Sociedad Quimica y Minera de Chile (NYSE: SQM) is a low-cost lithium producer currently benefitting from a huge rise in the price of the soft metal. The company — called SQM — has a massive presence in Chile’s Atacama salt flats, where it extracts lithium from brine through a process of evaporation and chemical recovery.
The Atacama Desert in Chile is basically the Saudi Arabia of the electric vehicle (EV) sector, as the highest concentrations of lithium on record can be found there. The element is a crucial material in EV batteries.
The SQM share price has shot up 42% over the last 12 months, but remains 22% off its November high of $111.
Soaring demand and profits
Beyond lithium, SQM’s four other business segments are specialty plant nutrition, iodine, potassium, and industrial chemicals. The company is the world’s largest producer of iodine, which is widely used in pharmaceuticals and disinfectants.
This provides a degree of diversification in its earnings, but the jewel in the crown is lithium. That’s because the world’s soaring demand for EVs and battery storage systems caused the price of lithium to start rocketing in 2021. This produced a Cambrian explosion on the company’s income statement.
| For the third quarter | ||
| 2022 | 2021 | |
| Revenue from lithium and lithium derivatives | $2.33bn | $185m |
| Total revenue | $2.95bn | $661m |
| Net income | $1.09bn | $106m |
| Net income per share | $3.85 | $0.37 |
| For the nine months ended 30 September | ||
| 2022 | 2021 | |
| Revenue from lithium and lithium derivatives | $5.62bn | $483m |
| Total revenue | $7.57bn | $1.77bn |
| Net income | $2.75bn | $263m |
| Net income per share | $9.65 | $0.92 |
The price of lithium has come down this year, but remains significantly above the five-year average. It’s no surprise then that the company has been investing to increase its lithium production capacity. With much of that now complete, the company expects to increase its market share.
It recently acquired a refining plant in China and management is open to more acquisitions. It certainly has the wherewithal to do so with over $3bn in cash on the balance sheet.
Cheap valuation with risk
The stock currently has a forward price-to-earnings (P/E) ratio of 6.3. That, compared to a sector median of 14, suggests the shares may well be in bargain territory right now. The dividend yield currently stands at a whopping 9%, covered 1.8 times by earnings.
This high yield is the reward for taking on the risk that lithium prices may tumble further as more supply enters the market. Goldman Sachs is extremely bearish for 2024, forecasting an average lithium carbonate price of $11,000 a tonne. That would be over a 75% drop from today’s price.
Meanwhile, Macquarie Research is calling for an average price of $62,586 a tonne in 2023, and a steady price through 2026. The consensus forecast for 2023 is $29,063 per tonne.
This variance means nobody really knows for sure. But long term, sales of EVs should grow exponentially, driven by the global transition towards a greener economy. The International Energy Agency predicts lithium demand will have to grow 26-fold by 2050 to reach net-zero.
This should keep the company’s profits healthy and dividends flowing for years. If I hadn’t already bought SQM stock, I’d buy today at $86 a share.
