Good morning, and welcome to the SQM Fourth Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Kelly O'Brien, Head of Investor Relations. Please go ahead..

Good morning. Thank you for joining our fourth 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 our presentation with a summary of the results has been uploaded to our website where you can also find a link to the webcast..

Good morning. We thank you for joining the call today. As you know, 2020 began with uncertainty, but we are more than satisfied with the trends that we have seen in the markets in which we participate.

The significant advances that we have made related to our sustainable development plan, and of course, the operational succeeds seen throughout the year, especially related to lithium production.

Before discussing the results in more detail, I'm proud to announce that we are the first lithium mining company in the world to join the Initiative for Responsible Mining Assurance, IRMA. For years, we have built a sustainable operation in an effort to protect the environment, our neighboring communities, and contribute to sustainable industries.

This is part of our commitment to a high level of transparency, seeking public reportability of the objectives we have statics related to environmental matters, sustainable operations, and social responsibility.

It is also linked to the role we play in the value chain of the strategic industry for human development, including the electric and sustainable mobility markets, renewable energy, and sustainable farming..

Operator, with that we will turn it over to questions..

Thank you. We will now begin the question-and-answer session. And the first question will come from Joel Jackson with BMO Capital Markets. Please go ahead..

Hi. Good morning. Ricardo, we've seen a dramatic churn in the lithium market in the last six months. Spot prices are up in China and around the world. Inventories look a lot lower outright tight. Your commentary last night in the release was that, you could see higher lithium prices in the first half of the year.

Could you expand on that? Like wouldn't you have to see very strong price increases in the first half of the year now? And maybe talk about any changes you're seeing right now in how lithium customers want to transact, do contracts, price, products, et cetera?.

Hi, Joel. Good to know about you. But as – yes, we are relatively optimistic about prices in lithium. That's right. But what we are observing, of course, we think that average prices this year should be higher than last year as an average prices. However, you -- if I'm not wrong you use the word a strong prices increase on the run.

We don't foresee a strong price increase as we probably foresee five or six years ago in a short period of time. That's why we prepare to be more conservative about that. Prices are going to be better and are going to be higher than last year, but we don't expect a strong price increase. But as you know, Felipe is with us now.

And Felipe maybe you want to add something about this specific situation of the pricing in lithium..

No, I would like – hello, Joel. I would like to add perhaps to what Ricardo is saying, the fact that the market is still very volatile. So we have seen in the past months a very rapid decreases and increases of price. So being in such an early stage of the year, I would prefer to be cautious about what the market price will be over the coming months.

The only thing that we feel will happen is that, our price should be higher than 2020. But the level I cannot comment now..

Okay. A couple more questions. Okay. So when you put up your sustainability target plan I think in October, you talked about now extracting less brine and producing less potash or producing less – having less potash for merchant sales. When I look at your outlook for 2021, you're talking about similar potash – merchant potash sales in 2021.

You're talking about NOP sales being up and you're doing really well in lithium production.

So is this where you're not extracting less brine this year, or are you producing more material now, better yields from the ponds while extracting less brine?.

Okay. Joel, first we – it's important to say that we are very proud of the technology and research and development advances in the Salar, that's clear. Today, we can produce more with previous brine and we hope to continue improving that way.

We believe that in the long term, we'll be able to produce 180,000 metric tons of lithium carbonate per year with 50% of the brands we use in 2020. In the same way, we hope to increase our deals in the extraction of potash. However, as we have said previously, the lower extraction of brands will affect the potash production capacity in the long term.

Anyway, if you go to the 2021, I think it's important to try to focus in this year specifically. We project sales volume for potash close to 10% higher than the previous year. It means that, we are using some of our inventories where being improving our deals and our production capacity.

But in the long term, it's important to consider that even though we have been able to increase our total production of lithium carbonate, we will not be able to increase in the same way the production of potash. And probably, the total potash production will be reduced in the long term..

Okay. My last question will be on iodine. So I think it's very impressive is obviously with all the things that happened with COVID and the macro, you saw a large iodine sales volume decline in 2020. But your per ton costs were a lot lower.

Can you talk about that? Were there things that you did is just accounting? How are you able to get per ton costs lower despite much lower volumes?.

Yeah. It's important to consider that, we have been working for, I don't know three or four years or maybe more in different initiatives to reduce our costs in every single business line. As you may know, we produce in the same process from the caliche iodine and nitrates. We shared the cost.

And we are proud to say that, both costs are going in the right direction, even though nitrate is more difficult to reduce the cost. We have been able to reduce our costs in the iodine in the past. That's right, and we are very proud about it..

Okay. Thank you very much..

And the next question will be from Ben Isaacson with Scotiabank. Please go ahead..

Thank you very much, and good morning, everyone, and congrats on a difficult 2020. First question is on SPN. If I read it correctly, I think you said that the market increased by 5% and you guys had volume down maybe 0.5% or so.

Can you split that up between NOP and the rest of the SPN business? And do you expect to lose market share or gain market share in 2021 in both SPN and the NOP within SPN?.

Okay. I don't think it's a big difference between the different products we have in SPN. I think the main reason of 2020 that you already mentioned, is that, if you review our sales per quarter, you can notice that our sales volume were really affected during the first half of the year.

Third quarter and fourth quarter, our volume sales were high, it’s been first quarter. Why first half was so bad? Because it was in the middle of the COVID-19 and for us, you can see net sale positioning the market, the first half of the year is a very important period of the year.

And that's why we were really affected at the beginning of the process. But if you consider the trend of the third quarter and fourth quarter, it's so positive that we think that it's reasonable to expect that our sales volumes for the year 2021 will be higher than 2020.

And the second point that I want to note is that, if you consider the margins per ton in 2020, even though the volumes were slightly lower than 2019, the margins per ton were higher.

This means that we have been able to improve our market conditions and improve our margins in the different markets where we participated in the year 2020 as compared to 2019.

I expect to continue this trend in 2021, and I repeat again, I think that 2021 in volumes for our specialty plant nutrition, including potassium nitrate and other fertilizers in the specialty plant nutrition business line will be higher than 2020..

Thank you for that. In terms of the Mt. Holland project, congrats on the approval. But can you just -- I haven't looked at Wesfarmers to see if they've put out any numbers.

But can you talk about your decision to approve that project? What are the kind of assumptions that you're using in terms of margins or prices? And what type of return are you looking for?.

We prefer not to share what is -- it's our long-term expectation of the price of volumes of the lithium business. We have different scenarios and we use different scenarios in our evaluation. In every single scenario we put on the table, it was a good project. That's why we are very excited about the project in Mt. Holland.

As you know, we are very positive about the future of lithium business. We think this business in 2025 demand will be in excess of 800,000 metric tons. We think that Mt. Holland will be -- that's the most important issue in the first point of -- in the first quarter of the cost curve at the world level. I mean -- I think, the Mt.

Holland is a very good project of production of lithium hydroxide from this project. It is a low-cost project, no doubt about it. We have a very good partner with Wesfarmers. We think that we have a lot of opportunities to continue to grow with them in the future.

And again, the most important thing, it's a growing market out there and we are strongly believe in the growth of the lithium market. And the second key point is that we think we're a really competitive project in Mt. Holland.

Means that we are going to be in the first 25% or 30% of the cost curve at the world level, this is the most important factor to keep in mind in order to move forward with this project..

Last question for me. Your capital is going to be fairly tied up over the next few years as you expand in lithium. But when you think a little bit further out, I mean, you guys are going to generate a lot of cash.

How do you plan on using that cash, say, in kind of three, four, five years from now? Do you expect to continue investing in projects to maintain your market share in lithium? Do you think there will be a change where you start to return capital to shareholders through higher dividends or buybacks? How do you kind of think about capital allocation once all of these current expansions are complete?.

As we speak, we're working in the next, and next, and next step of production capacity and new projects around the world. And you're right, it means, we are thinking about new projects all the time. I don't think that Mt. Holland is the last project we're going to develop outside Chile.

I think it will be a lot of opportunities where we can capture good opportunities to do business and we're working on it now. We think that we can grow again and again in the nitrate and iodine business.

We have a know-how and knowledge of the lithium business that is very important for us and we think we can move forward with that in the long long-term.

As I mentioned -- as I want to mention to you that now we're working -- starting we are reviewing that something a potential increase in our lithium hydroxide production capacity and we expect to inform the market whenever we are ready the amount, but I expect to move from 30,000 to 60,000 in the short term -- in the medium term, sorry.

And we're working in these kind of projects now. Means, we have a very many different alternatives to do. And of course, as you mentioned before, we -- as a company we have a very high dividend policy so far. I mean, we -- it's up to the shareholders' meeting what is the dividend policy. But so far, SPN usually pay high dividends to their shareholders.

It means, some of the cash flow we generate is used in order to pay dividends. That's something important and is part of the company policy in the past..

Great. Thank you very much..

And the next question will be from Javier Martinez with Morgan Stanley. Please go ahead..

Thank you. Hi, Ricardo, Kelly. So let me take advantage of that question too. So talking about new plants for the future. Maybe you can update us a little bit on the -- on this next capacity increase that you have in Atacama focus on lithium hydroxide.

Maybe a little bit of information – updated information on the timing, volumes, cost of production, if you are able to share something with us?.

Yeah. As you may know we're really busy now, because we are moving from 70,000. Now we are producing more than 70,000. We are very proud about it. But we're moving to 120,000 metric tons and we expect to be ready at the end of this year. It means, it's not a minor expansion. It's moving from 70,000. That's really today is more than 80,000.

But moving 40,000 to 50,000 metric tons increase is like a huge new project in the world. And we're working as we speak very hard in order to be ready from the day number one producing all the production the 120,000 full quality at the end of this year. But it's not enough. As you know, we are moving from 120,000 to 180,000.

It's an additional 60,000 metric tons capacity at the end of 2023 – 2022, sorry. That's a lot for – 2023, sorry. And that's why we do expect to have a lot of things to do and we're really busy about that. But if you consider that we are moving to 180,000 metric tons of lithium carbonate. And the lithium hydroxide market is growing.

It's growing probably more than the lithium carbonate market even though we have a significant advantage in lithium carbonate. We have been very, very successful in order to reduce the cost and to be very effective in the production of lithium hydroxide. That's why for me 30,000 metric tons that is the expansion we are moving now.

We're moving from 15,000 to 30,000 metric tons. It's not enough. That's why we are working with our team, production team, and development team now, in order to as fast as we can present to the market a project to move forward in the lithium hydroxide increased capacity. That's why I'm thinking the first stage will be something close to 60,000.

And probably, I'm thinking in the long-term, I probably want to go to the 90,000 metric tons capacity lithium hydroxide. Means, using portion of what we are using in lithium carbonate to use lithium hydroxide or to have additional production.

This is the things where we're reviewing today, but we want to have the full flexibility to – even though considering the 180,000 metric tons to have more lithium carbonate or more lithium hydroxide to have the flexibility – market flexibility and business flexibility. This is the first – the second most important new project we are working now.

And of course, 180,000 just a first stage, I want to review, if it is possible to move forward to 200,000 or 220,000 metric tons capacity in Chile. That's something we are reviewing now. I don't expect to have a news about that in the short-term, but it's something we are reviewing, that’s will be very important.

But the lithium hydroxide facility is going to be up and lithium carbonate capacity expansion probably my next or our next big project. And of course, we are -- we expect to be very successful in Australia with Mt. Holland. And as you know, Mt. Holland is a great project. And the first stage of the Mt. Holland is the 50,000 metric tons capacity.

There's no reason why to stop there. If the project goes in the right direction, and I'm quite sure, it's going to go in the right direction. We can move in Mt. Holland 200,000 metric tons. It's something that we have to discuss and to review with our partners from West partners.

But we are very excited both of us to complete the first stage of the project in 2024. It means to be at 50,000, and if everything goes in the right direction, to move forward to something close to the 100,000. Means we have a lot of things to do in the lithium, and we expect to do it in a really short period of time..

Ricardo, so, it's quite impressive the way you are increasing volumes. That was obviously the highlight of the quarter, 50% up quarter-over-quarter. So, with this, you're moving the company to a new level.

And with that scale, I guess that makes more sense to invest more in technology, and technology to allow you to be, not only the leader, but also to continue to be the low-cost of production. So – that's exactly what I want to understand.

So, how technology may change your position in the cost curve, if you don't want to talk about absolute levels but maybe relative levels in the cost curve for both carbonator, particularly in oxide where maybe you are a little bit less competitive today? Also, where are we in that process? So are we at the beginning of potential improvements in your cost curve – in your cost production or there is a lot of things that will happen as you gain scale.

That's – a framework for that would be very useful..

First – thank you, Javier. First, you have to consider the following. We are so proud about our technology and capacity and our R&D people. If you consider at the beginning of less than a year ago, we had a lot of problems to reach the 70,000 metric tons and a lot of problem to reach the quality, at the beginning of the expansion to 70,000.

Now, we're producing in the same facility more than 7,000 metric tons per month. That's the first two months of this year. It means the same-facility that was designed for 70,000 metric tons was producing more than 80,000 metric tons. Second, the whole production is full quality. This is completely commercial quality.

This – those two factors are due to the quality of our people, the R&D, the technology capacity. Second point, in the Salar del Carmen we announced, because we -- after reviewing our process, improving our process, being very effective in our process. We public announced that we -- internal commitment, no required by the government authorities.

It was SPN commitment to reduce up to 50% in the long-term of the lithium -- the brand extraction in the Salar. And at the same time, increase our production from 70,000 metric tons to 180,000 metric tons, means there's a lot of development in the technology, a lot of R&D involved in this decision.

Third, lithium hydroxide, we wait maybe just a little bit more than six months to announce our new expansion, because we're looking forward for significant improvements in our lithium hydroxide production process. We think that we will announce an expansion from 30 to 50, so it will be very, very low cost.

We are very proud that the new announcement -- the new 30,000 metric tons, it means increased from 16,000 to 30,000 that we're working now, will be better than the original 16,000, but we think that we are working very hard in technology and research and development in order to supply very low cost, high-quality hydroxide.

Keep in mind that we are being -- we are going to be producing in the short term 120,000 metric tons per year and our target is to be 100% full quality of the 120,000 -- commercial quality of the 120,000 metric tons production capacity. That's a lot of R&D, a lot of technical development behind these goals..

Thank you, Ricardo. Much appreciated..

And the next question will be from Cesar Perez-Novoa with BTG Pactual. Please go ahead..

Yes. Good afternoon. Congratulations on your fourth quarter report. Well done job, considering 2020 unprecedented circumstances. My question to you relates on prevailing market dynamics.

You mentioned that you're currently operating on a monthly run rate of 7,000 tons at your lithium plant, aiming to exceed over 80,000 tons by 2021, which is a meaningful jump versus 2020.

Could you please walk us through what segments drive this growth specifically of EVs amasses volume and/or if other industries drive this growth as well? Some breakdown would be greatly appreciated.

And perhaps as a follow-up, when integrating the 70,000 carbonate line into the new 120,000 line, should we expect some downtime at any level? And would you hold any inventory to cover any possible shortfall? Time-wise when would this just take place? Thank you..

Hi, Cesar. First, as you know, we expect to produce this year in excess of 80,000 metric tons. As I mentioned before, we expect our volume sales to be close to 25% maybe more I don't know. 25% in volumes, as compared to the previous year, it means that we expect sales to be something higher than 80,000 metric tons.

It means, sales volumes and sales volumes production will be quite similar in 2021. We don't expect to use inventory. We have inventory in order to -- if we need it. But keep in mind that we expect and we are very close to reach the 120,000 metric ton capacity.

Means, we don't expect to have a problem to accomplish our market goals in the medium term because we are very close to 120,000 and we are very close to the 180,000 metric tons capacity. We have inventory. That's why from the point of view of having the capacity to supply the market, we are very proud that we have.

Second, from a logistic and commercial point of view, I think we -- the track record of the fourth quarter is amazing means we were able to sell in one quarter 26,000 metric tons, means we have the capacity at the logistics and a very complex logistics environment, commercial, logistics, production, supply, everything to sell in one quarter 26,000 metric tons.

It means that we are more than prepared to 100,000 metric tons per year in terms of the capacity of the organization to sell this product. Everything in quality, everything delivered to the customer and so. That's why we're in a very strong position for our sales volumes, we expect for this year and the next year.

And I will ask Felipe to give more color about what you expect Felipe about where are the market growing now and what your expectation about that?.

Okay. Hello, Cesar. Well, actually, we are very convinced about the fundamentals of the lithium market. The main driver of the growth that we expect over the next five to 10 years will definitely be the EV market and this we are seeing today. Actually in 2021, we expect sales of electric vehicles to be around 40% higher than in 2020.

And our estimation is that the growth of sales of electric cars over the next five years will be in the range of 30% to 32% per year, which is very, very strong growth. This, of course, is the main driver. But we are also seeing in the smaller sales, a very good development in the recent time.

We see that also looking ahead those particular applications will have a good growth not as fast probably as the car, but also significant. So, this is the main reasons why we are quite convinced of the business of lithium for the future. .

All right. Fair enough, gentlemen. Thank you very much..

And the next question will be from Susan Simonato with Bank of America. Please go ahead..

Hi. Good morning, everyone. This is actually Isabella. My question is on the chemicals business. We did see a big jump on volumes, but we saw also a contraction in margins as we could estimate here. Can you just give us a little bit more color on this business? How do we think about it in 2021 in terms of topline and margins? Thank you..

Hi, Isabella. You should consider that what we call industrial to be is mainly the most important business. The product they are already solar source, means the product we use for this energy storage system. And we have a pre-contract with the customers in the Middle East that was 160,000 metric tons during the year 2020.

We expect to be very close to 190,000 tons with the same customer at the same price environment for the year, it is very long -- it’s a very old contract we have within in the year 2021. That's why we do expect to have similar margins. The only things we have to consider, if it is any change in the cost of production.

We are working very hard to improve our yields and so on in order to maintain and to overcome this pressure of the cost that I already mentioned before. But I think, it's reasonable to expect similar margins per ton in 2021 as compared to 2020.

But keep in mind that volumes will be slightly higher from 160,000 to 190,000 just in the solar salts business. And probably a very small increase, close to 4,000 metric tons in the normal industrial nitrates business. That's why in total, I think the volumes will be increased close to 34,000 metric tons in 2021 as compared to 2020.

And keep in mind that, solar salts is a mix between sodium nitrate and potassium nitrate, a specific high-quality mix that is used in the solar energy storage process..

Okay. Thank you..

And the next question will be from P.J. Juvekar with Citigroup. Please go ahead..

Yes. Good morning, Ricardo. Last year you built inventories in lithium. And I think you mentioned earlier that, you still have inventories left.

Can you just talk about order of magnitude on inventories? And you also mentioned that you've improved your quality of the product with R&D, can you talk about how much of your product today lithium is battery-grade versus non-battery grade? Thank you..

Firstly, we have all our inventories commercial quality means, we have different clients with different quality requirements, and we have inventories for them for their needs. And all the inventory -- more than 95% of the inventory is fully commercial quality. That's the first point to be very clear about that.

Second, about the total inventory even though we don't disclosed the total inventory of the company; we maintain inventories in lithium and lithium carbonate close to six months of sales..

Okay. That's helpful. And what we are hearing is there is regionalization of supply chain happening in lithium. Europe is building its own supply chain, Asia, and maybe in the future in the U.S.

So how much of your product goes to China today? And do you anticipate selling more into Europe in the future?.

P.J. maybe I can answer to the question. I would say that, during 2020, we were able to recover our market share in China, and we feel that we have reached a reasonable level, which is more in line with the market total demand share of China. I don’t know if this answers your question..

Yeah. Do you anticipate selling more into Europe in the future? Thank you..

Well, as I said before, we are very committed to the industry and to support the growth of the industry, independently on where this demand will take place. So of course, we are considering and preparing ourselves for scenarios, in which you will have more demand of lithium either in Europe or in North America.

So yeah, there's no -- we do not see a big challenge. Actually, due to the business in nitrate that we have today, we have already established in Europe, a very strong network of warehousing same as in the US. Remember that, we sell more than 900,000 tons of nitrate. So we are prepared to handle big volumes in different markets.

So I'm not particularly concerned about building up the supply chain to Europe or the U.S..

Okay. Thank you so much..

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Kelly O'Brien for any closing remarks..

Thank you for participating in our earnings call. We look forward to having you join us in the future. Have a good day..

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