2023-11-18 06:30:50 ET
Summary
- SQM reported below consensus 3Q23 results due to lower lithium prices and volumes.
- Consensus estimates are expected to fall further as analysts update their models, potentially overestimating the impact of lower prices.
- The bottom may have been reached at 9x PE YE24 reduced estimates.
- Catalyst dependent on LCE prices and Atacama concession resolution.
Summary
Sociedad Química y Minera de Chile S.A. (SQM) reported disappointing results for 3Q23, which were below market expectations due to lower lithium prices and volumes. The company has forecasted weak volumes for 4Q22 as inventory reductions continue in the USA and Europe. As analysts update their models, consensus estimates are expected to fall further, with some perhaps overestimating the impact of lower LCE prices. I have revised the LCE prices (from my last update SQM: Get Ready To Buy) for YE24 and beyond to US$18kg from US$20kg while keeping the volumes at 200mt in light of the company's recent statement that it has reached a capacity of 210mt this month. At the current share price, the stock is trading at 8.8x PE and 5.7x EV/EBITDA, which is only lower than Livent (LTHM) (pre-M&A).
3Q23 Results
As can be seen in the table below consolidated results were well below consensus estimates. One key driver was flat LCE volumes vs 2Q23 plus a 13% lower realized price per kg. On the positive side, this did not impact margins in a dramatic manner. Management stated that now that they have reached 210mt LCE capacity they can begin to focus on costs and productivity. The other business segments also declined from the pandemic-induced highs, except Iodine which is now the second most relevant contributor.
SQM 3Q23 Results (Created by author with data from SQM)
SQM Forecasts
As mentioned earlier, I have lowered the long-term LCE prices to US$18kg to provide more conservative estimates. Furthermore, I have reduced the volume of LCE for 4Q23, but kept YE24 forward estimates intact. It is essential for SQM to focus on costs to maintain margins. The Corfo royalty payments, which amount to 35% of revenue if LCE prices exceed US$10km, pose a significant challenge.
SQM Lithium Forecast (Created by author with data from SQM) SQM Lithium Forecast (Created by author with data from SQM)
Azure and Concession Renewal
SQM made a US$1bn bid for 80% of Azure, a pre-operational lithium company based in Australia that has an estimated 100k LCE ton capacity. SQM had acquired 20% for US$20m prior to the announcement. While the board approved the transaction two large shareholders expressed concern that the valuation was too low. SQM issued a US$750m bond (6.5% coupon) to help fund the acquisition. In my view, this is a clear sign to the Chilean government that SQM is prepared to move operations away from Chile if they do not reach favorable concession renewal terms. I believe the company can wait for a change in government in 2026.
Valuation
It appears that SQM's current stock price incorporates both the expectation of lower lithium carbonate (LCE) prices for an extended period of time and concerns about the renewal of the Salar de Atacama concession, which is set to expire in 2030. This concession is currently the primary source of the company's lithium production. However, I believe that the LCE prices are near the bottom and will support a solid operating cash flow. Moreover, I am optimistic that the concession will be renewed with the requirement of implementing direct lithium extraction (DLE) technology, which not only has a positive impact on the environment but reduces production time substantially. Therefore, I continue to value SQM at 10 times its EV/EBITDA, which is supported by a discounted cash flow ((DCF)) valuation without the Atacama concession post-2030. Based on this, my price target for SQM is $86.
SQM Summary Financials and Valuation (Created by author with data from SQM)
Consensus Estimates
The consensus continues to decline and following the release of 3Q23 results, I expect another round of downgrades. This is key to clearing the path for a buy signal and reducing risk. Any analyst who assumes a long-term LCE price of US$20/kg or less may have reached the bottom; further reports may not hold negative surprises and the stock may have essentially priced in the worst. Note that the market should continue to discount SQM vs peers until it resolves its Salar de Atacama concession renewal.
SQM Consensus Estimates (Created by author with data from Capital IQ)
Peer & End User Comparison
It's important to note that SQM plays a crucial role in the EV supply chain as it supplies a vital element to battery and car manufacturers, who are its primary clients. Although SQM may sometimes be in commercial competition with its clients, their relationship is symbiotic. Market prices and margins may favor battery or EV makers at different times, but they all need each other to invest in growth capacity to achieve mandated EV penetration targets. It's essential for investors to keep this in mind.
To compare key valuation and growth metrics across the EV supply chain, I used a combination of consensus estimates and my own analysis. The results showed significant differences in valuation that cannot be explained by differences in growth or profitability. Such discrepancies highlight the diverse perspectives of investors and their respective buying power, which ultimately shape the market.
Albemarle Corporation (ALB) maintained a valuation premium over SQM. However, CATL, the global leader in batteries, lost its premium to LG Energy Solutions, while BYD Corp (BYDDF) is significantly cheaper than Tesla (TSLA).
SQM Consensus Peer Comps (Created by author with data from Capital IQ) SQM Consensus Peer Comps (Created by author with data from Capital IQ) SQM vs Peer Stock Performance (Created by author with data from Capital IQ) SQM EV/EBITDA Valuation vs Peers (Created by author with data from Capital IQ)
Conclusion
The current stock price of SQM has already taken into account the lower LCE prices and the end of the Atacama concession. As the current inventory of LCE declines, the prices are expected to stabilize, which will provide support for the shares. However, the significant gains in the stock are more likely to depend on the resolution of the Atacama concession. Therefore, the stock has entered a wait-and-see period with limited downside.
For further details see:
Sociedad Química y Minera de Chile: Bottom Setting In