The Chemical and Mining Co. of Chile Inc. (NYSE:SQM), one of the world's largest commodity and specialty product producers, has seen its stock price fall from a two-year high of $33 in March of 2014 to around $16 today. While a nearly 50% drop in value over two years seems to signal major problems with this company, the decline is based on global commodity markets and is not indicative of the company itself.
SQM's massive drop can be attributed to a number of factors. However, the major catalyst for the decline has been the drop in global iodine prices from $50/kg to $37/kg. SQM's iodine segment accounted for 35% of its gross profit in early 2014 but by the end of 2015 that number dropped to 19% of gross profit. To put those numbers in perspective, SQM reported quarterly revenue of $102.6 million in the fourth quarter of 2013 (reported in the beginning of 2014) from its Iodine Segment. The revenue from its Iodine Segment for the third quarter of 2015 (its latest earnings report) was $60.1 million, a drop of nearly 40%.
Iodine prices decreased significantly over the last two years because there was a global surplus of iodine. According to Global Industry Analysts, worldwide iodine consumption in 2014 was 28,110 metric tons and global production was 30,300 metric tons which created a 2,190 metric ton surplus.
However, this surplus won't last. Global iodine consumption is predicted to increase to 36,300 metric tons by 2017 but based on an average annualized growth rate of 3.3% for iodine production (calculated from US Geological Survey Data), global iodine production will only be 33,300 metric tons which leaves a supply deficit of 3,000 metric tons. The global iodine supply deficit will push prices higher, back near 2014 levels.
The decline in revenue from the Iodine Segment is closely correlated to the decline in the stock price. As global iodine prices rebound, revenue and gross profit from SQM's Iodine Segment will increase and the stock price should follow.
SQM will not only rebound to previous levels because of the improving iodine market, it will grow aggressively based on the strength of its Lithium Segment. Lithium is the lightest metal in the universe and its chemical properties make it a fantastic material for batteries. SQM's Lithium Segment accounted for 20% of its gross profit in its latest earnings report.
The global market for lithium has grown rapidly in the past and is expected to continue to grow at a tremendous rate in the future. From 2000 to 2011, global lithium prices grew from $2,000 per metric ton to $6,000 per metric ton, a 200% increase. According to Dahlman Rose & Co., global lithium consumption will double by 2020 and Credit Suisse estimates that demand will continue to grow 12% a year. The growth in this market is driven primarily by increasing demand for rechargeable batteries which are used to manufacture consumer electronics and electric vehicles. Demand for electric vehicles is expected to help grow the demand for rechargeable batteries at 25% a year. To meet this demand, Tesla (NASDAQ:TSLA) is constructing a Gigafactory which will produce rechargeable batteries for 500,000 electric vehicles by 2020.
Clearly there is an aggressively growing market for lithium which all lithium producers can benefit from. However, SQM has a major competitive advantage which makes it well positioned to profit from the growing lithium market. To understand SQM's competitive advantage you must understand how lithium is produced. There are two methods for producing lithium: brine evaporation and hard rock mining. Brine evaporation is a 50% cheaper method for extracting lithium and it's also simpler. SQM's competitive advantage is its ownership over the brine fields of the Atacama Desert in Chile which contains the world's largest source lithium brine: 7.5 million tons of 13.5 million worldwide. Due to this advantage, SQM can beat any of its competitors in terms of price and volume when it comes to lithium production.
Competitors and Legal Issues
SQM's major competitors are Basf SE (NYSE:BAS) and Dow Chemical Co.(NYSE:DOW). While DOW and BASF both have market caps much greater than SQM, SQM has the major advantage described above with regard to lithium production which not a single competitor can match.
SQM also faces a few issues from Chilean regulators regarding the sale of shares by company insiders. This issue should not affect the company going forward because all of the levied fines have been or are in the process of being paid.
As global iodine markets rebound, SQM's stock price should follow suit. The global lithium market has more than doubled since 2000 and is expected to double again by 2020. SQM's unique competitive advantage will allow it to beat competitors in terms of price and volume in the lithium market leading to major profits from its Lithium Segment.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.