Sociedad Quimica Y Minera: Supply Shortage Provides Opportunity

Summary

• There is a dramatic shortage of raw material to produce the battery packs that are going into the mass market Electric Vehicles and significant growth prospects.
• The mine that provides over 47% of their revenues is called Salar de Atacama. This mine contains lithium and potassium deposits and is strategically important to SGM’s business.
• A world-wide supply shortage of Lithium and other minerals to produce lithium ion batteries is cause for a pricing spike in the raw material and miners to invest heavily to extract.
• The company announced over $517 million in capital expenditures through 2018 to capture this lithium growth opportunity.

Synopsis

Sociedad Quimica y Minera de Chile SA (NYSE:SQM) is a market leader in the extraction and production of lithium, Plant Nutrition, Iodine, Potassium and other products. The company is experiencing double-digit growth in sales as they expand operations to supply electric car manufacturers with the precious raw material to make their battery components. The company has highlighted this supply shortage on their 1st quarter conference call and laid out their business strategy to position themselves as a market leader in the extraction of lithium.

The company's main mining assets are located in Chile and the government has promoted a favorable business environment by reaching an agreement with Sociedad Quimica y Minera de Chile SA to increase the amount of raw material to be mined from their mines. The mine that provides over 47% of their revenues is called Salar de Atacama. This mining asset contains lithium and potassium deposits, which currently account for 47% of revenues. This mining asset is strategically important to Sociedad Quimica y Minera de Chile SA's business.

(Source: 20F)

Operational Excellence

(Excel)

The company is growing all segments of their business. From 2016 to 2017, lithium and advanced materials revenues grew 42.6% to $1.31 billion. Management said:

“The lithium market continued its strong growth in 2017, with total lithium demand increasing by nearly 17% according to our estimates.”

The tight supply coupled with increasing demand from the automaker battery market saw pricing increase 25% to $13,000 a metric ton. Management expects a 25% market share in global lithium sales and they expect total demand to double within 5 years.

The company reached an agreement to modify the Corfo rights on the lease agreement with the Chilean government entity that lasts until 2030. The company derives 47% of their annual revenue from these mining rights and is limited

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SQM over 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.

I manage client portfolios for my Investment Advisory business and I may acquire share in Sociedad Quimica y Minera de Chile within the next 24 hours.