Sociedad Quimica y Minera S.A.

Good day and welcome to the SQM third quarter 2023 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 and 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 Irina Axnova, Head of Investor Relations. Please go ahead.

Thank you, Dave. Good morning. Thank you for joining ESCOM's Earnings Conference Call for the third quarter of 2023. This conference call will be recorded and is being webcast live. Our earnings press release and the presentation with a summary of the results have been uploaded to our website. We can also find a link to the webcast. Ricardo Ramos, our chief executive officer, will be speaking on the call today. Gerardo Yanes, our chief financial officer, Carlos Diaz, executive vice president of lithium, Felipe Smith, commercial vice president of lithium, Mark Fons, vice president of strategy, and M&A Lithium, and Juan Pablo Biloglio, commercial vice president of iodine and industrial chemicals, will be also available to answer any questions. Before we begin, I would like to remind you that statements made in this conference call regarding our business outlook, future economic performance, anticipated profitability, revenues, expenses, and other financial items, along with expected cost synergies and product or service line growth, are considered forward-looking statements under federal securities laws. These statements are not historical facts and may be subject to changes due to new information, future developments, or other factors. We assume no obligation to update these statements except as required by law. For a complete forward-looking statement, please refer to our earnings press release and presentations. I now leave you with our Chief Executive Officer, Ricardo Ramos.

Thank you, Irina. Good morning. Thank you for joining the call today. Yesterday, we reported our third quarter 2023 earnings. And on this call, I would like to focus on the key drivers in each of the business behind our performance during this quarter. In the lithium business, we reported close to $1.3 billion in revenues, approximately 10% lower than compared to the previous quarter this year. primary as a result of significant lower realized sales prices, partially offset by record high sales volumes over 43,000 metric tons during the quarter. We all observe a downward price trend that commenced at the beginning of this year and could continue for the remainder of 2023. Since the majority of our sales contracts are linked to price indices which move with the market, I will realize sales prices have followed the same trend with a small delay, and it is reasonable to expect that they should continue to reflect market price dynamics in the upcoming month. we continue to see strong fundamentals behind long-term growth of lithium demands supported by EV production and sales volumes emission reduction targets worldwide. In the short term, however, the excess of inventories along chemicals and battery materials supply chain, as well as additional supply, which entered the market this year, have been negatively affecting customer purchasing activity. As a result, we expect to see quarter-on-quarter similar or lower sales volumes during the fourth quarter this year. In the iodine business, we reported over 210 million in revenues for the third quarter 2023, driven by a strong pricing environment with sales prices close to $70 per kilogram with year-to-date higher volumes than last year. This is supported by increased demand from X-ray contrast media segment, albeit some reduction in demand coming from other price-sensitive applications. We believe that Eskem remains the only iodine producer to increase its supplies this year while we keep on increasing our capacity. Moving to fertilized business, our revenues in specialty plant nutrition and potassium business segments reach almost $300 million during the third quarter as a result of positive demand growth, which began during the third quarter this year and is expected to continue into 2024. In the industrial chemical business, During the third quarter, we completed solar soils delivery to the concentrated solar power plant project in the Middle East, with a total of more than 430,000 metric tons of solar soils produced and shipped between 2020 and 2023. This mission proved to be challenging, particularly as the majority of the deliveries occurred amidst the global pandemic, which strained both our production capabilities and logistical conditions. We are proud of our accomplishments and the successful completion of this contract. I would also like to comment our progress with our expansion plans both in Chile and abroad. Our lithium carbonate capacity in Chile has reached the 200,000 metric tons per year, and we expect to complete the expansion to 210,000 metric tons in the beginning of 2024, almost a year earlier than anticipated. This gives us space to focus on production costs, optimization, and to ensure that we remain one of the most cost-efficient lithium producers in the world. In Australia, the first production of spodumene concentrate at Mount Holland is expected during this quarter, while in China, we have started lithium hydroxide production from lithium sulphate. As we continue our progress toward more sustainable operations, another very significant milestone reached last quarter was an international recognition from IRMA of our commitment to becoming the world's most sustainable source of lithium. Our operations in the Salar Atacama received the highest score to date of FIRMA 75, reflecting our dedication to transparency and community engagement. While there is a considerable amount of work ahead of us in collaboration with our communities and stakeholders, we will persist in the collective efforts to achieve our sustainable objectives. Thank you, operator, and we will now open for the line to questions.

We will now begin the question and answer session. To ask a question, you may press star, then one on a touch-tone phone. If you're 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, and then two. Our first question comes from Joel Jackson. with BMO Capital Markets. Please go ahead.

Good morning, everyone. Ricardo. I'm going to ask a few questions one by one. First, you previously said, Eskrim previously said that you would produce about 185,000 tons, 185,000 tons this year. Looks like your sales are going to be more 150,000 tons. So am I correct in assuming that that production number is the same? You're building inventory this year of 20,000 to 30,000 tons. And a follow-up on that is, does SQM feel the need to be disciplined and hold back production in 2024? Or for a little while, we're seeing other producers hold back production. And if you do run at the capacity you say you have in 2024, your sales volume would be up maybe 30% next year, which would seem to be above market growth. So do you need to be disciplined? So inventory build right now, and we'd be building more inventory next year, and we'd be disciplined.

Hello, Joe. This is Carlos Diaz, the Vice President of the Lithium Division. Thank you for your question. Well, first of all, we have seen this type of distortion in the market in the past, a lot of time in our different division, including lithium, in the different SQM division. But due to our leadership position in cost, quality, and sustainability, Our strategy has been and will continue to be to produce at the maximum capacity in all our plants, the meat in Chile, what we are producing in China and Australia. And the idea is to be prepared when the inventories return to the normal level and customer purchases are reactivated. Therefore, our production strategy is to continue to work producing, what I said before, at the maximum capacity. We are not changing that.

Okay, so you expect to be building inventory in the next bunch of quarters, correct? And have been building inventory. Is that fair?

Yeah. Well, what I said before, this is something that we have done in the past, and we are prepared for that. We are building inventory, having it in our warehouse, in different places. Yes, we will be prepared for that. Okay.

My next question is obviously a sensitive one, but we need to address. To the extent that you're able to talk about maybe some potential range of outcomes with your discussions with Cadelco, there's been some numbers thrown around this week. Again, it's sensitive. Maybe I'd like to ask, in any sort of arrangement you may come up to, how fast could Atacama production be pushed to? If there were no constraints, no quotas, nothing with Corfo, could you get to 300,000 tons? Could you get to 4,000 tons of LCE out of Atacama? How long would it take you to do that? And do those discussions focus very heavily in your discussions with Codelco for what are reasonable expectations for an SQM down the road?

Ricardo Ramos speaking. As you know, I'm directly responsible for the negotiation with Colerico. I think a couple of days ago we issued a statement, SQM, about some news on the press that was not right, it was not correct. It's very difficult to answer your question because we have to consider all the restrictions, environmental restrictions, what are our environmental goals in the Salar Atacama, what is the country goals in the Salar. That's why talking about what is the maximum capacity without any restrictions makes no sense because we do have restrictions and it doesn't matter who operates the Salar, it will have restrictions. That's why when you think about the future operation of the Salar de Cama, you should think about what is the most efficient way to do it from an environmental point of view, from a social responsibility point of view, with a relation with the community, according to all the Chilean restrictions. That's why There's nothing that you can have a different answer, just trying to forget about what is the goals, the environmental goals. For us, the environmental goals in the solar diagram is a must. It's a competitive advantage to be a producer, sustainable producer in the solar. That's why having huge amount of production, if we affect our sustainability and our environmental goals, of course, we don't expect to do so. That's why, as we have said in the future, we don't expect significant increase in production in the future plants of Codelco, sorry, in Sardacama. We were very clear in our Salar Futuro presentation, I think, a couple of years ago, that maybe, depending on the technology and so on, you can reach close to 300,000 metric tons, but it will depend on the different environmental restrictions, environmental permits, and our environmental goals internally. But considering that you are asking about the Codelco, I want to be very clear about this negotiation process. First, I want to add a couple of things that I think are quite important in this process. First one, In my opinion, and let me give my opinion about that, Codelco, that is the one we are having the negotiations now, the company, is a great company. I have a very good opinion about Codelco. They have an outstanding professional team. And of course, like any large company in the mining and natural resources area, of course, Codelco faces important challenges in the short term in their businesses, like everyone. SQM, like any other large company, also facing challenges. We started conversation with Codelco, as you know, about six months ago. I'm not so sure it was six or five, whatever, something close to that. And a significant part of the meetings at the beginning we have had so far have been focused on explaining in detail our lithium businesses. The technology we have developed, the production process, the different initiatives we are working on. It is important to remember that we have the largest lithium production site in the world in the Salar de la Cama, along with the largest integrated lithium refinery capacity in the world located near the city of Antofagasta. It's a big, big business. It's complicated. It's complex. It's great. It's beautiful. It's the best one in the world. But, of course, it takes a lot of time to explain everything. to a high professional group of people from CODELCO, all the main details of our operation. They have to understand that. On top of this, we have spent a significant amount of time sharing visions over the Salar Futuro project. That was your question. Of course, discussing the different alternatives we have in order to develop the Salar for the future. The importance, in our opinion, and we have an agreement with CODELCO about that, that the successful execution of this project has over the sustainability of the operations in the Salar Atacama. We both agree that having a sustainable operation in the long term is the most important. target we face in the salar de la cama development investment required are significant we review the investment all the technologies we are developing to achieve the goal of aiming to reach what we expect to be an hydric neutrality in the Salar de Atacama Basin. Keep in mind that we, as SQM, been working probably two and a half years, maybe close to three years, in what we call the Salar Futuro project. We have been working very hard with new technology, new process, new alternatives, and we have been working very hard with Coelco now, trying to explain to them, trying to share with them all the advance of SQM in this project. It's very, very important to do it during this process. At the same time, it is important also to remember that whatever potential agreement, if we have an agreement in this negotiation, has to be for the benefit of Chile, for the benefit of the Antofagasta region, the local communities, Codelco, and of course, Esquim. And clearly, an agreement must be based on a shared vision of the challenges and opportunities this operation has for all stakeholders. Please Rest assured that we will inform the market on a timely manner through our own channels of communication of any significant development in this negotiation. Thank you. Thank you, Ricardo.

The next question comes from Lucas Ferreira with JP Morgan. Please go ahead.

Hello everyone. I have two questions. The first one on your lithium production for next year. So what allowed you guys to anticipate the ramp up to 210,000 tons? Was this a challenge at the carbon plant level that was Overcome and then you you made some comments about the cost so can you also give us a view of? How your costs per ton should evolve once these capacities run top so we will you be diluting more fixed costs? with the production at 210 so could we expect a a good performance or even a reduction in the cost per tonne, and if you can comment about soda ash contracts for next year, so how to think about your cost per tonne in 2024, that's the first question. And the second question, I don't know how much you're also going to be able to comment about Azuri, but this tender to announce a tender to the Azuri shares, What's your expectations in terms of timing of that to be fully approved? And then what you guys are planning to achieve there in terms of production in the future, size of production, timing for this production, if you can share with us some initial expectations about timing and size of lift and production in LCE terms. Thank you.

Hello, Lucas. This is Carlos Diaz. Thank you for your question. Regarding to the production of lithium, as we mentioned in the press release, we already reached a total capacity of 200,000 metric tons during the month of October. This is because we have been working so hard in order to the bottlenecks, all the the processes and and so on and at the same time we have been working hardly in in increasing our quality and reducing our carbon and water footprint and for the beginning of next year we expect to reach 210. for the other side i have to mention that we've we have been working hard in in to produce a lithium sulfide in the salada gamma that later on is go to China to the conversion, so that gives you an additional capacity in total, all this product coming from the Salar de Cama. Part of those, the main part of those is converted in our Antofagasta plant near to Antofagasta, sorry, and the other part, the lithium sulfate converted in China. That is the plant that we have for the lithium.

Regarding cost, I Regarding, well, hi Lucas, this is Gerardo. Regarding Azure, unfortunately, given the nature of the transaction and the jurisdiction in which this transaction is happening, at this moment, we cannot share more details on what was informed through a press release a few weeks ago. When we have more information that we can share, rest assured that you will get it along with the rest of the market.

Super clear. Just maybe a quick follow-up on the cost. If it's fair to assume the cost declining or growing less in inflation next year because of the cost dilution.

So as soon as we already finished our expansion, now we're focusing obviously on reducing our costs, increasing the yield. I don't know if you know, but we have been reducing our brine extraction according to our sustainability plan defined in November of 2020. So that means we'll have less brine and we'll have for the other side the challenge to keep producing more. So that is a huge challenge. But at the same time, we have been increasing the yield in our chemical plant so that that will mean less cost in the coming year. But we still need to analyze that in the coming months when we make the budget for next year. Perfect. Thank you very much.

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

Thank you very much. Two questions. One on the market in general. We see that the futures market is showing $16,000 or $17,000 per ton. Can you reflect on that price level? How liquid do you think that market is? Who is actually selling at those prices? And are you concerned that prices will stay in that area for all of 2024? And my second question is the Solar Futuro program that you announced a couple of years ago, How is the DLE tracking? When can we expect the first tons to come out from DLE, and how will that change your cost profile? Thank you.

Hello, Ben. This is Felipe Smith. How are you? Let me comment a little bit about the market, first of all. So, well, the demand fundamentals remain solid in the long term. We are convinced about that. With an annual average growth above 20% for the next five years. We expect EV sales of around 14 million units this year, which represents still a growth of around 35% compared to last year. So that is a first as an introduction. Now we have seen some softening of the demand outside China, which coupled with a higher than expected supply has resulted in some excess of inventories accumulated in the whole battery supply chain. And this is what is resulting in a prices showing downward pressure today. Okay. So, What will happen in the future? Well, it's difficult, you know, prices are at the end, the result of supply and demand, but as part of our commercial strategy, we'll continue to be contracting volumes following market indices. During 2023, we have been able to strengthen further the relationship with our customers. We have entered into several new long-term supply agreements And that at the end, and those long-term agreements also are based on these indices. So basically SQM will always follow whatever the market is. And we are very confident on the fact that we are a cost leader. So our leadership position in cost, quality and sustainability allow us to be very confident that we will always be there in the market.

Sorry, about DLE, and as you know, we have been working, as I already explained a couple of minutes ago, we are now working in what is going to be the technology and process and everything about Solar Futuro. And of course, if we reach an agreement with CODELCO and we have a project together with them, Of course, we will be very clear and very specific about all the technologies and process we expect to implement in the Salar de la Cama. And of course, one of the alternatives, many different technical alternatives, technological alternatives, is DLE. But so far, we will announce if we have something for clear. But anyway, we have been advancing in the technology point of view in order to have a a new technology available to SQM, I will ask Mark if you can comment on what we have been doing in terms of M&A in order to have more DLE knowledge and experience.

Thanks, Ricardo. So yes, as you mentioned, we continue to be active in M&A, not only in the resource base, but also in further downstream technologies, both in processing and also in starting from DLE technologies. So in the last quarter, so Q3 of this year, we have made an investment to hire a percentage stake on a French company called Adionics. And this is a French developer on DLE technology. And we are looking forward to continue now working together with them in engineering and developing industrial scaling for this kind of technology into the future. This is in addition also to other ventures and innovations and investments we perform in the SQM Lithium Ventures that we also tackle entrepreneurship and innovation in that area.

Great, thank you very much.

The next question comes from Isabella. Samomato with Bank of America. Please go ahead.

Thank you. Good afternoon, everyone. My question is on SPN. I think it's interesting that you guys are calling for the bottom on prices, right? When we look at the potter's prices you guys had in the quarter and the spot prices for potters, right, it seems that there's downside to potters from now on. But on the other hand, as you're expecting more flattish SPN or some recovery on prices from now on, can we assume that the premium widens from two, three levels going forward? I mean, if you could give us a little bit more color on how are you seeing the dynamics of prices between one another, I think it could be helpful. Thank you.

Isabella, Ricardo Ramos speaking. Yes, it is right that MOP prices being in a more stable environment, I think, in the last quarter. If you consider the prices of last year was very high in the MOP. Now we see during third quarter, and we do expect during fourth quarter to have similar price environment in the MOP. That's seems like we are reaching a stable price environment. That's quite good in order to have something for sure. You never know. Fertilizer prices have always been quite volatile, but the trend seems to be quite stable in the last, I don't know, four to five months. If you go to the specialty plant nutrition, the good news is that starting the year, the demand was very, very affected and was very low, maybe because the prices were too high coming from 2020-22 and some of the users and farming, especially in Europe, was affected about that and the lack of energy in order to produce. But now, nowadays, we foresee during the last quarter and again on the last two quarters, a positive environment in volumes. We are very positive about fourth quarter. Our first idea about fourth quarter is going to be a record. It means we'll be very high in terms of volumes. And we do expect and we're very positive about. moving forward to the year 2024, and especially to plant nutrition, especially we're talking about potassium nitrate. Pricing is always difficult, as I said before with the MOP, to say what is going to be the future price. But today, price is more stable than probably six months ago. We think that keeping pricing stable At today levels, maybe slightly lower because the volume increase in different areas. It's a reasonable assumption, but again, fertilizer pricing, it's volatile, and the fertilizer market being under a lot of pressures moving up and down in the last two years, and we need to be very careful having long-term projections about pricing in the fertilizer. But we think that today the environment is more positive in terms of volumes and probably more stable in terms of pricing.

That's very clear. Thank you.

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

Thank you for joining our call today, and we look forward to having you in our next call. Goodbye.

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