Sociedad Quimica y Minera S.A.

Good day and welcome to the SQM fourth quarter 2021 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'll 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 now like to turn the conference over to Kelly O'Brien, head of investor relations. Please go ahead.

Good morning. Thank you for joining SQM's fourth quarter 2021 earnings conference call. This conference call will be recorded and is being webcasted live. Our earnings press 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 Rodríguez, Chief Executive Officer, and Gerardo Illanes Chief Financial Officer. Carlos Diaz, Executive Vice President of the Lifseum business, and Pablo Altimiras, Executive Vice President of the iodine and nitrates business, will also be available to answer any questions. 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 the term is defined under federal securities laws. Any forward-looking statements are estimates reflecting the best judgment of SQM. They are 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 filings made with the U.S. Securities and Exchange Commission, and in our earnings press release issued in 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 CEO, Ricardo Ramos.

Thank you, Kelly. Good morning, and thank you for joining the call today. Our earnings during the fourth quarter of 2021 were significantly higher than earnings reported during the same period last year. These results were Thank you very much. Our average prices in the potassium-chloride business line during the fourth quarter reached almost $685 per metric ton, prices that haven't been seen in over a decade. This pricing environment has also had an impact on the global prices of potassium nitrate, and our average price in the SPN business line was approximately 40% higher during the fourth quarter of 2021 when compared to the same period of 2020. Positive news was also seen in the island market with 2021 surpassing pre-pandemic levels. This strong recovery led to a strong pricing environment during the year, with prices increasing over 11% in the fourth quarter 2021 when compared to the third quarter, as a result of tight supply-demand equilibrium. We are expecting the outward pricing trend to continue during 2022. We are working on expanding our capacity and to bring on an additional thousand metric tons of capacity next year. In parallel, we are working on the Pampa or Coma project in the Tarapacá region will allow us to increase the effective iodine capacity by approximately 2.5 thousand metric tons. Using seawater for the leaching operations, and it is expected to begin operations during 2024. In the lithium market, our sales volumes met new records during 2021, when they surpassed 100,000 metric tons. We sold over 31,000 metric tons during the fourth quarter, with an average price of approximately $14,600 per ton. During the period, approximately 20% of the sales volumes we expect to sell in 2022 are contracted at a fixed price or at a variable price with specific floors and ceilings, while approximately 50% of the sales volume we have contracted have variable prices linked to specific price indices. The remaining 30% of our volumes for 2022 are still open. It is important to remember that we will see Alive between market prices and our realized average prices because of the structure of our variable price contracts. We believe that our prices in the first and second quarter of 2022 will be significantly higher than the prices reported during the fourth quarter 2021. Additionally, we believe that sales volumes will grow to about 140,000 metric tons during 2022. We are extremely proud of the successful lithium expansion in recent years. Our expansion to 180,000 metric tons of carbonate and 30,000 metric tons of hydroxide should be completed during the first half of 2022 ahead of schedule. We have begun working on a new project at the Carmen Lithium Facility in Chile that was announced with our With this project we will further expand our lithium carbonate and lithium hydroxide capacity to 210,000 metric tons and 40,000 metric tons respectively. Next year with an expected CAPEX of approximately 250 million. I remind you that this CAPEX was not included in the $2 billion CAPEX that was previously disclosed. We remain committed to our previously announced goal to reduce brine extraction, weather usage, and our carbon footprint in the Salar de la Cama. These growth plans and environmental goals to be met with relatively low CAPEX have only become possible after years of research and development due to improvements, expertise and of course a strong effort by our production and engineering teams.

Operator, we'll now go to questions.

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. The first question comes from Cesar Perez-Nova with BTG Pacho. Please go ahead.

Good afternoon, ladies and gentlemen, and congratulations for the stellar quorum here. If I may, a couple of questions from my end. In the press release, you state that around 20% of your volume is tied to fixed parameters, 50% referenced. To a benchmark and the remaining 30% open for pricing. Could you please provide added disclosure on this? And to be clear, the 50% is tied to what a pricing benchmark and certainly what time passed through would that entail? For example, 30 days in the station, 60 days. to the spot. And the final 30%, would that go priced to the current spot? Could you provide perhaps some academic example, theoretical example that we can understand? And the other question that I have is that you will roll out a $250 million expansion and the salar, my question is when would that facility be Go Mercant, also SGM filed in late December, certainly a $1 billion program for total Chilean lithium production of 270,000 tons per year. Is yesterday's announcement part of this program or would this be a separate expansion? And if so, are there any regulatory hurdles that you may have to clear to conduct the upgrade. Those would be my questions. Thank you very much.

Good morning, Senator. Thank you for your question. You make a lot of effort to try to answer all your questions. First of all, according to our contract, our prices, We follow and work closely contract linked to the well-recognized price indices, which we think represent well the actual market prices. And obviously there is a natural lag due to different reasons, administrative or operational reasons. So we try to follow the market and we are very close with the product that we are selling and variable in the market. And regarding to the, when you asked for the expansion in Salar, the thing is the following. We're expanding our lithium carbonate and little aerosol capacity. And we expect that the middle of this year we expand our lithium carbonate capacity to 180. So we expect to complete that in the middle of this year. At the same time, we are already working to expand our capacity to 210,000, but we expect that it will be completed early next year.

Okay, thank you. But is this incremental 40,000 metric tons, 30,000 for carbonate, 10,000 for hydroxide? Is this part of the filed lithium production that you made in December for a total of 270? Are you going to work that in stages? Or are you going to do this as a separate expansion?

OK. All our expansions are part of the environmental permit that I was asking.

OK. All right. OK. Fair enough. Thank you.

Our next call comes from Joel Jackson with BMO. Please go ahead. As the caller disconnected, the next question comes from Corinne Blanchard with Deutsche Bank. Please go ahead.

Hey, good morning, everyone. Congratulations on a good quarter. Just if we can go back on the lithium pricing, Can you provide any color or any maybe like a year-over-year increase or range that we could expect for 2022?

Hello, Corinne. Since 50% is under variable price control and 30% is still open, we cannot know or forecast the final price for this year. However, we can say that during the first half, price will be significantly higher compared with the fourth quarter of last year.

Okay, that's fair. One follow-up question on the pricing, actually. With the 30% still remaining, or being up for negotiation, what do you intend to do? Do you intend to do more export prices, or would you be doing index on benchmark as well?

We're still reviewing that and we'll always try to maximize our margin of that and we're going to decide later on if this is going to be a fixed or a formula according to the market indices.

Right, thank you. And now, maybe if I can, just a last question on cost. Last quarter, you had mentioned seeing some inflation coming through for most of the cost, like, you know, similar to most industries. Can you comment on maybe how it did impact the capex or What do you expect to see throughout 2022? Thank you.

Hi, Corinne. This is Gerardo Illanes. Well, of course, there are some inflationary things happening all over the world because of the increased cost of raw materials and labor. Of course, we are also affected sometimes positively by the exchange rate and how it moves, but we don't see that there will be any All right, thank you.

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

Thank you, everybody, and congrats again on the great quarter. I'm going to ask you a pricing question again, try and approach it from a different way. So 20% fixed or variable with a ceiling, 50% variable and 30% not contracted yet. If prices didn't change from where they are today for the whole year and just excluding that 30%, so if we know what pricing is right now, what would your average selling price be?

Ben, it's a very good question that probably I don't want to answer, Ricardo speaking. And yes, the reason why I prefer not to answer that question is that, of course, I don't want now to disclosure some agreements with fixed price that we have with some clients that are confidential. And if I said that, you will know the prices. But if The price, today's price environment, and there's nothing very fixed about the price of lithium. Just that the price probably is going to be different than today's price. You see the trend in the last 30 days. But even though if we continue with the price as it is today, all our contracts, it means that close to 80% would be at today's price. And because even though we're going to use these indicators and indices, these indices will reflect the price and the details will reflect the price. And of course, today's price is very high. It means that our realized price for the year 2022 will be significantly higher than the year before.

I just have three very quick questions left. Number one is on what's happening with Russia and Ukraine and maybe just in Europe overall. I believe you have no assets there and you don't have any... Ben, first, let me say something. We deeply regret the current situation in Ukraine. That's the first point.

The company, we have our support for the people who are suffering. We hope that the current tragic situation can begin to be solved in the short term. But moving to your question, as you mentioned, Ukraine and Russia are not relevant markets in our business. We sell a very small amount of fertilizers in Ukraine, a very small amount of fertilizers in Russia. It means this will be not an issue for us in terms of Ukraine and Russia or Belarus. But of course, Europe is a very important market for us. It's a key market. So far, I'm talking about today, our sales in Europe are going up, are very strong. The price is very strong. The fertilizer market and the agricultural market in Europe is moving very strong in the right direction. But no, I don't know the future. It means if you have a recession in Europe or you have a war that is expanded, it's difficult to have an outlook about. But what is going on today, if you maintain this situation only focused on Ukraine and Russia and Belarus without affecting the rest of Europe, of course for our business it will have almost no impact.

Perfect. Just two more quick ones. Number one, I think you said iodine prices were about $39, if I'm not mistaken. Can you talk about how tight supply is? Can we see new supply coming on at $39 or not? Maybe I'll just leave that question there in terms of what $39 actually means in terms of the potential and the timing of new supply.

Ben, good morning. Pablo Altimiras speaking. Well, regarding to the iron, as you saw last year, we saw a great recovery on demand, but the situation that today is explaining the high prices level is that we have not seen more supply. And actually, according to the information that we have today, we are not seeing a lot of activity in supply. So despite of the price remains for a while at that level, Thank you. And just my last question.

And I'm not trying to sneak out the lithium price again from you, but if we stay at spot, in potash, iodine, lithium, whatever it is, you're going to generate an immense amount of free cash flow this year. Can you talk about how you would allocate that free cash flow? I mean, you've got a sizable CapEx program this year, but then after that, how does free cash flow get allocated? Thank you.

That's a class problem, huh? Definitely, it's very good to have cash flow in order to finance our CapEx. We are working very hard because our CapEx, I think, is going to be very good for the future of the company. We are doing great in the CapEx in the past, in the past three or four years, and we will continue to do great. I hope we will do our best about that. And, of course, the company, we have shareholders, and we work for our shareholders. We pay dividends. A portion of the cash flow will be used for the dividends that usually we pay important amount of dividends. Finally, we will reduce our debt. That's very good. We will finance some working capital because we are significantly increasing our sales this year because prices are better, volumes are better. Considering both, the account receivables will be higher and we will finance with some of the cash flow these additional account receivables.

Thank you very much.

Our next question comes from P.J. Joker with Citigroup. Please go ahead.

Hi, this is Patrick Cunningham on for P.J. Good afternoon, everyone. So my first question is kind of on lithium expansion, you know, more broadly. You know, you're starting to see aggressive forecasts for, you know, demand, you know, over a million tons by 2025. Could you just give us your outlook on, you know, if you think, you know, supply from competitors and yourself can keep up, you know, is there a serious risk where, you know, prices go high enough you could start to see demand delay and demand destruction? And then sort of on the flip side of that, would you see this as an opportunity to, you Thank you. Thank you. Thank you.

Moving in the next few months to the 180,000, we will move during next year to the 210,000. It means we're doing a great job increasing capacity. That's the first answer for this increasing demand. Second, we're working very hard with our partners in Australia. We have a very interesting project in Australia. We expect to be producing 50,000 metric tons in the first stage. Probably we'll go to the next stage. We expect to go to the next stage. Close to the 100,000 metric tons. And Australia is a very important potential project for us. It means we are doing a lot to increase our total capacity. That is the best way to get benefits of this positive trend of the demand. So far, even considering, of course, if the price of lithium is as it is today, The cost of production of electric cars, not only because lithium, because all the raw materials are more expensive, not a lot, but more expensive, but considering the strong demand, we don't foresee that this positive trend of the demand will be affected in the near term. It means that Our main focus now is to produce the best lithium, to provide the best lithium quality and quantity and logistics to our customers. The example is clear. From 60,000 or less than 60,000 three years ago, moving to 210 plus 50 means we're going to be into 60,000 metric tons in the year 2024. It means Of course, the $50,000 is a joint venture in Australia, but it's a professional strategy moving forward. It means we're doing our best in order to provide more lithium to the market and getting the benefits of that.

That's great. Thanks. And on those joint venture volumes, you mentioned there's an opportunity to go to 100,000 tons potentially. What would be the timeline to that? How long would that take to... to get to production.

Hi. Today with us is Mark Fonsis. He was living in Australia for three or four years, I don't know, working in the project. From SKM's point of view, he's here in our meeting room. I will ask Mark to give us just a summary of what you think about the project, what is going to be the next step. What's your overview of what we're going to do in Australia in the near future? Mark, please.

Thanks, Ricardo. First, I'd like to comment that this project is not only important for SQM itself, it's also very important for our partners, trade partners, waste farmers. It's also relevant for the Western Australian future battery industry. So, this is a project affecting many stakeholders in Australia, very important. And it's gratifying to see where the project is today. The project today is advancing very well. Today, we have already received Aerorome pipeline and non-processing infrastructure in the Monholland, in the mine. The project has already started construction of both the concentrator and the refinery plant, refinery in Cuinana, the concentrator near the mine. And we continue with our first estimation of having products in the second half of 2024, that's first product of lithium hydroxide, as well as we continue with the same expectation of a capital expenditure. of 1.4 billion split between the two partners. However, we are not, of course, we cannot avoid the inflationary pressures that every capital expenditure project is subject to today in the world. Even with that, we continue with the same expectations. We want our current estimation, and we're already working on the expansions, as you mentioned. Expansions we will take as any plans to build today in the world between two and three years, upon when the decision is made. We have not made the decision yet, and we are preparing the documentation for presenting to the board to present that expansion when time comes.

Great, thank you. And then maybe one last question, and another one on pricing, but a little less specific, and this one's for SPN. So how should we think about pricing in specialty plant nutrition? Obviously, we saw pretty tremendous prices in this quarter. If fertilizer prices swing either direction, maybe on extended supply risk or perhaps tensions ease in Russia and Ukraine and prices start to come off a bit, help me think about what's the lag time for that to show up in your overall specialty plant nutrition prices? As underlying spot fertilizer markets move, how will that affect your SPN price?

Okay, Pablo Altimiras is speaking. Well, you know that right now the situation is really good. We already disclosed the price increase regarding to the 2020, and we believe that the trend will continue. The situation today is good. The prices of pot that you know that is good, that also influence the price of SPM products, and actually also Thank you.

Our next question comes from Lucas Ferrario with JP Morgan. Please go ahead.

Hi, everybody. Thanks for taking my questions. I have two. The first one is kind of a follow-up of your capital increase in the second quarter of last year. I think one of the reasons for the capital increase was to be ready for a potential M&A, and we've been seeing the market quite active in M&A recently. So my question to you is if you're seeing any interesting opportunity or if just because of prices, probably asset prices also went up, should we expect you guys to still invest in more in the organic growth as opposed to M&A or if there's any interesting project to develop anywhere in the world? So from Mount Holland and Chile, what else could be in your plates for the future? That's my first question. And the second question is, to understand a little bit this yields, improving yields in your brines that is allowing you to increase production in Chile. So just wondering if there is more potential, if technology is improving enough for you to even go beyond 210 capacity in the future, respecting your limits, right, extraction limits you had with Corfo. Thank you.

Lucas, Ricardo Ramos speaking. Yeah, we're always exploring new alternatives or businesses that generate value for the company and our shareholders are quite conservative about M&A or buying companies. We are going to be very active doing M&A if we can find an alternative that is good and create value. If not, keep in mind that our priority today is not to lose focus in our current projects. We have a Very important projects are complex. Our past projects were very complex. We will keep focused on it, and we think that our projects today are essential for the future at SCIM. That's why we keep our efforts mainly in order to, again, keep ahead of a schedule delivering product to the market. Carlos can explain what we are doing because we are doing a lot of things and R&D in order to do it again.

Good morning, Lucas. Yes, Ricardo said we are doing a lot of research and R&D in how to improve our yield in brine. Once I find what we have in Salada da Cama and our plant lithium and carbonate. and Agroxide in Antofagasta. So we have been working on that in the last three or four years and we continue working improving our yields and we have been successful now but we still have a lot of projects to develop because we have our huge challenge that is for one side to reduce our brine extraction and for the opposite side to increase our production on lithium. So that is a huge challenge, but we have been successful until now, and we expect to continue increasing our yield.

Thank you very much.

Our next question comes from BMO. Please go ahead.

Hi, do you hear me?

Loud and clear.

Hi, it's Joel Jackson Vimo. Sorry I had a problem earlier. I have a few questions. I'm going to ask them one by one. Can you talk about what, if you wanted to and you could produce at maximum capacity, what LCE, what lithium carbonate production can you achieve in 2022 and 2023 if you want to go full out? Thank you.

As we explained in the press release, we expect to be at 180,000 metric tons during the next few months. It means that we will start operating the new increased capacity. So far, we've been very successful in the startup of new facilities. I want to be just a little bit conservative that we are not going to be producing from day number 180,000 metric tons. Probably with the surprises we had in the last three years, probably we will be producing the 180,000 metric tons from day number one. I hope Carlos will deliver again this kind of success story. But anyway, as we mentioned previously, we expect to sell this year close to 140,000 metric tons of lithium carbonate. That's very important. Thank you very much. This is this year. Next year, I'm completely sure that the 180,000 metric tons will be more than ready. It means that we will be in a position to sell at least the 180,000 metric tons plus Some additional production coming from this additional increased capacity that I already mentioned to you. And the final decision about the sales in 2023 is something probably that we will review during the third and fourth quarter this year because it will depend on market conditions, depend on the demand, the supply, everything. But we are going to be ready to supply the market if the market requests. Probably close to 290,000, if it is possible, 200,000 metric tons next year. Yes, it will be possible. We will try to do our best. But at the end, it will depend on the market conditions that we will review during the end of this year. It's a very fluid market, the lithium market, as you can see, in the last 12 months. We need to review it, our strategy, every quarter. One thing that is for us extremely clear is that we will increase capacity. I will improve quality. And our quality is the best. We will continue to be even better. And our quantity, we have been the best one in terms of increasing capacity. We will continue to be the best one. But our business strategy during next year will be according to the market conditions. And we will see.

Okay. My second question then would be – it's kind of three small questions. My second question would be, What is the capital intensity? How much capex do you need to spend to get the next 30,000 tons? LC out of commas, we'll go to 210. And then your capex seemed to rise this year versus expectations by $400 million. How much? What is the incremental $400 million exactly from 500, 900? And then you had a $2 billion capex plan from 2021 to 2024. What would that total capex now be, 21 to 24? Hi, Joel. This is Gerardo.

Well, last year we announced our CAPEX and expansion programs for 2021-2024 that include a total of $2 billion in CAPEX. The breakdown was approximately $1.1 billion for lithium expansion, $440 million for nitrates and iodine, and the rest was related to maintenance CAPEX. These $250 million that we said is going to be the total capex for expansion to reach 210,000 metric tons of lithium carbonate and 40,000 metric tons of lithium hydroxide is on top of the $2 million that were announced last year. For this year, we are projecting that the total capex is going to be around $900 million, but it falls all within this set of projects, again, expanding capacity In lithium, from 120 to 180, from 180 to 210 lithium carbonate, also expanding in lithium hydroxide, developing the project in Australia that Mark mentioned a few minutes ago, expanding our nitrate capacity, 1,000 metric tons by the end of this year, and 2,500 metric tons by the end of next year, and also expanding our nitrate capacity. All of that is included in the now we can call it $2.25 million capex from 2021 to 2025.

Okay, so just following up on that, ignoring hydroxide expansion, if I understand what you're saying, the additional 30,000 tons at Atacama LCE is going to be coming on for less than $8,000 a ton, correct?

That, Matt, is right. Yeah, that's correct.

Glad I can do math. Okay. So my last question is this. If we look at – so you have big growth plans out of Coma. You're executing on them. You've added a bit more. We know what's going on in Australia with West Farmers and Mount Holland. If I think about the back half of the decade, 2026, 2027, 2029, you'll be adding a little more capacity in Australia. But after that, your volume growth, your potential capacity growth really goes down to very little. So – Are you prepared to use your balance sheet now to go acquire more resource assets, go acquire other lithium producers or upstart producers? Are you have an urgency to keep your capacity growth growing by using your balance sheet to buy new assets? Thanks.

You're right. It means we are always exploring new alternatives. We are very committed in the lithium business. We think that we are very good in the lithium business. Yes, we have a team looking for alternatives. We'll continue looking for alternatives. Of course, if we are going to grow in lithium, it will be profits, projects that are going to be good for the company, good for shareholders. It's not just to grow. Growth with creating value for the company, and we're working very hard on it. and we have a complete team looking for potential new alternatives. We are conservative in terms that we don't want to buy everything that is on sale, but we are going to be ready to buy something to get involved in a business if we think it's good for the company and shareholders.

If I could be greedy and ask one more question, when I think of your lithium cost per ton, your lithium price is probably going to be up, let's just pick a number, $10,000 a ton. This year or more, and it's going to be over the highest marginal bracket. So you're going to pay the 40% royalty rate to Corfo on that additional price. How are costs for lithium progressing in 2022? If I ignore royalties, the non-royalty part, should we see flattish costs per ton? You're balancing inflation plus 40% more volume. So is it an offset?

Hey Joel, this is Gerardo again. We're not foreseeing, well, first, there is a very important factor that I think is important to consider that you mentioned, which is the lease payments that we make to Corfo. These high prices, of course, Corfo is paying with a very, very high payment that we are making to them and we will continue to make to them. So that is reflected on our cost line on our P&L. That's the first thing. Second, As we are seeing all over the world, there are inflationary pressures in the different industries, and of course we buy some raw materials to produce the lithium that we produce, and there are additional costs associated with labor and other issues that is putting some pressure on our costs. But on the other hand, the larger capacity of our plant and improvements in our operations are letting us reduce, or let me say offset, some of these inflationary pressures. Thank you for letting me ask so many questions. Excellent. Thank you. This concludes the question and answer session. I would like to turn the conference back over to Kelly O'Brien

for any closing remarks.

Thank you for joining the call today. We look forward to you joining next time.

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