Sociedad Quimica Y Minera De Chile SA (SQM) Q2 2021 Earnings Call Transcript

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Sociedad Quimica Y Minera De Chile SA (SQM 1.82%)
Q2 2021 Earnings Call
Aug 19, 2021, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the SQM Second Quarter 2021 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Kelly O'Brien, Head of Investor Relations. Please go ahead.

Kelly O'Brien -- Head of Investor Relations

Good morning. Thank you for joining SQM second quarter 2021 earnings conference call. This conference call will be recorded and is being webcast live. Following this call you will be able to access the webcast at our website www.sqm.com. 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.

Speaking on the call today will be Ricardo Ramos, CEO; Gerardo Illanes, CFO; and Felipe Smith, Commercial Vice President of Lithium and Iodine of Asia Pacific. They will all be available to help answer your questions after the prepared remarks.

Before we begin, let me remind you that statements in this conference concerning the company's business outlook, future economic performances, anticipated profitability, revenues, expenses, or other financial items, anticipated cost synergies and product or service line growth, together with other statements that are not historical facts are forward-looking statements as that term is defined under federal securities laws.

Any forward-looking statements are estimates reflecting the best judgment of SQM based on currently available information and involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those stated in such statements, including our ability to successfully implement the Sustainable Development Plan.

Risks, uncertainties and factors that could affect the accuracy of such forward-looking statements are identified in our public filings made with the Unites States Security and Exchange Commission and in our earnings release issued today and these forward-looking statements should be considered in light of those factors. We assume no obligation to update such statements, whether as a result of new information, future developments or otherwise, except as required by law.

I now leave you with Ricardo Ramos, our Chief Executive Officer.

Ricardo Ramos -- Chief Executive Officer

Thank you, Kelly. Good morning. We thank you for joining the call today. Our earnings during the second quarter 2021 were over 76% higher than earnings reported during the same period last year. This was a result of significantly higher sales volumes and prices across almost all our business lines, when compared to the first quarter of 2021. We are seeing positive market conditions in all our major markets in which we participate and expect to see demand growth of over 40% in the lithium market and over 10% in the iodine market. Our sales volumes would affect due to strong market momentum. As we mentioned in our earnings release, lithium and iodine sales volumes this year should surpass 95,000 metric tons and 12,000 metric tons respectively, higher than our original estimates.

Additionally, we believe pottasium chloride and our sales volumes will surpass 800,000 metric tons this year, an increase of approximately 10% compared to last year. In addition, we expect prices in the potash market increase significantly. Our strategy in the lithium market is to focus on the long-term. Currently, we are producing lithium carbonate in Salar de Atacama at the rate of approximately 110,000 metric tons per year and we remain on target to reach a nameplate capacity of 130,000 metric tons during the fourth quarter this year. As we mentioned in May, the completion of the next stage of our lithium carbonate expansion in Chile has been moved forward to 2022, and this remains true. We expect to produce approximately 140,000 metric tons next here.

In Australia,the development of 40,000 metric tons of lithium hydroxide line is on track and we expect to be operating in 2024. In terms of sales volume, we plan to continue growing with the market as we have done successfully over the past 18 months. For example, during the first half of this year, we have sold more than double in sales volumes sold during the same period last year. Our average lithium prices during the second quarter of 2021 were almost 20% higher compared to the first quarter 2021. Our sales contract signed last year are expiring and higher percentage of our sales are invoiced based on the current pricing scenario. Our average prices during the second half of the year I expect that to increase further as the market continues to tighten, and the 2020 contracts continue to expire. The fundamentals in the legal market are stronger than ever and we recently updated our 2025 lithium carbonate equivalent estimate to surpass 1 million metric tons, and we are working to strengthen our position in this market.

Thank you, operator, we may now go to the Q&A session.

Questions and Answers:

Operator

Pardon me ladies and gentlemen, it appears that we have lost connection to our speaker line. Please standby while we reconnect. Thank you for your patience. Pardon me ladies and gentlemen, this is the operator, we have reconnected to the speaker, so we will continue. [Operator Instructions] Our first question will come from Cesar Perez-Novoa with BTG Pactual. Please go ahead.

Cesar Perez-Novoa -- BTG Pactual -- Analyst

Thank you. Good afternoon Kelly, Gerardo, Ricardo, Felipe and congratulations for your sound performance in the first half of 2021. I have a couple of questions if I may. You upgraded 2021 lithium volumes to 95,000 tons and are projecting significantly higher prices in the second half of the year, in part because of sound market dynamics, but also because of expiration of old contracts that had lower prices. Could you please provide what percent of the old contracts are set to expire or how much of the newly price contracts should we expect in the second half of the year?

On potash, a similar question. You upgraded volumes by an incremental 100,000 tons and seen higher prices, if you could assess what is driving this market and also give a glimpse of what we should look in 2022 for SQM's volumes and and hopefully you can shed a little bit more light about the long-term outlook for that market.

Finally, I have a qualitative question perhaps for Ricardo regarding the political environment in Chile and comments by some lawmakers and media related to lithium royalties and the Salar de Atacama. While most of these statements are political in nature and unfortunately during an electoral year, I would like to hear your thoughts on a very broad level and perhaps tell us where SQM is positioned in all of this and and possibly separate fact from fiction. Those would be my questions and thank you very much for taking them.

Ricardo Ramos -- Chief Executive Officer

Hello, Cesar, Ricardo speaking. It's a really long question, a lot of questions. But let me try. Start with the lithium first, I would ask Felipe to give you more details about what we are doing with the lithium and add some comments about the potash industry. And finally, your -- what is the situation in Chile or whatever, let me got and talk in that order.

Cesar Perez-Novoa -- BTG Pactual -- Analyst

Okay.

Ricardo Ramos -- Chief Executive Officer

Felipe.

Felipe Smith -- Commercial Vice President of Lithium and Iodine of Asia Pacific

Okay. Hello, Cesar. Well, regarding your question. Let me start with a small introduction. So as part of our strategy of growth during the second semester last year, we in these contracted volumes for 2021 and if you look at the total volume of 2021 during the first semester more than 3/4 of the volumes were contacted prices, which were prevailing at that time. And for the second semester is less than 50%. So, we are now more exposed to the new price environment and all these contracts are expiring in December.

Cesar Perez-Novoa -- BTG Pactual -- Analyst

Thank you.

Ricardo Ramos -- Chief Executive Officer

Yes. And this is regarding the potash. Of course, we are -- now we have already unique situation in the market, where prices are going up very high. You can expect prices probably given second semester this year, especially fourth quarter probably at an average close to double than the prices -- average prices of second half last year. It means it's a significant increase in price. We don't know and what we don't have enough information today as we speak to how long term predictions about what is going on with the potash prices, there is lot of research about potash, you can -- we can check it on it and I think there are lot of uncertainties regarding what's going on in the long term, but in the short term prices are very, very good in the potash.

We are pushing our volumes as we put in our press release, we will try increasing our volumes during the second halfand we will, getting the benefit of the better price environment, it means that margins from potash second half will be significantly high than on first half and significantly higher of any half over the last three years maybe. We have very positive outlooks going on into the industry for second half of the year and for me too early now to give you an outlook about the volume for next year, as you know, we have this mix production of lithium and potash in the Salar de Atacama, we are now working in our business plan and operational planning to Salar in order to know what is going to be total volume of available potash for sale this year. Keeping in mind that the main use of potash is most important one to be raw material for potassium nitrate and we are working in our business part, so that may exit next year. Both prices of potash is going in the right direction. Of course, potassium nitrate is going into right direction too as we mentioned before many times [Indecipherable] potash that means when potash goes down, {Phonetic]we all goes down in the same level and we don't go up in the same level, but anyway prices of potassium nitrate second half this year is going to be significantly higher than first half, that's really good news, but I expect to have more information or more data regarding what we expect for next year in the next conference call after September.

Regarding your last question, that is not an easy question, the political situation. As we mentioned, we are in the middle of an electoral year in Chile. So it is reasonable to hear many statements on many different issues. In my opinion, there is no problem for companies to get involved in political discussions, of course not. However, I think it's important to remember some key facts, in my opinion about SQM and the Salar de Atacama operation if you. The first one on the first line in your opinion regarding what we seeing is the Salar de operations, I mean authorities. As you may remember it's an old story, but Salar de Atacama project was entering internationally by CORFO in the mid '80s if I'm not wrong, what we may see from 1985 something like that. And was awarded by an American and Chilean company. The American company, if you remember was [Indecipherable], I remember one of the largest mining company in the U.S. at that time and the Chilean company [Indecipherable]. The main conditions to break the Salar de Atacama was set in that process 1986, SQM of course was not involved, but after seven years, more or less seven years of these investment, research and development whatever in the project in the 1983, I'm sure it was 1983, these companies decided to sell their participation in the project, which when SQM brought the poject. Of course, inheriting the same conditions agreed by these companies with CORFO seven years ago.

Finally, as you may remember in 2018 during the previous government an amendment to the contract was signed between CORFO and SQM that was the year we were looking for, but of course in exchange of heftier economic conditions in favor of the CORFO. Currently, as you know the American Industry and Chilean Industry [Indecipherable] according to the agreement with CORFO which are close to 50% of the gross margin generated by this business. I mean, if you see again no other economic activity in Chile that has faced more taxes and contributes with higher resources as a percentage of its margins, that's the real situation of the project today.

The second component that I want to be very clear is that we had a lot of value with minerals in the Salar de Atacama on a sustainable way. Everybody know we are one of the few lithium producers in the world that is integrated in the mining instruction and subsequent refining of the product into extremely high quality lithium carbonate at the lithium market side. We add value in such a way that it can be used directly in high tech industries such as electric vehicles. As you know, most Australian players, extract the mineral and then send the raw material to China, where the value added process of producing refined lithium products is done. In less than two years, we have more than doubled our capacity and are already working to almost double in just a few years at the same time. And at the same time, we are reducing our brine extractions increasing yields in what is an unprecedented way, we are very, very proud about.

Finally, let me tell you that we will keep working on initiatives like this by committed to producing lithium in all our products and all our products in a sustainable way adding value to all our stakeholders.

Cesar Perez-Novoa -- BTG Pactual -- Analyst

All right, thank you very much, Ricardo, for the thorough explanation and good luck in the in the subsequent quarters.

Operator

Our next question will come from PJ Juvekar with Citigroup. Please go ahead.

PJ Juvekar -- Citi Banchile -- Analyst

Yes, hi, good morning or I should say. good afternoon. Your majority of lithium and other -- lithium goes to Asia, mainly to China and how is the shipping tightness impacted you. And what is shipping and transportation as a part of your COGS? Hello, can you hear me.

Ricardo Ramos -- Chief Executive Officer

Yes, hello. Hello, PJ, how are you?

PJ Juvekar -- Citi Banchile -- Analyst

Yes. Good. How are you?

Ricardo Ramos -- Chief Executive Officer

Well. Yeah, I think that indeed as you mentioned there is a general overall problem with the container shipments everywhere and port condition and so on.

Operator

Pardon me ladies and gentlemen, it appears that we have lost connection to our speaker line. Please standby while we reconnect. Thank you for your patience. Pardon me ladies and gentlemen, it appears that we have reconnected our speaker line. Speakers, please continue answering the question.

Ricardo Ramos -- Chief Executive Officer

Okay. Well, as I was saying PJ, that we recognize -- there is indeed an overall problem with the supply chain, but as part of our strategy, we have established local warehouses and storage points in the main markets. So that gives us good flexibility to supply our customers and to absorb part of these possible interruptions so -- or delays. So from that point of view we are in a good position.

And regarding the -- what is the cost of a -- if a very small percentage of our total cost, what has to do with the logistic and transportation.

PJ Juvekar -- Citi Banchile -- Analyst

Thank you for that. And my second question is, would you like to get bigger into the lithium refining business, getting into hydroxide business and going downstream. Can you just talk about why or why not. And would you look at potential M&A to -- if you decide to go into it. Would you potentially look at M&A in China to get into hydroxide business. Thank you.

Ricardo Ramos -- Chief Executive Officer

Hi, PJ. This is Ricardo Ramos speaking. As you may know, we are fully ready today with reduced lithium carbonate and lithium hydroxide, but of course, when looking forward when doing much better than today, and yes, we are looking for different synnergies to increase our lithium hydroxide, for example capacity. As I mentioned in the previous conference call, I expect during this year -- I hope it's going to be during the conference call of September, the announcement is going to be with targeting in terms of the lithium hydroxide capacity, so 530,000, but we are looking forward to increase our capacity and you're right in terms that we are looking for different alternatives not only in Chile, but outside Chile, we had a big player in the lithium, we are going to be in the short term --, medium term in the 180,000 metric tons capacity, that's a lot of lithium carbonate and lithium hydroxide we have to sell and of course, we are looking for different synnergies around the world. As soon as we have any news regarding that of course we will announce in the market.

PJ Juvekar -- Citi Banchile -- Analyst

Thank you.

Operator

Our next question will come from Joel Jackson with BMO Capital Markets. Please go ahead.

Joel Jackson -- BMO Capital Market -- Analyst

Hi, good afternoon everybody. I have a few questions, I'm goint to ask them one by one. If I listen to your commentary earlier about half of the second half year volume for lithium this year being sold contracted from last year's prices, with that seems implies that your spot price, your second half lithium price should average about 30% higher in the first half of the year. Is that the right ballpark?

Ricardo Ramos -- Chief Executive Officer

Yeah, hi, Joel. Well we believe that a good estimation of our price in the fourth quarter is to approach the 10,000 [Indecipherable] per ton average.

Joel Jackson -- BMO Capital Market -- Analyst

Okay. That's actually quite helpful. Thank you. So, I'll kee going. If I think -- I think you said earlier on this call that you expect to be able to produce 140,000 tons LCE next year as you look to your expansion, you've obviously got a really big volume growth this year, 30,000 tons. You've been able to increase your sales guidance throughout the year. Do you think, right now early stage you can place 45,000 tons next year, obviously you've been lucky even you had a lot of production increase this year, others haven't, and actually is more supply coming on, it's also a big growth. Do you expect to be building inventory next year, whether you could sell the full 45,000, any early thoughts would be helpful.

Ricardo Ramos -- Chief Executive Officer

Yeah. Regarding this question, I think that our idea or target is to grow at least same as the general or the overall market. Okay. So our best estimation for that today with the information we have today is that the market will grow around 20% next year. So this should be our minimum growth in sales as well.

Joel Jackson -- BMO Capital Market -- Analyst

Okay. So if that's what you think is going to happen, if the market grows 20% and you're planning to produce 40,000 tons or 45,000 tons more next year, half for incremental sale and half for inventory build. Is that correct.

Ricardo Ramos -- Chief Executive Officer

Yeah, I mean, the extra capacity that we will have will allow us to have flexibility, Joel. So I mean, we -- the business and our sales will move depending on our strategic and on priorities -- a strategic actions on priority. So, yeah, the most important thing is that we will have enough capacity to sustain a growth in sales, but also to give us flexibility to move in the market.

Joel Jackson -- BMO Capital Market -- Analyst

This is helpful. If I look at in the iodine business now you downgrade to recover volume, you've been holding price on your iodine cost and also going up a fair bit. As we look into the next year, will these iodine cost stay roughly the same and your goal is try to balance price with growing that volume to where you were a couple of years ago. So, are you able to offset the higher cost with price.

Ricardo Ramos -- Chief Executive Officer

Yeah. Ricardo Ramos speaking, I think that the cost is mix like next year depending of course is energy and exchange rate in Chile, are very important. We need to keep an eye on it, but anyway we have different initiatives to maintain our cost of time, we are trying. to reduce our costs next year iodine business and the price is the market condition pricing. Today, as you know is a very good trend means the increase in demand is very strong, the clients are recovering, our customers are recovering, their inventories that they decreased in the past during the second quarter this year. We think we are going to have a strong second half this year, means that it continue that way of course pricing is going to be positive, but it's too early to give a price guidance for iodine next year, but of course in the cost area we are working forward to moving in the right direction to reduce some of the cost.

Joel Jackson -- BMO Capital Market -- Analyst

Just my last question, I can be greedt. You've done very well to raise your guidance for merchant potash sales volumes this year, looking at what you're plan -- extraction plans have been which you've announced about in the past couple of years. Should we expect a decent drop off with a large drop-off in your merchant potash sales while below 800,000 tons next year. Can you hold roughly this level next year.

Ricardo Ramos -- Chief Executive Officer

I think I mentioned before Joel, it is too early for us to have guidance about volumes of potash next year, but we're working in our business plan for next year and our operational plan in the Salar. As you know, lithium is a very important priority for us, it's a very good, a long-term business for us, and second, most of the use of the potash for us is a raw material for potassium nitrate. That's why we cannot, we don't have today a guidance of potash next year, but it is reasonable to expect that the volumes we're going to sell the next year is going to be slightly lower or lower than this year, but I don't have the numbers so far. Of course, considering what is the market condition during the second half this year, I'm trying to increase at as much as we can the volumes because we think that the proice is very, very interesting pricing environment in the potash industry so far, but it's very difficult now to have a guide and as I think I have to wait until September.

Joel Jackson -- BMO Capital Market -- Analyst

Thank you very much.

Operator

Our next question will come from Ben Isaacson with Scotiabank. Please go ahead.

Ben Isaacson -- Scotia Capital -- Analyst

Thank you and congrats on the great quarter. First question. Ricardo, you talked about looking at different alternatives both within and outside of Chile for lithium. Is the Mt. Holland project an alternative for you. The 50% that you don't own. How is that structured. Is that possible for you to buy that 50% or do you foresee yourself being 50-50 JV partners indefinitely?

Ricardo Ramos -- Chief Executive Officer

Hi, Ben. We're very happy with our partner in Australia, means with Wesfarmer is by far the best funding you're going to have in Australia nowadays. I mean this, you said great company you probably the number one company as a global company in Western Australia and doing business with them in Western Australia is a dream come true for us. It means, I'm very happy, being partner with Wesfarmer and we will continue to the business together in Australia. I have no single doubt about it.

Ben Isaacson -- Scotia Capital -- Analyst

Second question, when you look at the impact that COVID had on iodine volumes, it seems that there was quite a bit of a lag. You did 3,000 tons in Q4'19 before COVID and then you went to 2800, 2600, 2200 and then by Q4 2020, you were at just over 2000. Now that we're heading into the fourth wave with the Delta variant, you guys just did really, really well in Q2 with respect to your iodine volume. Is there a risk now that we start to see declines to your sales volume over the next several quarters as it relates to the Delta variant?

Ricardo Ramos -- Chief Executive Officer

Yes, hello, Ben. Well 2020 was indeed a negative year for iodine because the pandemic was hitting strongly certain applications, but this year 2021, we have seen recoveries as a matter of fact, we believe that the total demand will even surpass 2019 total demand, which is good news. And we are expecting that looking ahead in the coming months, this growth or this recovery will be maintained. Okay. So, during the second quarter, we had very good sales volume, part of it explained by the demand, but also customers feeling more confident about the future, they started to recover or rebuild stocks. Okay. So we will have to see how this goes in the coming quarters. But at least we are positive.

Ben Isaacson -- Scotia Capital -- Analyst

My last question is when you look at the supply demand balance for lithium right now, it's quite tight, you talked about lithium demand may be growing a little bit better than you expected to 2025. I think a lot of consultants are looking at 800,000 tons to 900,000 tons, now people are starting to talk about more than 1 million tons in 2025. How do you see the next 18 to 24 months playing out versus the tightness right now? Do you think things are going to get tighter or are there going to be pockets of softness when new supply comes on. Do you think it will basically stay where it is right now. And I'm sorry, just I don't mean pricing, I really mean the supply demand imbalance.

Ricardo Ramos -- Chief Executive Officer

Yes. Well, regarding the demand forecast, as I mentioned in a question before, we believe that for next year it should be at least 20%. Now being retroactively we were also thinking that the growth this year would be around 20% and we were surprised by the very good growth. So we have to monitor that development and we hope that our estimation is on the low side and that we can see a much solid market in the next one or two years.

Ben Isaacson -- Scotia Capital -- Analyst

Thank you.

Operator

Our next question will come from Corinne Blanchard with Deutsche Bank. Please go ahead.

Corinne Blanchard -- Deutsche Bank. -- Analyst

Hey, good morning, good afternoon guys. Again, congrats on the nice quarter. Most of my question have already been answered, just probably two more. The first one would be on the Solar Salt contract. How much of the contract has been pushed to 2022, and is there any timeline that has been pushed even further to 2023. Already in last quarter you guided sales for 120 kilo ton on for Solar Salt and now you decrease it by on that. So just trying to get an idea there.

Ricardo Ramos -- Chief Executive Officer

Hello. Corinne, Ricardo Ramos speaking. Yes you're right and means that we have some delay in the volume sales for this year to the first half of next year. This ia mainly due to the away client, he had some issues at the beginning of the COVID-19 with the workforce, they have solved the issue of the workforce, now they are moving ahead as fast as we can. That's why we moved some of the scale [Indecipherable] from second half of this year to first half next year. There is a delay, if and around close to 100,000 metric tons from this year to next year, plus of course the sales that were originally estimated for 2022. But the real delay from this year to next year is close to 80,000 metric tons to 100,000 metric tons. Total volumes this year, it's going to be close to 100,000 metric tons instead of being in 90,000 metric tons something like that that was the original schedule. But this total volume will be a just reschedule of the achievements for the first half. There is no reduction and probably is going to be an increasing volume seeing this sales, but no reductions just a delay in the achievements.

Corinne Blanchard -- Deutsche Bank. -- Analyst

Okay, that's good to know. And yes, for the segment by itself industry or chemical, what is your guidance again for the entire year in term of volume?

Ricardo Ramos -- Chief Executive Officer

Sorry. We have a problem with the communication. Can you repeat the question. We have very bad noise here.

Corinne Blanchard -- Deutsche Bank. -- Analyst

Sure. Sure. I was just asking you what the total volume guidance for this year for the entire segment for the industrial or chemical division?

Ricardo Ramos -- Chief Executive Officer

Okay. Industrial and chemical, we have two main business in the industrial, chemical, The first one is the Solarsoft business, as I mentioned you before is like 100,000 metric tons expected for this year and the second one is that the traditional use of industrial chemical and this is close to 65,000 metric tons per year and we expect to have this year between 65,000 metric tons to 70,000 metric tons of what we call the traditional industrial chemical.

Corinne Blanchard -- Deutsche Bank. -- Analyst

All right, thank you. Just one last question if I may and this is kind of broader topic. Could you just give us an update on the license renewal process, the timeline. Where do you stand now, and what can we expect maybe over the next 12 to 24 months.

Ricardo Ramos -- Chief Executive Officer

Okay. As we mentioned before not only today, but in the last I don't know several other quarters report, we are very focused in increasing capacity, increasing our productivity, increasing deals and doing that great job in sustainability in the Salar. We are going to reach the 180,000 metric tons that is more than four times what you used to have three years ago, we are increasingly [Indecipherable] our facilities the qualities incredibly grew today, we're really proud of our process that we're working on fast and as good as we can and we don't foresee any issue regarding our license or work connectivity activity in the Salar; of course, publicly known. we have full agreement you are already explained that until the year 2030. We're working very hard in order to do the best job we can.

Corinne Blanchard -- Deutsche Bank. -- Analyst

Great, thank you. Thank you so much.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Kelly O'Brien for any closing remarks.

Kelly O'Brien -- Head of Investor Relations

Thank you for joining our call. We look forward to you joining our next quarter -- quarterly conference call in a few months.

Operator

[Operator Closing Remarks]

Duration: 39 minutes

Call participants:

Kelly O'Brien -- Head of Investor Relations

Ricardo Ramos -- Chief Executive Officer

Felipe Smith -- Commercial Vice President of Lithium and Iodine of Asia Pacific

Cesar Perez-Novoa -- BTG Pactual -- Analyst

PJ Juvekar -- Citi Banchile -- Analyst

Joel Jackson -- BMO Capital Market -- Analyst

Ben Isaacson -- Scotia Capital -- Analyst

Corinne Blanchard -- Deutsche Bank. -- Analyst

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