Decisive Partnerships And Global Expansion Fuel Lithium Leader's Growth Amid Challenges

Key Takeaways

• Strategic partnerships and expansion initiatives signal strong future revenue potential from lithium sales, driven by EV sector demand.
  
• Diversification and commitment to capacity expansion projects despite market challenges demonstrate a focus on long-term growth and profitability.
  
• Sociedad Química y Minera de Chile faces risks from declining lithium prices, potential oversupply, geopolitical tensions, uncertain partnerships, and fluctuating energy costs impacting profitability and growth.

Catalysts

Operates as a mining company worldwide.

• The partnership agreement with Codelco to jointly operate the Salar de Atacama until 2060, which signifies a robust operational base for sustainable lithium production in Chile, potentially improving long-term revenue growth from lithium sales.
  
• Record sales volumes in lithium and iodine businesses indicate strong demand growth, particularly from the EV sector in China, potentially driving revenue and earnings growth.
  
• Introduction of SQM International Lithium to develop lithium business outside of Chile aims at expanding lithium portfolios overseas, likely impacting revenue growth through diversification and tapping into new markets.
  
• The reassessment of the attractiveness of certain market initiatives in the current price environment suggests a strategic focus on profitability and cost-effective operations, likely positively affecting net margins.
  
• The commitment to previously announced capacity expansion projects, despite current lithium price declines, indicates confidence in future market recovery and demand growth, potentially leading to increased sales volume and revenue.

Assumptions

• Analysts are assuming Sociedad Química y Minera de Chile's revenue will grow by 7.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.5% today to 29.0% in 3 years time.
• Analysts expect earnings to reach $2.0 billion (and earnings per share of $7.23) by about October 2027, up from $26.6 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 $1.2 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 2027 earnings, down from 444.3x today. This future PE is lower than the current PE for the US Chemicals industry at 25.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.21%, as per the Simply Wall St company report.

Risks

• Declining lithium prices since the beginning of July could negatively impact the average selling prices in the third quarter, affecting revenue and net margins.
  
• Potential oversupply in the lithium market, with production exceeding sales forecasts, could lead to inventory challenges and negatively impact selling prices, affecting revenue.
  
• Reliance on exports to China for lithium sulfate conversion could introduce vulnerabilities related to geopolitical tensions or changes in trade policies, impacting costs and net margins.
  
• The partnership with Codelco to operate the Salar de Atacama involves several conditions precedent, adding uncertainty to future operations and potential impacts on expansion projects, affecting long-term growth and earnings.
  
• Exposure to fluctuating energy costs in Chile and the commitment to maintain planned CapEx despite market conditions could strain operational costs and impact profitability.

Valuation

• The analysts have a consensus price target of $56.69 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 $85.0, and the most bearish reporting a price target of just $32.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.9 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 8.2%.
• Given the current share price of $41.42, the analyst's price target of $56.69 is 26.9% 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.