Chemical And Mining Company Of Chile Finds Growth Beneath The Surface

Nov.21.11 | About: Chemical & (SQM)

For those that follow my Twitter feed you know I have been long agriculture for some time and I am invested on a global basis. The basics: growing global population mixed with growing wealth in emerging markets causes increasing demand for protein and better nutrition. An emerging class of people is demanding more chicken, beef, pork etc., all which feed on grains in industrial farms. Additionally there is increased demand for higher quality fruits and vegetables. Agriculture, simply put, grows on fertilizers. As I am a global agriculture investor, I invest directly in commodities and also on occasion invest in strategic support companies in growing regions.

Based in Santiago, Chile, I am in a full size long position with Chemical and Mining Company of Chile (NYSE: SQM). Taken from its web site, the firm is broken into four business segments with the largest comprised of fertilizers and specialty chemicals marketed globally. SQM produces soil nutrients, including potassium nitrate, sodium nitrate, sodium potassium nitrate, and specialty blends for crops, such as vegetables, fruits, flowers, potatoes, and cotton. The firm has also joined the global craze developing products for organic farming.

Another substantial business unit produces iodine and its derivatives which are used in a range of medical, pharmaceutical, agricultural, and industrial applications. It represented 22% of Total Gross Margin back in 2010. The largest economically exploitable reserves of Caliche Ore are in northern Chile, and SQM holds the largest part of them. Iodine is produced from this ore, and SQM has the world’s largest production capacity.

In addition, the company is probably best known as the world’s largest lithium producer and lithium carbonate. They are used in various applications including the rapidly growing market for new technologies for batteries, frits for the ceramic and enamel industries, heat-resistant glass, primary aluminum, lithium bromine for use in air conditioner equipment, and continuous casting powder for steel extrusion, pharmaceuticals, and lithium derivatives; and lithium hydroxide, which is used as a raw material in the lubricating grease industry. Lithium represented 10% of Total Gross Margin in 2010.

Further, it produces various industrial chemicals, 11% of Total Gross Margin 2010. When it comes to Nitrates, Potassium Chloride, Boric Acid and Magnesium Chloride, SQM has proved to be a reliable and committed supplier. Due to its ample product range, SQM can satisfy the raw material needs of different industries.

The company made a presentation (pdf) back in May that is the source of much of my market share data. Although it is not completely current, it still serves as a guide to where the company is headed. Approximately 87% of sales are exports. The firm exports to over 100 countries. There are other fertilizer firms growing revenue faster, but SQM is growing at a good pace for a firm of its size. The firm boasts Return on Equity on a trailing 12 month basis of 26.31%, and good cash flow. One negative is its 252 day beta of 0.73 which can be light in both the materials sector and emerging markets. I view it as another data point to manage in the portfolio and an advantage in flat to down markets.

Year-to-date the stock is beating the iShares MSCI Chile Index Fund (NYSEArca: ECH) and the US Materials Select Sector SPDR (NYSEArca: XLB) which I use in tandem to hedge my exposure. The firm has vast natural resources, production capacity and exports to all major and most secondary markets. With a slowdown in the developing world financially, I find limited correlation to the “need for feed” and other agricultural requirements for a growing population of humans and live stock.

Disclosure: Mr. Corn is chief investment officer of E5A Funds LLC. Through various equity strategies under his supervision, he is currently long SQM. He may be long or short the ETFs mentioned as trading and hedging vehicles.