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Sociedad Quimica y Minera (NYSE: SQM) operates in the Atacama Salt Desert in northern Chile, a region with some of richest reserves of lithium, potassium, iodine and nitrate in the world, residing in caliche ore deposits and salar brines.

While geologists aren't entirely certain how the caliche ore formed in Chile, it is widely believed that at some point the region was underwater. As that water evaporated, minerals were leached from the soils below and brought to within a few feet of the earth's surface. Sociedad Quimica y Minera uses explosives to remove the top layer of soil and earth covering the deposits and then crushes the ore and applies a leaching process to recover iodine and sodium nitrate.

Salar brines are formed by a similar leeching process. As ground water works its way to the region's surface, it brings with it a number of minerals and eventually becomes trapped beneath the saline crust in the region. Sociedad Quimica y Minera drills beneath that crust and removes the brine, then transfers it to solar evaporation ponds. As the liquid evaporates, salts precipitate out of the solution and fall to the bottom of the ponds. Once that process is completed, the remaining concentrated brine is processed to remove lithium carbonate and boric acid while the salts are processed to recover potassium chloride and potassium sulphate.

The company is the largest single iodine producer in the world and controls about a third of the global market share for the resource.

When most of us think of iodine the first use that comes to mind is probably tincture of iodine, the disinfectant our mothers applied to our childhood wounds and which is also used as a surgical disinfectant. More than half of all iodine produced is used in ways related to human and animal health, ranging from the table salt additive and animal feed to pharmaceuticals. It is also a commonly used contrast in x-rays, a major component in the manufacture of liquid crystal displays and is a key ingredient in nylon.

While 57 percent of the world's iodine is produced in Chile, Japan is the next largest producer at 20 percent. Most of Japan's production is centered in the region devastated by the massive earthquake and tsunami which struck the region in March 2011. As a result the price of iodine has shot up from about USD25 per kilogram in 2010 to almost USD40 today, creating a huge tailwind for Sociedad Quimica y Minera and accounting for 21 percent of the company's revenues.

The mining stock is also a major producer of lithium, controlling 31 percent of global market share.

While lithium has a number of uses, including lubricating greases, air conditioners, pharmaceuticals and polymer production, the single largest source of demand (33 percent) is rechargeable batteries used in everything from laptops and cell phones to iPods.

Hybrid-electric car batteries are becoming one of the largest sources of demand. Since the vehicles were first introduced in 2001, almost 5 million of the vehicles have been sold worldwide, according to auto industry trade groups. Annual sales are expected to reach between 2 million and 3 million units globally by 2015. By the end of the decade that figure is expected to range between 5 million and 10 million.

The explosion in demand for lithium over the past decade has attracted a number of new entrants into the market, pushing the average selling price of lithium down from about USD6,500 per ton to around USD5,000 per ton. While that decline in price could have proven a serious challenge for Sociedad Quimica y Minera (lithium accounts for about 9 percent of revenues) the company ramped up its production capacity to 48,000 metric tons annually, more than making up for the decline in price with an increase in volume.

That said, the company's most important business line by far is potassium production, which accounts for about 26 percent of revenues. Sociedad Quimica y Minera produced about 1.2 million metric tons of the fertilizer last year and is on track to produce 2 million in 2012. Potassium prices have been depressed recently - most of the world's crops have been harvested for this year and overproduction has left global inventories elevated. However, prices should recover for Sociedad Quimica y Minera, as higher crop prices drive a strong South American planting season.

Potassium mining also supports the company's specialty plant nutrition division, which manufactures a wide range of fertilizers. Its Ultrasol product is used on a variety of fruit crops while Qrop is commonly appied to potato, agave (used as a sweetener, food crop and in the production of tequila), avocado and tobacco. Its Speedfol product is primarily used on vegetable crops. In all, the company holds about 50 percent of global market share in potassium nitrate fertilizers.

Thanks to the high concentration of its target minerals in its operational area, Sociedad Quimica y Minera is the lowest-cost producer in the market. Its processing facilities are located close to the mineral deposits, reducing transportation costs. The company even operates its own railroad to move its finished products to a deep-water port on Chile's coast.

Annual revenues have been posting impressive growth over the past few years, rising from USD1.5 billion in 2009 to just over USD2 billion last year.

In this year's second quarter, Sociedad Quimica y Minera saw revenues jump to USD683 million from USD551.7 million last year, largely thanks to sales increases across all of its business lines, particularly lithium. That drove a 45.5 percent increase in net profits for the quarter compared to a year ago.

In addition to growing sales, the company also sports a rock-solid balance sheet, with a USD614 million cash hoard. It also has relatively little debt, with a debt-to-equity ratio of just 0.6.

Despite all of those positives, shares of Sociedad Quimica y Minera have sold off recently on a bit of bad news. The Chilean government voided a 20-year lithium contract it awarded to the company after problems in the tendering process. Under the terms of the tender, only companies that didn't have pending lawsuits with the government were to be eligible to bid. Unfortunately, Sociedad Quimica y Minera does have outstanding legal actions with the government.

The botched tender has created a minor scandal in Chile, claiming the job of a deputy mining minister. However, the mining ministry hasn't said whether it will launch a new tender process. Speculation has arisen that Sociedad Quimica y Minera will ultimately get the contract, given the attractive terms it offered the government.

Regardless of how this particular deal works out, Sociedad Quimica y Minera is still one of the most attractive miners of lithium, potassium and iodine in the world and is one of the stocks to watch this year.

Source: Sociedad Quimica Y Minera: Buy The Battery Craze