons. The USGS has estimated global potash resources at 250bn tons.
Chart 40: Global cash cost of production, US$/ton
300
Cash cost on DDP basis, US$-ton
SQM
200
100
0
0
7
15
22
30
37
44
52
59
67
74
Cummulative potash capacity in mn-tons
Source: BTG Pactual.
Where can new supply be sourced?
■
SQM: In the mid-1990s, to secure potassium chloride, a raw material for
production of nitrate, SQM acquired, from the Chilean development agency
Corfo, the rights to exploit the Salar de Atacama through 2030, co-producing
chloride and potassium sulfate, brine concentration of lithium chloride, boric
acid and residual magnesium chloride salts. After successive expansions, its
2012 production capacity of potassium salts was 2.6mn tpy. This includes
the capacity to produce 340,000 tons/year in a dual plant, which is enabled
for processing alternatively sulfate or potassium chloride. SQM allocates
between 300,000 and 350,000 tons/year of potassium chloride crystals for
producing potassium nitrate.
■
SCL was the pioneer in exploiting the Salar de Atacama, starting in the mid1980s, to extract lithium-containing brines, with a secondary interest in
obtaining potassium chloride. Under a contract with Corfo, it has permission
to produce an initial maximum 200,000 tons of lithium equivalent. Its original
production capacity for potassium chloride was 80,000 tpy, and this has
grown to the current level estimated at 130,000 tpy, because potassium is
not the focus of its business. In fact, its solar ponds are much smaller than
those of SQM – whose ponds have to be larger to favor crystallization of
potassium salts. SCL sells its chloride production to SQM.
Chile is in fact a minor player in the global potassium market. On the other hand, it
supplies 3% of global production, though this figure is growing.
Co-production of potassium salts and lithium enhances both, although producing
companies have divergent strategies. SQM’s favors potassium, while SCL’s favors
page 21
SQM
20 June 2014
page 22
lithium. As they increase the extraction from brines, they need to recover more of
both products – though in differing proportions for reasons of process design. Among
other reasons, this explains why SQM, favoring potassium, has become the first
player in the lithium market.
Potassium chloride is the essential raw material for the production of potassium
nitrate. SQM is the largest producer and exporter of both products. So it is clear that
the control exerted on the domestic potash market acts as a barrier to the
development of other, existing and potential, potassium nitrate players – which in turn
will have to rely on imports of this raw material in the absence of supply, losing
competitiveness.
SQM has oriented its potassium chloride to the export market since 2009, in
response to the high prices in 2008 (US$704/ton, versus US$223/ton in 2007). As we
see it, the presence of shareholder PotashCorp must surely have an influence in the
increasing emphasis on potassium in SQM’s business model.
The international market is dominated by two player units. One is the Canadian trader
Canpotex (representing PotashCorp, Mosaic, Agrium); the other comprises the
Russian and Belarusian producers, which in fact split in mid-2013.
The price of Canadian exports FOB Vancouver is one of the key international
reference prices for potassium chloride. In 2011 this ranged between US$350 and
US$370/ton FOB, rising in 2012 to a range between US$460 and US$550/ton. Now,
following the market decline in 2013, its level is between US$290 and US$300/ton.
Chilean producers of potassium salts, given their low global market share, are largely
price takers.
Chart 41: Chilean potassium chloride export volumes, ’000 metric tons
1,500
1,358
Chart 42: Chilean potassium chloride exports, value (US$mn)
560
513 501
1,187
1,087
385
932
319
750
243
280
449
71
50
22
26
67
55
7
0
2
4
5
15
39
0
2003
2005
Sources: Cochilco, BTG Pactual.
2007
2009
2011
2013
2003
2005
Sources: Cochilco, BTG Pactual.
2007
2009
2011
2013
SQM
20 June 2014
page 23
Appendix I: Industrial assets and extraction yields
SQM’s mining interests are at locations spread over the Tarapacá Valley and the
region of Antofagasta in Northern Chile. They include processing facilities, leaching
heaps, solar evaporation ponds, ports, and train/rail infrastructure. The facilities
currently operated are Pedro de Valdivia, Maria Elena and Nueva Victoria. SQM
extracts two unique natural resources from its mines, in Chile: Caliche ore, from
which nitrates and iodine are extracted; and Salar brine, which is processed and
separated into high-grade potassium, lithium, sulfates and boron.
Table 4: Production facilities
Location
Pedro de Valdivia
María Elena
Coya Sur
Pampa Blanca
Nueva Victoria
Salar de Atacama
Salar del Carmen, Antofagasta
Tocopilla
Type of facility
Nitrates and iodine production
Nitrates and iodine production
Nitrates and iodine production
Concentrated nitrate salts and iodide production
Concentrated nitrate salts and iodine production
Potassium chloride, lithium chloride, potassium sulfate and boric acid
Lithium carbonate and lithium hydroxide production
Port facilities
Size (ha)
236
98
251
129
537
4,122
63
22
Source: SQM, BTG Pactual.
Table 5: Extraction yields per operating mine
Mine
Pedro de Valdivia
Metric tons, ore mined
Average nitrate grade (% )
Iodine head-grade (ppm)
Crystallized nitrate (ton)
Iodine produced (ton)
12,029
7.2
378
458,000
2,300
12,362
7.2
402
476,000
2,600
11,652
7.2
399
454,000
2,500
10,670
7.5
354
423,000
2,300
11,003
7.1
345
407,000
2,200
11,631
7.3
363
434,000
2,600
11,773
7.4
403
496,000
3,000
12,151
7.2
417
454,000
3,100
12,027
7.3
406
466,000
3,200
11,571
7.5
415
445,000
3,200
Maria Elena
Metric tons, ore mined
Average nitrate grade (% )
Iodine head-grade (ppm)
Crystallized nitrate (ton)
Iodine produced (ton)
5,835
8.6
485
480,000
1,500
5,917
8.0
428
479,000
1,400
5,682
7.5
399
504,000
1,300
4,651
7.4
363
424,000
1,000
4,683
7.1
358
151,000
1,000
5,443
6.8
375
155,000
1,200
307
5.8
443
22,000
200
6,027
5.9
466
0
800
6,787
6.2
454
0
1,700
5,870
6.6
484
0
1,500
0
0
0
257
302
193
155
395
491
441
Pampa Blanca
Ore recovered (ton)
Iodine head-grade (ppm)
Iodine produced (ton)
4,976
560
1,400
5,309
520
1,500
4,832
530
1,400
3,108
527
1,100
3,811
533
1,100
3,785
645
1,200
383
634
800
0
0
0
0
0
0
0
0
0
Nueva Victoria
Ore recovered (ton)
Iodine head-grade (ppm)
Iodine produced (ton)
6,776
505
2,000
7,140
504
2,200
14,635
941
4,600
12,285
495
3,700
15,760
475
4,000
17,326
463
5,100
14,252
456
4,800
18,418
457
5,200
23,937
465
6,000
23,515
462
6,100
27,000
638,000
178,000
9,000
27,000
632,000
162,000
9,000
29,000
539,000
170,000
8,000
30,000
611,000
157,000
7,000
30,000
700,000
163,000
8,000
Coya Sur
Crystallized nitrate (ton)
SQM Salar
Lithium carbonate (ton)
Potash (ton)
Potassium sulfate (ton)
Boric acid (ton)
Sources: SQM, BTG Pactual.
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
14,000
26,000
38,000
41,000
33,000
886,000 1,409,000 1,448,000 1,977,000 1,908,000
189,000
0
0
0
0
5,000
0
0
0
0
SQM
20 June 2014
page 24
Appendix II: Caliche and brine concessions and resources
Approximately 93% of SQM’s total mining operations are under exploitation
concessions; 7% are operated under concessions for exploration. In 2013, SQM paid
the Chilean government US$9.7mn for the aggregate of all its concessions.
Reserve delineation is calculated in-house using the Kriging method: caliche ore
reserves are determined on engineering evaluation of assay values derived from
sampling of multiple space-interval drill-holes, and other openings. Subsequently,
continuity of the caliche bed is assessed on surface geological reconnaissance and
analysis of samples/trenches. For brine calculation, drainable/exploitable volume is
determined using substance parameters obtained from a 2D and 3D geostatistical
study. Based on the chemical properties, the volume of brine, and drainable porosity,
SQM derives an estimate for the number of tons for each of the chemical ions.
Table 6: Exploitation and exploration concessions at year-end 2013
Mines
Pedro de Valdivia
Maria Elena-EI Toco
Pampa Blanca
Nueva Victoria
Subtotal caliche ore mines
Exploitation concessions
Number
Hectares
565
144,737
647
190,352
469
137,662
306
78,667
1,987
551,418
Exploration concessions
Number
Hectares
16
4,500
42
10,600
21
5,900
1
600
80
21,600
Total
Number
581
689
490
307
2,067
Hectares
149,237
200,952
143,562
79,267
573,018
Salar de Atacama
Subtotal mines
1,025
3,012
444,808
996,226
112
192
70,100
91,700
1,137
3,204
514,908
1,087,926
Subtotal other areas
Total
7,931
10,943
1,763,668
2,759,894
251
443
62,800
154,500
8,182
11,386
1,826,468
2,914,394
Source: SQM, BTG Pactual.
Table 7: Proven and probable reserves of caliche ore, at December 2013
Proven reserves
Mine
Pedro de Valdivia
Maria Elena
Pampa Blanca
Nueva Victoria
Reserve (mn tons)
194.4
134.1
71.4
336.7
Nitrate grade (%)
7.1
7.2
5.6
5.7
Iodine grade (ppm)
369
416
544
442
Cutoff grade
Nitrate 6.0 %
Nitrate 6.0 % - Iodine 300 ppm
Iodine 300 ppm
Iodine 300 ppm – Nitrate 6.0%
Probable reserves
Mine
Pedro de Valdivia
Maria Elena
Pampa Blanca
Nueva Victoria
Reserve (mn tons)
118.7
98.0
447.8
59.1
Nitrate grade (%)
6.9
7.3
5.8
7.6
Iodine grade (ppm)
444
380
538
362
Cutoff grade
Nitrate 6.0 %
Nitrate 6.0 %
Iodine 300 ppm
Nitrate 6.5 %
Source: SQM, BTG Pactual.
Table 8: Reserves for the Salar de Atacama brines, at December 2013
Mineral
Potassium
Sulfate
Lithium
Boron
Sources: SQM, BTG Pactual.
Proven (mn MT)
52.8
31.0
3.0
0.9
Probable (mn MT)
18.6
10.3
3.1
0.3
Total (mn MT)
71.4
41.3
6.1
1.2
SQM
20 June 2014
page 25
Appendix III: Shares and principal shareholders
The two stockholders currently able to command a majority of the shares in SQM are:
■
■
Mr. Julio Ponce Lerou, with 29.9%, and
Potash Corporation of Saskatchewan, with 31.9%.
Mr. Ponce Lerou controls SQM via a joint-performance agreement with Kowa,
through Pampa Calichera Group, which indirectly increases his control to 32%.
There are currently 142,819,552 Series A shares and 120,376,972 Series B shares.
The B shares cannot exceed 50% of the total stock. All shares have voting rights, and
the A and B shares have the same rights, with the exception that the A shareholders
elect seven members of the Board of Directors, and the B shareholders elect one
(who cannot vote in a tied election for Chairman of the Board).
There are maximum individual voting power rights per shareholder (related parties
have to be aggregated with their related shareholders), of 37.5% for each Series, and
32% in relation to the total ownership of SQM. These rules are in place until 2043.
Chart 43: SQM – Shareholder structure, March 2014
31.9%
23.2%
1.4%
29.9%
Julio Ponce
PotashCorp
13.6%
BONY
Inversiones Esperanza
Other
Sources: SVS, SQM, BTG Pactual.
Table 9: Controlling shareholder structure breakdown – March 2014
Series
Potasios de Chile
Pampa Calichera
Global Mining Chile
Julio Ponce
A
18,179,147
44,758,830
8,798,539
71,736,516
%
12.7
31.3
6.2
50.2
Inversiones El Boldo
Inversiones RAC
Inversiones PCS
PotashCorp
29,330,326
19,200,242
15,526,000
64,056,568
20.5
13.4
10.9
44.9
Sources: SVS, SQM, BTG Pactual.
B
0
6,971,799
0
6,971,799
17,693,546
2,202,773
0
19,896,319
%
0.0
5.8
0.0
5.8
14.7
1.8
0.0
16.5
Total
18,179,147
51,730,629
8,798,539
78,708,315
%
6.9
19.7
3.3
29.9
47,023,872
21,403,015
15,526,000
83,952,887
17.9
8.1
5.9
31.9
SQM
20 June 2014
SQM
page 26
SQM
Income Statement (US$mn)
Revenue
Operating expenses (ex depn)
EBITDA (BTG Pactual)
Depreciation
Operating income (EBIT, BTG Pactual)
Other income & associates
Net Interest
Abnormal items (pre-tax)
Profit before tax
Tax
Profit after tax
Abnormal items (post-tax)
Minorities / pref dividends
Net Income (local GAAP)
Adjusted Net Income
Tax rate (%)
Per Share
EPS (local GAAP)
EPS (BTG Pactual)
Net DPS
BVPS
Cash Flow (US$mn)
Net Income
Depreciation
Net change in working capital
Other (operating)
Net cash from operations
Cash from investing activities
Cash from financing activities
Bal sheet chge in cash & equivalents
Balance Sheet (US$mn)
Cash and equivalents
Other current assets
Total current assets
Net tangible fixed assets
Net intangible fixed assets
Investments / other assets
Total assets
Trade payables & other ST liabilities
Short term debt
Total current liabilities
Long term debt
Other long term liabilities
Total liabilities
Equity & minority interests
Total liabilities & equities
Company Profile:
Sociedad Quimica y Minera de Chile SA (SQM) is a Chilebased company engaged in the production of specialty plant
nutrients and chemicals commodities. The Company's activities
are structured in six business units. Specialty Plant Nutrition
(SPN), involved in the production of organic fertilizers and
nutritional solutions under the Ultrasol, Qrop and Speedfol
brands. Iodine, engaged in the extraction and production of
iodine derivates. Lithium, chemical element principally used in
the production of rechargeable batteries. Industrial Chemicals,
active in the production of such chemicals as sodium nitrate,
potassium nitrate and boric acid, among others. Potassium,
which includes the production of potassium chloride and
potassium sulfate. The last business unit is Other Products and
Services, which comprises additional support to the other
segments.
12/2009
1,437
(843)
594
(152)
442
(20)
(17)
0
405
(77)
328
0
(1)
327
327
19
12/2009
1.24
1.24
1.31
5.57
12/2009
327
152
107
0
587
(373)
202
222
12/2009
545
1,200
1,745
1,324
31
102
3,203
278
267
545
1,035
110
1,690
1,513
3,203
12/2010
1,830
(1,139)
691
(144)
547
(32)
(22)
0
493
(106)
387
0
(5)
382
382
21
12/2010
1.45
1.45
0.67
6.17
12/2010
382
144
(74)
0
452
(237)
(211)
55
12/2010
601
1,094
1,695
1,454
42
182
3,373
289
188
477
1,090
135
1,702
1,671
3,373
Financial ratios
EBITDA margin
Operating margin
Net margin
RoE
RoIC
EBITDA / net interest
Net debt / EBITDA
Total debt / EBITDA
Net debt / (net debt + equity)
12/2011
2,145
(1,186)
959
(196)
763
(13)
(16)
0
734
(180)
554
0
(8)
546
546
24
12/2011
2.07
2.07
1.05
6.89
12/2011
546
196
220
0
961
(516)
(105)
13
12/2011
614
1,342
1,956
1,755
43
117
3,872
468
161
629
1,237
141
2,007
1,864
3,872
12/2012
2,429
(1,311)
1,118
(196)
922
(24)
(25)
0
873
(216)
657
0
(8)
649
649
25
12/2012
2.47
2.47
1.27
8.10
12/2012
649
196
240
0
1,085
(563)
(198)
26
12/2012
640
1,606
2,247
1,988
62
119
4,416
456
153
609
1,446
174
2,229
2,187
4,416
12/2013
2,203
(1,370)
833
(217)
616
43
(46)
0
613
(139)
475
0
(7)
467
467
23
12/2013
1.77
1.77
1.06
9.03
12/2013
467
217
(31)
0
653
(487)
(2)
296
12/2013
937
1,518
2,455
2,054
143
115
4,768
321
401
723
1,417
195
2,335
2,432
4,768
12/2014E
2,087
(1,398)
689
(215)
473
(24)
(41)
0
408
(101)
306
0
(6)
301
301
25
12/2014E
1.14
1.14
0.47
9.57
12/2014E
301
215
(88)
0
428
(80)
(342)
144
12/2014E
1,081
1,488
2,569
1,958
143
122
4,792
420
186
605
1,410
196
2,211
2,581
4,792
12/2015E
2,257
(1,507)
750
(205)
545
(19)
(35)
0
491
(120)
371
0
(7)
364
364
24
12/2015E
1.38
1.38
0.64
10.31
12/2015E
364
205
(112)
0
458
(150)
(680)
(155)
12/2015E
925
1,394
2,319
1,903
143
136
4,501
437
186
623
900
196
1,718
2,783
4,501
12/2016E
2,455
(1,631)
824
(200)
625
(19)
(22)
0
584
(143)
441
0
(8)
434
434
24
12/2016E
1.65
1.65
1.07
10.89
12/2016E
434
200
77
0
710
(150)
(281)
117
12/2016E
1,043
1,483
2,526
1,853
143
152
4,674
450
186
636
900
196
1,731
2,943
4,674
12/2012
46.0%
38.0%
26.7%
32.9%
32.6%
44.7x
0.9x
1.4x
30.5%
12/2013
37.8%
28.0%
21.2%
20.7%
19.5%
18.1x
1.1x
2.2x
26.6%
12/2014E
33.0%
22.7%
14.4%
12.3%
15.2%
16.6x
0.7x
2.3x
16.6%
12/2015E
33.2%
24.1%
16.1%
13.9%
18.6%
21.6x
0.2x
1.4x
5.4%
12/2016E
33.6%
25.4%
17.7%
15.5%
21.9%
37.0x
0.1x
1.3x
1.4%
Source: Company reports and BTG Pactual estimates. Valuations: based on the last share price of that year(E)
based on share price as of 18 June 2014
SQM
20 June 2014
page 27
Required Disclosures
This report has been prepared by BTG Pactual Chile S.A. Corredores de Bolsa.
The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results.
BTG Pactual
Rating
Buy
Neutral
Sell
Definition
Coverage *1
IB Services *2
Expected total return 10% above the company’s sector
average.
Expected total return between +10% and -10% the
company’s sector average.
Expected total return 10% below the company’s sector
average.
55%
46%
41%
46%
4%
0%
1: Percentage of companies under coverage globally within the 12-month rating category.
2: Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.
Absolute return requirements
Besides the abovementioned relative return requirements, the listed absolute return requirements must be followed:
a) a Buy rated stock must have an expected total return above 15%
b) a Neutral rated stock can not have an expected total return below -5%
c) a stock with expected total return above 50% must be rated Buy
Analyst Certification
Each research analyst primarily responsible for the content of this investment research report, in whole or in part, certifies that:
(i) all of the views expressed accurately reflect his or her personal views about those securities or issuers, and such recommendations were elaborated independently, including in relation to Banco
BTG Pactual S.A., BTG Pactual Chile S.A. Corredores de Bolsa and/or its affiliates, as the case may be;
(ii) no part of his or her compensation was, is, or will be, directly or indirectly, related to any specific recommendations or views contained herein or linked to the price of any of the securities
discussed herein.
Research analysts contributing to this report who are employed by a non-US Broker dealer are not registered/qualified as research analysts with FINRA and therefore are not subject to the
restrictions contained in the FINRA rules on communications with a subject company, public appearances, and trading securities held by a research analyst account.
Part of the analyst compensation comes from the profits of Banco BTG Pactual S.A. or BTG Pactual Chile S.A. Corredores de Bolsa as a whole and/or its affiliates and, consequently, revenues
arisen from transactions held by Banco BTG Pactual S.A., BTG Pactual Chile S.A. Corredores de Bolsa and/or its affiliates.
Statement of Risk
We identify 5 main risk areas for SQM. The biggest would be a pronounced global economic downturn, impacting farmers’ economics, planting, and fertilizer application decisions, possibly with a
credit squeeze, ultimately reducing demand, and prices – and whatever the effect on earnings, possibly affecting investor sentiment. Industry-specific risks are: (i) competition – SQM operates in
small markets, so one new project can quickly change the dynamics; (ii) regulatory – SQM is subject to changes in mining law, especially on royalties and concession areas, which could increase
costs, or reduce access to its key resources; (iii) environment – heightened scrutiny has led to new parameters, and may continue to tighten, preventing SQM from developing new projects, or
requiring additional expenditures to meet lofty standards; (iv) water rights – an important issue when operating in the world’s driest desert (SQM has sufficient rights to aquifers and other sources,
but capacity expansions will eventually make it seek new sources of water, such as sea water, which could increase costs); and (v) opaqueness of its markets: due to the small size and niche focus
of SQM’s markets, up-to-date information on pricing dynamics and consumption trends is hard to come by, making forecasting more challenging.
Company Disclosures
Company Name
SQM 12, 18, 19, 20, 21, 22
Reuters
SQM/B.SA
12-mo rating
Neutral
Price
US$30.83
Price date
18-6-2014
12. Directors or employees of BTG Pactual Chile S.A. Corredores de Bolsa, Banco BTG Pactual S.A., its affiliates or subsidiaries take part on the advisory board of this company.
18. As of the end of the month immediately preceding the date of publication of this report, neither BTG Pactual Chile S.A. Corredores de Bolsa, Banco BTG Pactual S.A., nor its affiliates or
subsidiaries beneficially own 1% or more of any class of common equity securities.
19. Neither BTG Pactual Chile S.A. Corredores de Bolsa, Banco BTG Pactual S.A. nor its affiliates or subsidiaries have managed or co-managed a public offering of securities for the company
within the past 12 months.
20. Neither BTG Pactual Chile S.A. Corredores de Bolsa, Banco BTG Pactual S.A. nor its affiliates or subsidiaries engaged in market making activities in the subject company's securities at the time
this research report was published.
21. BTG Pactual Chile S.A. Corredores de Bolsa, Banco BTG Pactual S.A. or its affiliates or subsidiaries have not received compensation for investment banking services from the companies in the
past 12 months.
22. BTG Pactual Chile S.A. Corredores de Bolsa, Banco BTG Pactual S.A. or its affiliates or subsidiaries do not expect to receive or intends to seek compensation for investment banking services
from the companies within the next 3 months.
SQM
20 June 2014
SQM
Stock Price (US$)
Price Target (US$)
80.0
60.0
40.0
Buy
Neutral
Sell
No Rating
Source: BTG Pactual and Economatica. Prices as of 18 June 2014
20-Jun-14
20-Mar-14
20-Dec-13
20-Sep-13
20-Jun-13
20-Mar-13
20-Dec-12
20-Sep-12
20-Jun-12
20-Dec-11
20-Sep-11
20-Jun-11
0.0
20-Mar-12
20.0
page 28
SQM
20 June 2014
page 29
Global Disclaimer
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