SQM: The Low-Cost Lithium Producer With A High Dividend Yield

In today's edition, we will track the fundamental readings of long-term bullish companies in strong (TigerTrade Top 1 Gainer) concepts each week and look forward to your attention and discussion.

Disclaimer: Capital at risk. This is not direct financial advice or a recommendation to acquire or dispose of any investment, but for communication only.

3 of the 3 indexes closed green last week. The stock market indexes closed mixed despite both consumer prices and producer prices coming in better than expected.

The best-performing concepts are solid-state battery, gene editing, lithium battery, US infrastructure and British banks.

Considering the different perceptions of the stock, this time TigerPicks choose  $Sociedad Quimica Y Minera De Chile SA(SQM)$ to have a fundamental highlight to help users understand it better.

$Sociedad Quimica Y Minera De Chile SA(SQM)$

SQM is a Chilean company that produces various commodities. Their operations mainly focus on lithium, widely used in batteries for electric vehicles and energy storage systems.

Additionally, they have a specialty and standard potassium fertilizer, iodine, used mainly in X-ray contrast media and solar salts. SQM obtains these materials from its high-quality caliche ore and salt brine deposits.

What is happening to lithium?

Lithium prices have dropped significantly in recent months, dragging lithium companies' stock prices, and this trend appears to continue.

SQM and peers share performance

A couple of trends have affected the price of lithium. The price of lithium carbonate has fallen to a 12-month low due to oversupply in the market and weakening demand from China's electric vehicle (EV) sector. CATL initiated a price war, betting on cheaper inputs to remain competitive.

On the other hand, $NIO Inc.(NIO)$ has built a battery factory, which may increase the demand for lithium. Additionally, $Tesla Motors(TSLA)$ has reportedly targeted the lithium bottleneck and aims to undercut China's battery production, which may also lead to increased lithium demand. While this is a positive forecast, it remains to be seen if the price of lithium will recover in the short term. There is a possibility that lithium prices may follow the super cycle of mining, meaning that prices may experience a cyclical downturn before eventually recovering.

SQM: A Major Producer with Competitive Advantages

Thanks to its access to high-quality mineral deposits, SQM is a leading producer of lithium, iodine, and nitrates for specialty fertilizers. The company's lithium assets are particularly advantageous, with its low-cost deposit in the Salar de Atacama containing the world's highest lithium concentration. With the increasing adoption of electric vehicles, the demand for lithium is expected to grow rapidly, making it a highly promising commodity.

SQM is expanding its production capacity in Chile and Australia through a joint venture with Wesfarmers called Mt Holland Lithium Project. The project involves the construction of a lithium hydroxide plant and a mine that will produce spodumene concentrate. Both companies hold a 50% stake in the venture. SQM is also a market leader in potassium nitrate, a specialty fertilizer used in high-value crops, and the world's largest producer of iodine.

The company's competitive advantage lies in its ability to produce lithium, iodine, and specialty fertilizers at a lower cost than its competitors due to its salt brine and caliche ore assets in northern Chile. SQM's salt brines in the Salar de Atacama are the most cost-effective source of lithium globally due to their high lithium concentration and dry climate. The caliche ore is one of the world's most extensive and least expensive sources of nitrates and iodine. SQM extracts the brine and concentrates it into lithium derivatives, such as lithium carbonate and hydroxide, for use in batteries.

However, mining rights to the Salar de Atacama will expire in 2030. SQM has a long-term agreement with the Chilean government to extract approximately 2.2 million metric tons of lithium carbonate until then.

SQM agreement with Chilean government

When Australia's spodumene mine and lithium hydroxide conversion plant are fully operational, SQM's joint venture in Australia will become a low-cost lithium hydroxide operation.

Approximately 85% of SQM's gross operating profit comes from products that provide a distinctive cost advantage, such as lithium, specialty fertilizers, and iodine. As the demand for these commodities continues to rise, SQM is well-positioned to maintain its leadership position in the industry.

Dividend

Another reason to make SQM is an attractive investment is the dividend yield. The dividend has grown from $1.00 in 2013 to $7.52 in 2022, implying a dividend yield of 10.4%.

SQM dividend growth

I believe SQM's dividend appears to be secure due to the company's strong financial position. As of the end of 2022, the balance sheet showed $2.6 billion in cash and $2.9 billion in debt. Based on lithium prices, I anticipate the company's operating cash flow will generate between $2.5 to $4.3 billion, while capex is expected to be $0.8 to $1.2 billion. This indicates that SQM would have between $1.3 to $3.5 billion available for dividends, well above the 2022 dividend payout of $834 million.

Even if the company does not increase its dividends, I believe there is potential for the dividend yield to compress from the current 10% to 5%, which would require a substantial increase in the share price.

SQM dividend yield

Stock Price Forecast:

Here are the target price forecast for the future 12 months from analysts on CNNMoney.com.

The 14 analysts offering 12-month price forecasts for Sociedad Quimica y Minera de Chile SA have a median target of 115.00, with a high estimate of 136.00 and a low estimate of 85.00. The median estimate represents a +45.24% increase from the last price of 79.18.

Hope this analysis helps you get more understanding of the company's whole image, Tiger Picks will follow up the monthly performance as a longterm track.

Resource:

https://seekingalpha.com/article/4584618-sqm-low-cost-producer-double-digit-dividend-yield

What are your thoughts on $Sociedad Quimica Y Minera De Chile SA(SQM)$ ?

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