2023-11-27 09:00:00 ET
Summary
- SQM faces uncertain near-term prospects, with the weak EV sales and surplus in lithium supply triggering headwinds to its top and bottom line performance.
- With no conclusion to the nationalization negotiation with CODELCO, the producer's 2030 prospects remain mixed after all.
- Despite the challenges, SQM's expertise in Chile, consistent contribution to the government's treasury, and the importance of lithium in the electrification progress through the next decade support a Buy rating.
- The correction in lithium spot prices may lower EV costs and boost adoption as the macroeconomic outlook improves, making SQM a favorable long-term investment.
- Its dividend investment thesis remains robust, with the consensus still estimating FY2024 payout per share of $4.55, implying a forward yield of 8.9%.
We previously covered Sociedad Química y Minera de Chile S.A. (SQM) in August 2023, discussing its mixed prospects as the lithium spot prices decline, with the management likely having to relinquish 51% of ownership to CODELCO by the expiry of its contracts in 2030.
However, we had rated the stock as a Buy then, attributed to its deep-rooted expertise in Chile and sustained contribution to the Chilean treasury, with $2.4B contributed in the first three quarters of 2023 ( -33.3% YoY).
With the negotiation with CODELCO still ongoing, we will be discussing SQM's uncertain near-term prospects as the weak EV sales have directly contributed to the growing lithium inventories, worsened by the ramp-up in global productions thus far.
However, we maintain our Buy rating, since then we believe that lithium remains pivotal to the electrification movement through the next decade, with the correction in spot prices likely to boost demand as the macroeconomic outlook lifts over the next few years.
The Lithium Investment Thesis Remains Robust
For now, SQM has reported underwhelming FQ3'23 results , with revenues of $1.84B ( -10.2% QoQ / -37.8% YoY ) and GAAP EPS of $1.68 (-17.2% QoQ/ -56.4% YoY).
Lithium Spot Prices
Trading Economics
For now, much of SQM's top and bottom line headwinds are attributed to the normalizing lithium spot prices of 133.5K Yuan per tonne (-25.9% MoM/ -73.7% YoY).
Assuming that the correction persists for a little longer, it is not overly bearish to assume a further decline in the spot prices to the 2019 averages of 67K Yuan per tonne, implying another downside of -49% from current levels.
SQM Valuations
Seeking Alpha
Since lithium comprises 69% of SQM's top line and 74% of its bottom line, it is unsurprising that the stock now trades at an impacted FWD EV/ EBITDA valuation of 4.58x, compared to its 3Y pre-pandemic mean of 12.51x and the sector median of 10.99x.
The Consensus Forward Estimates
Tikr Terminal
On the one hand, the consensus forward estimates that SQM may report an impacted top and bottom line expansions at a CAGR of -11.1% and -13.9% through FY2025, compared to its historical CAGR of +33% and +40.4% between FY2016 and FY2022, respectively.
This trend is unsurprising, with the lithium oversupply resulting in lower spot prices.
On the other hand, we believe that the depression observed in the SQM stock valuations has been overly done.
Much of the pricing headwind may be well-balanced by the rising volumes sold, with its low-cost operations expected to contribute to the expansion in its adj EBITDA margins from 33.2% in FY2019 to 49.6% by FY2025.
In addition, SQM already produced 43.3K tonnes by FQ3'23 (+0.4% QoQ/ +4% YoY) with guidance of 210K tonnes in cumulative annualized capacity by early 2024 (+33.9% YoY), in line with its previous guidance, allowing it to achieve an improved economy of scale and cost efficiencies.
Most importantly, with the October 2023 CPI already suggesting a flattish report, a further rate hike is rather unlikely. While some analysts continue to project a delayed pivot , things should improve over the next few quarters as we are already halfway through the bottoming market.
In addition, the US labor market remains robust with the Chinese government already offering EV tax breaks through 2027 , with it likely being a matter of time before demand rebounds.
Battery Price Chart
Research Gate & Goldman Sachs Research
This will be significantly aided by the improved affordability of EVs, thanks to the moderating battery prices, which currently cost $98.5 per kWh as lithium prices fall.
This is down drastically from $1,355 per kWh in 2008 and $684 per kWh in 2013 , with Goldman Sachs Research already expecting a further decline to $72 per kWh by 2030. This is also attributed to the drastic expansion in global lithium production from 118.4 kt in 2022 to 304 kt by 2030, at a CAGR of +12.5%.
Price Parity Between EVs and ICE Vehicles
Goldman Sachs Research
Assuming a new normal in the Brent Crude oil prices at $80 per barrel moving forward, we may also see EVs achieve price parity with ICE vehicles by 2026, demonstrating why the destruction seen in lithium spot prices is a necessary evil in order to achieve mass adoption.
If anything, China has already achieved an extremely low-cost LFP cell of $85.7 per kWh, with the Li-NCM811 cells similarly priced cheaply at $82.6 per kWh, explaining why the country boasts 35% EV penetration compared to the EU at 19.8% and the US at 7.9% .
In addition, with the slowdown in EV sales, much of the excess batteries have been deployed to renewable projects instead, with China also expected to accelerate its cumulative solar capacity to 500 GW by 2023 (+42.8% YoY) and 1 TW by 2026.
These developments will sustain the electrification momentum across EVs and renewables through the coming decade as lithium prices continue to fall and adoption increases from here. Investors may rejoice, indeed, since this underscores the importance of lithium-focused low-cost miners such as SQM.
So, Is SQM Stock A Buy , Sell, or Hold?
SQM 5Y Stock Price
Trading View
For now, SQM has already retraced drastically by -50.2% since its 2022 peak, with the stock's lower lows and lower highs implying a lack of bullish support and a potential retracement to its next support levels of $40s, implying a downside of -21.1% from current levels.
Then again, we believe that its dividend investment thesis remains robust, with the consensus still estimating FY2024 payout per share of $4.55, implying a forward yield of 8.9% based on its current share prices, or up to 10.1% based on $45.
Despite the correction in lithium spot prices, we believe that SQM may still be able to sustain its variable dividend payouts, aided by the improving TTM Interest Coverage of 40.54x and Dividend Coverage Ratio of 1.75x, against its 5Y average of 19.19x and 1.52x, respectively.
Its cash position of $2.68B (+2.2% QoQ/ -28.7% YoY) and stable long-term debts of $2.47B (-1.2% QoQ/ +12.7% YoY) remain healthy as well, implying the producer's ability to weather through the near-term uncertainties.
As a result of the attractive risk/ reward ratio at current levels, we continue to rate SQM stock as a Buy.
For further details see:
SQM: Oversupply Is Good - EV Parity Nears