SQM: We View Proposed Azure Acquisition as Value-Neutral

SQM 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.

We view SQM shares as significantly undervalued, trading at more than a 45% discount to our fair value estimate. The current market price implies that lithium prices will fall to roughly $15,000 per metric ton and remain there for the rest of the decade. We view this scenario as highly unlikely, as it is well below our estimate of the current marginal cost of production of $20,000 per metric ton. If lithium prices were to fall to $15,000 per metric ton, we would expect high-cost supply to exit the market while new project development slows. With lithium demand still growing strongly from rising electric vehicle sales and the buildout of energy storage systems—utility-scale batteries used to support renewables—we think demand would quickly outpace supply, leading to rising prices.

While we think SQM’s deal is likely to go through, Chinese lithium producer Tianqi Lithium’s 22% ownership of SQM could bring scrutiny from Australian regulators, which recently blocked a Chinese firm from acquiring an Australian lithium asset. However, as Tianqi is a minority owner of SQM, and both SQM and Tianqi independently own and are developing lithium assets in Australia, we think the deal will likely be approved by regulators.