Sociedad Quimica Y Minera De Chile

Sociedad Quimica y Minera reported strong second-quarter earnings as adjusted EBITDA more than quadrupled year over year driven by higher lithium prices and volumes.

Why it matters: SQM shares were up 3% at the time of writing on Aug. 19 as the market reacted to the second-quarter results. Management does not guide to profits, so the market tends to use the most recent results and lithium spot and futures prices as directional indicators of profits. The huge profit increase is in line with our view that SQM's low-cost lithium operations, which underpin our narrow-moat rating, will allow the company to generate strong profits and positive free cash flow. SQM should benefit from rising long-term lithium demand from growing global electric vehicle sales and the buildout of utility-scale batteries used for energy storage systems. We view low-cost lithium producers as “picks and shovels” winners of the EV and ESS growth.

The bottom line: We raise our fair value estimate to $85 from $80 for narrow-moat SQM. The increase is driven by our outlook for higher long-term Chilean and Australian lithium volumes versus our prior forecast, partially offset by increased capital expenditures. At current prices, we view SQM shares as fairly valued, with the stock trading around 10% below our updated fair value estimate but in 3-star territory. Accordingly, we recommend that investors wait for shares to offer a larger margin of safety before considering an entry point. Lithium spot prices have fluctuated but averaged $20,000 per metric ton so far in 2026. This is in line with our long-term forecast based on the marginal cost of production. At this level, SQM's low-cost lithium operations should continue to generate current profits.

We raise our SQM fair value estimate to $85 from $80 following the company's second-quarter earnings. The increased valuation is driven by our outlook for higher long-term Chilean and Australian lithium volumes relative to our prior forecast, partially offset by higher capital expenditures.

Our valuation assumes a 9.5% weighted average cost of capital and values free cash flows generated beyond our 10-year explicit forecast horizon at a multiple of 11 times our estimated midcycle EBITDA.

Our fair value estimate includes the joint venture with the Chilean state-owned copper miner Codelco, in which SQM contributed its Chilean lithium assets in exchange for a lithium lease running until 2060. We assume SQM owns 49.9% of the joint venture.

We assume the 50%-owned Mount Holland spodumene operation in Australia ramps up with phase 1 reaching full capacity by the end of 2026. We assume the phase 2 expansion enters production at the start of the next decade. Our valuation also includes the Azure Minerals acquisition in a joint venture with Hancock Prospecting. As Azure's project is at a similar development stage as when SQM acquired the 50% interest in Mount Holland, we assume a similar project development timeline, leading to initial production by the end of the decade.

Lithium will remain SQM's largest business. Lithium carbonate spot prices, which tend to be a leading indicator of contract prices, are currently around $19,500 per metric ton (based on published indexes), up from $8,000 per metric ton in mid-2025. Prices rose as demand outpaced supply over 2025 and into 2026. As demand growth remains strong and global supply growth slows, we expect the market to remain closer to balance in 2026.

In the longer term, we expect lithium prices to remain volatile but to average around the marginal cost of production, which we estimate at approximately $20,000 per metric ton. Our price forecast is based on our forecast for the marginal cost of lithium production on an all-in sustaining cost basis. We expect lithium demand to grow at nearly a 20% annual rate from around 1.6 million metric tons in 2025 to 3.2 million metric tons by 2030. By 2030, approximately 95% of lithium demand is expected to come from batteries that require high-quality lithium with minimal impurities. To meet demand, higher-cost supply will need to come online from lower-quality resources that will require higher processing costs.

In iodine, we forecast iodine prices will remain near peak levels, a little over $70 per kilogram, in the near term. Longer term, we forecast prices will fall to the low-$60 range as new supply enters the market. However, this is well above the cyclical bottom in 2017, when prices averaged $15.75 per kilogram at the peak of SQM's volume-over-price strategy.

Our long-term price forecast for potash is in the mid-$300 per metric ton range in 2025 real terms, which is in line with current contract prices. Specialty potash prices generally move in line with potash over the long term, while greater global demand for high-value crops should increase volumes over time.

Given the wide range of potential lithium prices, we see a range of outcomes for SQM. In lower-for-longer pricing scenario, we forecast lithium prices to average less than $10,000 per metric ton in 2025 real terms over the next decade. We also assume the Mount Holland joint venture project does not expand beyond the first phase and the Andover project does not move forward due to low prices. In this scenario, our fair value estimate would be $30.

In a higher-pricing scenario, we forecast lithium prices to average $25,000 per metric ton in 2026 real terms over the remainder of the 2020s, generating profits and free cash flow well above our base case. We also assume higher iodine and fertilizer prices. In this sceneario, our fair value estimate would be $160 per share.

We award SQM a narrow economic moat rating based on its cost advantage in the production of lithium, iodine, and specialty fertilizers, stemming from its salt brine and caliche ore assets in northern Chile. The salt brines in the Salar de Atacama are the lowest-cost source of lithium globally because of the high concentrations of lithium. Likewise, caliche ore is one of world’s largest and lowest-cost sources of nitrates and iodine.

Globally, lithium carbonate is produced from either lower-cost evaporation of brine or higher-cost mining of spodumene minerals. SQM has a cost advantage in lithium carbonate production due to its lucrative brine assets in the Salar de Atacama in Chile, which produce lithium at the lowest cost globally excluding royalties.

Two factors make the Salar de Atacama the lowest-cost source of lithium in the world: dry conditions and high lithium concentration. The Salar de Atacama is one of the driest places in the world and the largest salt flat in Chile. It has an extremely high evaporation rate and low rainfall. Snow from the Andes Mountains melts and flows underground into pools of brine, which have the highest concentration of lithium globally. This high concentration makes the company one of the lowest-cost lithium producers even among brine-based producers. The company pumps the brine above ground into a network of large evaporation ponds. Water evaporates from the ponds over the course of approximately 18 months, leaving behind concentrated lithium brine, which is then processed into lithium derivatives, including lithium carbonate and lithium hydroxide for batteries. SQM has a long-term contract through 2060 with the Chilean government to extract lithium in a joint venture with Codelco. Additionally, SQM’s joint venture operation in Australia will become a low-cost lithium hydroxide operation when the spodumene mine and accompanying lithium hydroxide conversion plant fully ramp up by the mid-2020s.

On a cash cost basis, SQM's lithium carbonate produced from the Salar de Atacama is the lowest in the world. However, the government of Chile also implements one of the highest royalties globally, in a progressive scheme that, at the highest bracket, sets a 40% rate on prices over $10,000 per metric ton. At $20,000, which is our current view of the marginal cost of production, this amounts to a 27% royalty rate. Due to the royalty expense, neither SQM nor Albemarle, which also operates at the Salar de Atacama, is the lowest-cost producer if lithium prices are at $20,000 per metric ton or higher. However, for a cost advantage moat source, we look at an operation’s ability to generate an excess return on invested capital when prices are at the bottom of a cycle. When lithium prices are below $14,000 per metric ton, the royalty is greatly reduced, and the geological advantage puts the Salar de Atacama, both SQM and Albemarle, firmly at the bottom of the cost curve. As a result, we view Albemarle’s Chilean brine as having a durable cost advantage in place.

SQM’s caliche ore is the lowest-cost source of iodine globally due to its high concentration of iodine. Over half of the global supply of iodine comes from caliche ore in Chile, where SQM is the largest producer. Another major source of iodine supply comes from recycling of LCD screens, which is mostly done in Japan. High-cost sources of iodine come from extraction of underground brines as a byproduct of oil and gas production.

SQM’s specialty fertilizer, potassium nitrate, is made by taking commodity potash produced as a lithium byproduct from the Salar de Atacama and low-cost nitrates that are produced as a byproduct from its caliche ore. The company's cost position in potash, which makes up the bulk of the remaining gross profit, is average—not as low-cost as Nutrien, for example, but considerably better than high-cost producers in Europe. Because of the high concentrations of potassium in the brines and nitrates in the company's caliche ore, SQM also holds a cost-advantaged position in specialty fertilizers. Altogether, we estimate that the vast majority of SQM's gross profits come from products that have a distinctive cost advantage—namely lithium, iodine, and specialty fertilizers.

We are confident that SQM is likely to generate an excess return on invested capital for at least the next decade.

SQM's crown jewel is its Salar de Atacama operation in Chile, which is the lowest-cost lithium deposit globally. Its capacity expansions at this resource should create long-term value.

The company’s specialty fertilizer blends of potassium, nitrates, and sodium garner a premium to commodity fertilizers due to their use in high-value crops, including fruits and vegetables.

Lithium prices will remain well above the marginal cost of production through at least the remainder of the decade, leading to excess profits and return on invested capital for SQM.

Lithium prices will fall as new supply comes online faster than demand, which will weigh on profitability. SQM's plans to develop a new lithium resource will prove value-destructive in the wake of lower prices.

SQM's lithium hydroxide JV in Australia has a high capital intensity and carries additional risk as neither SQM nor Wesfarmers has experience operating a hard rock lithium project.

SQM's deal with the Chilean government to form a lithium joint venture in exchange for a lease extension is value-destructive for shareholders.