Gerardo Illanes - VP, Finance and IR Patricio Solminihac - CEO.

Oliver Rowe - Scotiabank Isabella Simonato - Bank of America Andrew McCarthy - Banchile Jose De Gregorio - Santander Lucas Ferreira - JP Morgan David Wong - Morningstar.

Good morning. And welcome to the SQM Second Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Gerardo Illanes, Vice President of Finance and Investor Relations. Please go ahead..

Thank you. Good morning, everyone, and welcome to SQM’s second quarter 2016 earnings conference call. For your information, this conference call will be recorded and is being webcast live. You may access the webcast later on at our website www.sqm.com.

Joining me today our speakers are Patricio Solminihac, Chief Executive Officer; and Ricardo Ramos, CFO.

Before we begin, let me remind you that statements in this conference concerning the Company’s business outlook, future economic performance, anticipated profitability, revenues, expenses or other financial items, anticipated cost synergies and product or service line growth, together with other statements that are not historical facts, are forward-looking statements as that term is defined under federal securities law.

Any forward-looking statements are estimates reflecting the best judgment of SQM, based on currently available information and involve a number of risks, uncertainties, and any other factors that could cause actual results to differ materially from those stated in such statements.

Risks, uncertainties and factors that could affect the accuracy of such forward-looking statements are identified in the public filings made with the Securities and Exchange Commission. Any forward-looking statements should be considered in light of those factors.

I now leave you with our Chief Executive Officer, Patricio Solminihac, for brief comments before we move to Q&A..

In the industrial chemicals business line, revenues for the first half of this year were approximately 48% lower compared to the first half of 2015 which is in line with the 45% in sales volume. The lowest sales volumes are mainly explained by the fact that we have not reported sales of solar salts in 2016 year.

We are lowering our estimate of solar salts sales for 2016 as some of the 70,000 tons we originally expected will most likely push back to 2017 as result of delay in this trade.

Finally, although gross profit for the year today have been lower than it was last year, we continue to expect gross profit for the full year 2016 to be higher than 2015 gross profit. With respect to the arbitration proceedings with CORFO the process continue.

We now expect the decision to be delayed as both CORFO and we have initiated additional arbitration proceeding related to the original arbitration. But we remain confident that we have full complied with all our contracted obligation with CORFO.

I will finish with an update of our joint venture with Lithium Americas in order to develop the Cauchari-Olaroz lithium project. We have been hard at work updating the feasibility study. And we now expect that this project production capacity could reach 50,000 metric ton per year instead of 40,000 that we originally announced.

Construction is still expected to begin during the first half of next year and we are planning to start with the first stage of 25,000 tons per year and then add the remaining 25,000 tons per year. We expect the CapEx for the first stage to be in the neighborhood of $435 million pre value added tax. I'll now open up the line for questions. .

[Operator Instructions] The first question comes from Ben Isaacson with Scotiabank. Please go ahead. .

It's Oliver Rowe calling in for Ben. Thank you for taking my question. I have a couple on your expansion projects. Maybe I could start with a couple on the lithium and then follow up on the nitrate expansion.

So with the Argentina lithium project, you gave a CapEx for the first stage, do you have an estimate for the both stages combined? And then on top of that what are the next steps on actually committing the capital to move forward or have you already made those steps?.

Well, thank you very much for the question. Regarding on our expansion program, we are doing all the studies for the total 50,000 ton per year capacity. We started with first stage as I indicated of 25,000 with close to $435 million CapEx.

Our estimation for the second half is in the range of $260 million additional for the second 25,000 tons of course because all the infrastructure will be in place. We are right now working in drilling in order to get the better knowledge on how we'll proceed with the construction. We are committing now close to $18 million - $20 million in this stage.

And we expect to have the decision to go ahead with the construction first half of next year. .

Thank you. And then just on the nitrate expansion that had come up over last quarter. Now the CapEx guidance that you have for 2016 looks like it's pretty close to your sustaining CapEx level. But you had mention that 100,000 tons of metric capacity would come on in 2016.

So my question is, is that volume increase get push back or is it just a very inexpensive project? And then could you also comment on how you would breakout the $140 million for the remaining nitrate expansion across 2017 and 2018?.

Well, we took the decision strategically that we want to continue growing our work in the potassium nitrate business and specialty plant nutrition business. And for that we want to be ready and have the capacity installed. You know that we have a total capacity today of close to 1 million tons.

And our idea is to bring that capacity to 1.5 million tons. Of that 200,000 additional capacities will come from upgrading our [artel] operations which is quite low in capital intensive. And then of course the new plant which is the one that will take most of the capital of the $140 million that I explained that we will be doing in 2017 and 2018. .

The next question comes from Isabella Simonato with Bank of America/Merrill Lynch. Please go ahead. .

Good morning, Patricio and Gerardo. I have two questions only. First, we continue to see this quarter the prices performed very well and continue to go up.

I'd like to get an update review from you on where do you think they could stabilize once new supply comes to the market? And the second question is we saw that CORFO and Rockwood sign a new contract for expansion and there was news a couple of months ago mentioning that maybe SQM would be willing to talk to CORFO again about expanding the business and what would be the terms.

I'd like to understand better from you where does this stand for? And if expanding in Chile at this point is really an option. Thank you. .

Okay, thank you very much, Isabella. Regarding the price of lithium, it is difficult to have straight answer to that. We've been looking how the demand has been evolving. We are seeing in the last couple of months less pressure than at the beginning of the year.

And on the other hand also we've seen that some of the supply that was supposed to come that is actually coming. Others have been delayed so we'll have to see how that evolved the rest of the year. We think that prices that we are right now selling we don't see upward pressure in that.

So we will have to really monitor the rest of the year to know what the next year could be. On general terms we continue to see a strong demand and of course a lot of interest of new projects but we also know that new projects are not that easy to come online.

So we continue to be optimistic about the market the volume but probably not continue strong pressure for higher prices. Regarding the Rockwood announcement agreement with CORFO, we read also publicly what it was said. We understand that they have a general agreement but it's not signed yet. So we will have to see how that evolved in the next month.

I think they announced it could be ready for that. We, of course, have indicated that we will like to increase our production in lithium in Chile. We have prepared to do it but of course we need to agree with CORFO. Right now you know we are in the middle of our arbitration process.

And we are concentrated and trying to of course finish that procedure in order to be able to sit down with CORFO and increase the production together. .

The next question comes from Andrew McCarthy with Banchile. Please go ahead. .

Hi, good morning, everyone. And thanks for taking my questions. And two questions on lithium.

First one, I was wondering if you could give us maybe some insights into how the volume mix is evolving in terms of what you are seeing more spot sales now versus contract sales? Whether you have seen more sales in certain geographies such as China than previously? I know in terms of the product mix if you are maybe more hydroxide than carbonate today than previously.

And my second question was from the projection possibly increasing sales volumes this year by more than 25%. Given the production constraints that you face just that therefore imply that you probably be reducing some more inventories this year in lithium. That's it. Thanks. .

Thank you very much, Andrew. First regarding volumes, yes, we are taken the opportunity of the strong market and the good prices that's why we are increasing our volume as you indicated. We expect to have total volume this year of close to 25% more than last year. We are diminishing our inventory actually.

We did have some old inventory that we process in order to be able to sell and more this year and we are also producing more. Most of the additional demand comes for the batteries and/or catheter user for batteries are mainly in Asia. So geographically we are increasing our sales in Japan, Korea and China mainly.

And regarding the product mix, we are increasing our sales in lithium hydroxide given the some of the new technologies for catheters are using more hydroxide and carbonate. So in proportion we are now selling more hydroxide. .

The next question comes from Jose De Gregorio with Santander. Please go ahead. .

Hi. Thanks for taking my question. Now regarding the iodine market.

What is your expectation for the iodine market? Have you seen any bottom level or do you estimate a bottom level where margin are closer to becoming shutting down production?.

Well, thank you very much. Regarding the iodine market, we've been very clear in our strategy. Our strategy is to recover our market share so we are putting more volumes into the market.

And of course the price we sought is the balance between supply and demand and has been of course pressure on the prices and the prices you have seen that has been going down. Average price for a first half ended in the level of $23 per kilo. We see that for the rest of the year we continue to see some pressures.

We will continue to increase our volumes according to the market and hopefully little bit more. We want to increase our market share and the price would be the result of the supply and demand. And we of course in our internal part continue to put a lot of effort in our cost.

We've been very successful in lowering our cost especially after the operation restructuring that we did last year. So we feel very comfortable and we still handle reasonable margin for our business for this business line. .

The next question comes from Lucas Ferreira with JPMorgan. Please go ahead..

Hi, good morning, everyone. And thanks for hosting the call. I have a question on your expansion project in Argentina. I was wondering if you could share some expectations regarding your margins or cost of production or profitability return and level of opportunity you are expect to have in this expansion project. Thank you very much. .

Thank you, Lucas. We will review many different alternatives where to expand our lithium and we found that the project in Cauchari-Olaroz is a very competitive project. We of course it is intensive capital but according to our estimate we will have a very competitive cash cost that will allow us to the -- within the lower cost curve in the supply.

So we feel comfortable that we will have extremely competitive situation in this project. .

[Operator Instructions] The next question comes from David Wong with Morningstar. Please go ahead. .

Hello. Thank you for taking my question. Just one on the new Argentinean expansion. Previously I think you guys were targeting 40,000 tons for about four years and that you are targeting a higher production capacity.

Does that mean that mine life decreases or is it greater reserves as well?.

Thank you very much for your question. Clearly what we have that mine has that we have a more reserve, that's why we determine that we can go up to 50,000 and keep the length of the project.

And of course given the size of the market and the way we want to enter into the market with this additional capacity we design in two stages, 25,000 first and additional 25,000 afterwards. .

Okay.

And is it still expectation to have about $1,332 of operating cost per ton including the potash credit?.

We have not disclosed yet the operating cost. We are doing our work. We are optimizing our actual estimate as I indicated before and very competitive but we have not disclosed exact number yet..

This concludes our question-and-answer session. I'd like to the turn conference back over to Gerardo Illanes for any closing remarks. .

Thank you all very much for joining us today. And we hope to have you with us in the next conference call. Good bye everyone. .

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..