Good day, and welcome to the SQM Third Quarter 2020 Earnings Conference Call. Please note this event is being recorded. I would like now turn the conference over to Kelly O'Brien, Head of Investor Relations. Please go ahead..

Good morning. Thank you for joining SQM’s third quarter 2020 earnings conference call. This conference call will be recorded and is being webcast live. Following this call, you will be able to access the webcast at our website, www.sqm.com. Our earnings press release and a presentation with a summary of the results have been uploaded to our website.

Joining the call today as speakers are Ricardo Ramos, CEO; Gerardo Illanes, CFO; and Pablo Altimiras, Vice President of Lithium and Iodine businesses..

Thank you, Kelly. Good morning. Thank you for joining our earnings call today. Our gross profit as you know was approximately $115 million, similar to average gross profit during the first half.

Our average iodine prices held steady and our sales volumes in the lithium business lines were up over 40% compared to the last quarter and almost 60% higher than what quarter we sold in the third quarter of last year. Recent months we have been very busy and dedicated to our efforts related to sustainability.

Last month, we proudly announced our Sustainability Development Plan, which includes, voluntary expanding our monitoring system, promoting better than more profound conversations with neighboring communities and becoming carbon neutral and reducing water by 65% and brine extraction by 50%.

As part of this plan, we also made a goal of obtaining international certifications and participating international sustainability index.

In September, we began the self assessment process in the Salar de Atacama under IRMA, which is the first step in the certification process for this strict standard and last week we were accepted into the Dow Jones Sustainability Index Chile and the Dow Jones Sustainability Index MILA Pacific Alliance Index.

We have always been committed to environmental protection and social responsibility, and now we feel prepared and proud to share our commitments and goals with all of you.

I invite you to visit our company website to learn more about the Sustainability Development Plan and online monitoring system, and I encourage you to reach out to us with any questions or concerns about these plans..

Good morning, everybody. Thank you, Ricardo. In the iodine market we saw a more negative impact on the iodine demand, expected to decrease approximately 8% or 9% in 2020 compared to last year as result of COVID-19. This impact was seen in the iodine market as a whole, but mostly in the x-ray contrast media segment.

We believe the demand will recover when the impact of the pandemic fades away. After a slowest start of the year, our lithium sales have been gaining momentum. As Ricardo mentioned, our lithium sales volumes surpassed 17,600 metric tons in the third quarter, and we expect this strong volume growth to continue into fourth quarter.

This growth is a result of the strong demand recovery in the second half of the year and, more importantly, our ability to sustain relationships with existing clients and acquire new customers around the world.

We have been able to do this as a result of improving the quality of our products and being able to meet all of our customers' requirements, all while increasing efficiencies in our production process and ensuring our low cost position. The demand recovery seen in recent months, most of which was in Asia, were as a result of the pandemic.

We have seen an increase in the demand of e-bikes and scooters and personal computers. This demand was in addition to a significant increase in electric vehicle sales in Europe and Asia. To quantify this a bit in the third quarter, we believe electric vehicles unit sales increased in China approximately 40%, and in Europe, more than 130% year-on-year.

Although there is still uncertainty surrounding the pandemic and the economic impact on the lithium market in the near future, we remain optimistic about the long-term growth perspective in the lithium space. We expect to see a strong demand growth in 2021 and beyond.

Because of this, we expect to increase our sales volumes by more than 30% in 2021 when compared to our expected 2020 sales volume, which is aligned with our strategy to grow our lithium market share. For this reason, we have laid out a robust CapEx plan, for which I will let Gerardo Illanes, our CFO, to comment..

Thank you, Pablo, and thank you, everyone, for joining the call today. Last night, in our press release, we described details of our 2021-2024 investment plan, which will require approximately $1.3 billion in Chile.

This plan will include the completion of our lithium expansion plans that are currently underway at our facilities in Antofagasta requiring approximately $240 million..

Our first question comes from Joel Jackson with BMO Capital Markets. Please go ahead..

Good morning, everyone. I have a few questions. I'll ask them one by one. So I guess I'd like to know that you finally now approved the lithium expansions to 180,000 tons carbonate. How do you expect to place those tons in the market? I know because of the iodine experience, you have not liked contracts.

It has to mean one of your larger lithium competitors seems to be doing quite well under price realizations versus you with contracts.

Will you seek to go out to get longer-term contracts to be able to ensure you can sell up to 180,000 tons at attractive prices?.

Okay, Pablo Altimiras speaking. Regarding to long-term contracts, yes, you're right that we have been some competitors that today have some long-term contracts with some customers. We are working on that as well.

We are trying to have long-term contracts, and well, today, that we believe that our position is better because exactly what we are doing, expanding capacity and producing more volumes. We believe that and a step-like expansion will allow us to secure long-term contracts for sure. We are working hard in order to do that.

Regard to your question on prices, yes, today, maybe we have some difference regarding to prices. In the past, when we have the boom of the lithium demand, you saw that the price was so high in some markets. And if you have a long-term contract, well, the price of your contract was different to the spot price. That's happened with the long contract.

But at the end, our customers, what they want is to secure the supply, and we are aligned on that, and that's why we will continue to secure some of the contracts in the near future..

Okay. And as you triple sales volumes over the next five years, wherever it's going to be, can you talk about how your cost of – assuming kind of, let's take the price of lithium out and just talk about kind of like a non-royalty, non-CORFO, just non-community payments, just cash costs for lithium.

You're going to triple your volume over five years, let's say. You also have a lot more things going on for sustainability, reducing brine, you're changing how you do things, you're changing the potash you produce.

What will cost look like as you ramp your volume a lot, but now have a lot more sustainability costs and network changes?.

Joel, this is Gerardo speaking. Well, you have seen on our financial statements, we have been lowering our production cost of lithium quarter-after-quarter, as promised when we finish our ramp-up expansion to reach 70,000 metric tons. Of course, I'm excluding CORFO effects in there.

And you see that the prices – sorry, the costs we reported in the third quarter were ex CORFO, were under $4,000. We are working in these projects that will let us expand our capacity significantly. And this expansion of capacity will also come with more efficiencies in production that will let us keep on lowering our cost.

Now regarding your question about sustainability and how that may impact our cost, well, we have been working on sustainability initiatives for a long time. And part of these costs are already included in the cost of what we're doing.

And the challenge for us and the challenge for everyone in the industry is to be able to produce in a sustainable way without having a strong impact on the cost..

Okay. And just finally, you've done really well in iodine. You've really done well the last several years to push up the price of iodine every quarter. COVID happened this year. You took a step back in the third quarter on sequential pricing.

How do you see – when do you think iodine prices can get back to $35 a kilo? What's the – say with volume, like when do you see coming back to the level you achieved not that long ago? Is it going to be two years, three years, one year? What's your base case?.

Okay. Well, you know the demand was affected by COVID-19, but the first thing that is important to say is that we believe that this is something temporary, which is not related with the fundamentals of the market. We believe in the fundamentals. We don't see any important change in the fundamentals of the demand.

And actually, remember that the prices started to go up because of the growth of the demand was bigger than the growth of the supply. Regarding to the supply, we have not seen any big change. So what we are doing today is to reveal our inventories, that will allow us to reach healthy levels once the demand recovery arises.

And regarding to the recovery, well, we are optimistic because of the news. So we expect that in the near future, and we believe that will happen in the next year, we will see a recovery of the demand levels to reach similar levels to 2019..

Thank you. Just one more question.

When you talk about the long-term lithium contracts you might seek, would you be seeking fixed contracts, fixed-price contracts or floating price contracts?.

Well, you know that it is important at the end to try to get good contracts, and when I say good contracts, it's from the customers but also from the suppliers' point of view. And in that regard, the needs of the different customers are different.

So depending on the customers, depending on the strategy that we have with these specific customers, we do different things. So you have alternatives which is related to quality, pricing, volumes. So I would say that it is specific to – for every customer..

Thank you very much..

Our next question comes from P.J. Juvekar with Citigroup. Please go ahead..

Yes, good morning.

Can you talk about how much inventory do you – are you carrying, either in terms of months of supply or in terms of dollars? And when do you think inventories will return to normal? And what is normal for you?.

Okay. So regarding to inventories, as you know, we have been producing at a very good production rate in the last month, which has been allowing us to recover our investment positions in order to face the sales forecast that we have today. We announced that we want to expect 50% more next year compared to this year.

And we will have – and today, we have enough inventory to go ahead with this program. So we don't see any issue regarding to our inventories..

So I think last quarter, you mentioned, I think it was close to $1 billion of inventory that you had – sorry, not billion, I meant $100 million of inventory you had.

Can you just sort of talk about how much inventory do you have in lithium?.

P.J., this is Gerardo Illanes. Yes, we do have more than $1 billion of inventories across the board. You can see that in our financial statement. That includes inventories of iodine, lithium, nitrates, basic materials and so on and so forth.

Regarding the specific level of inventories that we have in each particular business line, we don't disclose that information. But as Pablo was saying, we have enough inventories to be able to comply with the growth we are projecting for next year..

Okay. And my second question is, other companies are talking about a trend towards regionalization of supply chain, without the COVID. So how much of your lithium exports go to China? And let's say, Europe is certainly kicking into higher gear. EV sales are high.

And as the European market develops, what's your strategy towards selling into Europe? And how are you positioned there? Thank you..

Well, you know that in SQM as a lithium producer, we have been in industry for many, many years, so that means that we supply to many, many customers around the world. But today, you are right, our exposition and exposure in China is big. I would say that more than 40% of our sales today are in China.

But this is explained because you know that more than 50% of the lithium demand is in China, and that is explained because of the EV's revolution and battery manufacturers and car manufacturers.

But our strategy will continue to be for all the customers, remember that we are talking about here not only demand of lithium for electric vehicles and batteries. We have the industrial applications. For us, it is important to remain relationship with those customers and to support those customers in also their expansion plans..

Thank you..

Our next question comes from Isabella Simonato with Bank of America. Please go ahead..

Good morning, Ricardo, Gerardo. Thank you for the call and for the questions. First of all, I'd like to ask about iodine. You also mentioned in the release, right, you're ready to – with the expansion plans by 3,000 tons. I just like to get more details of the time frame for that.

And when we think about sales right in the long term, the 3,000 tons additional should yield about 16,000 tons potentially of sales when the expansion is ready. Just wanted to confirm that. And also, I would like to know how – what's your outlook for prices of potash and SPN.

We understand that demand for SPN is actually quite resilient but prices have been coming down.

How are you thinking about pricing in 2021?.

Isabella, Ricardo speaking. About our CapEx in the iodine business, we are working very hard as it's included in the $1.3 billion already mentioned by Gerardo. We expect to be higher than 15,000 metric tons of iodine at the end of 2024.

That's very important for us to be at that level, and we are more than ready in order to be prepared for the market and demand recovery that we expect next year. We have inventories of iodine today, and we think that the market will recover, and we will have more capacity included in the CapEx that is already mentioned.

And I think it's going to be ready 2023, 2024. On price of the fertilizer, first, in order to answer this question, you have to consider first that the demand in some way this year was – has been lower than originally expected to the effect of the COVID in some specific markets. Second, the low price of MOP.

MOP means potash pricing this year is lower than last year. And you have to consider MOP is the main raw material using by our competitors in order to introduce potassium nitrate. We had some due to the fact that demand was lower, and we faced more competition in some markets.

My short-term outlook here is that the pricing that we are having today is reasonable to expect to have some price recovery maybe next year as compared to what we are having third and fourth quarter this year.

And certainly, we think that all the signals are going in the direction that the demand will increase, some of the demand that was not there this year will be recovered during next year.

Your next question, I think?.

Just wanted to confirm what Ricardo said about iodine volume should be more – even more than 16,000 tons when expansion is done in 2024, right?.

Yes. Yes, of course, we’re working right now in order to have the that’s for sure..

Okay. Thank you..

Our next question comes from Cesar Perez-Novoa with BTG Pactual. Please go ahead..

Thank you very much. Hi, Gerardo, Ricardo, Pablo, Kelly. I have two questions.

On your recently announced investment program for iodine and lithium, could you please provide more color on what steps need to be taken from an environmental and regulatory standpoint to make that effective? Also if I heard correctly, you just mentioned that details on funding for this program will be delivered next month, but perhaps understand if this would be mostly debt or a combination of equity and debt.

And my second and last question actually relates to Mt. Holland, where you note on the press release that a decision will be taken on next January. I understand that you already have a definitive feasibility study.

However, if you could please remind us what you want to achieve from this joint review? Is this essentially just enhancing the value of the asset? Or is this a combination of perhaps, building a larger facility there? Any color would be appreciated? Thank you..

Hi, Cesar.

So the first question was – let me comment about the environment?.

About CapEx, environmental permits….

The environmental permits, we have been working very hard in the last I think, 10 years in order to be ready for environmental needs. In every single project, we are expert about that so far. As you know, in every single mining project, you need environmental permits and all different permits.

In the case of lithium, we are prepared with the permit for the 180 – I mean, 180,000 metric tons is already included the permit that we have today working at 120,000 that’s why we don’t expect any delay or any issue regarding moving to the 180,000 metrics tons.

In the other hand, in the nitrates and iodine business, we have the working the permits in the last three years, we are almost ready. We’re working in the sea – in the water, seawater pipeline, that’s very important part of the project and we have the permits now and we’re working on it.

In the engineering, we have some of the permits in the mining side, some of the permits of the construction. I do expect to have all the permits ready during first half next year. It means, we’re working in advance in the terms of the permits and environmental problem. We don’t foresee any big issue there.

It’s going to be a plus in order that we think, we can go with the $1.3 billion we have without delay because of environmental. The second question was, Gerardo….

About financing of….

Financing, as Gerardo informed you before, we expect to have the Board meetings in December. Our commitment is to present to the Board the different alternatives. As you know, it’s not a secret, we have many alternatives.

Of course, an alternative you mentioned before, as part of the alternatives that we will present to the Board and you have my word that during the press release of December, we will be very clear after the Board meeting, we are going to be very open about what is the decision of the Board about moving forward in that area.

But let me remind you that Gerardo said before that we have a very conservative – we are a very conservative company. Users have been followed SQM in the last – I don’t know, 30 years, 25 years, whatever, you know us and we have a strong balance sheet today. We will continue to have a strong balance.

It means that we will – you can imagine that we are going to be very strong and very conservative in our financial plan for the future. And finally, on Mt. Holland, Mt. Holland I just mentioned, one point we are waiting for the final feasibility study from the engineering company. We expect to receive the final document the next 30 days.

We expect to have the meetings with our partners in the next 60 days in order to formally announce. Every announcement in the project is a joint announcement because we have a great partner. We are very proud of the partner we have in Australia. We’re working together in this idea.

We think we strongly believe that we have a very good project in Australia. I expect to be announcing the project during January after the meeting we are going to have with farmers with all the papers and document in front of us. And you will be informed..

Thank you, Ricardo and everyone. Congratulations. Thank you..

Our next question comes from Ben Isaacson with Scotiabank. Please go ahead..

Hi. Good morning. I missed the first few minutes of the call. So just let me know if I’m asking something that was already asked. So the first question is on the constitution that’s coming next year at some point.

Is there any discussion at the government level or just in the general public domain about the lithium industry, as it relates to the new constitution in terms of opening up access to more players or rethinking the royalties? If there are any risk that SQM sees for in the lithium space as it relates to the new constitution?.

To answer directly your question, I have – I don’t – I’m not in a – I’m not aware about any specific discussion about lithium in the new constitution. That’s for the first point. Second, just as a personal opinion, I’m very optimistic about the future of Chile today.

After the last moment decision to move ahead to the new constitution, everything is back to normal. We’re working very hard now. We have full work, full productivity, every single company. And my personal opinion, I mean, it’s a personal opinion. There’s nothing wrong to review the constitution.

It’s something normal that happens from time to time in different countries. We have an institutional process looking forward in order to go ahead with this change or potential change to the construction. And I strongly believe that the changes will be for the better.

Anyway, at the end, I think everyone agree that growing economy is probably the best way to solve all the needs that the people want.

And it means that the main discussions about constitution, talking about education, talking about health care, talking about reasonable pension plan, in order to have this demand that it sounds reasonable to have, you need more money. And in order to have more money, you need that growing economy.

I think everyone agree about that, and that’s why I’m not in the negative side of the outlook about the discussion of the new constitution..

My second question is, in terms of the cost of lithium, I understand when prices are lower, your royalty payments are lower.

But in terms of the actual cost to produce a ton, is there work that you see where you could lower your cost over time? And if so, can you talk about timing and magnitude of that?.

Yes, of course, we have many initiatives in order to reduce costs, to improve productivity and improve the quality. And we’re working. Some of them are very confidential and internal, but you have my – of course, we’re doing so.

The most important one that we announced yesterday, that we are going to be very effective in the first step of increasing capacity, if you consider the amount of investment in order to go from 120,000 to 160,000 metric tons, it’s really, really low. It means that we are more than prepared to be extraordinarily competitive in the market.

Because at the end, the investment is a cost and you have to pay for it. And that’s why when we talk about cost in SQM, we talk about total costs. And our total cost, because the marginal investment is so low, have been reduced. That’s a very good news and is a new competitive advantage of the company in the lithium space. This is in the investment.

We expect to continue to reduce investment and maintenance, but we have a lot of initiatives in order to reduce the cost in our process. And if you review details, our cost of sales every quarter, you will have the number that our cost is going down.

Be careful that the royalty on the payment, the rent payments or the voice included in the cost, that’s why you need to be careful to put it aside. Because it is a cost, but it’s more than a cost, it’s a profit-sharing process we have with CORFO, where we pay and it’s public amount with the percentage of the price, depending the price of the lithium.

But putting this aside, that is a payment of shared profits to CORFO with total cost of production, including depreciation, including cash flow is going down. And I suspect that it’s going to have a big, big news in the future, so we are working very hard in order to do it..

Are you willing to share some guidelines or kind of goalposts in terms of what you want to achieve? Like do you want to save $200 by 2023 per ton excluding profit sharing? Or do you not want to give targets yet?.

Sorry, I don’t want to share now. We are working with the R&D department week by week. Every week, we have a meeting in order to know where they’re going, what is their next step. I hope we’re going to have the final steps in the different projects we’re working on it now.

And as soon as we have a clear understanding of potential projects and their effect, of course, we are going to be public about that..

Okay. And my last question is, if you go back a quarter ago, I think you realized about $6,800 per ton. And now you’ve realized about $5,400 per ton. And of course, that was the average for the quarter. So when you think about where you ended September, I’m guessing it must’ve been a little bit lower.

So in order to have the same average price in Q4, do you see prices rising a little bit?.

Ben, Pablo Altimiras speaking. As you know, price is a result of the supply and demand. And as I commented before, our perspective on demand is positive. However, regarding to supply, despite of some production decrease of some players, we have seen some investments in the market that could potentially continue to put some pressure on price recoveries.

However, having success we have been seeing in China, which is a important market. They’re recovering the price level, which could mean that we have already slowed. Therefore, for next year, with the demand recovery and the use of the inventories, we should see better prices during the next year and the near future..

Thank you very much. I appreciate it..

This concludes our question-and-answer session. I would like to turn the conference back over to Kelly O'Brien, Head of Investor Relations, for any closing remarks..

Great. Thank you for joining today. We’ll see you at our next quarter call..

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