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Morningstar | SQM Announces Lower Third-Quarter Lithium Production; We Maintain Our $65 FVE With Outlook Intact. See Updated Analyst Note from 22 Oct 2018

On Oct. 19, SQM announced a five week delay in the ramp up of its new battery-quality lithium carbonate plant. Due to the delay, SQM now forecasts that third-quarter lithium production will be 15% lower than the 11.1 thousand metric tons produced during the second quarter. In response, we've reduced our 2018 lithium production forecast to 47,000 metric tons, down from 51,000. SQM noted that the delay should not affect fourth-quarter production and management expects the new plant to be running at full capacity by mid-November. With our long-term outlook intact, we maintain our $65 per share fair value estimate, as the valuation impact of lower lithium production in 2018 is offset by time value of money effects. Our narrow moat rating is also unchanged.

Over the long term, SQM will benefit from operating the lowest-cost lithium carbonate resource globally. Our narrow-moat rating stems from SQM's geological advantage stemming from the high concentration of lithium in its brine that provides low unit costs. Additionally, because SQM's lithium capacity expansion plan includes the conversion of existing assets and infrastructure from potash production to lithium, the company's capacity expansion will cost less than half of the cost for its competitors.

Due to lower operating and capital costs, we think SQM is well positioned to benefit from growing electric vehicle demand. We forecast that electric vehicles will increase from 1% of global light vehicle sales in 2017 to 15% by 2028, a massive increase. As a result, we forecast that lithium demand will grow 19% per year through 2028. With favorable secular tailwinds, SQM is materially undervalued, trading at a 35% discount to our $65 per share fair value estimate.

We note this announcement did not contain any financial details. However, SQM will provide a detailed update on the new lithium carbonate plant in its third-quarter earnings release, which is scheduled for Nov. 21, 2018.

For more information, 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."