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Sociedad Quimica y Minera de Chile (NYSE: SQM) is a low-cost lithium producer at present benefitting from an enormous rise within the value of the smooth metallic. The firm — referred to as SQM — has a large presence in Chile’s Atacama salt flats, the place it extracts lithium from brine by way of a strategy of evaporation and chemical restoration.
The Atacama Desert in Chile is principally the Saudi Arabia of the electrical car (EV) sector, as the best concentrations of lithium on document could be discovered there. The ingredient is an important materials in EV batteries.
The SQM share value has shot up 42% over the past 12 months, however stays 22% off its November excessive of $111.
Soaring demand and income
Beyond lithium, SQM’s 4 different enterprise segments are specialty plant vitamin, iodine, potassium, and industrial chemical substances. The firm is the world’s largest producer of iodine, which is broadly utilized in prescription drugs and disinfectants.
This gives a level of diversification in its earnings, however the jewel within the crown is lithium. That’s as a result of the world’s hovering demand for EVs and battery storage methods prompted the worth of lithium to begin rocketing in 2021. This produced a Cambrian explosion on the corporate’s revenue assertion.
| For the third quarter | ||
| 2022 | 2021 | |
| Revenue from lithium and lithium derivatives | $2.33bn | $185m |
| Total income | $2.95bn | $661m |
| Net revenue | $1.09bn | $106m |
| Net revenue per share | $3.85 | $0.37 |
| For the 9 months ended 30 September | ||
| 2022 | 2021 | |
| Revenue from lithium and lithium derivatives | $5.62bn | $483m |
| Total income | $7.57bn | $1.77bn |
| Net revenue | $2.75bn | $263m |
| Net revenue per share | $9.65 | $0.92 |
The value of lithium has come down this yr, however stays considerably above the five-year common. It’s no shock then that the corporate has been investing to extend its lithium manufacturing capability. With a lot of that now full, the corporate expects to extend its market share.
It not too long ago acquired a refining plant in China and administration is open to extra acquisitions. It definitely has the wherewithal to take action with over $3bn in money on the steadiness sheet.
Cheap valuation with danger
The inventory at present has a ahead price-to-earnings (P/E) ratio of 6.3. That, in comparison with a sector median of 14, suggests the shares could be in cut price territory proper now. The dividend yield at present stands at a whopping 9%, coated 1.8 occasions by earnings.
This excessive yield is the reward for taking up the chance that lithium costs could tumble additional as extra provide enters the market. Goldman Sachs is extraordinarily bearish for 2024, forecasting a mean lithium carbonate value of $11,000 a tonne. That could be over a 75% drop from as we speak’s value.
Meanwhile, Macquarie Research is asking for a mean value of $62,586 a tonne in 2023, and a gentle value by way of 2026. The consensus forecast for 2023 is $29,063 per tonne.
This variance means no person actually is aware of for positive. But long run, gross sales of EVs ought to develop exponentially, pushed by the worldwide transition in the direction of a greener financial system. The International Energy Agency predicts lithium demand should develop 26-fold by 2050 to succeed in net-zero.
This ought to hold the corporate’s income wholesome and dividends flowing for years. If I hadn’t already purchased SQM inventory, I’d purchase as we speak at $86 a share.
