Sociedad Quimica y Minera de Chile SA
NYSE:SQM
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Sociedad Quimica y Minera de Chile SA
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Good day and welcome to the Second Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Gerardo Illanes, CEO.
Thank you. I’m not the CEO. Good morning, everyone, and welcome to SQM’s second quarter 2018 earnings conference call. For your information, this conference call will be recorded and is being webcast live. You may access the webcast later on at our website, www.sqm.com. Joining me today as speakers are Patricio Solminihac, Chief Executive Officer; and Ricardo Ramos, CFO.
Before we begin, let me remind you that statements in this conference concerning the Company’s business outlook, future economic performance, anticipated profitability, revenues, expenses or other financial items, anticipated cost synergies and product or service line growth, together with other statements that are not historical facts, are forward-looking statements that term is defined under federal securities law.
Any forward-looking statements are estimates reflecting the best judgment of SQM based on currently available information and involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those stated in such statements. Risks, uncertainties and factors that could affect the accuracy of such forward-looking statements are identified in the public filings made with the Securities and Exchange Commission, and forward-looking statements should be considered in light of those factors.
I now leave you with our Chief Executive Officer, Patricio Solminihac, for brief comments before we move to Q&A.
Thank you, Gerardo. Good morning and thank you for joining SQM’s second quarter 2018 earnings conference call. On Wednesday night, we posted our results for the second quarter. Our net income reached $134 million an increase of over 30% when compared to the same period last year. Higher price in lithium contributed significantly to those strong results.
When compared to the second quarter last year, we saw higher price across all our business lines and higher sales volumes in almost every business line. In fact, in the iodine and SPN business lines, we sold record quarterly sales volumes.
During the second quarter, we made significant progress in our lithium expansions. We finished the construction of our lithium carbonate capacity in Chile, reaching 70,000 metric ton per year. And we work to produce at this rate during the fourth quarter of this year.
Additionally, as the global demand for lithium hydroxide is expected to grow faster than for lithium carbonate in the coming year, we continue to work on the development and innovation of the process to produce lithium hydroxide more cost efficiently in Chile. A the same time, we expect to complete our current lithium hydroxide expansion in the coming months, bringing our expected capacity to 13,500 metric ton per year.
I would also like to note that the new agreement with CORFO became effective on April 10 this year. And consequently, our rent payment reported in the cost of goods sold line in the financial statement increases accordingly. And even though we are producing at full capacity, our production costs remain flat.
In Australia, we reaffirmed our strong commitment to the Mt. Holland project. The time table for delivery remains on track to produce spodumene 2020 and lithium hydroxide in 2021. A major milestone for this project was successfully securing the industrial site for the future refinery where we expect to produce at least 45,000 metric ton of lithium hydroxide per year.
As announced, our iodine capacity has successfully reached 14,000 metric ton per year, an increase of over 25%. We continue increasing our nitrate capacity and an important development at the water soluble potassium nitrate market growth at approximately 10% and the solar salts market continued to evolve positivity.
During the second quarter, we distributed over $300 million in dividend, which is a reflection of our strong balance sheet, which is also ratified by the upgrade from Standard & Poor’s to BBB plus.
In summary, strong results during the second quarter along with a growing demand in our main businesses, gives us confidence to keep growing. This has been confirmed by our expansion efforts. There are lot of exciting things happening at SQM, and we look forward to working hard to maximize long-term value for all our stakeholders.
I thank you for joining the call today, and I’ll now open the line for questions.
[Operator Instructions] The first question comes from Joel Jackson of BMO Capital Markets. Please go ahead.
Good morning, everyone. I had a couple of questions. So, first, Patricio, last quarter, you talked about 55,000 tons of lithium production this year; now, your guidance is for sales of more 50,000 tons. Will you still produce 55,000 tons? Are you doing inventory build, or are you doing some market discipline, maybe holding back sales to hold price or you are lowering production? What’s going on?
Thank you, Joe. Effectively, we continue to think to sale what we were thinking to sale in the second half of the year, together with a new capacity. What happened is that in the second quarter, we sold a little bit less than what we wanted to sell and were prepared to sell. Unfortunately, the tight inventory and all the situation for starting up the plant played against that. So, we were not able to sell in the second quarter what we wanted. And that of course roll over. So, right now, we are thinking to sell, as we indicated over 50 and less than 55.
So, you’ll produce 55 this year and a little bit of carryover happened into the second half, is that right?
We will produce, yes, at the rate of -- we expect to produce at a rate of 70,000 tons in the fourth quarter, and of course we need to recover inventory.
Okay. Second question and it’s been very topical of course last 24 hours on water and brine. So, can you give us an update on, I know you will be able to pump less brine because the water levels have gone down, I believe a centimeter. Where are we on that? And then, can you talk about some of the headlines about in Atacama maybe trying to restrict new water rights in Chile, out of Atacama. Will this affect any of your current operations, or more importantly, as you move to 180,000 tons, could this cause some restriction?
Regarding this question, they are two very different questions, and I’ll answer both of them. But before, in general, we don’t see any restriction for us to produce as we have planned and to be able to have enough lithium brine in order to be able to produce according to our plan.
Regarding the situation on the brine extraction, we are working with the authorities in order to comply with the plan. And we see that because of that and because of our objective of increasing lithium without more extraction of brine, we will be producing less potassium chloride. So, basically, we’ll continue with our plan in having enough brine for our production plant and at the same time having less production of potassium chloride.
A completely different thing is what was reported yesterday because of an interview of an authority is regarding the freshwater. Freshwater are completely different under growing. And we today operate wells in the east part of the Salar that allow us to have 250 liters per second, which is less than 4% of all the rights that are in the complete basin. And what was reported is a restriction in the south part of the Salar, where there are other companies extracting water for copper production. So, we don’t see any effect on our small quantity of water. And besides that according to our production plans, we expect to increase our lithium production without needs of more fresh orders than the one that we have.
That was very helpful. And maybe just on the potassium chloride. You’ve given guidance of -- you’ve maintained the guidance of selling fewer than million tons of MOP this year. You also gave guidance this quarter saying Q2 will be the highest sale of the year. If I put those numbers together Q3 and Q4 sales volumes won’t be much different than Q2, or are you saying your 2018 potassium chloride sales will be much lower, significantly lower than 1 million tons?
For the second half of this year, we see less volumes to be able to sell in potassium chloride, mainly because of less production, but also because of more production for potassium nitrate. So, our expectation for the total year will be selling less than 1 million ton. And for next year, we are thinking also that that also will be some less than what we will be selling this year for the same reasons. More production of potassium nitrate in one hand, then we will use more of our own potassium chloride for that direction, and also because of the focus on more lithium production.
Sorry to be greedy, just one more question. Just going back to the first question I asked about the Q2 sales volume for lithium. Just to understand, you weren’t able to sell the product in Q2, or you short the product because of production?
As you look at the two previous years, we were selling more than our nameplate capacity. So, what we did was to force the plant at the maximum in one hand and the second hand diminishing the low optimal, all our inventories around the world. So, of course, because of that, we were not able to sell what originally thought that we will be able to sell during the second quarter. Now that is solved, because we are starting the new plant, and with the new capacity, we expect, as we indicated in the press release, to be able to have 50% more in the second than in the first half.
The next question comes from Isabella Simonato of Bank of America. Please go ahead.
Two questions on my side. First of all, on SPN, of course volumes continued to be pretty strong and you’ve been benefiting from more limited supply from competition. If you could give us an indication for how long that should last? I understand for the second half outlook remains pretty much the same but for 2019, how you’re seeing demand and your volume specifically on that live? And on the lithium part of the business, you mention in the release, you’re expecting new supply from competition in the second half aside from your own. What sort of volume increase are you looking in, in terms of supply in the second half of this year and in 2019? Thank you.
Thank you, Isabella. First, SPN, yes, we are very, very happy with huge growth. And as we indicated, there are two reasons for that growth. One is the growth in market, we continue to see for the total demand ranges of 6% growth. And if you go only to water soluble, we see even higher numbers, like 10% growth. So, very healthy growth from the total demand.
On the other hand, the other reason is the short supply from one of our main competitors, that of course is solving their problems partly, but they are of course we expect that they will be producing more in the second half of what they produced in the first half. So, that also will affect our growth -- our continued growth in the second half. But we continue to increase our capacity, mainly because of the strong growth of the market. And we need to give the assurance to the market that the product will be available, like we did when there was this problem in the market and the market did not feel short, that’s because we were able to supply immediately the needs. So, we see continued growth for next year according to this growth of the market.
Regarding the new supply, as I indicated in previous conference call, we continue to be very optimistic and we are continue to seeing the strong demand this year, the demand will grow more than 20%. And also we see the actions of the OEMs in the car manufacturer industry being more committed to introduce new models for electrical cars. So that, I think there is a consensus that the market will continue with a very, very healthy, more than healthy growth.
Regarding the supplies where there is more uncertainty, we have been seeing more product coming from Australia going to be converted in China, we have been seen more products also been offering China. But, it’s very difficult to have very precise numbers on what we will see. We -- as we indicated, we see that the price will be slightly lower in the second half. And we expect that even though that those prices are the second half will be significantly higher than it was in the second half of last year.
The next question comes from Lucas Ferreira of J.P. Morgan. Please go ahead.
Hi. Good morning and afternoon, everyone. First of all, we would like to wish good luck to Patricio in his next step in life career after next year. And I have a question, and my first question regarding the lithium market and the prices. I just wanted to understand a bit when you look at the prices in the second half and say they’re going to be slightly lower than the prices you had in the first half, is it because you’re seeing already your new contracts be set at lower prices and those at much lower prices but you still have contracts being sold at those levels of 16,000 plus you posted in the first half. So, what I’m trying to understand is when we look let’s say 12 months forward, 18 months forward, are you seeing already your new contracts are being set at much lower prices? Just I know those references were made in the past, but we see spot prices in China for carbonate collapsing from the peaks. Is this something that concerns you? I know it’s a very small market compared to the seaborne market, but I just wanted to hear your thoughts on that.
And the second question is regarding the cost of production of lithium. This quarter was a bit difficult to read because of the new lease fees, but trying to strip out this effect. We realized that the cost of production was very low. If that was the case, if -- how to explain that and if there will be maybe a bump in the cost again in the third quarter? So, what I’m saying -- trying to understand, why costs were significantly lower adjusting for leases?
Okay. Thank you very much Lucas. First, regarding lithium prices. We do not have long-term contract. Basically, we have agreement with our customers on volumes and commitment on volumes both sides with certain definitions. And then, we define the price for the quarter. So, we will not have the visibility on contract for next year.
We do have already, because we are close there, some agreement on prices for the -- of course for the third quarter, and third quarter prices are slightly lower than what it was in the second quarter. And we are also seeing some agreements already for the fourth quarter, which again are only slightly lower than what this was in the second quarter. We see and we heard a lot of rumors on China, but those rumors were similar of what we heard in the fourth quarter of last year when we were selling in the range of $12,000, and people were saying there were spot prices at 18,000 but I never saw it. So, I mean the visibility and the transparency on the publication are very low. What we really care is our agreement with our customers. And right now, we are seeing price pressure because of this additional supply. But it’s in the range of what I just commented.
Regarding the cost of lithium, yes, you are right, the effects of the new contract of CORFO has an important effect on the cost of we reported because the rent that -- the new rent that we put, is in the same line. But, what I can tell you that our actual cost of production remained more or less the same. We are not seeing lower cost, not higher cost in the last quarter compared with the previous quarter.
The next question comes from Ben Isaacson of Scotiabank. Please go ahead.
Thank you and good morning. First question is on the iodine market. We’ve seen iodine prices moving higher over the last few months. And one of the things you talked about a few quarters ago was how, at the low price levels, you started to see interest from new applications. And so, there was quite a bit of demand elasticity at this price level. Now that we’re rising up to $24, $25, are you starting to see some of that demand pulling away? In other words, how should we think about the momentum of price increases going forward?
You’re right that we have been seeing and we continue to see price increases in iodine. We see that some -- this trend should continue in the second half of this year. And we are also responding with volume. As we reported, second quarter was the record volume ever we had in a quarter and we are also still looking for the record volume for the year, which will be well over 13,000 tons for the year. So, that is looking very nicely. The demand for the traditional uses continue in the right way. X-ray contrast media is over, in the range of 5% growth. And we see also disinfectant area going well and LCD also, so most of the applications. Regarding new applications, we always -- when we look for new application and work and support people to do more research on new application using iodine, we always look for applications that will be able to pay a reasonable price for iodine. We don’t think that makes sense to look for applications that need a price of iodine that is in the range of $20 or less, doesn’t makes sense. So what we really look is applications that are able to pay higher prices and of course they will end up paying market price. And we have seen a couple of applications that continue with the interest in increasing. So, if those new applications really work, we’ll see even better news for iodine.
My next question is maybe on your philosophy towards how you produce lithium. When iodine prices were falling a few years ago and they were, I think in the mid or upper 30s, low 40s, you tried to show a disciplined game and wasn’t as effective as the volume game that you’ve been showing now. When you look out at the outlook for lithium, and given your capital commitments, is it a foregone conclusion that you are going to approach the lithium market with a volume strategy or is there going to be room and opportunities to be disciplined?
Well, I think answering directly the question of philosophy, our philosophy is to optimize the long-term value, the present value of our business. Our philosophy is not being the largest producer, and not be in such a specific market, market share. Our philosophy is to make the most money we can for our stakeholders. That is our philosophy. And we not only in iron but also in lithium, we have been for more than 50 years in the lithium business, not in the battery, because that’s really more new. But, we have gone through cycles. And we have behaved in a way that we want to optimize the value. And that is what we will do in the future again. And to do that, we feel that it’s very important to have the capacity in place. And the second decision will be afterward according to what we face and the information we have regarding supply-demand commitment with our estimate and so forth is what we will decide as how much will run that capacity. The good thing for us and is that we do have a very low capital cost. If you look that our capital cost for our expansion will be $4,000 per install capacity that allow us to have these installed capacity at a reasonably low cost.
Can you talk a little bit about why your potash realized price going lower quarter-over-quarter, given that we’ve been in a rising environment? Was this just a product mix issue or was there something else?
No. What really some time affect that is more now that we have less volumes is that when we do some shipment to China that we need to accomplish some agreement with customer that we sell other things. And China of courses, as you say, is a mixing. So, that is the only situation. But what we see today is that we are getting to prices at over $300, $310 into granular product into Brazil. And you’re right, the price continue in that trend, we’ll have to see what happen in India and China but there is nothing especial there.
Okay. And then, very quickly, you talked about lower prices in lithium in the second half, can you give some guidance as to the magnitude of that lower pricing?
As I indicated in the previous question, we have already some remaining prices, of course for the third quarter, which is only slightly lower than the second quarter and we are expecting o have already some agreements for the fourth quarter. It’s difficult to give you a number, but this is more or less what we’re seeing that will depend how the new supply continues to evolve in China.
Without getting a specific lithium price, is it fair to say that we’re going to be within 10% of the realized price in Q2?
At this stage, yes, but that can change if something evolves decently.
This concludes our question-and answer-session. I would now like to turn the conference back over to Gerardo Illanes. Please go ahead.
Thank you very much all for joining us today and we hope to have you with us in the next conference call. Goodbye everyone.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.