Sociedad Química y Minera de Chile (NYSE: SQM) is one of the world’s biggest lithium stocks. And it’s been on one hell of a bull run over the past 12 months. The share price is currently up 90% year on year and it could go further.
So, let’s take a closer at this lithium giant and see whether I’ve missed my chance to invest.
Mega returns
SQM is a Chile-based speciality chemicals company, focusing on the mining and production of iodine, lithium and other industrial chemicals.
The stock has gained in recent years amid increasing demand for lithium, which is widely used in the production of batteries used in electric vehicles and other technologies.
SQM’s upward trend over the past five years is phenomenal. The stock is up 151% over the past five years, although most of this has come in the last 12 months. If I had invested $1,000 is in this stock five years ago, today I’d have $2,150. That’s a pretty astonishing return.
But my portfolio is in GBP, so I need to take the exchange rate changes into account. Five years ago, £1,000 would have got me $1,276 and today that investment would be worth $3,210 or £2,626. So the depreciating pound has essentially added another 7% to my hypothetical investment.
I’d also have five years of dividends. The yield is currently 2.9%.
Outlook
SQM is a low-cost producer and has a 25% share of the global lithium market with 20+ years of reserves.
The firm is looking to increase lithium carbonate equivalent capacity by 30% annually until 2025 in an effort to maintain its market leadership and respond to increasing demand for the metal.
The firm’s revenue has shot up over the past year with the lithium price soaring. The price of the silvery-white alkali metal has gone from around $10,000 per tonne to nearly $68,000 today.
Over the past 12 months, SQM has achieved around $4.3bn in sales, up from $1.8bn in 2020. In fact, in the full year to December 2021, the miner only made $2.8bn in revenue, so it’s clear that the growth has really come on in the past few months.
There are more positives too. It’s got significant free cash flow and considerable margins, but political risk has been weighing on the share price.
Lithium price concerns
I’m pretty bullish on mining stocks right now as I contend that we’re entering a period of scarcity characterised by increasing competition for resources.
However, the near 600% increase in lithium prices over the past six months concerns me. I think the size of the increase may lead to demand destruction, and amid recession forecasts around the world, we could see lessening demand for products that require lithium, such as EVs. Goldman Sachs recently forecast lithium prices falling to $16,000 per tonne the second half of the year and further in 2023.
So, while I’m bullish on mining stocks and entirely appreciate the growing demand for lithium over the next decade, I’m not buying SQM stock right now. I think there will be better entry points later in the year amid a global economic downturn.
