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Morningstar | SQM Shares Remain Undervalued as Long-Term Lithium Outlook Intact

Of our two key takeaways from SQM's fourth-quarter earnings release, the first is that management seems likely to act as a rational player in the lithium carbonate market over the next several years as new supply comes on line. This should partially support medium-term lithium prices, although we continue to forecast lower prices over the next few years. Our second takeaway is that SQM will sell less than 50,000 metric tons of lithium on an LCE basis in 2019, which is well below our previous forecast of around 70,000 metric tons. Although our long-term lithium outlook remains intact, we've reduced our SQM fair value estimate to $64 per share from $65 due to our lower near-term volume forecast. Our narrow moat rating is unchanged.

SQM shares fell 8.4% at the time of writing as the market reacted to lower near-term volumes and management's commentary that SQM's lithium prices would fall in 2019. The pricing commentary is in line with our outlook that lithium prices will fall over the medium term from current prices around $12,000 per metric ton (on a Chilean export LCE basis) to $10,000 as new supply outpaces demand growth. However, as electric vehicle adoption continues to grow, we forecast higher long-term lithium prices of around $12,000 per metric ton (in 2018 real terms) as higher-cost supply will be needed to meet demand. With our long-term outlook unchanged, we view SQM shares as materially undervalued and think the market is overreacting to the near-term guidance below expectations.

Management's guidance of 2019 lithium production of at least 60,000 metric tons of lithium on a LCE basis, which we point to as a sign that the company is successfully ramping up its 20,000 metric ton capacity expansion that was completed last year. The 10,000 metric ton difference between production and sales is evidence that SQM will likely act as a rational player in lithium as new supply ramps up faster than demand over the next few years.

For more information on our lithium outlook, please see our Nov. 30 report "Put the Pedal to the Metal for Lithium Stocks."

For more information on our electric vehicle forecast, 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."