SQM Earnings: Falling Lithium Prices in China Weigh on Near-Term Profits

SQM’s SQM 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.

We view shares as significantly undervalued, with the stock trading in 4-star territory. We reiterate our Very High Uncertainty Rating due to elevated political risk. The company’s lease to extract lithium at the Salar de Atacama in Chile expires in 2030. Chilean President Gabriel Boric wants the government to take a controlling equity ownership stake in all lithium operations as a condition to extend the company’s lease.

In response to elevated political risk in Chile, SQM has explored the acquisition of additional resources outside of the country. The company is already constructing a fully integrated spodumene-based lithium hydroxide operations in Australia in a joint venture with Wesfarmers. In early 2023, SQM bought a 19.99% equity ownership stake in Azure Minerals, which owns two potential lithium resources in Australia, both of which are in the early development phase. In the past, SQM owned an equity stake in a brine-based lithium project in Argentina. Accordingly, the company could look to acquire resources in Argentina as a way to grow volumes and diversify its lithium production.

We expect the lithium market will end 2023 in a deficit, driven by rising electric vehicle sales and the growing buildout of energy storage systems, the utility-scale batteries used to support renewable power generation. As demand more than triples by 2030 to 2.5 million metric tons from 800,000 in 2022, we expect the lithium market will remain in a deficit, supporting prices well above the marginal cost of production. We forecast prices will average in the mid-$30,000 per metric ton range from 2023 through 2030.