Lithium And Iodine Investments Will Unlock Future Opportunities

Key Takeaways

• Significant lithium and iodine investments, along with potential external financing, could strain cash flows and impact margins amid unstable commodity prices.
  
• Ongoing disputes and tax implications from mining activities may pressure net income, leading to a cautious earnings outlook.
  
• Policy uncertainties and shifting production focus could impact lithium demand and revenue, while financial liabilities and funding expansions may affect future earnings and cash flow.

Catalysts

Operates as a mining company worldwide.

• The company's significant investments in lithium expansion, particularly a $750 million allocation in 2025, are expected to support increased production capacity but may strain operating cash flows and necessitate external financing, possibly impacting net margins and earnings if lithium prices remain unstable.
  
• The dispute-related one-time charge of approximately $1.1 billion and potential future tax implications from the mining activities at SQM Salar may continue to impact net income negatively, leading to more conservative earnings projections if unresolved.
  
• The expected stabilization of lithium prices in 2025, with supply growing approximately 10% compared to an anticipated demand growth of 17%, suggests a potential squeeze on revenue growth and continued pressure on profit margins.
  
• Continued investment in iodine capacity, such as the planned $350 million investment this year aiming to add 4,000 metric tons, might not yield immediate returns due to potential slower pacing in demand growth for 2025, impacting short-term revenue and net margins.
  
• Potential capital needs due to aggressive expansion plans, like the lithium hydroxide capacity aimed at 100,000 metric tons, and the decision to potentially raise external capital could strain financials, lowering net margins and affecting earnings per share if growth projections are not met.

Sociedad Química y Minera de Chile Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Sociedad Química y Minera de Chile compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Sociedad Química y Minera de Chile's revenue will grow by 7.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -8.9% today to 18.0% in 3 years time.
• The bearish analysts expect earnings to reach $1.0 billion (and earnings per share of $3.53) by about May 2028, up from $-404.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.8x on those 2028 earnings, up from -23.7x today. This future PE is lower than the current PE for the US Chemicals industry at 20.2x.
• 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 8.91%, as per the Simply Wall St company report.

Sociedad Química y Minera de Chile Future Earnings Per Share Growth

Risks

• The significant one-time charge of approximately 1.1 billion USD related to the tax treatment of mining activities reduced the company's net income in 2024, indicating potential future financial liabilities that could adversely affect earnings.
  
• The company's lithium prices experienced a decline quarter-over-quarter in 2024, with only expectations of stable prices for 2025. This could limit revenue growth if prices do not improve.
  
• The shift in production focus from potash to lithium reduced potash output by 50%, potentially affecting revenue from potash sales and leading to future supply imbalances.
  
• The capital expenditure of approximately 750 million USD for lithium capacity expansion relies partly on the stability of lithium prices, raising concerns about funding these expansions as they may require raising capital, impacting cash flow and net margins.
  
• Possible policy uncertainties affecting EV demand in the U.S. and European markets could impact lithium demand projections, potentially affecting revenue from lithium-related sales.

Valuation

• The assumed bearish price target for Sociedad Química y Minera de Chile is $35.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Sociedad Química y Minera de Chile's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be $5.6 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 8.9%.
• Given the current share price of $33.57, the bearish analyst price target of $35.0 is 4.1% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
• 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.