Company Reports

On April 29, lithium stocks rallied on the news of China's recently issued automobile subsidy. Consumers who trade in an older vehicle and buy a new vehicle that meets energy-saving requirements, including electric vehicles, can get a subsidy of up to CNY 10,000 (about $1,381) to reduce the purchase price through the end of 2024.

Our key takeaway from SQM's fourth-quarter earnings results and subsequent conference call was management's discipline to act as a rational player in lithium by reducing volume growth in response to lower prices. SQM plans to slow its sales volume growth in 2024 to a midpoint of 7.5%, which is below our outlook for the pace of lithium demand growth. The company also does not plan to sell spodumene into the market at its Mt. Holland project, which just began production last year. As a result, we think SQM's supply discipline will help the lithium market move back into a supply deficit by the end of the year. Having updated our model to incorporate fourth-quarter results, we maintain our $95 per share fair value estimate. Our narrow moat rating is also unchanged.

Through its access to high-quality mineral deposits, Sociedad Quimica y Minera de Chile is a large, low-cost producer of lithium, iodine, and nitrates used in specialty fertilizers. SQM’s crown jewels are its geologically advantaged lithium and caliche ore assets. SQM’s low-cost lithium deposit in the Salar de Atacama boasts the highest concentration of lithium globally and benefits from high evaporation rates in the Chilean desert. As electric vehicle penetration increases, we expect high-double-digit annual growth for global lithium demand, one of the best growth profiles among commodities.

Lithium spot prices fell over 80% in 2023. As prices reached all-time highs in 2022, new, higher-cost supply brought the market to balance, sending prices plummeting. Bears say oversupply conditions will occur in 2024 amid rising supply and slowing demand as battery electric vehicle, or EV, sales falter.

SQM announced a memorandum of understanding with the Chilean state-owned copper producer to create a joint venture for the company's lithium operations in Chile. SQM will own just under 50% of the joint venture and contribute all its existing lithium operations to the joint venture. In exchange, SQM's lease to produce lithium will be extended until 2060. The lease was set to expire in 2030. If the deal is finalized, it would go into effect beginning in 2025. We think the deal will likely close with these key features.

Through its access to high-quality mineral deposits, Sociedad Quimica y Minera de Chile is a large, low-cost producer of lithium, iodine, and nitrates used in specialty fertilizers. SQM’s crown jewels are its geologically advantaged lithium and caliche ore assets. SQM’s low-cost lithium deposit in the Salar de Atacama boasts the highest concentration of lithium globally and benefits from high evaporation rates in the Chilean desert. As electric vehicle penetration increases, we expect high-double-digit annual growth for global lithium demand, one of the best growth profiles among commodities.

SQM announced an update to its planned acquisition of Azure Minerals. SQM now plans to acquire Azure in a joint bid with Hancock Prospecting for AUD 3.70 per share in a scheme arrangement, which is roughly a 5% premium to SQM's prior bid of AUD 3.52 per share. We think the deal is likely to close as proposed. After updating our model for the new acquisition price, we maintain our USD 95 per share fair value estimate for SQM. Our narrow moat rating is also unchanged.

Through its access to high-quality mineral deposits, Sociedad Quimica y Minera de Chile is a large, low-cost producer of lithium, iodine, and nitrates used in specialty fertilizers. SQM’s crown jewels are its geologically advantaged lithium and caliche ore assets. SQM’s low-cost lithium deposit in the Salar de Atacama boasts the highest concentration of lithium globally and benefits from high evaporation rates in the Chilean desert. As electric vehicle penetration increases, we expect high-double-digit annual growth for global lithium demand, one of the best growth profiles among commodities.

Through its access to high-quality mineral deposits, Sociedad Quimica y Minera de Chile is a large, low-cost producer of lithium, iodine, and nitrates used in specialty fertilizers. SQM’s crown jewels are its geologically advantaged lithium and caliche ore assets. SQM’s low-cost lithium deposit in the Salar de Atacama boasts the highest concentration of lithium globally and benefits from high evaporation rates in the Chilean desert. As electric vehicle penetration increases, we expect high-double-digit annual growth for global lithium demand, one of the best growth profiles among commodities.

SQM's third-quarter results reflected the decline in lithium prices as adjusted EBITDA fell 53% year over year driven by a realized lithium price decline of 47% versus the prior-year quarter. However, the quarter was in line with our outlook for the year, and we expect SQM's average realized lithium price to fall further in the fourth quarter. While we expect SQM's profits will see a near-term decline from lower lithium prices, we continue to see a strong long-term outlook for the low-cost lithium producer. Having updated our model to incorporate SQM's third-quarter results, we maintain our $95 per share fair value estimate and narrow moat rating.

Through its access to high-quality mineral deposits, Sociedad Quimica y Minera de Chile is a large, low-cost producer of lithium, iodine, and nitrates used in specialty fertilizers. SQM’s crown jewels are its geologically advantaged lithium and caliche ore assets. SQM’s low-cost lithium deposit in the Salar de Atacama boasts the highest concentration of lithium globally and benefits from high evaporation rates in the Chilean desert. As electric vehicle penetration increases, we expect high-double-digit annual growth for global lithium demand, one of the best growth profiles among commodities.

Lithium producer stocks fell on ExxonMobil's announcement that the company is planning to enter the lithium production industry through the development of a lithium project in the U.S. state of Arkansas. While Exxon provided little details on its plans, the company said it aims to begin lithium production in 2027 and produce around 100,000 tons per year by 2030.

On Nov. 6, shares of lithium producers Albemarle, Livent, and SQM fell on a broker downgrade. After reviewing the note, we see no reason to change our fair value estimates for the three narrow-moat companies. At current prices, we view all three lithium producers as materially undervalued relative to our base-case fair value estimates. Albemarle and Livent both trade at roughly 40% of our $300 and $38 fair value estimates, respectively, and in 5-star territory. SQM trades at a little less than 50% of our $95 per share fair value estimate. Along with Lithium Americas and Lithium Argentina, we view these five stocks as the most undervalued among our specialty chemicals coverage.

SQM announced its proposal to acquire Azure Minerals, which is developing the Andover lithium project in Western Australia, for a little over $1 billion (AUD 1.63 billion). SQM already owns 19.99% of the project, which is in an early development phase. Having updated our model for the acquisition and subsequent project development and construction, we view the deal as value-neutral. Accordingly, we maintain our $95 fair value estimate for narrow-moat SQM.

Through its access to high-quality mineral deposits, Sociedad Quimica y Minera de Chile is a large, low-cost producer of lithium, iodine, and nitrates used in specialty fertilizers. SQM’s crown jewels are its geologically advantaged lithium and caliche ore assets. SQM’s low-cost lithium deposit in the Salar de Atacama boasts the highest concentration of lithium globally and benefits from high evaporation rates in the Chilean desert. As electric vehicle penetration increases, we expect high-double-digit annual growth for global lithium demand, one of the best growth profiles among commodities.

On Oct. 18, lithium stocks plummeted following a sell-side broker's downgrade for Albemarle and SQM. The downgrade is due to the outlook that the lithium market will move into a supply surplus in 2024 and 2025, leading to lower lithium prices. We disagree and continue to forecast a price rebound as strong demand growth outpaces supply leading to a supply deficit in 2024.

In 2022, battery electric vehicles represented nearly 10% of global auto sales, up from a little less than 6% in 2021. Much of the growth occurred in China, which has been a leader in EV sales over the past decade. However, with national EV subsidies in China expiring in 2022 and far lower sales in the U.S. and Europe, the market questions if EV sales can continue to grow without subsides.

Through its access to high-quality mineral deposits, Sociedad Quimica y Minera de Chile is a large, low-cost producer of lithium, iodine, and nitrates used in specialty fertilizers. SQM’s crown jewels are its geologically advantaged lithium and caliche ore assets. SQM’s low-cost lithium deposit in the Salar de Atacama boasts the highest concentration of lithium globally and benefits from high evaporation rates in the Chilean desert. As electric vehicle penetration increases, we expect high-double-digit annual growth for global lithium demand, one of the best growth profiles among commodities.

SQM's second-quarter results reflected lower lithium prices, as the company sells much of its lithium in China, where spot prices saw the largest decline during the quarter. After updating our model to account for lower near-term lithium prices, we trim our fair value estimate to $95 per share from $100. Our narrow moat rating is unchanged.

Shares of lithium producers plunged in 2023 as falling spot prices leave investors worried the 2022 boom turned bust. However, we see no reason to panic. For investors, the selloff creates an attractive opportunity to invest in lithium.