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Chemistry and Mining Society of Chile (NYSE: SQM) is a low-cost lithium producer currently benefiting from the massive rise in the price of the soft metal. The company — called SQM — has a massive presence in the Atacama salt flats in Chile, where it extracts lithium from brine through a chemical evaporation and recovery process.
The Atacama Desert in Chile is essentially the Kingdom of Saudi Arabia for the electric vehicle (EV) sector, as the highest lithium concentrations on record can be found there. The element is an important material in electric vehicle batteries.
SQM’s share price is up 42% over the past 12 months, but it’s still 22% from its November high of $111.
High demand and profits
In addition to lithium, SQM’s four other business segments are specialty plant feed, 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. This is because growing global demand for electric vehicles and battery storage systems has caused the price of lithium to skyrocket in 2021. This has resulted in a Cambrian blowout on the company’s income statement.
| for the third quarter | ||
| 2022 | 2021 | |
| Revenue from lithium and lithium derivatives | $2.33bn | $185 million |
| Total revenue | $2.95bn | 661 million dollars |
| net income | $1.09 billion | $106 million |
| 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 | 483 million dollars |
| Total revenue | $7.57bn | $1.77bn |
| net income | $2.75bn | $263m |
| net income per share | $9.65 | $0.92 |
The price of lithium has fallen this year, but remains well above the five-year average. It’s no surprise, then, that the company is investing to increase its lithium production capacity. With much of that now completed, the company expects to increase market share.
It recently acquired a refinery in China and management is open to further acquisitions. It sure has the money to do that with more than $3 billion in cash on the balance sheet.
Cheap valuation with risks
The stock currently has a forward price-to-earnings (P/E) ratio of 6.3. This, compared to a sector average of 14, indicates that the stock may be in bargain territory at the moment. The dividend yield is currently at a whopping 9%, covered by 1.8 times earnings.
This higher return is the reward for the risk that lithium prices may fall further as more supply enters the market. Goldman Sachs It is very bearish for 2024, as the average lithium carbonate price is expected to be $11,000 per ton. That would be more than 75% less than today’s price.
Meanwhile, Macquarie Research claims an average price of $62,586 per ton in 2023, and a flat rate through 2026. The consensus forecast for 2023 is $29,063 per ton.
This difference means that no one really knows for sure. But in the long term, electric vehicle sales should grow exponentially, driven by the global shift towards a greener economy. The International Energy Agency expects lithium demand to grow 26-fold by 2050 to reach net zero.
This would keep the company’s healthy dividend and earnings flow for years. If I hadn’t already bought SQM shares, I would have bought today at $86 a share.
