Sociedad Quimica y Minera S.A.

Good afternoon and welcome to the SQM second 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. Please note, this event is being recorded. I would now like to turn the conference over to Irina Axanova, Head of Investor Relations. Please go ahead.

Thank you. Good afternoon. Thank you for joining SQM's earnings conference call for the second quarter of 2024. 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. Ricardo Ramos, our Chief Executive Officer, will be speaking on the call today. Gerardo Yanez, our Chief Financial Officer. Carlos Diaz, CEO of SQM Solar. Mark Fons, CEO of SQM International Lithium. Philippe Smith, Commercial Vice President of SQM Solar. Pablo Hernandez, Senior Director of Business Strategy and Development at Esquirem Solar, Pablo Altimires, CEO of Iodine Nitrates, and Juan Pablo Biloglio, Commercial Vice President of Iodine and Industrial Chemicals, are also available to answer any questions. 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 Executive Officer, Ricardo Ramos.

Thank you, Irina. Good afternoon, everyone, and thank you for joining us today. Before diving into the key drivers behind our results, I would like to highlight an important milestone we achieved last quarter. As mentioned in our earnings release, We are very pleased to have entered into a partnership agreement with CODELCO to jointly operate the Salar de la Cama until 2060. Based on the principle of private-public alliance, we believe this agreement is a pivotal moment for both SQM and for the future of the lithium industry in Chile. While there are several conditions precedent for the partnership to become effective, together with CODELCO, we are committed to ensure that these conditions are met by the first half of 2025. We're looking forward to working together with Codelco to operate the most sustainable lithium operation in the world based in the Salar de Atacama. Our second quarter results were positively impacted by a strong volume growth in all our major businesses, supported by a strong demand growth in their respective markets. We reported record sales volumes in lithium and iodine businesses exceeding 52,000 metric tons and 4,000 metric tons respectively. We anticipated solid growth in the lithium market this year, driven by a strong EV performance mainly in China. Demand growth in the iodine market this year exceeds our expectations. We expect this trend to continue for the remainder of the year and believe that our iodine volumes could exceed 14.5 thousand metric tons this year, marking 2024 a record year. While our average realized price in the lithium business improved slightly in the second quarter compared to the previous quarter, we have seen lithium prices decline since the beginning of July. As most of our contracts are linked to price indices and our average prices follow the prevailing market prices, we believe that our average selling prices in the third quarter could be lower than in the previous quarter, given the current price environment. We are convinced that most of the greenfield projects are not profitable. While we continue with our previously announced capacity expansion projects, we're also reassessing the attractiveness of certain market and initiatives in their current price environment. We believe our lithium sales volumes in the second half of the year could be similar to those reported for the first half of the year, with a potential upside should the market conditions improve. We recently formed SQM International Lithium to develop our lithium business outside of Chile. Its primary objective is to leverage the lithium assets and expertise we have in exploration, project development, mining, and chemical operations to expand our lithium portfolios overseas. Thank you, operator. We'll now go open to the line of questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Our first question today is from Joel Jackson with BMO Capital Markets. Please go ahead.

Good afternoon. This is Anthony on for Joel. So you indicated in the press release that in the current lithium price environment, peers may take production out of the market. Yeah, SQM is maintaining 24 production targets with sales volume maybe slightly lower. Obviously, SQM has a unique quota system with Corfo and the least that was previously expiring, which encourages maximizing production, but shouldn't SQM as a market leader be disciplined in maybe lower volumes?

Hello, this is Felipe Smith here. How are you? I'm not sure if I understood correctly your question, but let me rephrase that we estimate that the sales in the second semester of 2024 will be similar to those reached in the first semester of 2024, meaning that our annual sales could be around 190,000 tons, with a potential upside should market conditions recover.

Just to follow up on that, the question was, I guess, around whether SQM as a market leader should be disciplined if we start needing to see production come out of the market. Yeah.

Hello, this is Carlos Diaz. How are you? Well, let me tell you a little bit about our capacity in Chile. Now it's according to our schedule, and so we expect this year to produce 210,000 as a lithium carbon equivalent in the different quality, let's say carbon dioxide or sulfate. We should know that 30,000 are converted in China, so we're still reviewing the volume to be converted in China for lithium sulfate to hydroxide or carbonate. and during the second semester. So the total volume converted in China obviously will depend on the specific market segment and following the current price environment. So finally it would depend on how the price is coming in the next month. So I don't know if I answered your question.

Great, thanks. Just a follow up. So maybe weighing strategic priorities Um, how would SQM rank delaying future times out of Chile versus, you know, investments in places like Australia or other opportunities moving forward?

Moving forward, as is clear, we are going to develop a huge project that is called Salar Futuro together with CODELCO. That's why our investment together with CODELCO in the next 10 years in Chile is going to be significant. If you consider the Salar Futuro project, we will develop together. We expect to increase some production in Salar de Cama. With the project, of course, but this is mainly Chile, it's mainly oriented to the Salar Futuro project. Of course, we want to grow outside Chile. If we find good opportunities, as you know, we have been active. We have investment today in Australia. We continue to have geologists looking for new alternatives and probably we will announce new investment or new projects in Australia in the medium term. I don't know, but we are working very hard in order to do it.

Great, thank you.

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

Hi, everyone. This is Aparva on for Ben. I might just piggyback off of the last question a little bit, but given that the market is currently oversupplied and you've previously shared based on your 210,000 tons of production versus about 190,000 of sales, is the expectation still that you'll be able to work through these inventories? Are you finding any challenges, seeing any challenges in finding buyers for that lithium inventory? Are you holding in anticipation of demand and pricing picking up in the near term?

Yeah. Well, we're already coming. We expect to sell this year around to 190,000 metric tons of lithium carbonate. And we expect to produce around 210,000. So it's going to be 20,000 exceed. That is approximately what we sell in one month. So for the other side, we have to prepare for next year where we expect to sell a little bit more. So it's a good investment in working capital. We don't see that it's too much. It's healthy inventory.

All right, and then as a follow-up, your production volume for 2024 were contracted with kind of a one-month-like despot. How should we be thinking about lithium realized pricing in Q3 so far, given that quarter-to-date the index is down, what, 15% to 20%? Is there any sort of indication as to whether you're baking price floors and ceilings into your contract?

Yeah, hello, Felipe again. So indeed, the SQM price mechanism is based on price indices in the different geographies with certain lag which average approximately one month. This means that in general, our realized average price will always be close to the prevailing average spot price. Now, during the beginning of second quarter, We observed a certain price recovery, which unfortunately lasted until mid-April. Then we saw price fluctuations that were quite moderate. But over the last three months, we have seen a persistent decline in the index prices, especially in China. So that is why we are expecting that the average price in Q3 will be lower than in Q2.

Thank you, and if I may sneak in a... Pardon me ma'am, we seem to have lost audio from your location.

Hello, can you hear us?

We can hear the main speakers, we can't hear the questioner.

Can we go to the next question, please?

The next question will come from Isabella Simonotto with Bank of America. Please go ahead.

Thank you. Good afternoon, everyone. So I have a couple of questions. First of all, on lithium. When you say that SUM is looking for re-evaluation, is re-evaluating the markets and what's attractive at those levels, I wonder what exactly do you mean by that and what are things that are being taken into consideration here? And also on the international expansion here, and you mentioned 100,000 tons by 2030. If you could give us a sense, what are the main regions of focus, the main raw materials, and eventually what type of cost of production should we be thinking about for these 100,000 tons? Thank you.

As we're coming, we expect to produce a little bit more than 200,000 in Chile. 30,000 or 40,000 of those is produced as a lithium sulfate in Salada-Dakama that is sent later to China to convert to lithium carbon dioxide. So that is something that we could re-evaluate according to the market condition, the production that we're going to expect to produce in China in the second quarter, in the second semester. That's the response.

Regarding the future projects. Hi, Mark Fones here speaking. Regarding the future projects in Australia and what was mentioned in the press release regarding the 100,000 tons per year of lithium carbon equivalent production looking into 2030. As you know, we've been pretty active in Australia. We now have gained access to two world-class lithium deposits, namely the Andover project and the Mount Holland lithium project. both of which were expected not only to have a significant scale, but also we are already discussing the expansion for the Monhollandism project. In addition to that, we continue to work on, monitor and invest in various early exploration projects, not only in Australia, but also across the world. We have just recently announced a new partnership in Sweden with Talga Group. All of them aimed to develop early stage innovative and marginal cost effective products into the long term. We intend to be a lithium chemical processor, not only in Chile, but also outside, and leveraging on SQM's knowledge and also technology innovative process to be in the lower part of the marginal cost of production.

Thank you.

The next question is from Lucas Ferreira with JP Morgan. Please go ahead. Hi, guys.

Can you hear me? Yes. Yeah, okay. Thank you. So, two questions. The first one, can you explain, and correct me if I'm wrong, but I'm seeing your average cost, cash cost per ton in lithium increasing like 8% quarter over quarter. That's driving your gross margin to be reduced. So, can you explain the reason why? I was expecting actually the opposite since... I would imagine lease payments allocations would be lower, given the lower prices, and also higher volumes would imply maybe fixed cost dilution, the depreciation of the peso maybe helps you as well. So can you explain why this quarter specifically cost was higher? And the second question to Ricardo Ramos, just to confirm, so obviously you signed already the contract with Codelco for the JV. But you mentioned that certain conditions must be met. So just wanted to clarify that. So apart from the signing of the contract, what are the next steps for the JV to be actually formed and run smoothly? So how long that could take? If you can explain, that would be great. Thank you.

Hi, Ricardo Alamos speaking. We published the agreement with Coelco. It's available for everyone in our webpage, and there's a list of condition precedents that are included in the contract. You can check it. But there are mainly legal ones that we have to follow some steps in the companies and so on, by law, whatever. But we are working on that, and we are going to be ready as we speak in the first quarter of next year. But if you want to review in detail this condition present, those are included in the contract that are public.

Hi, Lucas. This is Carlos Diaz speaking. Well, I respect your first question about the cash cost of the lithium. This is mainly explained because of the inventory adjustment related to lithium sulfate. The lithium sulfide that we export to China that will later be converted to carbon dioxide was exported during the second quarter where the prices were higher. And the royalties are paid in the moment that we export. So we have an effect mainly related with that. The royalties that we pay to the Gulf of Surrey in Chile.

Perfect. If I may, just a quick follow-up. What's your lithium cash cost... today, is it remains around 5,000? Is this something we can work with?

Our cost is stable during this period. I mean, we don't see a significant change or whatever like coming before it was most related with the priority that we pay as we pay in the moment that we export and not we pay when in the moment that we sell. And you know there is a lack because we have to export from Chile to China and we keep inventory there and so on. And that is the main effects that is in the lithium sulfate.

Perfect. And apologies, one final in this topic of the royalties, if I may. Can you confirm if that quota, that quota, legacy quota of the previous contract with Corfo before 2017, so If not mistaken, as of this year, you should be already exploring part of the quota, something like 50,000 tons a year with that six flat rates. Is this already in place? So eventually that comes to sort of flow into the P&L in future sales. If you can confirm this, please.

Hi, Lucas. This is Gerardo. Yes, what you're saying is right. And for those that are not familiar, when we signed the new contract in 2018, we had a balance under the previous contract at a fixed rate of 6.8% with Corfo. According to the new contract, the balance that we had could be used from 2024 onwards, and it's approximately 50,000 metric tons per year. So approximately 50,000 metric tons sold this year will pay a fixed rate of 6.8, while the rest will pay based on the table that is publicly available.

Perfect. Thank you very much, everyone.

The next question is from Alejandro de Miquelis from Jefferies. Please go ahead.

Alejandro de Miquelis Yes, good morning. Thank you very much for taking my question. Just one question on the CODELCO agreement. As you said, you get the conditional presence in the first half of 2025, then my understanding is there is a kickoff of extra capacity there. Are there any discussions with CODELCO regarding what could happen to that extra capacity in 2025?

No, we are not having marketing or commercial discussion with CODELCO yet because part of the condition presence are some authorization and the following antitrust rules, we need to have the agreement ready before starting to talk about commercial strategy.

So if the current lithium market pricing conditions continue, is there a chance that the extra capacity for next year may not become available, or you may choose to delay that?

As someone said before, we're a very disciplined company. It means that we will increase the capacity anyway, and we will sell more lithium carbonate next year as compared to this year. That's for sure.

Okay, that's very clear. Thank you.

The next question is from . Please go ahead.

Thanks very much. Just a follow-up on cost. So how do you expect cost to pan out through the rest of the year in the light of electricity price increases in Chile? And do you have any cost mitigation program in place, possibly by reducing production of your hydroxide volumes in Chile? which has a relatively high cost base, or maybe by slowing down ramp-up at more hole-end projects. Thank you.

This is Carlos Diaz. Our focus is to reduce our cost and to look at alternatives to keep increasing the quality of the cost and our carbon footprint and so on. But we're not thinking to reduce our capacity of lithium hydroxide. I don't know if it was your question, but no, we continue with our plan to expand the lithium carbon hydroxide in Chile.

Thank you. And just to question on your Mount Holan project. You know, are you planning to slow down ramp up, you know, given the adverse economics? And what would this mean for the sales contribution in 2024 and 2025?

Hi, Mark Fons here. Thanks for your question. No, we continue full throttle managing the Monhollandian project. We, as you know, are already producing spodumene concentrate from the miner concentrator. We have already produced more than 100,000 tons of spodumene concentrate. We will continue to increase productivity, reduce costs, and maintain quality into the future. On the refinery side, we have already above 80% construction completion. We are starting commissioning at the refinery, which we expect to have first product mid-2025, so mid-next year. Once completed, we expect the project to be fully profitable and to increase and add value to SQM's full expect of projects.

Got it. And just a follow up on that. So until commissioning of your refinery, are you looking at the tolling opportunities or selling spodumene directly into the market or maybe just holding on to your spodumene inventories until you commission the refinery?

Yes, we do have tolling commitments. We are tolling spodumene concentrate and we are also open to additional alternatives in that respect.

The next question is from Marcio Sayu with Goldman Sachs. Please go ahead.

Thanks, everyone. Thanks for the opportunity. A couple of questions on my side. Obviously, when you look at my income year-to-date, it's still negative by about $650 million. I understand that has been, you know, mainly explained by 1.1. billion dollars in payment that will be there in the year, but just trying to understand how should we think about this.

Marcio, sorry to interrupt you, but there is a problem with your microphone, so we will go to the next question, and then we can come back with you, but please try to fix your microphone.

Is that enough?

No, let's please try to change to another microphone because there is a problem. We cannot hear anything of what you're saying.

The next question is from Cesar Perez Navarro with BTG Patchwell. Please go ahead.

Yes, good morning. Good afternoon, I'm sorry. In the press release, I see that management reaffirmed their previously announced expansion plan for this year, but at the same time, you also suggested some certain reassessment of specific market and initiatives that may be quote-unquote less attractive in the short term. Could you please provide further detail on that specific assessment and potential near-term impact? Thank you.

So there is, I think, two differences probably connected, but we have our long-term strategies to give an increase in our capacity in Chile, what I said before, as a lithium carbon hydroxide, and to keep it growing at the same pace that the demand is doing. But it's a tactic in the short term if we have to reduce the conversion, what I said before, in China because the prices are not convenient for us to do the business we're doing. I mean, it's something that we would do in the short term, but it's a little bit different than we are planning for the long term because we still think that this market is going to keep growing in the future.

Okay, understood. Thank you.

The next question is from Corinne Blancher with Deutsche Bank. Please go ahead.

Hey, good afternoon. The first question just related to the pricing. Is there a scenario or is there a certain price, like spot price, at some point that you could be thinking actually of having contract with a negotiated price. So basically the question is like, are you considering at some point moving back with like maybe like fixed price contract or with having like a stronger like flow and selling price?

Hello, Corinne. This is Felipe. As we have been doing already in the past years, and we want to continue like this, we are a low-cost producer, so we prefer to follow the indices. We think that this is the best way to contract our volumes. It's good both for the customer and for us.

Okay. Fair enough. The second question, can you please give an update on the TNC situation? I mean, we saw a lot of filing since there is not a lot of further option for them to do anything, but just trying to understand the view here, that would be very helpful.

Okay, what you call TNT situation is a public situation. We don't have different information than the one that is on the press. It means that TNT, they have a different opinion of the regulator in Chile, the CMF, that is the regulator. They have an opinion about the transaction. TNT has a different opinion, and they appeal to the court with their position. We are participating in the appealing also. with our opinion, and there's nothing new about that. It means it's public. Tintia has been very public about their statements, their opinion, and the company has been also very public about what's our opinion on the situation, and the regulators, CMF, also being very clear about their opinion about this specific situation.

So maybe differently asked, can they do any other step that they can be taken? We're just trying to understand what can... or this is just a statute code that is . Okay.

Probably you have to ask Tianqi about the potential future steps. I really don't know. But, of course, in this specific situation, we expect that after the court decision, that we are very optimistic about the court decision. I hope it's going to be over. But, again, if they are thinking something else, you have to ask Tianqi. I don't have the answer.

All right. Thank you.

The next question is from Camilla Barter with Bradesco. Please go ahead.

Hi, good afternoon. Thank you for taking my questions. So just quick questions on my side. Regarding the deal with Codeco, could you please elaborate on the main challenges in discussions with local communities? And the second question is on CAPEX. In case the market gets worse, would you consider flexibilizing CAPEX? And if so, how much would it be? Thank you.

Okay, about the deal with Coelco, there's a clear process in order to have a relation with the communities for the new agreement, and we're working on it. You have to go to the communities, ask their opinion that is not binding, but it's a very important opinion for Corfo and for the companies. For them, we're working very hard in order to do it. as soon as we can. Our relation with the communities, I will say, are very good. We are open with them, they are open with us, and we are working in order to solve any difference that we may have. Regarding the CAPEX, the CAPEX informed by the company, it will continue. We think that the capex we have today in the lithium industry is very good in the iron and nitrates is the right one, and the projects that we have in Australia are the right one. As mentioned before, we don't think that the long-term pricing of lithium is the today price environment. There's a specific situation today of the price environment, but we are very clear that the price will be different in the future. That's why we have a clear plan of investment in the lithium. We are really committed about that. And we are very low-cost producer. That's why we will continue to do our investment.

Okay. Thank you very much.

This concludes our question and answer session. I would like to turn the conference back over to Irina Axanova.

Thank you, Gary. Just before we close, I had a question from Marcia who couldn't connect. If there's any dividend potential in the view of negative net income so far? I know, Gerardo, you would like to take it.

The company has a dividend policy that has been approved by the board and informed to the shareholders. And that dividend policy established that we will distribute the dividend as a function of the net income if certain conditions are met on our balance sheet. since the net income is negative because of a one-time effect that hit the results because of the lithium mining tax that was applied in the first quarter, I mean, the result is negative, and because of that, the net income that the board has approved as interim dividend has been zero. So it depends on what will happen in the rest of the year, but the policy is quite clear in that regard.

Thank you, Gerardo. And this concludes our call today. Thank you for joining us, and we look forward to having you in our next call. Have a great day, everyone. Bye.

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