Good day, and welcome to the SQM Fourth Quarter 2021 Earnings Conference Call. . 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 SQM's Fourth Quarter 2021 Earnings Conference Call. This conference call will be recorded and is being webcasted live. Our earnings press release and a presentation with a summary of the results have been uploaded to our website where you can also find a link to the webcast.

Speaking on the call today will be Ricardo Ramos, Chief Executive Officer; and Gerardo Illanes, Chief Financial Officer; Carlos Diaz, Executive Vice President of the Lithium business; and Pablo Altimiras, Executive Vice President of the Iodine and Nitrates business will also be available to answer any questions.

Before we begin, let me remind you that statements in this conference concerning the company's business outlook, future economic performances, 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 the term is defined under federal securities laws.

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, including our ability to successfully implement the sustainable development plan.

Risks, uncertainties and factors that could affect the accuracy of such forward-looking statements are identified in our public filings made with the U.S. Securities and Exchange Commission and in our earnings press release issued yesterday and these forward-looking statements should be considered in light of those factors.

We assume no obligation to update such statements, whether as a result of new information, future developments or otherwise, except as required by law. I now leave you with our CEO, Ricardo Ramos..

Thank you, Kelly. Good morning, and thank you for joining the call today. Our earnings during the fourth quarter of 2021 were significantly higher than earnings reported during the same period last year. These results were driven by considerably higher sales volumes and prices across almost all our business lines.

For the same reasons, our net income in 2021 was over 3x higher than the net income reported in the previous year. The fertilizer markets saw prices increase considerably in 2021, and we believe that average prices during 2022 will be higher than the average prices reported during 2021.

Our average prices in the potassium chloride business line during the fourth quarter reached almost $685 per metric ton, prices that haven't been seen in over a decade. This pricing environment has also had an impact on the global prices of potassium nitrate.

And our average price in the SPN business line was approximately 40% higher during the fourth quarter 2021 when compared to the same period of 2020. Positive news was also seen in the iodine market with 2021 surpassing pre-pandemic levels.

This strong recovery led to a strong pricing environment during the year, with prices increasing over 11% in the fourth quarter 2021 when compared to the third quarter as a result of tight supply-demand equilibrium. We're expecting the upward pricing trend to continue during 2022.

We are working on expanding our capacity and to bring on an additional 1,000 metric tons of capacity next year. In parallel, we are working on the Pampa Orcoma Project in the Tarapacá Region, will allow us to increase the effective iodine capacity by approximately 2,500 metric tons using seawater for the leaching operations.

And it is expected to begin operations during 2024. In the lithium market, our sales volumes met new records during 2021, when they surpassed 100,000 metric tons. We sold over 31,000 metric tons during the fourth quarter with an average price of approximately $14,600 per ton during the period.

Approximately 20% of the sales volumes we expect to sell in 2022 are contracted at a fixed price or at a variable price with specific floors and ceilings. While approximately 50% of the sales volume we have contracted have variable prices linked to a specific price indices. The remaining 30% of our volumes for 2022 are still open.

It's important to remember that we will see a lag between market prices and our realized average prices because of the structure of our variable price contracts. We believe that our prices in the first and second quarter of 2022 will be significantly higher than the prices reported during the fourth quarter 2021.

Additionally, we believe that the sales volumes will grow to about 140,000 metric tons during 2022. We're extremely proud of the successful lithium expansion in recent years, Our expansion to 180,000 metric tons of carbonate and 30,000 metric tons of hydroxide should be completed during the first half of 2022, ahead of schedule.

We have begun working on a new project at Carmen Lithium facility in Chile that was announced with our this project, we will further expand our lithium carbonate and lithium hydroxide capacity to 210,000 metric tons and 40,000 metric tons, respectively. Next year, with an expected CapEx of approximately $250 million.

I remind you that this CapEx was not included in the $2 billion CapEx that was previously disclosed. We remain committed to our previously announced goal to reduce brine extraction, water usage and our carbon footprint in the Salar de Atacama.

This growth plans and environmental goals to be met with relatively low CapEx have only become possible after years of research and development, yield improvements, expertise and, of course, a strong effort by our production and engineering teams..

Operator, we'll now go to questions..

. The first question comes from Cesar Perez-Novoa with BTG Pactual..

Congratulations for the stellar quarter and year. If I may, a couple of questions from my end. In the press release, you state that around 20% of your volume is side to fixed parameters, 50% referenced to a benchmark and the remaining 30% open for pricing.

Could you please provide added disclosure on this? And to be clear, the 50% is tied to what pricing benchmark? And certainly what time pass-through would that entail, for example, 30 days indexation, 60 days, whatever to the spot.

And the final 30%, would that goal priced to the current spot? Could you provide perhaps some academic example, theoretical example that we can understand. And the other question that I have is that you will roll out a $250 million expansion in the Salar. My question is, when would that facility go market.

Also SQM filed in late December, certainly a $1 billion program for total Chilean lithium production of 270,000 ton per year. Is yesterday's announcement part of this program? Or would this be a separate expansion? And if so, are there any regulatory hurdles that you may have to clear to conduct the upgrade? Those would be my questions..

administrative or operational reason. So we try to follow the market and are very close with that with the product that we are selling in variable market. And regarding to the -- you asked for the -- for expansion in Salar lithium following.

We're expanding our lithium carbonate and lithium hydroxide capacity, and we expect that the middle of this year, we expanded our lithium carbonate capacity to 180. So we expect to complete that in the middle of this year. And at the same time, we are already working to expand our capacity 210,000.

But we expect that it will be completed in early next year..

Okay.

But is this incremental 40,000 metric tons, 30,000 for carbonate, 10,000 for hydroxide, is this part of the filed lithium production that you made in December for a total of 270? Are you going to work that in stages? Or are you going to do this as a separate expansion?.

Okay. All our expansion are part of the environmental permit that are asking..

Our next call comes from Joel Jackson with BMO. As the caller disconnected, the next question comes from Corinne Blanchard with Deutsche Bank..

Congratulation on a good quarter.

Just if we can go back on the lithium pricing, can you provide any color or any maybe like a year-over-year increase or range that we could expect for 2022?.

Since 50% is under variable price contract, 30% is still open, we cannot know or forecast the final price for this year. However, we can say that during the first half, price will be significantly higher compared with the fourth quarter of last year..

Okay. That's fair. One follow-up question on the pricing, actually.

Will the 30% still remaining or like been up for negotiation, would you -- like what do you intend to do? Do you intend to do more export prices? Or do you -- will you be doing index on benchmark as well?.

We're still reviewing that, and we obviously try to maximize our margin on that. And we're going to decide later on if this is going to be a fixed or a formula according to the market indices..

And maybe if I can, just a last question on cost. Last quarter, you had mentioned seeing some inflation coming through for most of the calls like related to most industries.

Can you comment on maybe how it did impact the CapEx? Or what do you expect to see for throughout 2022?.

Corinne, this is Gerardo Illanes. Well, of course, there are some inflationary pressures happening all over the world because of the increased cost of raw materials and labor. Of course, we are also affected sometimes positively by the exchange rate and how it looks. But we don't see that there will be any significant change on our cost strategy..

The next question comes from Ben Isaacson with Scotiabank..

Congrats again on the great quarter. I'm going to ask you a pricing question again, try and approach it from a different way. So 20% fixed or variable with a ceiling, 50% variable, and 30% not contracted yet.

If prices didn't change from where they are today for the whole year and just excluding that 30%, so if we know what pricing is right now, what would your average selling price be?.

Ben, it's a very good question that probably I don't want to answer. Ricardo, speaking. And yes, the reason why I prefer not to answer that question is that, of course, I won't -- I don't know now to disclosure some agreements with fixed price that we have with some clients that are confidential. And if I said that, you will know the prices.

But if the price -- today price environment, and there's nothing very fixed about the price of lithium. Just that the price probably is going to be different than today's prices. You see the trend in the last 30 days.

But even though if we continue with the price as it is today, all our contracts, it means they -- close to 80% would be today pricing because even though we are going to use these indicators and indices, this indices will reflect the price and the sales will reflect the price. And of course, today, price is very high.

It means that our realized price for the year 2022 would be significantly higher than the year before..

I just have three very quick questions left. Number one is on what's happening with Russia and Ukraine and maybe just in Europe overall. I believe you have no assets there, and you don't have any risk to different feedstocks, of course. But you do make sales in Europe.

Can you talk about where those sales are in Europe? And what are you actually selling? And do you sell to Ukraine? Maybe, just talk about your exposure to Europe?.

Ben, first, let me say something. We deeply regret the current situation in Ukraine. That's for the first point. The company -- we have our support for the people who are suffering. We hope that the current tragic situation can begin to be solved in the short time.

But moving to your question, as you mentioned, Ukraine and Russia are not relevant markets in our business. We sell very small amount of fertilizers in Ukraine, very small amount of fertilizers in Russia. It means this will be not an issue for us in terms of Ukraine and Russia or Belarus.

But of course, Europe is a very important market for us, it's key market. So far, I'm talking about today, our sales in Europe are going up, are very strong. The price is very strong. The fertilizer market and the agriculture market in Europe is moving very strong in the right direction. But no, I don't know the future.

It means if you have a recession in Europe or you have award that is expanded, it's difficult to have an outlook about. But what is going on today, if you maintain this situation only focused Ukraine and Russia and Belarus, without affecting the rest of Europe, of course, for our business, it will have almost no impact..

And just two more quick ones. Number one, I think you said iodine prices were about $39, if I'm not mistaken.

Can you talk about how tight supply is? Can we see new supply coming on at $39 or not? Maybe I'll just leave that question there in terms of what $39 actually means in terms of the potential and the timing of new supply?.

Pablo Altimiras is speaking. With regard to the iodine, as you saw last year, we saw a great recovery on demand. But the situation that we were explaining, the high price level is that we have not seen more supply. And actually, according to the information that we have today, we are not seeing a lot of activity in supply.

So despite of the price remains for a while at that level, the project cannot enter so quickly to the market. So at the end we will depend on the capability of the different suppliers to put more product. But we don't see that we have in the short term.

So the current situation is something that we expect -- that's why we expect that the prices will continue growing in the year..

And just my last question, and I'm not trying to sneak out the lithium price again from you. But in a spot -- if we stay at spot in potash, iodine, lithium, whatever it is, you're going to generate immense amount of free cash flow this year.

Can you talk about how you would allocate that free cash flow? I mean you've got a sizable CapEx program this year.

But then after that, how does free cash flow get allocated?.

Definitely, it's very good to have cash flow in order to finance our CapEx. We are working very hard because, our CapEx, I think, is going to be very good for the future of the company. And we are doing great in the CapEx in the past -- in the last 3 or 4 years, and we will continue to do great. I hope we will do our best above that.

And of course, the company we have shareholders, and we work for our shareholders. We pay dividends. A portion of the cash flow will be used for the dividends. That usually, we pay an important amount of dividend. And finally, we will increase our -- we will reduce our debt. That's very good.

And we will finance some working capital because we are significantly increasing our sales this year because prices are better, volumes are better and considering both the accounts receivables will be higher, and we will finance with some of the cash flow, these additional account receivables..

Our next question comes from P.J. Juvekar with Citigroup..

This is Patrick Cunningham on for P.J. So my first question is kind of on lithium expansion, more broadly. I mean you're starting to see aggressive forecast for demand over 1 million tons by 2025.

Could you just give us your outlook on -- if you think supply from competitors and yourself can keep up, is there a serious risk where prices go high enough, you could start to see demand delay and demand destruction? And then sort of on the flip side of that, would you see this as an opportunity to grow faster than the underlying market and gain market share?.

Well, there's a lot of speculation in your question. Means, we don't know really what's going to happen next year or next 2 years. But of course, we are doing our best to increase our capacity, not only in Chile, remember that 2 or 3 years ago, we were close to 60,000. We are now moving in the next few months to the 180,000.

We will move during next year to the 210,000. Meaning we're doing a great job increasing capacity. That's the first answer for this increase in demand. Second, we are working very hard with our partners in Australia.

We have a very interesting project in Australia, and we expect to be producing 50,000 metric tons in the first stage, probably will go to the next stage. We expect to go to the next stage close to the 100,000 metric tons. And Australia is an important, potential project for us.

It means we are doing a lot to increase our total capacity that is the best way to get benefits of this positive trend of the demand.

So far, even considering -- of course, if the price of lithium is as it is today, the cost of production of electric cars, not only because lithium because all the raw materials are more expensive, not a lot, but more expensive, but considering the strong demand, we don't foresee that this trend -- positive trend of the demand will be affected in the near term.

It means that our main, main focus now is to produce the best lithium, to provide the best lithium, quality and quantity and logistics to our customers. And the example is clear from 60,000 or less than 60,000 3 years ago, moving to 10 plus, plus 50 means we're going to be into 60,000 metric tons in the year 2024, means -- yes.

Of course, the 50,000 is a joint venture in Australia, but lithium is steadily moving forward. Means we're doing our best in order to provide more lithium to the market and getting the benefits of that..

And on that -- on those joint venture volumes, you mentioned there's an opportunity to go to 100,000 tons potentially.

What would be the timeline to that? How long would that take to get to production?.

Today with us, if it's smartphone says, he was living in Australia for 3 or 4 years, I don't know working in the project. From SQM point of view, he's here in our meeting room.

I will ask Mark to give us just a rough summary, what do you think about the project and what is going to be the next step? What's your overview, what we're going to do in Australia in the near future Mark, please?.

Thanks, Ricardo. First, I'd like to mention that this project is not only important for SQM itself, it's also very important for our partners, great partners, Wesfarmers. It's also relevant for the Western Australia future battery industry. So this project is affecting many stakeholders in Australia, very important.

And it's very fine to see where it is today. The project today is advancing very well. Today, we have already received ever growing pipeline, a non-processing infrastructure in the Mt. Holland in the mine. The project has already started construction of both the concentrator and the refinery plant.

Refinery in Kwinana, the concentrator near the mine and we continue with our first estimation of having products in the second half of 2024. That's first product of lithium hydroxide as well as we continue with the same expectation of capital expenditure of $1.4 billion split between the 2 partners.

However, we are not, of course -- we cannot avoid the inflationary pressure that every capital expenditure project is subject today in the world. Even with that, we continue with the same expectations. We our current estimation. And we're already working on the expansion, as you mentioned.

Expansions we will take as any plant to build today in the world between 2 and 3 years upon when the decision is made. We have not made the decision yet, and we are preparing the documentation for presenting to the Board to present that expansion when time comes..

And then maybe one last question and another one on pricing but a little less specific and this one is for SPN. So how should we think about pricing in specialty plant nutrition? Obviously, we saw pretty tremendous prices in this quarter.

If fertilizer prices swing either direction maybe on extended supply risk or perhaps tension eases in Russia and Ukraine, and prices start to come off a bit.

Help me think about what's the lag time for that to kind of show up in your overall specialty plant nutrition prices? As underlying spot fertilizer markets move, how will that affect your SPN price?.

Okay. Pablo Altimiras is speaking. Well, you know that right now, the situation is really good. We already disclosed the price increase regarding 2020 and we believe that the trend will continue. The situation today is good. The prices of potash that is good, that also influenced the price of the SPN products.

And actually also -- it is important the situation that is happening in Ukraine and Russia because that situation could potentially, we don't know what will happen, but we are following up because food cost also affect the supply of potash as such things doesn't happen and put some pressure where we will see much pressure in prices.

So our expectation is that the price trend will continue in a positive way..

Our next question comes from Lucas Ferreira with JPMorgan..

I have two. The first one is kind of a follow-up of your capital increase in the second quarter of last year. I think one of the reasons for the capital increase was to be ready for potential M&A, and we've been seeing the market quite active in M&A recently.

So my question to you is, if you're seeing any interesting opportunity or if -- just because of prices, probably asset prices also went up. Should we expect you guys to still investing more in the organic growth as opposed to M&A, or if there is any interesting project to develop anywhere in the world? So apart from Mt.

Holland in Chile, what else could be in your plate for the future? That's my first question. And the second question is to understand a little bit is yields -- improving yields in your brines that is allowing you to increase production in Chile.

So just wondering if there is more potential if technology is improving enough for you to even go beyond capacity in the future, respecting your limits, right, extraction limits you have with CORFO?.

Lucas, Ricardo Ramos speaking. Yes. We're always exploring new alternatives or businesses that generate value for the company and our shareholders, we're quite conservative about in M&A or buying companies. We are going to be very active doing M&A, if we can find an alternative that is good and create value.

If not, keep in mind that our priority today is not to lose focus in our current projects. We have very important projects, are complex -- our past projects were very complex. We will keep focus on it. And we think that our projects today are essential for the future of the game.

That's why we keep our efforts mainly in order to again keep ahead of a schedule of delivering product to the market. About the second question about the -- I think Carlos can explain what we are doing because we are doing a lot of things and invest in R&D in order to do it again..

Yes, regardless to say we are doing a lot of research and R&D in how to improve our yield in brine. One side, what we have in Salar de Atacama and our plant lithium and carbonate hydroxide in Antofagasta. So we have been working on that in the last 3 or 4 years, and we continue working improving our yields.

And we have been successful now, but we still have a lot of projects to develop because we have our huge challenge that is for one time to reduce our brine extraction and for the opposite side to increase our productions on lithium. So that is our huge challenge, but we have been successful until now, and we expect to continue increasing our yield..

Our next question comes from BMO..

Do you hear me?.

Loud and clear..

Good. Joel Jackson, BMO. Sorry, I had a problem earlier. I have a few questions. I'm going to ask them one by one.

Can you talk about -- what if you wanted to and you could produce at maximum capacity, what LCE, what lithium carbonate production can you achieve in 2022 and 2023, if you want to go full out?.

Joel, as we explained in the press release, we expect to be at the 180,000 metric tons during the next few months. It means that we will start operating the new increased capacity. So far we're very successful in the start-up of new facilities.

I want to be just a little bit conservative that we are not going to be producing from Day #1, 180,000 metric tons probably with the surprises we had in the last 3 years, probably, we will be producing the 180,000 metric tons from the Day 1. I hope Carlos will deliver again this kind of success story.

But anyway, as we mentioned previously, we expect to sell this year close to 140,000 metric tons of lithium carbonate. That's a very important increase. Keep in mind that last year, we sold 100,000 and moving to 100,000 to 140,000 high-quality lithium products this year.

If things are much -- are better than expected in the production, we can increase just a little bit more than 140,000, we will see. But so far, our target is to have production. To have more production, of course, we need some inventories in order to increase 40% of our sales.

But we think everything is going in the right direction to deliver high-quality products to the customer, final customer during this year. I mean at 40% increase that means that we will be able to increase our working capital, increase our volumes, our inventories and so on. This is this year.

Next year, I'm completely sure that the 180,000 metric tons will be more than ready. It means that we will be in a position to set at least 180,000 metric tons plus some additional production coming from this additional increased capacity that I already mentioned to you.

And the final decision about the sales in 2023 is something probably that we will review during the third and fourth quarters this year because it will depend on market conditions, depend on the demand, the supply, everything.

But we are going to be ready to supply the market, if the market request probably close to 190,000, if it is possible, 200,000 metric tons next year. Yes, it would be possible. We will try to do our best. But at the end, it will depend on the market conditions that we will review during the end of this year. It's a very fluid market.

The lithium market, as you can see in the last 12 months, we need to review our strategy every quarter. One thing that is for us extremely clear is that, we will increase capacity and we will improve quality. And our quality is the best. We will continue to be even better.

And our quantity where we have been the best one in terms of increasing capacity, we will continue to be the best one. But our business strategy during next year will be according to the market conditions. And we will see..

Okay. My second question then would be, kind of 3 small questions.

My second question would be, what is the capital intensity? How much CapEx do you need to spend to get the next 30,000 tons out of the Atacama to go to 210,000? And then your CapEx seemed to rise this year versus expectation by $400 million, how much -- what is the incremental $400 million exactly from $500 million to $900 million? And then you had a $2 billion CapEx plan from 2021 to 2024, what would that total CapEx now be '21 to '24?.

Joel, this is Gerardo. Well, last year, we announced our CapEx and expansion programs for 2021, 2024 that include a total of $2 billion in CapEx. And the breakdown was approximately $1.1 billion for lithium expansion, $440 million for nitrate and iodine and the rest was related to maintenance CapEx.

The $250 million that we said is going to be the total CapEx for expansion to reach 210,000 metric tons of lithium carbonate and 40,000 metric tons of lithium hydroxide is on top of the $2 billion that were announced last year.

For this year, we are projecting that the total CapEx is going to be around 900,000 -- sorry, $900 million, but it is also within this set of projects, again, expanding capacity in lithium from 120 to 180 from 180 to 210 lithium carbonate, also expanding in lithium hydroxide, developing the project in Australia that Mark mentioned a few minutes ago, expanding our nitrate capacity, 1,000 metric tons by the end of this year and 2,500 metric tons by the end of next year and also expanding our nitrate capacity.

All of that is included in the -- now we can call it, $2.25 billion CapEx from 2021 to 2024..

Okay.

So just following up on that, ignoring hydroxide expansion, if I understand what you're saying, the additional 30,000 tons at Atacama, LCE is going to be coming on for less than $8,000 a ton, correct?.

That is right..

Yes, that's correct..

Glad I asked it. Glad I can do math. So my last question is that, if we look at -- so you have big growth plans Atacama, you're executing on them, you've add a bit more. We know what's going on in Australia with Wesfarmers and Mt. Holland.

If I think about the back half of the decade, 2026, '27, '28, '29, you'll be adding a little more capacity in Australia. But after that, your volume growth, your potential capacity growth really goes down to very little.

So are you prepared to use your balance sheet now to go acquire more resource assets, go acquire other lithium producers or upstart producers? Like, are you have an urgency to keep your capacity growth growing by using your balance sheet to buy new assets?.

You're right. It means that we are always exploring new alternatives. We are very committed in the lithium business. We think that we are very good in the lithium business. Yes, we have a team looking for alternatives. We will continue looking for alternatives.

Of course, if we are going to grow in lithium, it will be profit projects that are going to be good for the company, good for shareholders. It's not just to grow. Growth with creating value for the company, and we're working very hard on it. And we have complete team looking for potential new alternatives.

We are conservative in terms that we don't want to buy everything that is on sale, but we are going to be ready to buy something to get involved in a business, if we think it's good for the company and shareholders..

If I could be greedy and ask one more question. When I think of your lithium cost per ton, your lithium price is probably going to be up, let's pick a number, $10,000 a ton this year and -- or more. And it's going to be over the highest margin on bracket. So you're going to pay the 40% royalty rate to CORFO on that additional price.

How are costs for lithium progressing in 2022 affecting non-royalties. The non-royalty part, should we see flattish cost per ton -- your balancing inflation plus 40% more volume.

So is it an offset?.

Joel, this is Gerardo again. We're not foreseeing -- well, first, there is a very important factor that I think is important to consider that you mentioned, which is lease payments that we make to CORFO. These high prices -- of course, CORFO is spend with a very, very high payment that we are making to them, and we will continue to make to them.

So that is reflected on our cost line on our P&L. That's the first thing. Second, as we are seeing all over the world, there are inflationary pressures in the different industries.

And of course, we buy some raw materials to produce the lithium that we produce and there are additional costs associated with labor and other issues that is putting some pressure on our cost.

But on the other hand, the larger capacity of our plant and improvements in our operations are letting us reduce or let me say, offset some of these inflationary pressures. So excluding the royalties or not royalties, the lease payments that we make to CORFO, we expect that the cost should be quite stable in the upcoming quarters..

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

Thank you for joining the call today. We look forward to you joining next time..

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