Expect Big Gains from Sociedad Qumica y Minera de Chile

Sociedad Qumica y Minera de Chile (SQM), has not been in the news of late, and so has been off of my radar. Having some spare time this weekend, I have been revisiting a few old friends and this stock has caught my eye for a couple of reasons.

• It's the fourth largest holding in the iShares MSCI Chile Index (ECH).
• That index has performed very well and looks to continue its steady upwards trace.
• At the end of April, SQM reported some surprising figures year on year (Q1 2009 v 2008): net revenue increase of 33% on 2008, with the NYSE traded ADRs providing earnings of $0.33 per share, compared to $0.25 share in Q1 2008. As if that wasn’t enough, to round off this bullish performance, SQM also showed a 39% increase in operating income.

For those that are not familiar with SQM, it is primarily a producer of fertiliser for agricultural, infield use. The company has however diversified into other lines in the past few years.

In fact, SQM is the largest producer of Iodine and Iodine derivatives globally, which has a number of non-agricultural applications, including medical and industrial. SQM to date holds rights to the largest source of Caliche Ore in northern Chile.

At present, SQM is also the largest producer of lithium globally as it owns the production rights from the Atacama Salar deposits in the Andes. As the potential for Lithium hydroxide batteries for automotive use is becoming more apparent, SQM is set to be in pole position to exploit any upcoming technical breakthroughs.

The final string in the production bow is that the company has a very strong product line in nitrates for use in agriculture, industry and petrochemicals. SQM is also looking at solar power using Sodium and Potassium Nitrate as a heat transfer medium. With solar being very much in the public (and investor consciousness), this could be a key area for it in the very near future.

Now moving on from the pretty obvious, if you have a browser, you can Google all of this in less than 10 minutes. What has really got me going are the latest charts that SQM has produced.

Since the large market correction in March, the stock has performed remarkably well, especially considering the recent volatility of its perceived peers. MON, AGU, POT, etc. have all been up and down. In the last month, even whilst others have been selling off & also under some pretty heavy selling volumes itself, SQM has managed to keep its head above water and is defiantly holding to a very narrow trading range between its 50 & 20 day SMA. Tough little blighter. Even more important for me is the RSI indicator, which is running reasonably flat and not trending up or down from the 50 mark since mid-June.

Turning to the P&F chart, we can see that SQM has had a definite upward trend for the last 6 months. Any drop in the current price looks as though it will soon correct to the upside & the Price Objective yielded is 53.00 which is a 68% premium on Fridays close of 36.45.

Referring back to the original Sharp chart, it looks as though buy volume is starting to tail a little, and I am of the opinion that we will see a market correction in the near future; however SQM has proved itself to be pretty resilient. I am pegging an entry point at $35, with a view to following this up to the $40 mark before starting to scale out, with the high upside potential. I'll also be adding this to my investment portfolio.

Disclosure : Short on MOS, no current positions in any other stock mentioned.

Comments

[Deltaxray7:]

I've decided to just forget I own stock, and I'll check back in 10 years....

Jul 27 11:45 AM

[sligoo:]

SQM should become the best commodity play other than perhaps BHP. What gives SQM the edge is that their products are unique and scarce.

Jul 27 02:07 PM

[cosmic inve...:]

I agree with the article, I've been dollar cost averaging SQM for a couple of months now, and will for awhile. The only thing is--my math says 53 is a 45% premium to 36.45...which is right??

Jul 27 03:09 PM

[kmi:]

There's an explosion of lithium battery powered vehicles coming to market in the next 3 years and virtually every automaker is building battery production facilities right now. There are few lithium producers globally, and SQM is one of the big ones. I think it makes sense too, and I'm positioned accordingly.

Jul 27 08:30 PM

[RainmanRam:]

What about Lomiko buying SQM's lithium properties?

www.lomiko.com/files/J...

I can't find enough information on what (if any) their deal might be with SQM.

Anyone shed some light on what this purchase means for SQM?

Thanks,
Ray

Jul 28 02:30 PM

[Paul Harper:]

" What about Lomiko buying SQM's lithium properties?"

Ray ... Lomiko are not purchasing anything from SQM, at present the are buying up mineral rights/concessions in the area. SQM has a 600 hectare patch that it is currently extracting lithium salts, they also have a processing plant on site. My understanding is that Lomiko are keen to do deal with SQM on processing, naturally SQM are not so keen on the deal .... supply / demand economics prevail.

Cosmic ... my bad, you are right on this one.

Jul 29 03:55 AM

[User 422955:]

Thanks, User 426263. I clicked on your link and then clicked on the link to an interesting report on Lithium, worldwide. Lomiko has bought 8 claims on Salar de Aguas Calientes. As the article states, SQM's main production is from Salar de Atacama. As best I can figure out, "salar" may be used in parts of South America to refer to salt lakes, or salt flats, or salt deserts. Examples in the US may be the Great Salt Lake, Bonneville Flats, Salton Sea.

Jul 30 05:27 PM

[User 422955:]

I also recommend SQM's annual report. It has spectacular photos as well as other, expected information. I am bearish on potassium chloride prices because numerous new mines are supposedly coming on line. However, this fertilizer accounts for only 8% of their sales. Lithium accounts for 10% and Iodine 14%. These are the products in which they have the world's largest single market share.

I am grateful to Paul Harper for bringing SQM to my attention. However, I think his analysis overemphasizes charts and underemphasizes SQM's unique characteristics.

Jul 30 07:58 PM

[Paul Harper:]

"I am grateful to Paul Harper for bringing SQM to my attention. However, I think his analysis overemphasizes charts and underemphasizes SQM's unique characteristics."

I'm grateful that your grateful .... ;o)

As I said in my commentary, fundamental information on the company can be found via searching the web & as you yourself have seen, the company report is very detailed. Maybe I should have made it clear that my aim was to look at SQM from a technical point of view & emphasised the staying power of this stock, especially with regards to its peer asset class, who have been chopping all over in the last 20 days. I look for stability in my investments, especially in growth stocks & wanted to show this characteristic.
Best Paul

Jul 31 12:14 AM

[Gravity404:]

More info on Lomiko can be found here. It looks like they are buying up leases all around SQM -- www.lomiko.com/

For a compnay like SQM the forward PE is good, but why havent the anal-ist increased their targets?

Also, does anyone know the terms of the fileds leases from the Chilean government?

I've been watching this for a while and I think is a great long term buy at the right price. I have read severla times that POT ownes 38% of SQM??

Jul 31 01:25 PM

[User 422955:]

to Gravity 404: Neither the shareholder list on Yahoo nor that in the annual report indicates that POT is a major holder. They might, of course, be a major holder via a fund.

to Paul Harper. Thanks for your thanks. What do you mean by "peer asset class"? If you are referring to large fertilizer companies, they aren't exactly peers, They sell huge quantities of basic fertilizers (N, P, K). SMQ largest sales come from specialty fertilizers. I don't know of any other company selling large quantities of specialty fertilizers, let alone have a world class position in lithium or iodine.

Aug 01 07:28 PM

[Paul Harper:]

"Neither the shareholder list on Yahoo nor that in
the annual report indicates that POT is a major holder."

"to Paul Harper. What do you mean by "peer
asset class"? If you are referring to large fertilizer companies,
they aren't exactly peers"

answers to both :

"The world market for potassium nitrate is about 1.4 million tons a year. It's controlled by the Chilean company Sociedad Quimica y Minera de Chile, which is fondly known as SQM, and which is controlled by the Canadian company Potash Corporation of Saskatchewan).

Sociedad Quimica y Minera says it controls 47% of the world market, Haifa Chemicals has a 37% market share and Kemapco of Jordan, also controlled by Potash, controls 11%.

The three companies thus control 95% of the world's production of potassium nitrate. One company, Potash, controls 58% of the world's production. That's no recipe for competitive pricing. "

Personally, I view potassium nitrate as a commoditised fertiliser product. Although you are correct in discussing the benefits of its non-reliance on this product area. As for the POT holding in SQM, Google News search is a better indicator than Yahoo! Finance.

Aug 02 02:59 AM

[Gravity404:]

I have found that POT holds investments in SQM, Arab Potash (APC), Isreal Chemical (ICL), and Sinofert Holdings for a total $6.6 billion, collectively. I didn't spend too much time, but I found various numbers of POT holdings in SQM from 18%, 24% to 38%.

On this next big pull back, I will buy SQM (under 35 long) and POT (trade.)

Great discussion guys.

BTW - has anyone heard any more about the VALE acquisition attempt on Mosaic??

Aug 02 05:42 PM

[Paul Harper:]

from their own investor relations, they hold 32% in SQM :
www.potashcorp.com/inv.../

VALE has denied any takeover of MOS & I would tend to agree, as they have already purchased operations in Argentina & Canada from Rio Tinto for an estimated $850Bn, also there are targets closer to home (Brazil) that would make more sense.


On Aug 02 05:42 PM Gravity404 wrote:

> I have found that POT holds investments in SQM, Arab Potash (seekingalpha.com/symbo...),
> Isreal Chemical (seekingalpha.com/symbo...), and Sinofert
> Holdings for a total $6.6 billion, collectively. I didn't spend too
> much time, but I found various numbers of POT holdings in SQM from
> 18%, 24% to 38%.
>
> On this next big pull back, I will buy SQM (under 35 long) and POT
> (trade.)
>
> Great discussion guys.
>
> BTW - has anyone heard any more about the VALE acquisition attempt
> on Mosaic??

Aug 03 03:45 AM

[Gravity404:]

Thanks, Paul.
BTW the Arab Potash APC reference above was not meant to be converted to a ticker symbol, as that is Anadarko (APC) which I own also and is a buy.

Aug 03 09:55 AM

[FIFOkid:]

No disagreements here I also own SQM in my portfolio. If you are looking for international names silicon investor under lithum as a subject would have a listing of companies that are involved in the sector.

Aug 09 01:41 PM

[cosmic inve...:]

Thanks Paul; just making sure I wasn't missing something!


On Jul 29 03:55 AM Paul Harper wrote:

> " What about Lomiko buying SQM's lithium properties?"
>
> Ray ... Lomiko are not purchasing anything from SQM, at present the
> are buying up mineral rights/concessions in the area. SQM has a 600
> hectare patch that it is currently extracting lithium salts, they
> also have a processing plant on site. My understanding is that Lomiko
> are keen to do deal with SQM on processing, naturally SQM are not
> so keen on the deal .... supply / demand economics prevail.
>
> Cosmic ... my bad, you are right on this one.

Aug 11 09:29 AM

[einstein p ...:]

Been dollar cost averaging SQM from 15 up to the high 20s. It's a triple play on the future. One drawback may be if Bolivia decides to take a page out of the Venezuelan playbook but, sans that, it's a great stock to own as the auto industry converts to lithium batteries and the need for fertilizer rebounds.

Aug 15 03:27 PM