Good day, and welcome to the SQM Second Quarter 2017 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded..

I would now like to turn the conference over to Gerardo Illanes. Please go ahead. .

Thank you. Good morning, everyone, and welcome to SQM's Second Quarter 2017 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 as speakers are Patricio de 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 outlooks, future economic performances, anticipated profitability, revenues, expenses or other financial items, anticipated cost synergies and product or service line growth, together with other statements are not historical facts -- 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 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, and forward-looking statements should be considered in light of those factors..

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

Good morning, and thank you for joining SQM's Second Quarter 2017 Earnings Conference Call. Last night, we post our results for the first half of the year. Our net income reached $204 million, an increase of over 44% when compared to the second half of last year.

There were several highlights related to the results published for the first 6 months of last year. Sales volume reached record high in lithium, specialty plant nutrition and iodine..

In lithium, sales volume reached almost 24,000 metric tons, and prices reached all-time highs, surpassing the $12,500 per ton. In the iodine business line, sales volume reached record levels of 6,600 metric tons, which puts us on the target to sell over 12,000 tons this year.

Sales volumes in SPN business line reached close to 450,000 metric tons in the first half of this year, and we expect this momentum to continue for the remainder of 2017..

Along with the strong results and the highlight I just mentioned, during the first half of the year, we focused on various expansion projects in Chile and lithium projects abroad. Moving this venture and the company forward showed the dedication of the company to explore and develop new opportunities.

We announced last night that we are increasing iodine production at our Nueva Victoria facility. We are investing approximately $30 million to debottleneck and expand our capacity, thus, reaching a total capacity of 14,000 metric ton per year by mid-2018.

Along those same lines, we have been working on exploration, engineering and permitting of a new greenfield project in Chile, and we will ensure that supply is available now and in the future. Also, in Chile, we are moving forward with our lithium carbonate and lithium hydroxide expansion in the industrial site, Salar del Carmen.

The CapEx associated with both of these projects will reach approximately $80 million, and we expect to have both operating by mid-2018. The total lithium carbonate capacity will reach 63,000 metric ton, and the total lithium hydroxide capacity will reach 13,500 metric ton. These expansions will help SQM maintain its position in the lithium market..

The Cauchari project in Argentina with Lithium Americas is moving forward as planned and is expected to start the operation by the end of 2019. We recently announced an investment in a lithium project in Australia, a joint venture with Kidman Resources.

We feel that this project fits in our portfolio as a low-cost project, and we expect to sign the final agreement before September 30, 2017..

We also announced last night that we will pay a dividend equivalent to 100% of the net income of the results of the second quarter. This will be paid on September 14, 2017..

I thank you for joining the call today, and we now open the line for questions. .

[Operator Instructions] Our first question comes from Andrew McCarthy with Citi. .

I had 2 questions. Firstly, on the lithium business segment, I was just wondering if you could provide some more color on why the lithium volumes declined sequentially in the second quarter to 11,500 tons. And my second question was on the Industrial Chemicals segment. There, we also saw a fairly steep quarter-on-quarter decline in sales volumes.

I was just wondering if there was any change there in the guidance on solar salts volumes for this year and going forward. .

Okay. Thank you, Andrew. Regarding the lithium volume, we're still seeing that the total volume for the year will be similar this year of what it was last year. There were some delays because of shipments only and also because of some delays in some specific production or some specific [indiscernible].

But the most important thing is that our view and forecast today is that the volume for the year will be very, very similar to last year, which is running our plant at full capacity. Regarding the Industrial Chemicals. Industrial Chemicals, we are selling this year much more solar salt than last year.

Total sales this year will be consequently in the business segment higher the volume than last year, which will be close to 20% more. So we feel very comfortable with the development of the solar salt.

And also, besides solar salts, we are seeing also some recurrence in the industrial potassium nitrate as well as industrial solid nitrate, small one but still in the right direction. .

The next question comes from Cesar Perez-Novoa with BTG Partners. .

If I may, could you please comment on the progress related to the lithium carbonate and hydroxide expansions in Chile and provide further details and the rationale behind the iodine expansion? Likewise, on your partnerships in Argentina and Australia, what milestones should we monitor in your development? And finally, again, if you could break CapEx in 2018 given numerous fronts that you're attacking, it would be extremely helpful.

.

Thank you, Cesar. This is a lot of questions I have for one guy. But anyway, I would like to touch on everything. Well, regarding, first, expansions. We got, as was published, the environmental permit approval of both plants. We are moving forward now to finishing all the final requirement for buying the equipment and also the final detailed engineering.

We will be breaking ground very soon. And we are expecting to be in production with both projects by mid-next year. So things are moving forward as planned. We don't foresee at this moment anything that could affect that.

Regarding the iodine, clearly, we have been selling, as we indicated in our press release, the volumes according to our plan to recover our market share, which we have a target and things have been accomplished as planned. So the total sales in the first half was 6,000. We plan to sell more than 12,000 tons for the year.

So given that, of course, and given the cost structure that we have, we have defined to debottleneck our plants and do some expansions, investing close to $30 million to bring our total capacity as a company to 14,000 tons by mid of next year.

And also, looking for the long term, being us as the leader in this market and also the lowest-cost producer, we are also been working in a brownfield project in order to be prepared for the future growth. That is the iodine. Now regarding the third question, the milestone for Argentina and Australia.

Australia, the most important milestone will be the signature of the final agreement that we expect to have that ready before our due date, which is September 30 of 2017. We are already starting to work on the working plan, on the days work for the engineering and the concept that we will develop with our partner.

Regarding Argentina, we are doing, as planned, the drilling now for the wells, production wells as well as wells that we'll use to test the final hydrogeological model, as we indicated in the press release also. We continue to work in the camp and also in some other final detailed engineering.

So also, it's according to our plan, and we expect to be starting production by the end of 2019. Regarding the investment plan, we have been working, of course, in our plan for 2018, which was to your question, but we will not to give detail now. We plan to give it when we give our press conference call for the third quarter. .

The next question comes from Oliver Rowe with Scotiabank. .

Couple more questions on the iodine greenfield that you're considering. Do you have any details you can share on potential timing, maybe the size of the project and why you aren't expanding at the current site beyond this debottlenecking instead? Maybe I'll start with that, and I'll come back with another after. .

Thank you, Oliver. Regarding iodine, as indicated before, we have been working for some time already in the exploration and the engineering and permitting. We are in the final stage of getting the official environmental permit. That was published when we entered the permit like a year ago.

And the total project is 2,500 tons, and we are well advanced in that. But of course, the definition to start construction will depend on market conditions. .

Okay. And if I can stay on iodine.

So if you'd pull through this greenfield and I guess even with the debottlenecking, is this looking to grow market share beyond what you'd previously sort of want to get back to, which was your original market share? Or is this to capture incremental demand, grow market share further? And then I guess on top of that, could you discuss the supply response that you're seeing now that prices have broken sort of $20 a kilogram? Maybe what the cost curve looks like and how much pressure competitors are under at prices at this level?.

Well, we have been very clear from the very beginning that we wanted to recover our market share according to our capabilities and capacities and cost curve position. And we have done so. We feel very comfortable with that. And what we like to see now is that the growth of the demand start to pick up more.

We have seen some in some new applications, but we have to wait and see for that. I think that we, as an important players in the industry like in the other industry that we are, we would like really to promote more use of these molecules in the sense that there is more demand, and the demand for iodine really can start with new application.

That is our -- what our aim. .

The next question comes from Joel Jackson with BMO. .

This is Fahad on for Joel. I have a few questions on lithium. So I'll give them one at a time. So my first question is on lithium prices. You had mentioned that you expect higher prices in the second half of the year versus the first half.

Can you go over what you think are the main drivers for why you're now guiding to higher prices versus stable before?.

Yes. It's what we are seeing, the request from our customers. We are seeing that the demand really is quite strong. I mean, every time that we talk with people in the industry, we're seeing that the electrical cars are moving even better than before.

We are seeing that in the demand for cathode -- lithium for cathode materials in the batteries for electrical cars. And also, we see that the other lithium applications continue to be very active.

So from the demand side, there is not, let's say, a huge change from what we have seen some -- beginning of the year but some improvement in the right direction. And regarding supply, the short term, we have not seen that much as -- that was promised.

So these 2 together make us to see, especially lithium carbonate, better prices for the second half of the year. .

And just extending that, what about '18? I know previously you thought prices would drop off as a new supply comes on.

Has that view changed for 2018?.

We'll have to wait and see. The new supply is very difficult when you are looking from outside, how really the new projects are doing. But we're still seeing that there is a new production that is coming in. So prices, we should see as stable or as we saw before, next year, maybe going down a little bit. .

Okay. Great. And just a last question. We've read reports that a lot of the -- or some of the Australian spodumene producers are now selling their raw lithium ore to Chinese converters, and it seems to be Mineral Resources and Pilbara, they have plans to sell this ore.

Do you think that this direct shipping or DSO will have an impact on supply? Any thought you could share on this kind of recent phenomenon would be great. .

Well, we're seeing that is -- really is not the way to go. I understand that the people are doing it because it's the fastest way they can move and there is today demand. And there is also good -- very good prices. So of course, there is a margin if you do it right to do it that way.

But I don't say that, that will continue to be doing in the longer term. .

The next question comes from [ Danielle Iger ] with Bank of America Merrill Lynch. .

I just wanted an update on the arbitration with Corfo on lithium, if you could. .

Yes. This -- given that the arbitration is confidential, I cannot comment on the detail of the process.

Only I can say that given that Corfo comments that SQM is completely available, as always, we have indicated to solve the conflict and also agree on new condition to increase and project the lithium production in Chile, and with these, make quick investments and allow that Chile recover the world leadership in the lithium industry. .

The next question comes from Lucas Ferreira with JPMorgan. .

I have 2 questions on lithium. And the first one, looking at the numbers that you published in your article, I'm calculating that your cost of production per unit of lithium had declined substantially in the quarter. I just wonder why that's happening.

Is that something related to the royalties payment, some sort of a seasonality impact on your costs? So if you can talk a little bit about cost of production margins that will be great. And Patricio, the second question is related to this previous question.

I know that the process with Corfo is confidential, but thinking about the amount of free cash flow you're generating and capital allocation in the business in the next, let's say, 3 to 4 years, how much capital would you -- would SQM be willing to invest in lithium in Chile once this arbitration process is over? You mentioned that you have licenses to increase your productions.

So my question is, looking at the supply and demand for lithium in the next couple of years, the projects that you are already investing, so how much more equity and capacity expansion should we expect that SQM could be developing in Chile in the coming years?.

Lucas, first one, I think the lithium cost, lithium cost has been not real important changes as you compare this year with last year or second quarter with the first quarter. The important change always is regarding the rent that we pay to Corfo that is related to the price. So of course, when the price has been going up, then the rent goes up.

So that is reflected in the cost. But the direct cost of producing lithium, we have not seen really important changes. There are some minor increases in costs because of some specific situation but not important.

Regarding the Corfo issue, what we have said and more than -- really, your question is not really on the Corfo issue, regarding what we can do if we have more quota in the lithium in the contract and also more time after 2030.

Basically, we are saying that easily, we can double our production, and we can double our production without doing bigger investment in the Salar itself because we do have today the environmental permit as well as the pumping of the brines to produce the products they will produce, and then we have lithium in excess.

So the investment will be mainly related to produce, let's say, an additional 60,000 metric tons of lithium chemical by investing on the chemical plants. And that will depend on the market situation. It will be just lithium carbonate or also more lithium hydroxide that we already are now expanding our capacity. .

The next question comes from Alexandre Falcao with HSBC. .

I have 2 on lithium. The first one is, do you guys greenlight the -- I'm not sure with your press release, did you greenlight Cauchari to start producing? Or you're still on a phase before that? And the second question is on the rationale of going to Australia.

If you guys can comment on, clearly, if you can double your production in Chile, you have Cauchari, which is lower-cost production, why go to a -- I'm not sure what the cost is, but I'm assuming it's north of $6,000, $7000 to produce there.

Why go there? Is it basically to strategically retain that capacity? Or is there anything else we're missing here?.

Okay. First question regarding Cauchari, we are going forward with our plan. We continue to make all decisions that we need to make according to the timing. We are now investing on the wells construction. We are finishing some detailed engineering, some final process review. We are also buying some things. So everything is going in the right directions.

And we expect still, as I indicated, to be starting production by the end of 2019. Regarding Australia, if you look at the consensus that the industry is giving today, we will see growth in the range of 12% to -- some people -- 18% a year of growth.

We're talking about a growth in the demand let's say, starting today, from close to 200,000 metric tons of lithium carbonate equivalent. Growing at that rate, we will meet one project additional per year.

So clearly, if we want to keep our market share and really respond as a company, not only to this opportunity but also responsibility that we have as being the market leader in lithium chemicals, the potential expansion in Chile to double its capacity is not enough. So clearly, we need to have more projects for the future.

Also, we think that given the size that we have, it's wise to have production diversification. So that's clearly why we meet, and we're saying it makes a lot of sense for us to have these different production locations.

Now we have been working with -- to put this additional production for many, many years, and we have analyzed many different alternatives. And we choose the 2 that we think that are in the lower cost curve. So we feel very comfortable with the cost that we will -- having finally in Cauchari in Argentina and also the cost we can have in Mt.

Holland in Australia. We think that the characteristic of both projects and the technology and the know-how that we can bring to those will allow us to be in the low cost, including all costs, including the renting that you need to be paid to governments or other agency in each of their cases. .

Okay. If I can, just one follow-up on SPN.

Are you guys concerned at all with the reports of Brazilian farmers basically with tons of inventory that are still on the ground? And are there -- is there a concern for the second half of the year? And the competition, you guys mentioned a little bit on the press release, the competition being a little bit more steep.

Do you see more people migrating to more specialty chemicals here? Or this is mainly something to the second quarter of the year?.

SPN, we were quite clear that we will see this year an important growth regarding to previous year. It was not completely reflected, of course, in the first half. We would see that the second half will have better volumes. Brazil is not that important for us in SPN. Brazil is important for us in potassium chloride.

But we, of course, sell some potassium nitrate also in Brazil, but it's more diverse in all the countries around the world. We continue to see that, that soluble potassium nitrate continue to grow at a very healthy rate. And that is being reflected on the volumes that we have been selling. So we really do not see any important concern in that respect. .

The next question comes from Chris Terry with Deutsche Bank. .

A couple of questions for me. Just relating to lithium at the moment and then going forward.

Regardless of the outcome with Corfo and what might happen on future expansions, how are you looking at the hydroxide part of the business? Is there room to maybe grow that further beyond the first expansion? Is that something you would consider?.

I think that it's very important that we follow very closely what happen in the demand side as well as in the supply side, not as a lithium total but also between lithium hydroxide and lithium carbonate.

What we saw at the end of middle of last year and been continuing during the year and also beginning of this year, that we have seen more demand of hydroxide, not only in the grease market but also for the batteries, for the electrical cars in some of the technologies.

People are preferring now to start with lithium hydroxide instead of lithium carbonate. So we have to really see if the market continue that trend. And second, the Chinese that produce lithium chemicals from spodumene mainly from Australia, they also are moving more to lithium hydroxide without going to the route of lithium carbonate first.

So they are giving also some pressure to that. We, of course, have the capacity of moving more lithium hydroxide and less lithium carbonate and vice versa. And we, of course, we will continue to do so given our size. For us, both those are very, very important.

So the future growth, which was your specific question, will depend on these 2 factors that we continue to monitor continuously. .

Okay. And then just -- I know you're not giving a lot of details at this stage on Mt.

Holland, but post the September 30 due date for the deal completion, what would be the rough time line do you think to maybe release a pre-feasibility study on the concept? Is it 6 months? Or is it more like a year? Or do you have a rough time line on that?.

We indicated that we want to move quickly with our partner in the mining stage, then the concentrate and then the chemical plants. Given that we do not have yet the final document signed, I prefer to postpone that answer. .

Okay. Sure. And the last one for me, just on the remainder of the year. I think you've touched a little bit on the volumes you expect for 2017. Just thinking about 3Q and 4Q, would we expect that you build volumes into the end of the year? I think you had a strong 4Q last year.

Is that related to the weather and evaporation rates, et cetera? So how do we think about the sort of progression in the second half?.

I understand that you continue to question about lithium, yes, the main concept that we have is that, according to our projection, we expect to sell similar volumes in the total year than last year. So of course, we'll sell some more, but this is -- we don't see up to now a -- very different between third and fourth quarter. .

This concludes our question-and-answer session. I would like to turn the 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 on the next conference call. Goodbye, everyone. .

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