Expanding Lithium And Iodine Production Will Meet Growing Demand In EV And Medical Markets

Key Takeaways

• SQM's strategic investments in lithium and iodine capacity expansion are aimed at capturing growing demand and supporting revenue and earnings growth.
  
• A strong financial position allows SQM to invest in expansion and leverage market opportunities, enhancing potential future earnings and shareholder value.
  
• The ongoing tax dispute, reduced potash production in favor of lithium, and financial pressures from capital raising could negatively affect SQM's profitability and diversification.

Catalysts

Operates as a mining company worldwide.

• SQM's capacity expansion efforts in Chile and internationally, particularly in lithium production, are set to continue with significant investments slated for 2025, aimed at meeting the rising demand in the electric vehicle and energy storage markets. This should help drive revenue growth through higher sales volumes.
  
• The ongoing demand growth in the iodine market, fueled by applications like x-ray contrast media, suggests potential for increased sales volumes and revenues, enhancing future earnings despite a slower growth rate.
  
• SQM's strategic focus on lithium, supported by the planned investments of $750 million in 2025 for capacity expansion, aims to capitalize on the stable lithium prices projected for the next year and robust demand growth, positively impacting future revenue and earnings.
  
• Investment in expanding the caliche operations, including the development of María Elena as a production site, indicates an effort to boost iodine production capacity, potentially supporting revenue growth and improving earnings margins through operational efficiencies.
  
• SQM's strong financial position and balance sheet provide the flexibility to invest in expansion and seize new market opportunities, which is expected to enhance future earnings potential and shareholder value.

Sociedad Química y Minera de Chile Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sociedad Química y Minera de Chile's revenue will grow by 13.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -8.9% today to 28.5% in 3 years time.
• Analysts expect earnings to reach $1.9 billion (and earnings per share of $6.66) by about March 2028, up from $-404.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.8 billion in earnings, and the most bearish expecting $1.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.2x on those 2028 earnings, up from -30.2x today. This future PE is lower than the current PE for the US Chemicals industry at 20.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.79%, as per the Simply Wall St company report.

Sociedad Química y Minera de Chile Future Earnings Per Share Growth

Risks

• The ongoing tax dispute related to mining activities at SQM Salar, resulting in a significant one-time charge of $1.1 billion in 2024, could negatively impact the company's net income.
  
• The guidance of reduced potash production by 50% in favor of lithium production could potentially impact SQM’s future revenue from potash sales and affect diversification efforts.
  
• The necessity to fill capital requirements through potential capital raising due to current lithium prices may put pressure on finances, impacting net margins and overall earnings.
  
• Potential excess supply in the lithium market, despite high demand, could lead to a stabilization or decrease in lithium prices, potentially affecting revenue and profitability.
  
• Increased capital expenditure requirements over the next three years might strain cash flow and require further capital raising, which could dilute existing shareholders and impact earnings.

Valuation

• The analysts have a consensus price target of $52.885 for Sociedad Química y Minera de Chile based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $80.0, and the most bearish reporting a price target of just $35.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.7 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 8.8%.
• Given the current share price of $42.71, the analyst price target of $52.89 is 19.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.