Why Sociedad Quimica y Minera de Chile Stock Crashed Today

What happened

Friday dawned bleak for investors in Sociedad Quimica y Minera de Chile (SQM 6.03%). Shares of the Chilean lithium miner tumbled by 14.8% through 12:57 p.m. ET in the wake of the Thursday evening announcement from Chilean President Gabriel Boric that he intends to nationalize the Chilean lithium industry -- which may or may not include SQM itself.  

So what

What does it mean for a country to nationalize an industry -- and more particularly, the companies that operate within that industry? At the most basic level, nationalization involves a forced transfer of ownership, with present owners of the property in question required to sell or simply surrender that property to the government.  

Nationalization may -- or may not -- include the government compensating the present owners for their property. But even if the government pays for the property it takes, because this is a forced sale, the government sets the price, which may be a fair price -- or may not.

This is the situation in which SQM shareholders now find themselves.

Now what

A couple of things need to be understood at this early hour: First, just because a government says it is going to do something doesn't mean it will follow through. Nationalization has been threatened, but it may not actually happen (or a future administration may reverse the policy).

Second, at present, it appears that Chile's plan is to nationalize its lithium resources -- not necessarily the companies (such as SQM) that are mining those resources. It's likely that even after nationalization, Chile will want to contract with SQM, Albemarle, and other lithium companies to do the work of mining the lithium, and to have those miners share the profits from its sale with the state.

Still, it's clear that this is bad news for SQM, which has 79% of its assets in Chile (according to data from S&P Global Market Intelligence). It's worse news for SQM than it is for Albemarle, which has only 26% exposure to the country. If all or even most of SQM's assets end up being nationalized at anything less than a fair price, it's likely that SQM's share price will fall much further.