Sociedad Quimica y Minera S.A.

Good day and welcome to the SQM third quarter 2020 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would like now to turn the conference over to Kaylee O'Brien, Head of Investor Relations. Please go ahead.

Good morning. Thank you for joining SQM's third quarter 2020 earnings conference call. This conference call will be recorded and is being webcast live. Following this call, you'll be able to access the webcast at our website, www.sqm.com. Our earnings press release and a presentation with a summary of the results have been uploaded to our website. Joining the call today's speakers are Ricardo Ramos, CEO, Gerardo Illanes, CFO, and Pablo Altimiras, Vice President of Lithium and Ionide Businesses. Before we begin, let me remind you that statements in this conference concerning the company's business outlook Future economic performances, anticipated profitability, revenues, expenses, and other financial items, anticipated cost synergies, and product or service line growth together with other statements that are not historical facts are forward-looking statements as the term is defined under federal security laws. Any forward-looking statements are estimates reflecting the best judgment of SQM based on currently available information and involve a number of risks, uncertainties, and other factors that could cause actual Results to differ materially from those stated in such statements, including our ability to successfully implement the Sustainable Development Plan. Risk, uncertainties, and factors that could affect the accuracy of such forward-looking statements are identified in our public filings made with the U.S. Securities and Exchange Commission and with our earnings release issued today, and these forward-looking statements should be considered in light of those factors. We assume no obligation to update such statements Thank you, Kelly. Good morning.

Thank you for joining our earnings call today. Our gross profit, as you know, was approximately $115 million, similar to average gross profit during the first half. Our average iodine prices held steady, and our sales volumes in the lithium business line were at Over 40% compared to the last quarter and almost 60% higher than what we saw in the third quarter last year. This month, we have been very busy and dedicated to our efforts related to sustainability. Last month, we proudly announced our sustainability development plan, which includes voluntary expanding our monitoring system, promoting better and more profound conversations with neighboring communities, and becoming carbon neutral and reducing water by 65% and brine extraction by 50%. As part of this plan, we also made a goal of obtaining international certifications and participating in international sustainability indexes. In September, we began the self-assessment process in the Salar de la Cama under IRMA. which is the first step in the certification process for this strict standard and last week we were accepted into the Dow Jones Sustainability Index Chile and the Dow Jones Sustainability Index Mila, Pacific Alliances Index. We have always been committed to environmental protection and social responsibility and now we feel prepared and proud to share our commitments and goals with all of you. I invite you to visit our company website to learn more about the Sustainability Development Plan, an online monitoring system, and I encourage you to reach out to us with any questions or concerns about this plan. I will now pass the call to Pablo Altimira, who will comment more on the iodine and lithium markets.

Pablo Altimira Good morning, everyone. Thank you, Ricardo. In the iodine market, we saw a more negative impact on the iodine demand, expecting to decrease approximately 8 or 9% in 2020 compared to last year as a result of COVID-19. This impact was seen in the iodine market as a whole, but mostly in the X-ray contrast media segment. We believe that demand will recover when the impact of the pandemic fades away. After a slow start of the year, our lithium sales have been gaining momentum. As Ricardo mentioned, our lithium sales volume surpassed 1,700 metric tons in the third quarter, and we expect this strong volume growth to continue into fourth quarter. This growth is a result of a strong demand recovery in the second half of the year, and more importantly, our ability to strengthen relationships with existing clients and acquired new customers around the world. We have been able to do this as a result of improving the quality of our products and being able to meet all of our customers' requirements, all while increasing efficiencies in our production process and ensuring our low-cost position. The demand recovery seen in recent months, most of which was in Asia, were as a result of the pandemic. We have seen an increase in the demand of e-bikes, scooters, and personal computers. This demand was in addition to a significant increase in electric vehicle sales in Europe and Asia. To quantify this a bit, in the third quarter, we believe electric vehicle unit sales increased in China, approximately 40%, and in Europe, more than 170% year-on-year. Although there are still uncertainties surrounding the pandemic and economic impacts on the lithium market in the near future, we remain optimistic about the long-term growth expected in the lithium estate. We expect to see a strong demand growth in 2021 and beyond. Because of this, we expect to increase our sales volumes by more than 30% in 2021 when compared to our expected 2026 volume. which is aligned with our strategy to grow our lithium market share. For this reason, we have laid out a robust CATEX plan on which I will let Gerardo Illanes, our CFO, to comment.

Thank you, Pablo, and thank you, everyone, for joining the call today. Last night, in our press release, we described details of our 2021-2024 investment plan, which will require approximately $1.3 billion in change. This plan will include The completion of our lithium expansion plans that are currently underway at our facilities near Antofagasta requiring approximately $240 million. Additionally, yesterday the board approved an expansion plan to reach 180,000 metric tons of lithium carbonate and 30,000 metric tons of lithium hydroxide capacity in 2023 requiring an investment of approximately $150 million. We will invest just under $400 million in lithium expansions in the coming years. As mentioned last night, our plans to develop the Moonhole and lithium hydroxide project continue. We have been working diligently with our partners, finalizing some studies, and will make a definitive investment decision in January 2021. Any potential future capex related to this project is not included in the $1.3 billion capex outlined in the press release yesterday. Given our history of maintaining a diverse portfolio, we are working to increase our production of nitrates and iodine as well. We plan to increase our annual production of nitrates and iodine by approximately 250,000 and 3,000 metric tons per year, respectively. To achieve this, we will modify our operations to incorporate the use of seawater and update our mining equipment and operational centers. It is expected that these investments at the mining site, and plant facilities will require approximately $440 million. This expansion plan gives us the assurance that we will be able to meet the future needs in the iodine, potassium nitrate, and solar cell markets. In addition, maintenance for the four-year period from 2021 to 2024 will be approximately $120 million per year, while depreciation and amortization should be between $200 to $250 million per year. We have a strong balance sheet, and we have always been conservative in our financial investment policies, being always a strong equity-weighted company. The financing strategy will be discussed in December, and relevant information will be shared with the market in a timely manner. Thank you, Bernardo. And now we can go to the Q&A session.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Joel Jackson with BMO Capital Markets. Please go ahead.

Hi. Good morning, everyone. I have a few questions. I'll ask them one by one. So I guess I'd like to know that you finally now approved the lithium expansions to 180,000 tons carbonate. How do you expect to place those tons in the market? I know because of the iodine experience, you have not liked contracts. I mean, one of your larger lithium competitors seems to be doing quite well in their price realizations versus you with contracts. Will you seek to go out to get longer term contracts to be able to ensure you can sell up to 180,000 tons at attractive prices.

Okay, Pablo Altimiras speaking. Regarding to long-term contracts, yes, you are right that we have some competitors that today have some long-term contracts with some customers. We are working on that as well. We are trying to have long-term contracts. and well today that we believe that our position is better because exactly what we are doing, expanding capacity and producing more volumes. We believe that a step like the expansion will allow us to secure longer contracts for sure and we are working hard in order to do that. Regarding to your question of prices, yes, today maybe we have some difference regarding to prices. In the past, when we had the boom of the lithium demand, you saw that the price was so high in some markets, and if you have a longer contract, well, the price of your contract was different to the spot price. That happened with the long contract, but at the end, our customers, what they want is to secure the supply, and we are aligned on that, and that's why we will continue to secure some long-term contracts in the near future.

Okay, and as you triple sales volumes over the next, you know, five years, whatever it's going to be, can you talk about how your cost of lithium, assuming kind of, you know, let's take the price of lithium out and just talk about kind of like a non-royalty, non-corfo, just non-community payments, just cash costs for lithium. You're going to triple your volume over five years, let's say. You also have Thank you. Thank you.

Hi, this is Gerardo speaking. Well, you have seen on our financial statements, we have been lowering our production cost of lithium quarter after quarter as promised when we finish our ramp-up expansion to reach 70,000 metric tons. Of course, I'm excluding CORPO effect in there, and you see that the prices, sorry, the cost we reported in the third quarter were ex-CORPO were under $4,000. We are working in these projects that will let us expand our capacity significantly and this expansion of capacity will also come with more efficiencies in production that will let us keep on lowering our cost. Now regarding your question about sustainability and how that may impact our cost, well we have been working on sustainability initiatives for a long time and part of these costs are already included in the cost of what we are doing and the challenge for us and the challenge for everyone in the industry Thank you very much.

You know, when do you think iodine prices can get back to $35 a kilo? What's the, you know, play with volume? Like, when do you see coming back to the level you achieved not that long ago? Is it going to be two years, three years, one year? What's your base case?

Okay, well, you know that demand was affected by COVID-19. But the first thing that is important to say is that we believe that this is something temporary, which is not related with the fundamentals of the market. We believe in the fundamentals. We don't see any important change in the fundamentals of the demand. And actually remember that prices started to go up because the growth of the demand was bigger than the growth of the supply. Regarding to the supply, we have not seen any big change. So what we are doing today is to reveal our inventories that will allow us to reach healthy levels once the demand recovery arrives. And regarding to the recovery, well, we are optimistic because of the news, so we expect that in the near future, and we believe that will happen in the next year, we will see a recovery on the demand levels to reach similar levels to 2019.

Thank you. Just one more question. When you talk about the long-term lithium contracts you might seek, would you be seeking fixed contracts, fixed price contracts, or floating price contracts?

Well, you know that It is important at the end to try to get good contracts. And when I say good contracts, it's from the customers, but also from the supplier's point of view. And in that regard, the needs of the different customers are different. So depending on the customers, depending on the strategy that you have with these specific customers, we do different things. So you have alternatives, which is related to quality, pricing, volume. So I would say that it's specific to customers. for every customer.

Thank you very much.

Our next question comes from PJ Juvicar with Citigroup. Please go ahead.

Yes, good morning. Can you talk about how much inventory are you carrying, either in terms of months of supply or in terms of dollars? And when do you think inventories will return to normal and what is normal for you?

Okay, so regarding to inventories, as you know, we have been producing at a very good production rate in the last month, which has been allowing us to recover our inventory positions in order to face the sales forecast that we have today. We announced that we want to sell 30% more next year compared to this year, and we will have, and today, we have enough inventory to go ahead with this program. So we don't see any issue regarding to our inventories.

I think last quarter you mentioned I think it was close to a billion dollars of inventory that you had. Sorry, not billion. I meant $100 million of inventory you had. Can you just sort of talk about how much inventory do you have in lithium?

IPJ, this is Gerardo Illanes. Yes, we do have more than $1 million of inventories across the board. You can see that in our financial statement. That includes inventories of IOI, lithium, nitrates, basic materials, and so on and so forth. Regarding the specific level of inventories that we have in each particular business line, we don't disclose that information, but as Pablo was saying, we have enough inventories to be able to comply with the growth we are projecting for next year.

My second question is, other companies are talking about a trend towards regionalization of supply chain after COVID. So how much of your lithium exports go to China? And let's say Europe is suddenly kicking into higher gear, EV sales are high, and as the European market develops, what's your strategy towards selling into Europe and how are you positioned there? Thank you.

Well, you know that in SQM, as a lithium producer, we have been in industry for many, many years, so that means that we supply to many, many customers around the world. But today you are right, our exposition in China is big. I would say that more than 40% of our sales today are in China. But this is Thank you very much.

Thank you.

Our next question comes from Isabella Simonotto with Bank of America. Please go ahead.

Good morning Ricardo, Gerardo. Thank you for the call and for the questions. First of all, I'd like to ask about iodine. You also mentioned in the release, right, you're ready to, with the expansion plans by 3,000 tons. I'd just like to get more details of the time frame for that. And when you think about sales, right, in the long term, this 3,000 tons additional should yield about 16 tons. I would like to know what's your outlook for prices of Scottish and SPN. We understand the demand for SPN is actually quite resilient, but prices have been coming down. How are you thinking about pricing in 2021? Thank you.

Hi Isabella, Ricardo speaking. About our capex in the agri business, we are working very hard as it's included in the $1.3 billion already mentioned by Gerardo. We expect to be higher than 15,000 metric tons of agri at the end of 2024. That's very important for us to be at that level and we are more than ready in order to be prepared for the market and demand recovery that We have inventories of iodine today and we think that the market will recover and we will have more capacity included in the CAPEX that is already mentioned and I think it's going to be ready 2023-2024. How price of the fertilizer first in order to answer this question? You have to consider first that the demand in some way this year has been lower than originally expected to the effect of providing some specific markets. Second, the low price of MOP. MOP means potash pricing this year is lower than last year. You have to consider MOP is the main raw material used by our competitors in order to produce potassium nitrate. We have some Due to the fact that the demand was lower, we faced more competition in some markets. My short-term outlook here is that the pricing that we are having today is reasonable to expect to have some price recovery maybe next year as compared to what we are having third and fourth quarter this year. And certainly we think that all the signals are going in the direction that the demand will increase Some of the demand that was not there this year will be recovered during next year. Your next question, I think?

No, I just wanted to confirm what Ricardo said about iodine volume. So it should be even more than 16,000 tons when expansion is done in 2024, right?

Yes. Yes, of course. We're working very hard in order to have more. That's for sure.

Okay. Thank you.

As a reminder, if you have a question, please press star then 1 to be joined into the queue. Our next question comes from Cesar Perez Novoa with BTG Pactual. Please go ahead.

Thank you very much. Hi, Gerardo, Ricardo, Pablo, Kelly. I have two questions. On your recently announced investment program for iodine and lithium, could you please provide more color on what steps need to be taken from an environmental and regulatory standpoint to make that effective? Also, if I heard correctly, you just mentioned that details on funding for this program will be delivered next month, but perhaps understand if this would be mostly debt or a combination of equity and debt. And my second and last question actually relates to Mount Holland, where you note on the press release that a decision will be taken next January. I understand that you already have a definitive feasibility study. However, if you could please remind us what you want to achieve next from this joint review. Is this essentially just enhancing the value of the asset, or is this a combination of perhaps building a larger facility there? Any color would be appreciated. Thank you.

Hi, Cesar. The first question was about CAPEX, environmental permits. Environmental permits, we have been working very hard in the last, I think, Ten years in order to be ready for environmental needs in every single project. We are experts about that so far. And as you know, in every single mining project, you need environmental permits, all different permits. In the case of lithium, we are prepared with the permit for the 180,000 metric tons. It's already included in the permit that we have today working at 120. That's why we don't expect any delay or any issue regarding moving to the 180,000 metric tons. In the other hand, in the nitrous and iodine business, we have been working in the permit in the last three years. We are almost ready. We are working in the sea water pipeline. That's a very important part of the project, and we have the permits now and working on it in the engineering. We have some of the permits in the mining side, some of the permits of the construction. I do expect to have all the permits ready during first half next year. It means we're working in advance in the terms of the permits and environmental problem. We don't foresee any big issue there. and it's going to be a plan in order that we think we can go with the $1.3 billion we have without delay because environmental. The second question was, Gerardo? About financing of the... Financing, as Gerardo informed you before, we expect to have the board meetings in December. Our commitment is to present to the board the different alternatives. You know it's not a secret. You have many alternatives and and of course the alternatives you mentioned before are part of the alternatives that we will present to the board and you have my word that during the press release of December we will be very clear at the board meeting we are going to be very open about what is the decision of the board about moving forward in that area. But let me remind you, as Gerardo said before, We have a very conservative, we are a very conservative company. You, Cesar, have been following SGM the last, I don't know, 30 years, 25 years, whatever. You know us. We have a strong balance sheet today. We will continue to have a strong balance. It means that we will, you can imagine that we are going to be very strong and very conservative in our financial plan for the future. Finally, from Holland. So, Munoz just mentioned one point. We are waiting for the final feasibility study from the engineering company. We expect to receive the final document in the next 30 days. We expect to have the meetings with our partners in the next 60 days in order to formally announce. Every announcement in the project is a joint announcement because we have a great partner. We are very proud of the partner we have in Australia. We are working together in this. Idea, we think, we strongly believe that we have a very good project in Australia. I expect to be announcing the project during January after the meeting we are going to have with farmers with all the papers and documents in front of us. And you will be informed.

Thank you, Ricardo, and everyone. Congratulations. Thank you.

Our next question comes from Ben Isaacson with Scotiabank. Please go ahead.

Hi, good morning. I missed the first few minutes of the call, so just let me know if I'm asking something that was already asked. So the first question is on the Constitution that's coming next year at some point. Is there any discussion Are there any risks that SQM sees in the lithium space as it relates to the new constitution?

Just to answer directly your question, I'm not aware about any specific discussion about this deal with the new constitution. That's for the first point. Second, just a personal opinion. I'm very optimistic about the future of Chile today. After the last month's decision to move ahead with the new constitution, everything is back to normal. We're working very hard now. We have full work, full productivity, every single company. In my personal opinion, and it's a personal opinion, there's nothing wrong to review the Constitution. It's something normal that happens from time to time in different countries. And we have an institutional process moving forward in order to go ahead with this change, a potential change to the Constitution. And I strongly believe that the changes will be for the better. Anyway, at the end, I think everyone agrees that growing economy is probably the best way to solve all the needs that the people want. It means that the main discussions about constitution is talking about education, is talking about healthcare, is talking about reasonable pension plans, and in order to have this demand that sounds reasonable to have, you need more money, and in order to have more money, you need a growing economy. I think everyone agrees about that, and that's why I'm not in the negative side of the outlook about the discussion of the new constitution.

My second question is, in terms of the cost of lithium, I understand when prices are lower, your royalty payments are lower. But in terms of the actual cost to produce a ton, is there work that you see where you could lower your cost over time? And if so, can you talk about timing and magnitude of that?

Yes, of course, we have many initiatives in order to reduce costs and improve productivity and improve the quality. And we're working, some of them are very confidential and internal, but you have my... Of course we're doing so. The most important one that we announced yesterday, because we are going to be very effective in the first step of increasing capacity. If you consider the amount of investment in order to go from 120,000 to 160,000 metric tons, Thank you very much. We expect to continue to reduce investment and maintenance, but we have a lot of initiatives in order to reduce the cost in our process. And if you review in detail our cost of sales every quarter, you will have the number that our cost is going down. Be careful that the royalty or the payment, the rent payment, or the voice included in the cost, That's why you need to be careful to put it aside, because it is a cost, but it's more than a cost. It's a profit-sharing process we have with corporate, where we pay, and it's public amount we pay, a percentage of the price, depending on the price of the lithium. But putting this aside, that it's a payment, a shared profit with corporate, Are you willing to share some guidelines or kind of goalposts in terms of what you want to achieve? Like, do you want to save $200 by 2023 per ton, excluding profit sharing, or do you not want to give targets yet? Sorry, I don't want to share now. We are working with our department every week. We have a meeting in order to know where they're going, what is their next step. I hope we're going to have the final step in the different projects where we're working on it now. And as soon as we have a clear understanding of potential projects and their effects, of course, we are going to be public about that.

Okay. And my last question is, If you go back a quarter ago, I think you realized about $6,800 per ton. And now you've realized about $5,400 per ton. And of course, that was the average for the quarter. So when you think about where you ended September, I'm guessing it must have been a little bit lower. So in order to have the same average price in Q4, do you see prices rising a little bit?

or Ben, Pablo Altimiras speaking. As you know, you know, price is the result of the supply and demand. And as I commented before, our perspective on demand is positive. However, regarding to supply, despite of some production decrease of some players, we have seen some inventors in the market that could potentially continue to put some pressure on price recovery. However, having said that, We have been seeing in China, which is an important market, a recovery in the price level, which could mean that we have already a floor. Therefore, for next year, with the demand recovery and the use of inventories, we should see better prices during the next year and in the near future.

Thank you very much. I appreciate it.

This concludes our question and answer session. I would like to turn the conference back over to Kaylee O'Brien, Head of Investor Relations, for any closing remarks.

Great. Thank you for joining today. We'll see you at our next quarter call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.