Sociedad Quimica y Minera S.A.

Good morning and welcome to the SQM fourth quarter 2022 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 on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would like to turn the call to Irina Axenova of Investor Relations. Please go ahead.

Thank you, Antonio. Good morning.

Welcome for joining SQM's earnings conference call for the fourth quarter of 2023. This conference call will be recorded and is being webcast 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, Chief Executive Officer, and Gerardo Illanes, Chief Financial Officer. Carlos Diaz, Executive Vice President of Lithium, Felipe Smith, Commercial Vice President of Lithium, and also Juan Pablo Belolio, Commercial Vice President of Iodine, will be also 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 and service line growth, together with other statements that are not historical facts, are forward-looking statements, and 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. Thank you very much. Thank you very much.

Thank you, Irina. Good morning and thank you for joining the call today. We are very pleased with the 2022 results we published last night. Leasing business contributed to almost 80% of our gross profit for the year. Thank you very much. including corporate taxes surpassed $5 billion in 2022. We see strong indicators of demand growth in the lithium market driven by the electric vehicle sales growth worldwide and investment in renewable energy that require energy storage systems. We estimate that the total global lithium demand could reach 1.5 million metric tons by 2025 and deliver at least 20% growth in 2023. After an expected slowdown in demand during the Chinese New Year celebrations, electric vehicle sales have increased in recent weeks in China, while the U.S. market electric vehicle sales are doubling when compared to last year. This growth rate should continue for the remainder of the year, with major OEMs showing an increase in their production volumes. Consequently, our sales volume during the second half of the year should be higher than compared to the first half of the year. We will continue to invest in growing our lithium production globally. Our capital expenditure plan for the next three years includes investment in lithium, iron and nitrate capacity expansion in Chile, completion of the Moon Holland project in Australia, and lithium refining capacity in China. We are also active on lithium mining exploration and we will continue looking for attractive assets worldwide. This CAPEX plan also includes investment in certain activities and initiatives related to our Solar Futuro project, which technically documentation we expect to submit for evaluation to the Chilean authorities in 2024. I would like to highlight our operation success during last year. We successfully completed a ramp up of our lithium capacity, reaching 180,000 metric tons, and finished the year with record high iodine production volumes over those 12,000 metric tons. None of this would have been possible without the continuous dedication, support, and commitment of our team at SQM. Thank you.

Operator, we would now open the line for questions.

We will now begin the question and answer session. To ask a question, you may press start them on your telephone keypad. If you're using a speakerphone, please put up your hands up before pressing the keys. To withdraw your question, please press start them too. At this time, we will pause momentarily to assemble our roster. Our first question will come from PJ Juvicar with Citigroup. You may now go ahead.

Yes, good morning. You know, I think you had mentioned last quarter that for 2023, you are 100% exposed to spot price. I was wondering, can you explain spot price? Because there is China spot price, which has dropped recently, but spot price ex-China has not dropped as much. And there is another price for seaborne lithium. So we're wondering what price are you exposed to? Thank you.

Hello, PJ. This is Felipe Smith. How are you? Good.

Thank you.

Yeah. No, well, I would like to commend that our sales are very well diversified geographically, by segment, by product. So you have to be careful when you look at the evolution of some of the indexes in the market. Because what we have at the end is a mix of different geographies and market prices. So what you are seeing today in China is still very early for us to consider as a real trend because the level of transactions that we are seeing so far are not that much relatively, okay? So I would say that the main message is that we are going to be very well exposed to the market. Whatever the direction the market takes, our sales will be mainly following the market.

Okay, thank you. And then secondly, you mentioned that, you know, the lithium sales in China slowed in the first two months, but recently have picked up, was the comment you made. I was wondering, can you just talk about kind of what kind of bounce back have you seen recently? That'll be helpful. Thank you.

Yes, we are seeing actually indeed that first of all, generally we are starting to see very good figures of sales of EVs. and that will definitely have an impact on the purchases of lithium and we are now already seeing that activity increasing.

Thank you. Our next question will come from Ben Isaacson with Scotiabank. You may now go ahead.

Good morning everyone and congrats on the good I have three questions. I'd like to ask them one by one if that's okay. First question is on iodine. These prices are really incredible. I think they're now much higher than they were after the Fukushima disaster 10 years ago. So what's going to crack the market? I mean, my view is that if demand destruction kind of didn't occur at $40 and $50 and $60 and now we're at $70, how is this market going to crack in iodine?

Hi Ben, this is Juan Pablo. Well, yeah, prices are high today, I would say almost at the same level or even higher in average than after Fukushima, but it is mainly due to a healthy demand coming from the market. I would say contrast media industry is growing more than what was the average of the island industry, so it's Thank you very much. Thank you. Could you repeat the question?

Given that prices are so high, why aren't we seeing any announcements for new capacities?

First of all, we as SQM, we have announced in the past, and we keep announcing new investment in new capacity in iodine, but you need to remember that new capacity in iodine takes a lot of time. We are talking about material capacity or new projects will take time to get the permits and environmental conditions to go ahead. And Thank you. My second question is on the SPN business.

I think one of the messages that you guys have been giving is that over the next few years, your potash volume, your potash production will start to decline. And if that's correct, then does that really limit the growth for NOP, for potassium nitrate in the SPN business? And if not, then where does the growth come from in SPN?

Hi, Ricardo Ramos speaking.

Of course, we expect to have some reduction in the production of MOP because we are going to reduce the pumping of solution, the brines from the Cerrado da Cama in the future every year. But we are increasing our technology and our deals at the salar in order that we can control in some way the reduction in total production. Anyway, the total production of MLP today is more than enough in order to cover the production of potassium nitrate. That's why we don't foresee until the next 10 years. Thank you very much.

There's a debate out there that perhaps spot prices or just in general will start to see prices start to moderate over time. And if that's true, why would you not add some more stability and predictability to your lithium portfolio by having a little bit more fixed prices, especially if you believe that prices will trend lower and moderate closer to the cost curve over the next few years? Why would you leave yourself exposed to spot if you believe prices will trend lower?

Yes. Well, we have taken that decision already some time ago that we want to have our contracts following the market. I think this at the end represents the best solution for customers and suppliers. Sometimes, I mean, we have learned the hard way in the past that sometimes when you fix prices and then market changes unexpectedly, then you are in a problem and we want to avoid that. Thank you very much.

Our next question will come from Corrine Blanchard with Deutsche Bank. You may now go ahead.

Hey, good morning, everyone. Thanks for taking my question. The first one, I want to try to understand better what you expect in terms of volume for this year, for 2023 for Lithium.

Do you want to know about capacity or about sales?

Sales.

or both.

Capacity is easy. I think, yeah.

Yeah. Well, I will speak about sales and Carlos can comment about capacity, whatever.

Let's start talking about capacity because, well, the sale is going to be probably a result of our capacity, but finally, it's important to mention that we continue to focus for the expansion in Chile with We are already reaching the capacity of 180,000, and now we're moving to produce 210,000 at the end of the year. So we're continuing to expand that, and the new capacity that we will have now in China, in the Sichuan region, we expect to produce around 20,000 metric tons there. So in total, it will be around 200,000 of product that is coming from the Salad de Atacama, from the brine extraction. So, in that way, we are on track with all our projects. And additional to that, at the end of the year, we start to start producing sputumine in our Monholland project in Australia. So, what I say, we're continuing to increase in our capacity, and why would it have any sales when it's going to depend on the supply and demand, finally. But it's not something that we could comment now, though. We are preparing now for supply in the market. For that, that is the reason that we're spending in Chile, China, and Australia.

All right, thank you. And then I need to come back on the iodine, and I'm not sure if that's what the previous question, but... I think you mentioned you expect to have pricing remaining strong at the current level for the next six months. Just trying to get a little bit colder, can you remain above the $60 per kilo or really remaining at $60, $68, $69? And then what do you see for the second half of the year? Thank you.

I would say you can look at our report, the prices that we have been selling at the end of the year, and we see prices at the same level for Q1 and Q2.

Okay, thank you.

Our next question will come from Joel Jackson with DMO. You may now go ahead.

Hey guys, this is Joseph on for Joel. Thanks for taking my question. So for the first question, for the 30,000 ton carbon and expansion that's taking capacity to 200,000 tons, what will be the capital intensity for that? And how does that compare to the project scope of past expansions?

Ricardo Ramos speaking. As you know, our CapEx that was informed, that is this $3.4 billion, if I'm not wrong, for three years. Carlos Diaz Ortiz, Carlos Diaz Ortiz, We will now be with the expansion. We are finishing now 30,000, 35,000 metric tons, but we want to be with investment in 24,000, 25,000 at the level of 100,000 metric tons. That's a huge expansion that I think is going to be very good for the company in order to have more flexibility in the lithium industry, having more opportunities to deliver our product to different clients. That's something very important, also including our CapEx. But, of course, the 210 is also included in this 3.4 trillion. Thank you very much. We strongly believe that we will reach an agreement and we will review all the data from the engineering and the geological studies that we're performing today that will allow us to go forward to 100,000 metric tons or something close to. That's why we include in our CAPEX a positive expectation that we will invest in more capacity in Australia.

Okay, thanks for that. And then secondly, so in the past six or so months since you guys announced the Solar Futuro plan, what has been the local and national government feedback on that?

Okay, yes, we announced Solar Futuro. We're really excited about the project. I think it's a great, great opportunity for the company, for the country, for the region, for the communities. As you know, we continue in the process of informing our different authorities in Chile and stakeholders and try to explain the scope of Solar Futuro project that we have been very active about that so far. And I think very proud that everyone agrees on the interest of developing process and technology that aim to the objective of of Water Balance. It means that there's a full agreement about that. High yields and maintaining extremely low carbon footprint also is very important for everyone. And we think that is the way to have a sustainable productive activity in the South Atacama in the future. In terms of what we're doing in the company, we're advancing at maximum speed in the work of process design. We're even better than expected, I think, today as we were two months ago. And the engineering technology definitions are working very hard and to develop a complete environmental survey of the project that is very, very complex to do it. The project, as you know, is a big project. It's very intensive work. That's the reason why we are so excited. It's a very good one, but it requires a high level of knowledge and experience. At SQM, we are convinced that with our 25 years of experience in the Saratakama, we have the human team, the experience, the commitment, and, of course, the resources to successfully face the project. We hope to complete all the necessary definitions to submit the final project to the environmental assessment we hope is going to be during the second half of 2024. In Chile, as you may know, complete progress is required in all the definitions of the project prior to being submitted to the environmental evaluation. It's important to consider, I think, at the end that this project implies operation commitment that go far beyond the year 2030, so working in agreement together with CORFO is necessary prior to its presentation to the environmental authority for evaluation. We all agree that the development of the Salar Futuro project must be carried out in a way that is positive for the second region, positive for the communities, For Positive for Chile and Positive for Spain. Currently, everybody know and probably you know that it's a public knowledge that the government is working on defining a national lithium policy. We expect that it's going to be this national lithium policy during this year. Of course, we believe in known for everyone and this is going to be the start point in order to move forward in Salar Futuro, but we are moving as fast as we can today. We are going to be ready at the end of 2024, and we have some time in order to have a national agreement in order to move forward.

Okay, thanks for that. And then just one more, if I may. So do you guys have any views on the various commentary that's been coming out of CATL in China for the future lithium pricing?

Yeah, you know, I will not comment about the decisions of other companies. What I can only say is that in our case, I will again emphasize that in our case, we believe that the direction of the price is totally depending on the supply-demand balance. So this is how we are structuring our contracts with the customers, following markets, and I think this is the best solution.

Our next question will come from Lucas Fejaira with JP Morgan. You may now go ahead.

Yeah, thank you. My first question is about the lithium market balance. So looking at your expectations of the demand growing 20%, I can be wrong, but I think it's more of on the conservative side when I look at the views of other lithium producers. So how do you see the supply and demand balance shaping up this year? If you think that increasing lipid-like capacity in China could put this market in some sort of a surplus this year, or if you think the market remains on a deficit. So pretty much how you see, reconcile this 20% growth, percent demand growth expectations with the supply you see coming to the market. And the second question, is more of a follow-up on the COPICS guidance. Because when I look at the number that you guys provided in the investor day in September, I know this was a number for 22, 24, but there was a considerable increase in that number, right? And I believe that part of this is explained by this increasing hydroxide capacity. So my question there is, is this increasing in hydroxide capacity considered already that $700 million you gave as a potential COPEX for increasing in value-added products? Or if you can talk about if there was any sort of inflation in the COPEX, maybe from Australia, I guess the number I was expecting from Australia was lower. I don't know if this COPEX you announced now includes Ricardo, there's two questions, I think, no?

Let me start with the CAPEX and I will give the answer to Felipe probably for the balance of the lithium. About the CAPEX, you were right. It means we were talking about 22, 24. Now we're talking about 23, 25. It's a different time frame. and there's some initiatives. First, we included in our investor day most of what you can call inflation or new cost environment. I think it's not so relevant in our new estimates. I think new projects and new initiatives are the most important ones in order to affect the total topics for the period. First one is It's what we remember that is nitrates, iodine, and lithium. It's not only lithium. And in nitrates, we're pushing very hard today, developing the seawater project for the production of nitrates and iodine in the first region. We're putting more efforts than before because we think it's going to be a very good... First, it will allow us to replace the consumption of continental water But second, we significantly increase IONI production capacity because we will have more water available for our production in Nueva Victoria, at least in the first region. And as you know, IONI is moving in the right direction in terms of healthy demand, in terms of pricing. That's why having more capacity as soon as we can is very important for the company. That's why this is a project that we increase our investment in the period, and we try to push as much as we can. Second is that we expect to have a new project that is a new nitrogen and iodine project that is a one-color coma that is going to be 24-25 most of the investment. It means most of it will be 25. That's why it's so important in terms of having an additional capacity of iodine. It means between both projects we will have a significant capacity increase in iodine for the market. That's something we were looking forward to. We expect to increase production capacity on high-quality potassium nitrate and sodium nitrate because at the moment you increase iodine, at the same moment you increase nitrates. That's why having capacity and facilities to have high-quality potassium and sodium nitrate is very, very important. Thank you very much. Thank you very much. We know that some of these new technologies are so good in some terms that we can recover these investments in the medium term. I think that the investments that are included until 2025 may allow us to further increase our production capacity in lithium. That's something we're working on now. But of course, using new technology goes in the right direction in order to have a better outcome in the lithium production. That's why we have a significant investment in this new technology, mainly in the year 2024-25.

Hi, this is Carlos Diaz. Respect to your question about the bank growth, Well, as we said at the beginning of the year, we expect a slowdown in demand due to the Chinese New Year. But now we're seeing a big sale that has now picked up at a similar pace that we had at the end of last year. So, in addition to what Felipe mentioned before, we recently knew one of the leaders, Carmaker now announcing almost double the sales that the production that have this month compared with last year. So we're really confident that the mine will grow more than 20%, probably in a range of 25% or something like that. And what I said at the beginning, we're preparing for that, adding more capacity from Chile and China and Australia. And regarding to the production of the lithium coming from the lipidolite, we really don't have clear information about the extract capacity and how is the quality or the sustainability of that production. So we really, we don't, we cannot comment too much about that. Perfect. Thank you very much.

Our next question will come from Xavier Martinez with Morgan. You may now go ahead.

Sorry, guys.

My questions were already taken.

Thank you.

Our next question will come from Cesar Perez-Noval with BTG Paxful. You may now go ahead.

Yes. Good afternoon, everyone, and congratulations for the results. Two questions here. On production targets for 2023, you already mentioned sales volume of around 200,000 metric tons, of which China would account for roughly 10%. Is the volume sent for tolling in the Sichuan refinery in China going to pay the same royalty scheme as carbonate produced in Chile? And my second question goes back to the CAPEX program. Essentially, how would this be financed, and would this figure contemplate additional possible partnerships or earnings like your recent agreement with Assure Minerals? If I heard correctly, Ricardo mentioned some sort of additional exploration and looking for potential projects at the beginning of the presentation. Thank you.

Okay, regarding to the lithium production, what I mentioned at the beginning that our targets to our capacity this year is going to be 180,000 as a lithium total in Chile, lithium carbonate plus lithium hydroxide. Additional to that, we have a capacity of 20,000 to 30,000 in China. and at the end of the year, the Sputum in production in Australia. So in total, it's around 200,000 to 110,000 as a capacity. How much is going to sell is going to depend on the supply and demand balance. So we're not saying that we're going to sell in that range. We're just saying that we will have that capacity ready for supply into the market. And regarding to the... Regarding to the China production, well, the plan now is continue to progress according to the plan, and we'll be ready soon to start the commission and start producing. And respect to the royalty, well, it's the same agreement, but it's according to the lithium hydroxide royalty, not to lithium carbonate, but it's already agreed with the Corfo.

Okay, thank you. Okay, thank you.

Okay, Cesar, regarding the investments that we have and the financial of CAPEX, okay, the financial situation of the company could not be better today. As you can see, December of last year, our total cash and cash equivalents was higher than the total financial interest-bearing debt. It means that the company is positive in terms of debt. That's very unusual and we're more than prepared for future projects. Of course, the most important way of financing the company is being very careful in the dividend policy. So far, we don't need to be very strong to reduce the dividend policy. As you may know, it has been 80%. Considering the profits of 2022 and 80% dividend policy means that we will retain a significant amount of money internally in the company. If you consider we have no debt Thank you very much. Potential M&A, potential new projects, potential geology studies. We're working very hard on it on a daily basis. It's not easy. The best project sometimes is the one that you don't get into. You need to be very careful not to run after projects. We need to be Clear that if we get into a new project or if we get into a new M&A, it will be good for the company, it will be good for the return on assets. That's why we need to be very careful, but we are working very hard. I cannot promise you that we will be a surprise or not, but I can promise you that we are working very hard in order to look for alternatives where we can create money, where we can create a return on our investments.

Absolutely. Fair enough, Ricardo. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Irina Axenova for any closing remarks.

Thank you, everyone, for joining our call today, and we look forward to having you at our next call. Have a great afternoon, everyone. Bye.

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