Dividend stocks form the core of my portfolio. They provide me with an income source — albeit one that isn’t guaranteed — and require little effort from myself.
Sociedad Química y Minera de Chile (NYSE:SQM) is one of the world’s biggest lithium mining stocks and currently offers a handsome 4.5% dividend yield. It’s also done very well over the past 12 months. The stock is up 90% over the past year and 112% over the past five years.
I’ve been keeping a close eye on this stock, and I’m looking to add it to my portfolio. But just not yet. So let’s take a closer look at Sociedad Química y Minera de Chile.
A mega bull run
SQM has a 25% share of the global lithium market with 20+ years of reserves. It is also a low-cost producer and demand for lithium has soared over the last year. So, unsurprisingly, the SQM share price has seen some huge gains.
With the lithium price soaring, the firm has surged. The price of the silvery-white alkali metal has gone from around $10,000 per tonne last year to around $70,000 today — that’s near all-time highs hit in March.
As a result, revenue for the trailing 12 months is $6.3bn. That’s more than double the $2.8bn earned during the full year 2021. So it’s clear that the growth really has come in 2022.
There are broad concerns about the health of the global economy and this will put negative pressure on commodities. Iron ore has already halved in price, but we haven’t seen the same movement with lithium.
As we know, lithium is core to the electric vehicle (EV) revolution, being an important component of batteries. But while the revolution is pushing up demand for lithium, a slowdown in the global economy could see lithium move towards oversupply.
Goldman Sachs recently forecast lithium prices falling to $16,000 per tonne in the second half of the year and further still in 2023. The US bank said it expected the lithium market “to pivot towards a prolonged phase of surplus starting this year”.
Not all analysts agree, but I certainly see a global economic slowdown reducing demand for EVs and other electrical goods and therefore demand for lithium.
So I see the SQM share price falling later this year as demand for lithium wanes amid an economic slowdown. And, for me, that represents a good entry point.
I’d buy this stock because of its long-term prospects. I think we’re entering a period of scarcity whereby resource prices will be elevated over the long run.
And with the electric revolution yet to really kick off, I see demand really shooting upwards beyond this near-term economic slowdown. In order to keep up with this demand, SQM is looking to increase lithium carbonate equivalent capacity by 30% annually until 2025.
The firm also has significant free cash flow and considerable margins that should provide plenty of scope to further expand product or take on new projects.