EUR 850.00 For Business Accounts Only

Morningstar | Maintaining Our $65 FVE For SQM; Lower Near-Term Lithium Production Will Be Offset by Higher Prices

SQM's third-quarter results were highlighted by sharply reduced lithium sales, as volumes fell 27% year on year to 9,300 metric tons. As a result, we've slightly lowered our lithium sales volume forecast for 2018 to 45,000 metric tons from 47,000. However, offsetting this decline, we expect lithium prices to remain higher through the end of the year. Further, SQM should also benefit from higher potash and iodine prices. Having updated our model to reflect these changes, we maintain our $65 per share fair value estimate for narrow-moat SQM. At current prices, SQM offers attractive risk-adjusted upside.

In lithium, the lower volumes are a result of temporary challenges the company is facing related to the ramp up of its 20,000 metric ton capacity expansion. The project required a complete overhaul of SQM's existing lithium carbonate plant. We view these issues as temporary in nature. While we have lowered our 2018 lithium volume forecasts, our long-term outlook remains intact. We continue to forecast that lithium carbonate volumes from SQM's Salar de Atacama operation will grow from 50,000 metric tons in 2017 to around 180,000 metric tons by 2028 as increased electric vehicle adoption drives unprecedented lithium demand growth.

As SQM ramps up its lithium volumes, the company will continue to reduce potash production. Further, SQM is also increasing its potash-based specialty plant nutrition volumes, which will further reduce the company's standard potash sales volumes. As a result, the company is supporting global potash prices by taking supply out of the market. We continue to forecast a $300 per metric ton potash price in 2019, with a long-term potash price forecast of $310 per metric ton. In addition to SQM, potash prices are also supported by lower production from K+S and Israel Chemicals, combined with a slower-than-expected production ramp from EuroChem.

In iodine, average selling prices reached $25 per kilogram during the third quarter, a 25% year-on-year increase. Over the last several years, SQM followed a volume-over-price strategy in order to gain market share that was lost to new entrants. As a result, iodine prices fell from an average of $41 per kilogram from 2011-15 to $20 in 2017. In 2018, SQM announced it will begin to act as a more rational player, having regained some market share as higher-cost players reduced production. Due to lower iodine supply, iodine prices have risen in 2018 and we expect prices to remain in the mid-$20 per kilogram range. We expect prices to remain around this level going forward, as SQM grows future volumes in line with market demand.

For more information on our electric vehicle outlook, please see our Sept. 24 Observer, "Electric Vehicle Sales in China and Europe Will Leave U.S. in the Dust, Driving Above-Consensus Global Adoption Rates."