Sociedad Quimica y Minera S.A.

Good morning and welcome to the SQM fourth 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 the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Kelly O'Brien, Head of Investor Relations. Please go ahead.

Good morning. Thank you for joining our fourth quarter 2020 earnings conference call. This conference call will be recorded and is being webcast live. Following this call, you will be able to access the webcast at our website, www.fqm.com. Our earnings press release and our presentation with a summary of the results has been uploaded to our website, where you can also find a link to the webcast. Speaking on the call today will be Ricardo Ramos, CEO, our CFO, Gerardo Illanes, and our Commercial Vice President of Lithium and Iodine of Asia Pacific, Felipe Smith. We will also be available to help answer any questions following the prepared remarks. 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, or other financial items, anticipated cost and entries, and product or service line growth, together with other statements that are not historical facts, are forward-looking statements, as that term is defined under federal securities laws. Any forward-looking statements or estimates reflecting the best judgment of SQMs Based on currently available information 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 our Sustainable Development Plan. Risks, 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 in our earnings release issued last night. And these forward-looking statements should be considered in light of those factors. We assume no obligation to update such statements, whether as a result of new information, future developments, or otherwise, except as required by law. I now leave you with our Chief Executive Officer, Ricardo Ramos.

Good morning. We thank you for joining the call today. As you know, 2020 began with uncertainty, but we are more than satisfied with the trends that we have seen in the markets in which we participate. The significant advances that we have made related to our sustainable development plan and, of course, the operation of succeeds seen throughout the year, especially related to lithium production. Before discussing the results in more detail, I'm proud to announce that we are the first lithium mining company in the world to join the Initiative for Responsible Mining Assurance, IRMA. For years we have built a sustainable operation in an effort to protect the environment, our neighboring communities, and contribute to sustainable industries. This is part of our commitment to a high level of transparency, seeking public responsibility of the objectives we have established related to environmental matters. Sustainable Operations and Social Responsibility. It is also linked to the role we play in the value chain of a strategic industry for human development, including the electric and sustainable mobility markets, renewable energy, and sustainable farming. I have said this before, and I will reiterate again, our dedication to the goals of our Sustainable Development Plan is paramount, and we look forward to sharing continued advances related to it in the future. Looking back at 2020, there are a lot of positive things to mention, starting with our lithium carbonate collection, which surpassed 70,000 metric tons in the year, exceeding our objectives for the year related to volumes, cost, and quality of the products that we have been producing and selling, allowing us to increase our market share and expand our customer base. As a result of this, our sales volumes in 2020 were over 43% higher than sales volume reported last year, reaching a company record. Additionally, in the fourth quarter, our sales volume reached almost 26,000 metric tons, over 134% higher than sales volume reported in the same period last year. This was part of our plan and continues to be part of our strategy going forward. As I said last night, it's a clear sign that we're prepared to continue to grow Thank you very much. Thank you. of 50,000 metric tons of battery-grade lithium nitroxide with first production coming online during the second half of 2024 before necessary permits are received as anticipated. We believe we are one of the lowest cost producers of lithium and anticipate this project will also be competitive position at the cost curve. While lithium is an exciting market and offers many growth prospects, I would be remiss if I did not mention the other opportunities that we were able to take advantage of during 2020. In industrial chemical business line, which represent about 9% of the gross profit of the company last year, mostly related to sales volumes of more than 160,000 metric tons of solar source, of which over 66,000 metric tons were delivered during the fourth quarter of 2020. In 2021, we expect to deliver close to 200,000 metric tons of solar cells, and we believe that we are prepared to satisfy the market needs with annual volumes of over 200,000 metric tons of solar cells going forward. Many of you have noticed, likely so, that the island market was impacted by the global pandemic in 2020. We believe that the total market demand decreased approximately 9%. However, we are optimistic that we will see multiple coverage during 2021 as the impact of the pandemic fades away, mostly led by the X-ray contrast media, LCD, and pharmaceutical markets. We hope to increase market share during the year, and we are confident that demand growth going forward will require new capabilities, like the one we announced last December. Again, while there are a lot of positive news to share about 2020, what year next? with various challenges, most of which we are able to overcome as a result of the effort and dedication of our team, collaborators, and neighboring communities. The well-being of everyone will remain our priority, and I want to thank each and every person of the accomplishment and the results we were able to achieve in 2020.

Operator, with that, we'll turn it over to questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And the first question will come from Joel Jackson with BMO Capital Markets. Please go ahead.

Hi, good morning. Ricardo, you know, we've seen a dramatic turn in the lithium market in the last six months. Spot prices are up in China and around the world. Inventories look a lot lower, outright tight. Your commentary last night in the release was that Hi, Joe. Good to know about you. But as

Yes, we are relatively optimistic about prices in Bitcoin. That's right. But what we are observing, of course, we think that average prices this year should be higher than last year as an average prices. However, if I'm not wrong, you used the word strong prices in Greece. I'm not wrong. We don't foresee a strong price increase as we probably foresee five or six years ago in a short period of time. That's why we prefer to be more conservative about that. Prices are going to be better. They're going to be higher than last year, but we don't expect a strong price increase. But, as you know, Felipe is with us now. Felipe, maybe you want to add something about this specific situation of the pricing in lithium?

Hello Joel, I would like to add perhaps to what Ricardo is saying. The fact that the market is still very volatile, so we have seen in the past months very rapid decreases and increases of price. So being in such an early stage of the year, I would prefer to be cautious about what the market price will be over the coming months. The only thing that we feel will happen is that our price should be higher than 2020, but the level I cannot comment now.

Okay. A couple more questions. Okay. So, you know, when you put up your sustainability – I think in October, you talked about now extracting less brine and producing less potash or producing less potash, having less potash for merchant sales. When I look at your outlook for 21, you're talking about similar potash, merchant potash sales in 21. You're talking about NOP sales being up and you're doing really well in lithium production. So is this where you're not extracting less brine this year? or are you producing more material now, better yields from the ponds while extracting less brine?

Okay, Joe. First, it's important to say that we're very proud of the technology and research and development advances in this lab. That's clear. Today we can produce more with fewer brines and we hope to continue improving that way. We believe that in the long term we will be able to produce 180,000 metric tons of lithium carbonate per year with 50% of the brines we use in 2020. In the same way, we hope to increase our deals in the extraction of potash. However, as we have said previously, the lower extraction of brines will affect the potash production capacity in the long term. Anyway, if you go to the 2021, I think it's important to try to focus in this year specifically. We project sales volume for potash close to 10% higher than the previous year. It means that we're using some of our inventories. We're improving our deals and our production capacity. But in the long term, it's important to consider that even though we have been able to increase our total production of lithium carbonate, We will not be able to increase in the same way the production of potash and probably the total potash production will be reduced in the long term.

Okay. My last question will be on iodine. So what I think is very impressive is obviously with all the things that happened with COVID and the macro, you saw a large iodine, you know, the sales volume decline in 2020. But your per ton costs were a lot lower. Can you talk about that? Were there things that you did? Is it just accounting? How were you able to get per ton cost lower despite much lower volumes?

Yeah, it's important to consider that we have been working for, I don't know, three or four years, maybe more, in different initiatives to reduce our costs in every single business line. As you may know, we produce in the same process from the caliche, iodine, and nitrates. We share the cost, and we are proud to say that both costs are going in the right direction. Even though nitrate is more difficult to reduce the cost, we have been able to reduce our cost in the iodine in the past. That's right, and we are very proud about it. But again, we have a lot of... Challenge about cost in the short term, the exchange rate in Chile is one of them. The high price of copper is a second one because it means that the market of different contractors in the north of Chile is going to be more expensive probably this year than what used to be. But we have a very good experience and we have a very good track record in order to reduce our costs, increase our productivity. We're working very hard to overcome, to be able to maintain a very low-cost position, even though these two situations that I already mentioned to you, the exchange rate, high cost of the labor, and high cost of the contractors in the north of Chile because of the corporate price. But again, we're very proud of all the costs, and we expect to continue the same trend in the future.

Okay, thank you very much.

and the next question will be from Ben Isaacson with Scotiabank. Please go ahead.

Thank you very much and good morning everyone and congrats on a difficult 2020. First question is on SPN. If I read it correctly, I think you said that the market increased by 5% and you guys had volume down Maybe half a percent or so. Can you split that up between NOP and the rest of the SPN business? And do you expect to lose market share or gain market share in 2021 in both SPN and the NOP within SPN?

Okay, I don't think it's a big difference between the different products we have in SPN. I think the main reason of 2020 that you already mentioned is that If you review our sales per quarter, you can notice that our sales volumes were really affected during the first half of the year. Third quarter and fourth quarter, our volume sales were high during the third quarter and fourth quarter. Why first half was so bad? Because it was in the middle of the COVID-19, and for us, considering Nesca positioning the market, the first half of the year is a very important period Thank you very much. Thank you very much. Thank you very much. I think that 2021 in volumes for specialty plant nutrition including potassium nitrate and other fertilizers in the specialty plant nutrition business line will be higher than 2020.

Thank you for that.

In terms of the Mount Holland project, congrats on the approval of that. Can you just, I haven't looked at Les Farmers to see if they've put out any numbers, but Can you talk about your decision to approve that project? What are the kind of assumptions that you're using in terms of margins or prices and what type of return are you looking for?

We prefer not to share what is our long-term expectation of the price of volumes of the lithium business. We have different scenarios and we use different scenarios in our evaluation. In every single scenario we put on the table, it was a good project. That's why we are very excited about the project in Mongolia. As you know, we are very positive about the future of lithium business. We think this business in 2025 demand will be in excess of 800,000 metric tons. We think that Mongolia will be, that's the most important issue in the first Thank you very much. Thank you very much. We strongly believe in the growth of the lithium market, and the second key point is that we think we're a really competitive project in Montola. It means that we are going to be the first 25% or 30% of the cost curve at the world level. This is the most important factor to keep in mind in order to move forward with this project.

Last question for me. Your capital is going to be fairly tied up over the next few years as you expand internationally. Thank you very much.

As we speak, we're working in the next and next and next step of production capacity and new projects around the world. And you're right. It means we are thinking about new projects all the time. I don't think that Mogollon is the last project we're going to develop outside Chile. I think there will be a lot of opportunities where we can capture good opportunities to do business, and we're working on it now. We think that we can grow again and again in the Niger-Sanayotan business. We have a know-how and knowledge of the lithium business that is very important for us, and we think we can move forward with that in the long, long term. As I mentioned, I want to mention to you that now we're working on studying, we are reviewing some things, Thank you very much. High dividend policy so far means it's up to the shareholders meeting what is the dividend policy, but so far S.P.M. usually pay high dividends to their shareholders. It means some of the cash flow we generate is used in order to pay dividends. That's something important and it's part of the company policy in the past.

Great. Thank you very much.

And the next question will be from Javier Martinez with Morgan Stanley. Please go ahead.

Thank you. Hi, Ricardo Kelly. So let me take advantage of that question to talking about new plans for the future. Maybe you can update us a little bit on this next capacity increase that you have in Atacama focused on lithium hydroxide. Maybe a little bit of information, updated information on the timing, volumes, Thank you very much.

That's a lot of work. and that's why we do expect to have a lot of things to do and we are really busy about that. But if you consider that we are moving to 180,000 metric tons of lithium carbonate and the lithium hydroxide market is growing, it's growing probably more than the lithium carbonate market even though we have a significant advantage in lithium carbonate We have been very, very successful in order to reduce the cost and to be very effective in the production of lithium hydroxide. That's why, for me, 30,000 metric tons, that is the expansion we are moving now, we are moving from 15 to 30,000 metric tons, is not enough. That's why we are working with our team, production team and development team now, in order to, as fast as we can, present to the market a project to move forward in the lithium hydroxide increased capacity. That's why I'm thinking the first stage will be something close to 60,000, and probably, I'm thinking in the long term, I probably want to go to the 90,000 metric tons capacity in lithium microxide. It means using a portion of what we are using in lithium carbonate to use lithium microxide or to have additional production. These are the things we're reviewing today, but we want to have the full flexibility to, even though considering the 180,000 metric tons, to have more lithium carbonate or more lithium microxide to have the market flexibility and business flexibility. This is the first, the second, the most important new project we are working now. And of course, 180 is just a first stage. I want to review if it is possible to move forward to 200,000 or 220,000 metric tons capacity in Chile. That's something we are reviewing now. I don't expect to have news about that in the short term, but it's something we are reviewing. This will be very important. But the lithium hydroxide facility is going to be after the lithium carbonate capacity expansion, probably in my next or our next big project. And of course, we expect to be very successful in Australia with Mount Holland. And as you know, Mount Holland is a great project. And the first stage of the Mount Holland is the 50,000 metric tons capacity. But there's no reason why to stop there. If the project goes in the right direction, and I'm quite sure it's going to go in the right direction, We can move in Moholan to 100,000 metric tons. It's something that we have to discuss and to review with our partner from West Farming, but we are very excited, both of us, to complete the first stage of the project in 2024. It means to be at the 50,000, and if everything goes in the right direction, to move forward to something close to the 100,000. It means we have a lot of things to do in the lithium, and we expect to do it in a really short period of time.

Ricardo, so it's quite impressive the way you are increasing volumes, no? That was obviously the highlight of the quarter, no? 50% up quarter over quarter, no? So with this, you're moving the company to a new level, no? And with that scale, I guess that makes more sense to invest more in technology, no? And technology to allow you to be not only the leader, but also to continue to be the low cost of production, no? So that's exactly what I want to understand. So how technology may change your position in the cost curve if you don't want to talk about absolute levels but maybe relative levels in the cost curve for both carbonate and particularly hydroxide, where maybe you are a little bit less competitive today. So where are we in that process? Are we at the beginning of potential improvements in your cost curve? Thank you, Javier.

First, you have to consider the following. We are so proud of our technology capacity and our R&D people. If you consider at the beginning of less than a year ago, We had a lot of problems to reach the 70,000 metric tons and a lot of problems to reach the quality at the beginning of the expansion to 70,000. Now, we're producing in the same facility more than 7,000 metric tons per month. That's the first two months of this year. It means the same facility that was designed for 70,000 metric tons is producing more than 80,000 metric tons. Second, the whole production is full quality. It's completely commercial quality. Those two factors are due to the quality of our people, the R&D, the technology capacity. Second point, in the Salar de la Cama, we announced, because we, after reviewing our process, improving our process, being very effective in our process, we publicly announced our internal commitment, no required by the government authorities, was SPS commitment to reduce up to 50% in the long term of the Thank you very much. For significant improvements in our lithium nitroxide production process, we think that we will announce an expansion from 30 to 60 that will be very, very low cost. We are very proud that the new announcement, the new 30,000 metric tons, it means increase from 15 to 30,000 that we're working now will be better than the original 15,000. But we think that we are working very hard in technology and research and development in order to supply Thank you, Ricardo. Much appreciated.

And the next question will be from Cesar Perez Novoa with BTG Pactual. Please go ahead.

Good afternoon. Congratulations on your fourth quarter report. Well done job considering 2020 unprecedented circumstances. My question to you relates on prevailing market dynamics. You mentioned that you're currently operating at a monthly run rate of 7,000 tons at your lithium plant. Andres Ortiz, Rodrigo Jasen, Trinidad Reyes, Carlos Diaz Ortiz, Greatly appreciated. And perhaps as a follow-up, when integrating the 70,000 carbonate line into the new 120,000 line, should we expect some downtime at any level? And would you hold any inventory to cover any possible shortfall? Time-wise, when would this take place? Thank you.

Hi, Cesar. First, as you know, we expect to produce a year in excess of 80,000 metric tons. As we mentioned before, we expect our volume sales to be close to 25%, maybe more, I don't know, 25% in volumes as compared to the previous year. It means that we expect sales to be something higher than 80,000 metric tons. It means Sales volumes and sales volumes production will be quite similar in 2021. We don't expect to use inventory. We have inventory if we need it. But keep in mind that we expect and we are very close to reach the 120,000 metric tons capacity. It means we don't expect to have a problem to accomplish our market goals in the medium term because we are very close to the 120 and we are very close to the 180,000 metric tons capacity. We have inventory. That's why, from the point of view of having the capacity to supply the market, we are very proud that we have. Second, from a logistic and commercial point of view, I think the chart record of the fourth quarter is amazing. We were able to sell in one quarter 26,000 metric tons. It means we have the capacity as a logistic, in a very complex logistic environment, commercial, logistic, production, and many more. Where is the market growing now and what is your expectation about that?

Okay. Hello, Cesar. Well, actually, we are very convinced about the fundamentals of the lithium market. The main driver of the growth that we expect over the next five to ten years will definitely be the EV market. And this we are seeing it today. Actually, in 2021, we expect The sales of electric vehicles will be in the range of 30% to 32% per year, which is a very, very strong growth. This, of course, is the main driver, but we are also seeing in the smaller sales All right.

Fair enough, gentlemen. Thank you very much.

And the next question will be from Susan Sumoto with Bank of America. Please go ahead.

Hi. Good morning, everyone. This is actually Isabella. My question is on the chemicals business. We did see a big jump on volumes, but we saw also a contraction in margins, as we could estimate here. Can you just give us a little bit more color on this business? How do we think about it in 2021 in terms of top line and margins? Thank you.

Hi, Isabella. You should consider that what we call Investor United today is mainly the most important business, the product there is solar source, means the product we use for the energy storage system and we have a pre-contract with the customers in the Middle East that was the 160,000 metric tons during the year 2020. We expect to be very close to 190,000 tons with the same customer at the same price environment for the year because it's a very old contract we have with him in the year 2021. That's why we do expect to have similar margins. The only things we have to consider is if there's any change in the cost of production. We're working very hard to improve our deals and so on in order to maintain and to overcome this pressure of the cost that I already mentioned before. But I think it's reasonable to expect similar margins in Pekton in 2021 as compared to 2020. But keep in mind that volumes will be slightly higher from 160 to 190 just in the solar source business. and probably a very small increase, close to 4,000 metric tons in the normal industrial nitrate business. That's why, in total, I think the volumes will be increased close to 34,000 metric tons in 2021 as compared to 2020. And keep in mind that solid salts is a mix between sodium nitrate and potassium nitrate, a specific high-quality mix that is used in the solar energy storage process.

Okay, thank you.

And the next question will be from P.J. Juvicar with Citigroup. Please go ahead.

Yes, good morning, Ricardo. You know, last year you built inventories in lithium, and I think you mentioned earlier that you still have inventories left. Can you just talk about sort of order of magnitude on inventories left? And you also mentioned that you've improved your quality of the product with R&D. Can you talk about how much of your product today, lithium is battery grade versus non-battery grade? Thank you.

First, we have all our inventories commercial quality, means we have different clients with different quality requirements, and we have inventories for them, for their needs. And all my inventory, more than 95% of the inventory is fully commercial quality. That's the first point, to be very clear about that. Second, about the total inventory, even though we don't disclose the total inventory of the company, we maintain inventories in lithium and lithium carbonate close to six months of sales.

Okay, that's helpful. And, you know, what we are hearing is there is regionalization of supply chain happening in lithium. You know, Europe is building its own supply chain, Asia, and maybe in the future in the U.S. So how much of your product goes to China today, and do you anticipate selling more into Europe in the future?

Okay. Peter, maybe I can answer to the question.

I would say that during 2020, we were able to recover our market share in China, and we feel that we have reached a reasonable level, which is more in line with the market total demand share of China. So, I don't know if this answers your question.

Yeah, do you anticipate selling more into Europe in the future?

Thank you. Well, as I said before, we are very committed to the industry and to support the growth of the industry independently on where this demand will take place. So, of course, we are considering and preparing ourselves for scenarios in which you will have more demand of lithium either in Europe or in North America. So, yeah, we do not see a big challenge. Actually, due to the business in nitrate that we have today, we have already established in Europe a very strong network of warehousing, same as in the U.S. Remember that we sell more than 900,000 tons of nitrate, so we are prepared to handle big volumes. in different markets. So I'm not particularly concerned about building up the supply chain to Europe or the U.S. Okay.

Thank you so much.

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Kelly O'Brien for any closing remarks.

Thank you for participating in our earnings call. We look forward to having you join us in the future. Have a good day.

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