SQM - Sociedad Quimica y Minera de Chile Faces Nationalization And EV Adoption Challenges

2024-07-12 07:25:46 ET

Summary

• SQM's agreement with Codelco means that SQM will lose half of its lithium business after 2030, harming shareholder value.
• The agreement has other concerning details, such as Codelco managing the business after 2030 and expensive technology changes.
• The lithium market faces challenges with slow EV adoption, increasing supply, and new battery technologies like sodium-ion batteries.
• I am not confident in management's ability to allocate capital well enough to justify the current valuation.

Company Background/History

Investors like Sociedad Quimica y Minera de Chile (SQM) because of its exposure to the lithium business. EVs account for 70% of lithium demand , and many consulting firms project 20%+ annualized EV growth over the next decade, so many believe the price of lithium will increase.

There are other reasons to like SQM. SQM has the best lithium brines in the world because they have high lithium concentrations. Additionally, SQM is one of the lowest-cost lithium producers in the world because they extract lithium through evaporation. It’s cheaper to get lithium from evaporation (brines) than from drilling rocks (the other method to extract lithium).

Investors also like SQM’s depressed valuation relative to peak levels. However, I believe investors are ignoring the SQM-Codelco deal, which will cause SQM to lose half its lithium business after 2030....

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