Sociedad Quimica y Minera S.A.

Good morning and welcome to the SQM third quarter 2021 earnings conference call. All participants will be in 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 touchtone phone. On your touchtone phone. Again, that is star then one to ask a question. 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 Irina Axenova, Investor Relations. Please go ahead.

Thank you, Grant. Good morning. Thank you for joining SQM's first quarter 2021 earnings conference call. This conference call will be recorded and is being broadcast live. Following this call, you will be able to access the webcast at our website, www.sqm.com. Our learning stress release and a presentation with a summary of the results have been uploaded to our website, where you can also find a link to the webcast. Speaking on the call today will be Ricardo Ramos, Chief Executive Officer, Gerardo Illanes, Chief Financial Officer, and Pablo Altimiras, Commercial Vice President, Lithium and IDI Business. who will 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 synergies, 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 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. Risks, uncertainties, and factors that could affect the accuracy of such forward-looking statements are identified in our public findings made with the U.S. Securities and Exchange Commission and in our earnings relief issued yesterday, and this forward-looking statement 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.

Thank you, Irina. Good morning and thank you for joining the call today. Our earnings during the third quarter of 2021 were significantly higher than earnings reported during the same period last year. These results were driven by considerably higher sales volumes and prices across almost all our business lines. We continue seeing very positive market conditions in all of the markets in which we participate. Demand in lithium market is exceeding our previous expectations. The hydrogen market has recovered from the pandemic faster than anticipated, while we are also seeing a positive trend in the fertilizer markets. We are now expecting that the lithium market demand should grow close to 50% this year, driven by strong sales of electric vehicles in all relevant markets, especially in China and Europe. The capacity expansions we have been working on are allowing us to grow even more than the market, letting us reach close to 100,000 metric tons in sales volumes this year. By the middle of next year, our expansion to 180,000 metric tons should be ready, allowing us to keep on growing our sales volumes. This accelerating lithium market growth is pressuring prices. At the same time, the contracts we signed last year are expiring. This allows us to expect an average sales price higher than $12,000 per metric ton during the fourth quarter and probably even higher during the first quarter next year. In the meanwhile, the iodine market demand has already reached the pre-pandemic levels. This quick recovery has had a positive impact on prices as supply has not been able to respond. We are now expecting total sales in 2021 around 12.5 thousand metric tons, with average sales prices increasing from prices seen over past few quarters. As we are working on expanding our iodine capacity, we expect to ramp up additional thousand metric tons In the beginning of 2023, followed by approximately 2,500 metric tons in 2024, all part of our early announced growth plan. We have seen some very interesting developments in the fertilizer markets globally. Supply has been impacted by export restrictions and logistic interruptions. The spot prices for both potash and potassium nitrate fertilizer have reached levels not seen in more than a decade. We now expect our potassium and potassium nitrate average prices to reach almost $700 and over $1,000 per metric ton respectively during the fourth quarter this year. Considering all the positive factors, we now anticipate a record performance during the fourth quarter this year with a significantly higher EBITDA. We remain confident in our ability to deliver future growth. while continuing to operate in a sustainable way, creating value for our customers, communities, and all our stockholders.

We now open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Joel Jackson with BMO Capital Markets.

Please go ahead. Joel Jackson Carter. I'm going to ask a few questions one by one. And we look into your production for next year for lithium. You've got to 120 already. LCE, you'll get to 180 some point next year. What do you think will be your ability for production next year? And what do you think will be your level of sales? Presumably you want to build some inventory, but what could be your maximum production or maximum sales next year? Thanks.

Okay. Hi, John. Ricardo Ramos speaking now. About production, as a total production, considering that we are ramped up to 180 during next year, we think it's reasonable to expect a production in the 140,000 metric tons next year. Maybe it's going to be just a little bit higher than that, but 140 is my best estimate today of the total lithium and lithium hydroxide total production in Chile. About sales volumes, Pablo, what's your opinion?

Yeah. Hello, Joe. Well, our idea is to continue growing according to the demand. If we consider that we expect a growth for the next year of the demand between 20% or 30%, we expect to grow ourselves in that same percentage.

Okay. Now, I appreciate your pricing guidance. Now, you know, when I look at October Chilean customs data, Your pricing in October seems well less than $12,000. You're going to average about $12,000, you say, for the quarter. So I want to know, if you expect to place so much more volume next year, and presumably you're now pricing volumes now for next year, like you're pricing ahead for next year, how much of your pricing, how much of your volume in 2022 are you locking in now, or will you expect to lock in by Christmas, let's say, and would you expect that pricing, that any pricing you're locking in now for 22, is that all above $12,000?

Okay. Well, you know that today we're in the middle of the negotiation for polio for the next year. However, what I can say, because you already know that we have secured some local contracts, but still for the next year we have We need to negotiate closely to the 80% of our total sales for the next year is open to discussions with our customers. So that's the percentage of the total volumes that is open for the next year.

So right now, today, 80% of your anticipated volume next year is open. Is that what you're saying?

Today, for the next year, 20% is already negotiated and then different kind of contract with our customers. Right. and 80% is still open to the conditions that we need to discuss with our customers.

Okay, and I appreciate that. And we can all see spot pricing from different Chinese and Asian benchmarks, be it $20,000 on carbon, $20,000 on carbon, $25,000 on carbon. Are those real prices that you can achieve at scale in the market for 2022? or is the answer, you know, it's much less than $25,000 or it's much more than $12,000? Like, help us understand how real some of those prices are we see in the 20s for real volume, real large volume like you offer.

You know that always is a noisy question regarding prices, but what we need to remember is that depending on what you negotiate with your customers, it means shorter contracts, longer contracts, Depending on the quality of the product, if it goes to battery applications, industrial applications, then you have different prices. What I said today is that because of the huge demand of lithium and lack of supply, the spot prices is today high. But it doesn't mean that we will see these kind of prices for the average price because, again, it's depending on the conditions that we negotiate with each customer.

Thank you very much.

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

Good morning. Thank you for taking my questions. I hope everyone's doing well. I'll ask a few questions one by one, if that's okay. I guess the first question is just to extend off of Joel's question. You talked about 20% of 2022 volume is negotiated already and 80% is open. Can you just talk about the shape of that 80%? How much of that 80% should be contracted by the end of this year? And how do those contracts get renegotiated in each of the next kind of four or five quarters? Are they all calendar 2022 contracts that will be negotiated before January 1st? or is it on a kind of continuous basis, some are short-term, some are long-term? Can you just give some more color in terms of when we expect that 80% to be contracted?

Okay, well, it is a difficult question because we are under negotiation. For sure that we know that when you are selling this amount of lithium, we need to secure that amount. but again also it's up to every customer. Some customers, I mean the rest of the 80% then will be a combination of closed, short-term contracts and for sure something that we are looking for if we are able to sign good contracts, we are also thinking to sign long-term contracts. And normally when you sign a long-term contract the negotiation process is longer than when you negotiate a short-term contract so at the end everything will depend how fast we can do that with our customers. So today I cannot I cannot say 100%. But

Most of it should be finished by the end of Q1, is that right? I mean, just based on the timing of the previous contracts and when they expire. Is that fair to say?

Well, again, I mean, it depends. It's a dynamic market, but for sure, because of the period of the year that we have today, by the end of the year we should have an important percentage already negotiated for Q1.

Okay, that's helpful. Thank you for that. Next question is on iodine. You guys have tried different strategies over the years, sometimes volume, sometimes price, with mixed success on the price side and the volume side has been very successful. Now we're getting above $35 or that's the direction that we're going per kilogram. And if I remember correctly, that's kind of the point in which you start to see The economics look attractive for marginal producers in Chile to come online. Is that what you want? Do you want to see higher prices? Or is that getting a little bit dangerous that you could see new capacity coming on? Can you kind of run us through what that debate looks like and kind of what your opinion is?

Okay, well, you know that, I mean, in the industry, we need to consider different things. So one of them is demand. You know that this year the recovery of the demand will be higher than expected, close to 12%. Then we need to consider the answer of the supply. So at the end, everything will depend on the behavior of the different players in the supply side. In that regard, what we have seen is not a... I mean, we have not seen enough response of the supply in order to Just two more quick ones for me. When you look at each of your business segments,

Can you talk about costs of production, whether it's iodine or NOP or potash or whatever it may be, and how that's been impacted by inflation, cost inflation of raw materials, of labor, of energy? Are you seeing that already, or is that something that we should expect and be modeling for over the next few quarters?

Ben, Ricardo Ramos speaking. If you review our numbers during the first three quarters of this year, you see the cost is slightly higher during the third quarter than compared to the previous quarters. I think that costs today are affected by the exchange rate, for example, the exchange rate in Chile, are affected by the increased cost of raw material, a significant increase in cost of raw materials on our production process, the additional cost of the energy, as you may know, Contractors, of course, the contractors we have, they reflect the exchange rate, the increased cost of raw materials, the energy, everything. Plus, we have some extraordinary costs in the last, I don't know, 18 months related to the COVID-19 pandemic that affects in some way our costs. I think that it's already reflected, some of it, yes. It will be some additional probably cost if the situation of the raw materials and energy continues during the next few quarters, yes. I think that we are doing the right thing in order to increase productivity, to increase the yields of our process, in order to control the cost allocation. But so far, we are seeing every single producer in the world, these increased costs that have been affecting our production in the last two or three quarters.

Great. And then very last question, if I may. Last quarter, you said that lithium demand Thank you very much. Thank you very much.

Very good and very positive. Actually, today our forecast is that total sales will be between 6.3 or 6.6 million, which is bigger than one expected. That's one thing. And the other thing, because we need to consider that some part of the lithium that is demand today is for the cars that we produce next year, also we have a more positive view from the road of the next year when I said to you between 20 or 30%. That view is a little bit bigger than the view that we had before. So, we have some very positive outcomes, at least in the short term. Regarding 2025, well, we have different scenarios. Our base scenario is one million tons of MCA, which is bigger to some indications that we gave some months ago. And still we are working and of course we are following up the market and potentially we could see better results, but today we remain our view of the $1 million.

Thank you very much.

Our next question comes from Guilherme Pajarni with Bank of America. Please go ahead.

Good morning, everyone. Thank you for taking my questions. There are two questions actually. The first one on the iodine business, if you could share a bit of the impacts of the fire that took place in one of our plants and what was the impact in terms of cost during this quarter. And the second question on the fertilizer business, if you could share a bit in terms of the pricing that we are seeing on the marketplace and what do you expect going forward for the next year as well.

Thank you. Hello Guillermo, Ricardo Ramos speaking. First of all, the fire we had in our facilities in the north three months ago, I think. The impact in production was not more than 40 tons because most of the production was recovered in the next month. Finally, about the cost, yes, we had some additional cost, probably in the range of $200,000. That arrangement means the improvement of the facility, replacement of Thank you very much. Thank you. About the fertilizers, it's difficult to give you an outlook after the fourth quarter. We know now that fourth quarter is very unusual. We are observing price levels that have not been recorded in previous years. As I mentioned to you, we are reaching $700 per ton in the potash, close to $1,000 in the potash and lychee. I do not have a long-term view. It's important today. It's important to consider that in the potash industry, we are relatively small. Current prices that we have today reflect, I think, a temporary supply and demand situation. One good news, in my opinion, is that the demand of the potash industry remains very strong. That is associated with better prices of agricultural products. On the other hand, these logistical difficulties of treatments push the prices up. It is very difficult for us to predict prices for next year. Definitely prices for fourth quarter are going to be very strong. The situation is very difficult to predict in the long term. Anyway, it's important to consider that the case of potassium nitrate is different from the case of potassium chloride. All the specialty fertilizers are less volatile. However, although with less volatility, they follow in some way the trend of potash prices.

Thank you very much.

Our next question comes from Corinne Blanchard with Deutsche Bank. Please go ahead.

Hey, good morning everyone. Most of my questions have been answered, but there's just a few, probably two follow-up questions. The first one on potassium. So you raised 2021 volume guidance to close to 900 kiloton, which implies a significant catch-up in 4Q. So if you could just comment on that catch-up for 4Q. And also, how should we be thinking in term of volume for 2022? Like, given the market condition, do you still expect volume to decrease? And would you expect maybe volume to stay close to 800 or 900 for next year?

Ricardo Ramos speaking. Of course, due to the fact that the prices are extremely good in STEM, it's a very unique price environment. Today, we are doing our best in order to increase the volumes during fourth quarter. We're using some inventories and so on in order to increase the volume during fourth quarter. That's why probably if you put the numbers together, fourth quarter total volumes is close to 300,000 metric tons. It's a very strong number we expect to deliver during one quarter. It's definitely lower probably depending on the achievements, Sometimes you have a delay of one or two treatments from fourth quarter to first quarter. You don't know yet because it will be decided at the end of the month depending on the conditions of the port. But anyway, it's going to be a really strong quarter because the price condition will try to push everything forward. About next year, I don't have now a forecast of volume potash. Remember that we have a total production in the Salar de la Gama, and we use some of the potash, most of the potash in the production of Potasio United, either for fertilizer or solar source business. That's why depending what's going to be our study in specialty fertilizer and solar source next year, and the total production from the Salar de la Cama, at the end, you have at the end, the remaining is going to be the potash we will sell to the market. Anyway, as you may know, we are reducing, it's our commitment from the company to reduce the pumping of solutions at the salar. The most important reduction will be in 2022 as compared to 2021. 23, 24, 25, we will have small reductions every year, but the most important one is going to be next year. and probably total production of potash at the Salar de Atacama will be between 100 and 150,000 tons lower. It means from a total level close to 1.25 million tons, we will move to 1.1 million tons probably production for next year. If you move forward, probably reductions because the reduction in pumping will be in the range of 40,000 metric tons per year. But the first year is an important one, is the $150,000. $100,000 and $150,000, we don't know yet exactly. We're improving a lot the deals at the salar level. That's why we expect it's going to be closer to $200,000 reduction. Most of it, of course, will be reflected in the potash industry because our first priority is to supply the potash for our nitrogen and solar source business.

All right, thank you. And just to come back maybe a little bit on lithium pricing, what's your expectations still going forward, and maybe 2022, but maybe even beyond that time, in terms of, you know, considering maybe using, you know, a little bit of contracts like short-term, a little bit of long-term, and maybe Switching to some sales on sports. Do you consider maybe switching at some point to a more hybrid model for pricing, like some of your peers are doing that, or do you rather stick more to contract and off-take agreements for most of the volume?

Okay. Well, regarding to the expectation of prices for the next year, we see a strong demand as we already said. However, you know that the price is an answer of the supply and demand, so everything also will depend on the reaction of the supply. We know that there are other projects under development, so everything at the end will depend on how the supply can react to the demand. Anyhow, we are really positive on the demand side, but we need to see what happens within the next year, but we should expect a positive trend. Regarding to the strategy of contracts and mixtures, and it's something that we have said before, we are open to consider different alternatives with our customers. Our idea always is to give to our customers the solutions that they need. In the past, we have announced some long-term agreements. We are under discussions of different contracts with our customers, but at the end, what we are looking for always is to have good contracts for both sides. So we are open finally to have a mixed strategy between short and long-term contracts.

Okay, thank you. That's helpful. And just the last one, do you have any update on the construction or any update for the Mount Orland project in Australia?

Yeah, well... Well, as you know, at the beginning of the year, we announced the final investment decision. So, from there, we are doing a good progress. We have started the early construction stage in both sites. That means the refinery in Cuinana and the Mojona site, where will be the mine and the concentrator plant. And so far, so good according to the plan. So, everything is going well.

Great. Thank you. That's good for me.

Our last question today will come from Cesar Perez Neboa with BTG Pactual. Please go ahead.

Cesar Perez Neboa Yes, good morning or good afternoon to everyone. Some of my questions have already been answered. Perhaps I have a weak connectivity here, but my questions would be what supply conditions does SQM see in the lithium market in general for next year considering that new volume We'll come on stream for several producers, including yourself. Second, I am fully aware management provides no pricing outlook. However, most lithium benchmarks are hovering around two times ASCAM's indicated fourth quarter price. The question being, in terms of direction, where would your realized price be or if that should come up? Hello? Okay, yeah.

Okay, Cesar, Pablo speaking. Regarding to your question about conditions in lithium market, as I said before, we are really positive about that. As I told you, we see a growth for the next year between 20% and 30%, and that is mainly explained for the electric vehicles penetration. As I said before, the sales of electric vehicles for the year, we expect that they will be between 6.3 and 6.6 million. For the next year, we see that that number will be close to 9 million, so we see that the demand of electric vehicles will continue growing. So we are really positive about the market. And we don't have any doubts about that. We see a strong fundamental of the lithium demand. Regarding to the new supply, Well, I think that it's good to see that new projects are coming, in the sense that in order to be able to supply this amount, this huge amount of demand, it's good for the industry, so we expect that the important players will continue with expansion plans that they also have announced, like us. So that's what we see. And finally, regarding to the prices, Well, it's really, again, it's really difficult to do any forecast about that because you see that the market is moving so fast, it's changed so fast that any price prediction, I would say, that is difficult to do. What we're going to do is to try, again, to secure volumes with our customers, negotiating good conditions from each party in order to secure, you know, a long-term offer to our customers.

All right, thank you very much. And if I may squeeze one more question there. Maybe you answered this before, but have you given any CAPEX guidance for 2022?

Yeah, if I'm not wrong, the CAPEX for next year, certainly the same. We didn't update the CAPEX in the last 30 days or 60 days, the same forecast we had at the beginning. Ladies and gentlemen, this concludes our question and answer session.

I would like to turn the conference back over to Irina Axenova, Investor Relations, for any closing remarks.

Thank you for joining us today, and we look forward to having you at our next call. Have a great day, everyone. Good luck.

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