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Morningstar | SQM Reports Solid 2Q Earnings; Shares Undervalued as Our Outlook Is Unchanged

SQM reported solid second-quarter results as gross profit grew nearly 25% year on year to $224 million, driven by higher prices in all segments. With our outlook largely unchanged, we maintain our $55 fair value estimate and narrow moat rating. We view SQM as undervalued at current prices, with the shares trading roughly 20% below our fair value estimate.

In lithium, revenue increased 22% year on year driven by higher lithium prices, partially offset by lower volume. SQM's average selling price increased sequentially for the 10th straight quarter and was over $16,500 during the quarter. In its earnings release, management reiterated its expectation for slightly lower prices during the second half of 2018, but noted that second-half prices would still be significantly higher than the average prices during the second half of 2017.

SQM's realized prices are a good gauge for near-term lithium price movements more broadly. Unlike Albemarle and FMC, which sell nearly all of their lithium volume on long-term contracts, SQM sells the majority of its lithium in shorter-term contracts less than one year long. Although lithium carbonate spot prices in China have fallen from $25,000 per metric ton in late 2017 to under $13,500 as of Aug. 23, we continue to emphasize that the lithium spot price in China accounts for very little of total lithium volume. We estimate the lithium spot market in China makes up roughly 5%-6% of global lithium volume.

As such, we think the market is placing too much emphasis on Chinese spot prices when valuing lithium companies. We note that all three lithium producers we cover reported higher prices during the second quarter and guided to higher prices during the second half of the year versus the prior-year period. For long-term investors, we view the recent decline in SQM's stock price as an opportunity to own the lowest-cost lithium producer at a valuation that provides attractive risk-adjusted upside.