Seeking Alpha
Long/short equity, deep value, value
Profile| Send Message| ()  

Sociedad Quimica y Minera de Chile (SQM) is a lean, mean, money-printing machine. On a high level, Sociedad Quimica y Minera is an industry leader in multiple spaces, ranging from Lithium production to specialty fertilizers, where it holds an iron grip over global supply. What makes this firm really stick out though, has to do with the unique land it controls in Northern Chile. This region holds rich mineral deposits of Caliche ore and the Salar brines. To say the least, these mineral deposits are the equivalent to mining treasure chests.

Below is a brief overview on these mineral deposits:

The Salar Brines:

The Salar brines carry the greatest lithium and potassium concentrations ever discovered in the world. From this deposit site alone, potassium chloride, lithium carbonate, magnesium chloride, boric acid, and potassium sulphate can be produced at very low costs. The firm’s 28.42% operating margins (TTM) illustrate this.

Caliche Ore:

The Caliche ore deposit in Chile is the only place in the world where natural nitrates can be extracted on a commercial level. In addition, this Caliche ore holds the largest amount of natural iodine in the world.

Next we have broken down the different revenue lines below:

1. Specialty Fertilizer Operations:

Specialty Plant Nutrition (SNP), Sociedad Quimica y Minera’s fertilizer operations, focuses on high quality plant fertilizer. The firm operates this revenue line under a low cost business model. This approach has allowed the firm to almost build a controlling interest (50%) in the world’s supply of potassium nitrate.

The current focus on specialty fertilizers has reduced the firm’s risk profile. For example, in 2009 Potash (POT) demand volume fell by roughly 45% while demand for Specialty Plant Nutrition’s specialty fertilizer dropped 19%. With a widening middle class in emerging markets and an expanding human population, we feel that specialty fertilizer demand should continue to pick up at a good pace. As well, we don’t perceive Potash to be a direct competitor.

Lithium and Iodine Operations:

Lithium is currently used in a variety of electronic markets such as cell phone batteries. The firm made the strategic decision in the mid-1990’s to take a position in the lithium market and it has been paying dividends ever since. Today, Sociedad Quimica y Minera supplies 30% of all Lithium in the world.

The firm’s Iodine operations provide 25% of all Iodine in the world. This substance is most easily indentified in products such as LCD TV screens. The firm will likely remain an industry leader given that it holds the largest single deposit of natural iodine in the world.

Valuation:

We are rating Sociedad Quimica y Minera an overall buy. Based on our proprietary model, we arrived at a fair value of $71. Obviously, we are bullish for the reasons stated above. But what matters the most in our view is that global market conditions are sufficiently improving to favor this firm. Below you will find three different scenarios with respective price points:

Bear Scenario:

Here we see the global economy contracting slightly. For the firm we forecasted a reduction in revenue growth, an increase in the cost of capital (WACC), and a decrease in our long-term growth rate assumptions. The fair value came out to be $46.

Neutral Scenario:

In our neutral scenario we assumed high single digit revenue growth and the current capital structure remaining unchanged. The fair value came out to be $63. Here we forecast that the global economy declines marginally below current conditions.

Bull Scenario:

We fell into the bullish camp. Here we see revenue increasing toward mid-double digits, keeping its current capital structure, and starting to leverage the power of its operating margins. As well, we would expect the global economy to start picking up the pace a little more and for developed nations to continue on their path to recovery. Our price target is $71.

X-Factors

  1. The firm operates a very favorable low cost platform. This allows it to hold large operating margins over an extended period of time.
  2. Sociedad Quimica y Minera controls unique mineral deposits with no current substitute in the world.

  3. The firm holds a substantial market share in each space it operates. We feel that this provides key industry advantages and better pricing.

Risks and Headwinds

There is always the possibility that a competitor may cut prices and/or increase production. The immediate goal for the competitor would be to take a larger percentage of market share if possible. Currently, we feel the probability of this is low.

Due to the nature of the quasi-commoditized products sold, there is always going to be the potential for irregular pricing. It is unlikely that the firm would be willing or able to completely hedge away all risk.

End user demand will ultimately affect Sociedad Quimica y Minera over the long term. Should the global economy slump again, the firm will be materially affected. This is why we see the firm as a global macro play.

Management

Patricio Contesse, CEO, turned Sociedad Quimica y Minera into the firm we recognize today. It was his vision to penetrate foreign markets and increase exports sales. The firm’s results speak for themselves. The company board is made up of eight independent members. Elections are every three years for everyone. This structure illustrates sound corporate governance along with the fact that the Chairman and CEO positions are separate.

Financial Health and Analysis

The firm is financially fit, as it holds a cash ratio over 1 and a current ratio over 2. This demonstrates that it has plenty of liquidity. When digging deeper, we found that the firm holds an impressive interest expense ratio of 20 for 2010. This is also after the fact that it doubled its long-term debt in 2009. Sociedad Quimica y Minera also holds a moderate D/E ratio structure of .61. Lastly, the firm’s cash flows are strong and stable, so we give the firm a clean bill of health from a financial perspective.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: The Upside Story for Sociedad Quimica y Minera de Chile