Chilean lithium giant Sociedad Quimica y Minera de Chile (SQM 1.45%), or SQM, released lighter-than-expected second-quarter results late last Wednesday.
Investors didn't seem overly concerned that SQM's quarterly revenue and earnings missed Wall Street's expectations. Shares declined 1.6% on Thursday, though a decent portion of this drop was likely due to headwinds in the broader market. Major U.S. stock indexes fell on Thursday, with the S&P 500 and the tech-heavy Nasdaq Composite sinking about 0.8% and 1.2%, respectively.
As background, SQM is generally considered the world's second-largest lithium producer, behind U.S.-based Albemarle. In recent years, demand for the "white gold" has been strong, driven primarily by the growth of the electric vehicle market. EVs are powered by lithium-ion batteries.
SQM's key numbers
| Metric | Q2 2022 | Q2 2023 | Change |
|---|---|---|---|
| Revenue | $2.60 billion | $2.05 billion | (21%) |
| Net income | $859.3 million | $580.2 million | (32%) |
| Earnings per share (EPS) | $3.01 | $2.03 | (33%) |
Data source: SQM.
Wall Street was looking for EPS of $2.53 on revenue of $2.24 billion, so the company missed both expectations by a relatively wide margin.
Gross margin (gross profit divided by revenue) was 41.7%, down from 49.9% in the year-ago period.
SQM's balance sheet is in solid shape. The company ended the quarter with $2.06 billion in cash and cash equivalents and $2.51 billion in long-term debt.
Revenue by business: Iodine was the growth driver
| Segment | Q2 2023 Revenue | Change YOY |
|---|---|---|
| Lithium and derivatives | $1.46 billion | (21%) |
| Specialty plant nutrition (SPN) | $247.5 million | (25%) |
| Iodine and derivatives | $221.3 million | 27% |
| Potassium chloride and potassium sulfate | $66.2 million | (64%) |
| Industrial chemicals | $47.1 million | (20%) |
| Other | $5.1 million | (18%) |
| Total | $2.05 billion | (21%) |
Data source: SQM. YOY = year over year.
The lithium segment's revenue accounted for 71% of total revenue, so it was the main driver of the company's overall results.
The lithium segment's sales volume increased 26% from the year-ago period and 33% from the prior quarter to 43,000 metric tons (MT) of lithium carbonate equivalent (LCE). However, these volume gains were more than offset by lower average realized prices, which declined 37% year over year and 33% sequentially.
In the earnings release, CEO Ricardo Ramos provided color on the dynamics in the lithium business:
Our second quarter 2023 results were lower when compared to the same period last year primarily due to the lower realized average sales prices in the lithium business. While lithium sales volumes showed a significant recovery during this quarter, reaching historical high levels, lower spot [market] prices, especially in China, in the beginning of the second quarter had a negative impact on reported sales and net income.
The iodine business was the only segment that grew revenue year over year. Its entire 27% revenue increase was due to higher average realized sales prices. Sales volume was flat with the year-ago period. This business has been benefiting from a combination of robust demand for iodine for X-ray contrast media and SQM being the only company that has materially added production capacity in recent years.
Key happenings during the quarter and recently
In Q2, SQM signed a long-term lithium supply agreement with Ford Motor. Just after the quarter ended, the company inked a new long-term lithium supply deal with South Korea's LG Energy Solutions, one of the world's largest makers of lithium-ion batteries.
No details of the Ford deal were disclosed. The LG Energy agreement, which replaces the previous one in force, calls for SQM to supply more than 100,000 metric tons of battery-grade lithium carbonate and lithium hydroxide during the 2023 to 2029 period.
2023 global lithium sales volume expected to grow at least 20%
In the earnings release, Ramos reiterated the company's prior rosy forecast about the growth of the lithium market this year: "We continue to see positive dynamic in lithium market supported by strong EV sales volumes in different markets and expect the global lithium demand growth to reach at least 20% this year."
SQM expects to its lithium sales volumes will be higher during the second half of the year than they were in the first half.
