Sociedad Quimica y Minera S.A.

Good day and welcome to the SQM first quarter 2024 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 telephone keypad. To withdraw your question, please press star then two. We do ask that you limit yourselves to one question and one follow-up. Please also note today's event is being recorded. I'd now like to turn the conference over to Irina Axanova, Head of Investment Relations. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining FQM's earnings conference call for the first quarter of 2024. This conference 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. Gerardo Yanez, our Chief Financial Officer, will be speaking on the call today. Carlos Diaz, Executive Vice President of Lithium. Mark Fons, Vice President of Lithium Development and M&A. Max Vial, Lithium Market Intelligence Director. Pablo Altamiris, Executive Vice President of Nitrates and Iodine. And Juan Pablo Bilolio, Commercial Vice President of Iodine and Industrial Chemicals, are also available to answer any questions. Our Chief Executive Officer, Ricardo Ramos, unfortunately couldn't join the call today. Before we begin, I would like to remind you that some statements made during this conference call regarding our business outlook, future economic performance, anticipated profitability, revenues, expenses, and other financial items are considered forward-looking statements. Please note that the same cautionary language used in our press release and presentation also applies to this call. And now I will leave you with our Chief Financial Officer, Gerardo Yanez.

Thank you, Irina. Good afternoon, everyone, and thank you for joining us today. As you may know, we reported our first quarter 2024 earnings result yesterday. On this call, we will be discussing the key drivers behind these results and sharing our outlook for the year. Our total revenues for the first three months of the year reached almost $1.1 billion, with an adjusted EBDA of over $400 million. Our net profit was impacted by a one-time adjustment related to the accounting treatment of the lithium mining tax in Chile from previous years, adding up to almost $1.1 billion as of March 31, 2024. This is not having a significant cash impact since the majority of this amount, close to $930 million, was paid in prior years. During the first quarter of this year, we delivered strong growth in our sales volume across all of our major business lines, reporting record high quarterly sales volumes in the iron business, positive sales volume recovery in the fertilizer business, and almost 30% higher lithium sales volumes compared to the same period last year. This growth helped partially offset the impact of lower average sales. prices realized for the first quarter 2024. In our nitrates and iodine business unit, we are proud of the results of the ramp-up of Pampa Blanca project, which is expected to reach approximately 1.3 thousand metric tons of new iodine capacity this year. Also, a few months ago, we began the construction of a seawater pipeline, which is expected to be completed in 2026. It is an exciting development, but it's also a challenging project. Almost 38 kilometers long with a total elevation of over 1,000 meters running from the Pacific coast near the city of Iquique to our operations. Once completed, the pipeline will have a capacity of 900 liters per second and will allow us to expand our production capacity even further while delivering fresh water to some neighboring communities. We have seen positive demand trends in the iron and potassium nitrate market since the beginning of the year. Our outlook is that the iron market demand could grow by approximately 4% this year, approaching 2022 levels. Our iron sales volumes are projected to increase in 2024 compared to last year, with an expected stable average sales price with a possibility of a slight upside. We are similarly optimistic about the potassium nitrate market outlook, with expectations of up to a 15% growth in the demand this year. Our sales volumes are also anticipated to follow a similar pattern. Potassium nitrate prices have been relatively stable over several quarters, and we believe this trend could continue for the remainder of the year. In the lithium business unit, Having completed expansion of our lithium carbonate capacity in Chile to 210,000 metric tons, we're now focusing on a series of initiatives that should allow us to increase this capacity to 240,000 metric tons by the end of the year, mainly through process improvements, increased quality and efficiency of existing production facilities. Our lithium hydroxide capacity in Chile has reached 40,000 metric tons annually, and we expect to complete this expansion to reach 100,000 metric tons per year during 2025. In China, we completed the modification of the Dishim lithium hydroxide conversion facility with a total capacity of 20,000 metric tons per year. This project represents years of innovation and development of a chemical facility to refine lithium sulfate produced in the Salar Adakama to battery-grade lithium hydroxide. At the same time, we have reached agreements to toll approximately 20,000 metric tons of lithium sulfate coming from the Salada da Gama into lithium hydroxide in China. All of this, together with the initiatives we're working on in Australia, should let us reach a total production capacity of more than 300,000 metric tons of lithium products by the end of 2025. Turning to broader lithium markets, we have observed some encouraging trends during the first month of this year strong demand growth have been driven by electric demand market mainly in china which accounts for almost 75 percent of global lithium demand we anticipate that the total ev sales could reach 17 million units by 2024 representing a 22 percent increase from 2023 and total lithium demand could exceed 1.1 million tons in 2024, representing a 20% increase compared to the previous year. Given this demand growth, we have anticipated our sales volumes outlook for this year, expecting to sell close to 200,000 metric tons. The expected growth in global lithium supply this year could be up to 30% compared to 2023. However, given current lithium prices, the expected supply from high-cost producers could be affected, providing some price stability as has been seen since February this year. Before concluding and opening the line for questions, I would like to ask Mark to share with us some of the recent developments in our lithium initiatives abroad.

Thank you, Gerardo. Good afternoon, everyone. From an Australian and international lithium perspective, Forest Cumming has been a very eventful and exciting start to 2024, with spodumene concentrate production commencing at the world-class Mount Holland Lithium Project, jointly owned with our partner, West Farmers, and the completion of the Azure Minerals acquisition with Hancock Prospecting. We are very fortunate to now have access to two globally significant lithium deposits, which we are progressing with two equally significant Australian partners, West Farmers and Hancock Prospecting. Moving first to Mount Holland, Last year, we commenced production at the newly constructed mine and concentrator facilities, exporting our first shipment of spodumene concentrate this month, to be told in time. During this calendar year, we expect to produce a total of between 120 and 150,000 metric tons of spodumene concentrate, that's SQM's share, and to toll close to 5,000 metric tons of lithium hydroxide. However, Given the timing of tolling and quality certification requirements, we do not anticipate seeing these volumes on the market until the end of the year. In the meantime, work continues on the Queen Anna refinery, with construction of our 50,000 tons per year facility at about a 75% to 80% complete, and expected to be in production by mid-next year, following commission later this year. We keep progressing with studies on environmental approvals for the Mount Holland mine and concentrator expansion, which would effectively see Mount Holland's doubling its sediment concentrate production facility after FIDA is taken. Moving now to the recent acquisition of Azure, which owns 60% of the Andover lithium project in Western Australia, also concluded this month. Together with Hancock Prospecting, we acquired all outstanding shares of Azure Minerals Limited and jointly became owners of 60% of the Andover lithium project. This significant investment by SQM further highlights our belief in Western Australia as one of the world's prominent hard rock lithium mining jurisdictions. We're extremely happy with this acquisition and with our new partner, Hancock, who will provide excellent project development and mining expertise in Australia to complement SQM's market-leading lithium knowledge. We believe our business model of partnering with great local companies to discover and develop Tier 1 lithium assets places SQM in a prominent position in the global hard rock lithium market. In 2024, we will continue to work the good work that Azure has done and work towards a resource estimate for the Andover project, as well as providing additional capabilities, continue with studies and regulatory approvals activities, as well as project definition and project development. While work still needs to be done to finalize this resource estimate, we are certainly looking at a deposit of global significance. Outside of these two major projects, as you may have seen in our public announcements, we continue to work on, monitor, and invest in various early-stage exploration projects in Australia with the aim to finding new high-grade lithium prospects with the potential for scale.

Thank you, Mark. At the radio, we will now open the lines to questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, we ask that you 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 two. We also ask that you please limit yourself to one question and one follow-up. Today's first question comes from Ben Isaacson with Scotiabank. Please go ahead.

Thank you very much and good morning, everyone. So I have three questions. I'd like to ask them one by one, if that's okay. First question is, I noticed in your presentation that the plant in China, in Sichuan, it's increased by 10,000 tons. It was 30,000 last quarter and now it's 40,000. Can you just explain that, please?

Sorry, hi Ben, this is Carlos Diaz. Yeah, our capacity in China is 20,000 metric tons in the Sichuan Dixing plant. And the other 20,000, we are going to produce this starting from lithium sulfate, but with taller. So in total, it's going to be 40,000, but 20 for our own factory and the other 20 for taller.

That's great. Thank you.

But both are coming from lithium sulfate, sorry.

Yeah, yeah, right. Second question is on the Azure acquisition. So you have a 50% stake in 60% of Andover, if that's right. Can you just talk about what next steps are for the project over the next 12 months or so, CapEx spending, and what should we expect to hear from you over the next year?

Thanks for the question, Joe. Yes, you're right on the math on the acquisition of the, at the end, Andover lithium project is 50% of the 60%. So, regarding next steps, as I mentioned, we are now aimed in three main things. Is the resource made an estimate? Driving more detail into what was already advanced by the Azure team. As you know, Azure issued an exploration target, which was a definition in between 100 to 240 million tons of mineral at between 1 to 1.5 percent lithium oxide content. So the main resource estimate will give us a more detailed view on that. At the same time, we are advancing on regulatory approvals, which usually in this case of capital investments in the resource industry, a critical path is aimed to those regulatory approvals. So we are advancing on those, as well as starting a project definition with our partner, Hancock. So for the future and the short term, Future, you won't see any capital requirements driving from Azure in next steps of development yet until we move into the DFS and FID.

Great. Thank you. And just my final question in the iodine market. So the price was around $70 or so, and it's kind of slipped back a little bit down to the mid-60s. Now it looks like things are strengthening again. Can you just give an overview as to where are we going over the next two or three years at seems like there's not a lot of supply coming on, and demand growth remains really resilient, even in a weak kind of macro market. So does this tightness continue over the next couple of years? Thank you.

Hi, Ben. This is Juan Pablo. Well, talking about the iodine market – As we mentioned in our release, we are seeing a recovery in the demand compared to last year. Last year went down about 4%. Now we're looking at it growing again this year. That's why we believe the price is going to stabilize. And talking about the next two to three years, uh the drivers of the demand are still the growth of the contrast media industry the lcd market and other healthy purpose of the iodine so we see that demand growing uh maybe not at the four percent that we are going to see this year but you know but still growing and at the same time we expect that a new supply may arrive to the market we we know that some competitors have has made some move those acquisitions for all projects that should be online in the next couple of years. Okay? Great.

Thanks again.

Thank you. And our next question today comes from Joel Jackson with BMO Capital Markets. Please go ahead.

Hi. Good morning. I also have three questions. I'll do one at a time. First question is, It was very clear a few months ago, it happened before the SGM that you were going to produce a bunch of lithium, the market may not be able to take it, and you would build inventory that have the tons for later, which is you do that for a lot of reasons. But usually what happens is you sell the tons anyways. So the decision not to build inventory or as much inventory into a lithium price market has been pretty flat the last few months. Explain that decision commercially. Is that a view you expect lithium price to be very stable here? and so no point to hold inventory back.

Hi, this is Carlos Diaz again. Well, as always, our strategy is to produce at the full capacity and expanding in line with the expected market growth in order to be always prepared to serve the need of our customer. Do you know that the lithium price hit bottom level in China by the end of February 24th? after we wish we observed a quick recovery of almost 10% until mid-April. And for several weeks after that, price fluctuations were quite moderate, potentially indicating more stability for the rest of the year. So the outlook for the rest of the year will depend, as always, on the supply and demand balance.

Okay. Okay. You talk about capacity reaching 300,000 tons at the end of 2025. Let's call that a production level for 2026 if you choose to produce that full utilization, as you just mentioned. If you can hit capacity of 305,000 tons at the end of 2025 and you were to run full out, what does that mean for actual production volume in 2025? Obviously, 305,000 tons is the capacity at the end of the year.

Well, this year we expect to produce around 210,000. That is according to our capacity in Chile that already was mentioned by Gerardo and the capacity that we have in China and additionally in Australia. But for next year, we're still reviewing that. What was announced, it was 250 this year. It was 240 in Chile, sorry, and 40,000 in China, so 280 next year. That is going to be the capacity. Yeah, that is going to be the capacity, and 310 in the year 2025. How much we're going to produce? Well, we'll have to see, obviously, how is the market, how the customer need, and so on. But I will always respect to sell according to our capacity. I mean, it should be close to that.

Okay, my last question has to be – oh, sorry. My last question, it has to be asked. It's kind of a two-part. So what is the last sticking point on finalizing this MOU with Koudelka, which you said is going to happen within a week here, end of May? And then, you know, Corrado and team, how concerned are you, you know, that Tianqi is going to use its legal options, to force a shareholder vote? And then are you preparing for the potential that if any complicated and complex outcome that you will get their sianchi stake put it to you? How are you preparing to possibly handle it financially?

Hey, Joe. How are you? This is Gerardo. As you can imagine, the deal with Codelco is quite a complicated deal with a lot of details, and we have been working really, really hard to meet the deadline. Last year, we had the deadline to issue something by the end of the year, and at the end of December, we issued this MOU. And now we're working to make sure we have all the contracts finalized by the end of the month, and we keep on working on that. There is no particular sticking point, as you ask. It's just that it's a complicated transaction.

Now, the Tianqi shareholder vote, are you preparing financially to be able to have to protect yourself in the very complicated legal situation Tianqi puts its shares to you?

I mean, the transaction as it was asked at the beginning of this year to the CMF has to be approved by the board. And we're planning that it will happen this way. And then once the contracts are signed, we will proceed with all the details to have the JV ready by the beginning of next year. But... We're not panning for anything else as the process should go as the regulator instructed.

Okay, thank you.

Thank you. And our next question comes from Gabriel Samos with Goldman Sachs. Please go ahead.

Hi, thank you for taking my questions. So my first question will be on the lithium expansion. So, given the increased capacity guidance that you have, we'd like to understand where these investments will be made. So, basically, you already mentioned the 10,000 tons additional in towing in China, but we'd like to understand what it would take for you to get to the increased 30,000 ton capacity in Chile, right? So if you need additional investment to get to that capacity, does it only need improvement in terms of efficiency, or does it require investment in more refining capacity as well? Just to understand how close you are already to your capacity in terms of refining and in terms of brine extraction. So that's the first question.

Okay, Gabriel, thank you for your question. Well, it was already explained a little bit by Gerardo, but in the last year we have been focused to increasing the capacity in Chile as a lithium carbonate, and now we're focusing on increasing it as a lithium hydroxide. We already reached a capacity of 210,000 in lithium carbonate, and now we're working to add in and to – Focusing on the bottleneck area of carbonate line and increasing the lithium recovery, this initiative has a lower capacity intensity when compared with the new production line. So it's not significant as it was when we were building new lines because more focusing the bottlenecking. And we're working, obviously, to keep it increasing in the future, now the lithium hydroxide, and the idea to reach the 100,000 metric ton, let's say, at the last quarter of the next year. I don't know if that answers your question.

It does. It does. Thank you. And I have just one more question on the lithium cost, right? So a few quarters ago, you mentioned that you'd start to focus on increasing the efficiency in production, so not only to increase production, but also in terms of costs, right? So in this quarter, the cost that you reported was already better than our estimate, but we'd just like to understand what is the sustainable level of production cost that we should see for SQM's lithium production in the future, particularly in the solar data thermal, right? and when you would expect to get there given the initiatives you are making right now. Thank you.

We expect the future cost to stay on the same level that it is today. We expect to reduce, obviously, because we are increasing capacity and gaining seniority. But for the other side, we have a, I don't know, higher cost because we are focused to produce a higher quality. So always you have more cost when you try to get in a better product. Yeah. As a summary, I would say it's going to be a stable cost compared to what it's been this year and last year.

Okay, perfect. Thank you.

Thank you. And our next question comes from Corinne Blanchard with Deutsche Bank. Please go ahead.

Hi, good afternoon. Thank you for taking my question. I have two questions. The first one, to come back maybe on the MOU and T&G situation, So let's say you get the MOU finalized and signed at the end of next week, basically, can TNC still continue creating some issue around this? Or would, like, if you sign the deal next week, would that just seal the deal and basically kind of all the regulatory affair that you have an issue with, would that go away?

Hi, Corinne. This is Gerardo. Well, we are working on the final documents on this agreement with CODELCO that was described on the MOU that was published at the end of last year. The approval process on our end was discussed or was asked to the regulator in Chile, the CMF, at the beginning of the year. And the regulator was quite clear on the way this has to be approved, which is at the board level. So once the contracts are ready, the board will meet, will review the details of the contracts. and we'll take a decision. On the Codelco side, to be quite honest, I'm not that familiar on how the process goes on their end to get the approval steps, but this is what should happen on our end.

Okay, thank you. And the second question would be, what do you see like industry-wise in the channel, like in terms of inventory? Are you seeing like any restocking move happening or is it still like a static cost?

Hello, Corinne. We have a healthy inventory. If you see this year, we expect to produce 210,000 and to sell 200,000. So, we will have to have more inventory in the chain because we are increasing the sales and we want to have enough inventory for supplying to our customers. We have a inventory in chile in china a lot of inventory there because obviously our main sales more than 70 percent of our studies is done in china we have a different warehouse and in korea i think it was i would say that that's the most important place where we have the inventory We are in a healthy position now of inventory, and we want to keep it in that way. We are not speculating with the price and so on. We just sell what the customer needs and according to our production.

Okay, thank you. Thank you. And our final question today comes from Cesar Perez Navarro with BTG Paxual. Please go ahead.

Yes, good morning and good afternoon, and thank you for taking my questions. Regarding the $1.1 billion tax impact in the first quarter of 2024, must we now assume that going forward our estimates must now include a higher mining tax? Is this reasonable to assume for the quarters ahead? And my second question is actually more clarification. For the incremental $30,000 that you plan to increase in the Carmen complex by – by 2025, you just mentioned that you will manage to achieve this via higher recovery, which is less capital intensive. Can you comment how much less intensive this is on a per ton basis? And is this already included in the 1.3 billion capex you reiterated in your press release for 2024? Thank you.

Hi, Cesar. This is Gerardo. Regarding the one-time tax hit on the first quarter, it's related to the interpretation that the tax authorities have on the lithium mining tax, where they understand that it's subject to mining tax, the lithium is subject to mining tax, and we are of the understanding that it's not. We have had this discussion dispute for a few years. It has been described in detail on our financial statements. But because of the ruling of the appeals court in April, we have changed the accounting treatment of this tax, which, by the way, has been paid by the company every time we have been invoiced by the tax authority. So that's why it doesn't have a significant cash impact on our balance sheet. Now, going forward, the treatment of these tax payments should continue to be exactly the same as it is today or as it was reflected on the first quarter financial statements as a function of the mining tax in Chile. To give you an idea, the impact in the first quarter, which is, again, a function of the price of lithium and the profitability of the business, was approximately $8 million. Going forward, we will continue to book that as tax expenses, depending on, of course, how the legal case continues. All right.

Hello, Cesar. Well, as I mentioned before, at the beginning we were focusing on increasing the capacity, adding the new lines. After we finished that, now we are focusing on the bottom naked, the area where we expect if we increase those equipment or unit, we can easily increase the total capacity of the same plant. There is no new lines. It's just doing the bottom naked of those areas. So that is why we estimate, let's say, $70 million, could be a little bit more, but a range around that, and to gain another 30,000 metric tons. If you do the math, it's around $2,300 per ton. But just because it's at the bottom, you cannot ask me to produce and to increase more the capacity with the same cost.

No, I understand. Thank you. Thank you very much, gentlemen.

Thank you. And this concludes today's question and answer session. I'd like to turn the conference back over to Irina Axnova for closing remarks.

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

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.