Seeking Alpha
Long only, value, contrarian, dividend growth investing
Profile| Send Message|
( followers)

Summary

  • SQM has seen a strong rebound from its 52 week lows.
  • The company has strong exposure to the lithium market, which has driven new investors into SQM.
  • Increasing potash prices and lowered capital expenses will be the main drivers in 2014.

(click to enlarge)

After an absolutely miserable 2013 where Sociedad Quimica y Minera (NYSE:SQM) lost over 50% of its value, the company has started to rebound in 2014. Due to several positive catalysts on the horizon, SQM has gained roughly 28% since the start of 2014. Since writing my first article on SQM back on December 11, 2013, the stock has risen approximately 40%. The company didn't have many bright spots to identify in 2013, but a rapidly growing demand for lithium, positive momentum in the potash market and significantly reduced capital expenses have helped the company regain positive investor sentiment.

Negative 2013 growth

2013

2012

% change

Specialty Plant Nutrition

$ 687.5

$ 675.3

1.8%

Iodine

$ 461.0

$ 578.1

-20.3%

Lithium

$ 196.5

$ 222.2

-11.6%

Industrial Chemicals

$ 154.0

$ 245.2

-37.2%

Potassium Chloride & Sulfate

$ 606.3

$ 605.1

0.2%

Other

$ 97.9

$ 103.2

-5.1%

Total Revenue

$ 2,203.1

$ 2,429.2

-9.3%

Cost of Goods Sold

$ 1,264.9

$ 1,254.6

0.8%

Depreciation & Amortization

$ 216.8

$ 46.0

48.5%

Gross Margin

$ 721.5

$ 1,028.6

-29.9%

Net Income

$ 467.1

$ 649.2

-28.0%

EPS

$ 1.77

$ 2.47

-28.3%

Source: SQM 4th Quarter Earnings Report

SQM saw weakness in virtually every business segment last year. Increased supply and weakening demand for Iodine and significantly decreased volume in solar salts in the Industrial Chemicals segment were the 2 main negatives during 2013. Management sees continuing weakness in both markets during 2014. In early 2014, the company has already seen iodine prices decline, and management sees this continuing through the rest of the year. Even after a dramatic decrease in volume of solar salts in 2013, the company expects 2014 volumes to be below that of 2013, but management has expressed optimism for 2015 and 2016 due to positive contract negotiations for 2015 contracts and beyond.

Specialty Plant nutrients

Iodine

Lithium

Industrial chemicals

Potassium

Other

Total

% share

31%

21%

9%

7%

28%

4%

100%

Positive Catalyst

Growing Lithium Demand

Source: SQM Corporate Presentation January 2014; Lithium market supply

The total lithium market grew 4% in 2013, with demand for lithium batteries growing well over 10%. The company expects total market demand to grow by another 8-10% in 2014. While sales volumes for SQM decreased by 21% in 2013, lithium prices increased 12% during the year, helping to offset its lower volume. An increased supply from competitors was the main reason for the company's lower volume, but SQM still accounts for roughly 27% of the total lithium market. SQM is also the world's low cost producer of lithium. During 2013, SQM produced 39,000 MT of lithium which was below the company's 48,000 MT capacity. The company is taking a conservative approach to 2014, because it's unknown how much capacity China and Canada may have added and how this will reflect in 2014 sales volume.

However, with Tesla (NASDAQ:TSLA) announcing their Giga Factory, which is expected to begin production in 2017, investors are flocking to stocks involved in the lithium market. SQM's recent bounce in stock price can be largely attributed to this news, and for good reason. While Tesla's plans and predictions are extremely ambitious, it has the potential to completely revolutionize the lithium market. The Giga Factory plans to produce more battery power than the entire world produced in 2013. Long-term, the demand for lithium will continue to grow by leaps and bounds, and SQM will reap the rewards of being the lowest cost producer in the world.

Potash Market

The breakup of the Russian/Belorussian potash cartel, which sent potash prices plummeting in August 2013, has been well-documented and was a major reason for SQM's disastrous 2013. SQM saw prices in the potash market 16% lower than 2012, but also saw sales volume increase 18% in 2013. The company expects total market demand for potassium chloride to grow in 2014 to 55 million tons, and the company expects its own sales volume to increase another 10%. Potash prices bottomed in late 2013 and are expected to rise in 2014. SQM CEO, Patricio Contesse, stated,

We remain confident that total potash demand levels in 2014 will surpass levels recorded during 2013, this could lead to a positive change in the pricing situation we have seen in recent months.

Even with depressed prices seen in 2013, potassium chloride and sulfate accounted for 23% of the company's gross profit. SQM has heavily invested in the expansion of its potassium-based products at the Salar de Atacama location and expects effective production capacity to increase to 2.3 million MT in 2014.

Capital Expense Reduction

SQM undertook intensive capital investments from 2009-2013. The biggest project was increasing potassium chloride production at Salar de Atacama from 800,000 metric tons to 2.3 million metric tons per year. The company also constructed a potassium nitrate plant in Coya Sur that now has the capacity to produce 300,000 metric tons per year. Iodine capacity was also increased to 12,500 metric tons per year. During 2013, the company spent $371 million in capital expenses. In 2014, with these improvements completed, capital expenses are projected to be cut by nearly 60% to $150 million. This $221 million cut in capital expenses will help bottom line numbers significantly in 2014.

Conclusion

SQM limped through the 2013 finish line, but has already shown a healthy bounce back in 2014. While iodine and industrial chemical business segments are expected to have another weak year, the company is in great position long-term. Reduction in costs, exposure to the booming lithium market and a rebound in potash prices should continue to push SQM higher. The company enjoys a debt/equity of 1.08, current ratio of 2.80 and EBITDA margin of 39%. All of this during one of the company's worst year on record. SQM's stock probably won't sustain the rapid rise seen thus far in 2014, but long-term investors can still get in at a very reasonable rate.

Disclosure: I am long SQM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Sociedad Quimica Y Minera Is Finally Showing Signs Of Life