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Operator: Good afternoon, and welcome to the SQM Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Irina Axenova, Head of Investor Relations. Please go ahead.

Irina Axenova: Thank you. Good afternoon. Thank you for joining SQM’s earnings conference call for the second quarter of 2024. This conference call will be recorded and is being webcast live. Our earnings press release and the presentation with a summary of the results have been uploaded into our website where you can also find a link to the webcast. Ricardo Ramos, our Chief Executive Officer, will be speaking on the call today; Gerardo Illanes, our Chief Financial Officer; Carlos Diaz, CEO of SQM Salar; Mark Fones, CEO of SQM International Lithium; Felipe Smith, Commercial Vice President of SQM Salar; Pablo Hernandez, Senior Director of Business Strategy and Development, SQM Salar; Pablo Altimiras, CEO of Iodine & Nitrates; and Juan Pablo Bellolio, Commercial Vice President of Iodine and Industrial Chemicals, are also available to answer any questions.

Before we begin, I would like to remind you that some statements made during this conference call regarding our business outlook, future economic performance, anticipated profitability, revenues, expenses and other financial items are considered forward-looking statements. Please note that the same cautionary language used in our press release and presentation also applies to this call. And now I will leave you with our Chief Executive Officer, Ricardo Ramos.

Ricardo Ramos: Thank you, Irina. Good afternoon, everyone, and thank you for joining us today. Before diving into the key drivers behind our results, I would like to highlight an important milestone we achieved last quarter. As mentioned in our earnings release, we are very pleased to have entered into a partnership agreement with Codelco to jointly operate the Salar de Atacama until 2060. Based on the principle of private public alliance, we believe this agreement is a pivotal moment for both SQM and for the future of the lithium industry in Chile. While there are several conditions precedent for the partnership to become effective, together with Codelco, we are committed to ensure that these conditions are met by the first half of 2025.

We are looking forward to working together with Codelco to operate the most sustainable lithium operation in the world based in the Salar de Atacama. Our second quarter results were positively impacted by a strong volume flow in all our major businesses, supported by a strong demand growth in their respective markets. We reported record sales volumes in lithium and iodine businesses exceeding 52,000 metric tons and 4,000 metric tons, respectively. We anticipate solid growth in the lithium market this year driven by a strong EV performance mainly in China. Demand growth in the iodine market this year exceeds our expectations. We expect this trend to continue for the remainder of the year and believe that our iodine volumes could exceed 14,500 metric tons this year, marking 2024 a record year.

While our average realized price in the lithium business improved slightly in the second quarter compared to the previous quarter, we have seen lithium prices decline since the beginning of July. As most of our contracts are linked to price indices and our average prices follow the prevailing market prices, we believe that our average selling prices in the third quarter could be lower than in the previous quarter, given the current price environment. We are convinced that most of the greenfield projects are not profitable. While we continue with our previously announced capacity expansion projects, we are also reassessing the attractiveness of certain market and initiatives in the current price environment. We believe our lithium sales volumes in the second half of the year could be similar to those reported for the first half of the year, with a potential upside should the market conditions improve.

We recently formed SQM International Lithium to develop our lithium business outside of Chile. This primary objective is to leverage the lithium assets and expertise we have in exploration, project development, mining and chemical operations to expand our lithium portfolios overseas. Thank you, operator. We’ll now open to the line of questions.

Operator: [Operator Instructions] Our first question today is from Joel Jackson with BMO Capital Markets.

Unidentified Analyst : This is Anthony on for Joel. So you indicated in the press release that in the current lithium price environment, peers may take production out of the market. Yet, SQM is maintaining 24 production targets with sales volume maybe slightly lower. Obviously, SQM has a unique quota system which CORFO and the lease that was previously expiring, which encourages maximizing production. But shouldn’t SQM, as the market leader, be disciplined and maybe lower volumes?

Felipe Smith: This is Felipe Smith here. I’m not sure if I understood correctly your question, but let me rephrase that we estimate that the sales in the second semester 2024 will be similar to those reached in the first semester of 2024. Meaning that our annual sales could be around 190,000 tons, with a potential upside should market conditions recover.

Unidentified Analyst: Just a follow-up on that. The question was, I guess, around whether SQM as a market leader should be disciplined if we start needing to see production come out of the market.

Carlos Diaz: This is Carlos Diaz. Well, let me tell you a little bit at our capacity in Chile that now is according to our schedule and as we expect this year to produce 210,000 as a lithium carbon equivalent and the different quality and the carbon hydroxide sulfate. We should — those are 30,000 are converted in China. So we’re still reviewing the volume to be converted in China for lithium sulfate to hydroxide or carbonate and during the second semester. So the total volume converted in China obviously will depend on the specific market segment and following the current price environment. So finally, it would depend how the price is coming in the next month. So I don’t know if I answered your question.

Unidentified Analyst: Great. Just a follow-up. So maybe weighing strategic priorities, how would SQM rank delaying future tons out of Chile versus investments in places like Australia or other opportunities moving forward?

Carlos Diaz: Moving forward, it’s clear, we are going to develop a huge project that is called Salar Futuro together with Codelco. That’s why our investment, together with Codelco, in the next 10 years in Chile is going to be significant. If you consider the Salar Futuro project we will develop together, we expect to increase some production in Salar de Atacama with the project, of course. But this is mainly Chile, it’s mainly oriented to the Salar Futuro project. Of course, we want to grow outside Chile. If we find good opportunities, as you know, we have been active. We have investment today in Australia. We continue to have geologists looking for new alternatives and probably we will announce investment on new projects in Australia in the medium term. I don’t know, but we are working very hard in order to do it.

Operator: The next question is from Ben Isaacson with Scotiabank.

Apurva Kilambi: This is Apurva on for Ben. I might just piggyback off of the last question a little bit. But given that the market is currently oversupplied and you’ve previously shared and based on your 210,000 tons of production versus about 190,000 of sales, is the expectation still that you’ll be able to work through these inventories? Are you finding any challenges — seeing any challenges in finding buyers for that lithium inventory? Are you holding an interposition of demand and pricing picking up in the near term?

Carlos Diaz: We’re already coming on, we expect to sell this year around to 190,000 metric ton of lithium carbonate, and we expect to produce around 210,000. So it’s going to be 20,000 is approximately what we sell in one month. So for the other side, we had to prepare for next year whether we expect to sell a little bit more. So it’s a good investment in capital — working capital. We don’t see that it’s too much. It’s healthy inventory.

Apurva Kilambi: All right. And then as a follow-up, [Technical Difficulty] production for 2024 were contracted with kind of a 1-month like to spot. How should we be thinking about lithium realized pricing in Q3 so far given that quarter-to-date, the index was down, what, 15% to 20%? Is there any sort of indication as to whether you’re baking price floors and ceilings into your contracts?

Felipe Smith: Felipe again. So indeed, SQM price mechanism is based on price indices in the different geographies with certain lag, which average approximately one month. This means that in general, our realized average price will always be close to the prevailing average spot price. Now during the beginning of second quarter, we observed a certain price recovery, which unfortunately, lasted until mid-April. Then we saw price fluctuations that were quite moderate. But over the last 3 months, we have seen a persistent decline in the index prices, especially in China. So that is why we are expecting that the average price in Q3 will be lower than in Q2.

Apurva Kilambi: And if I may sneak in… [Technical Difficulty]

Operator: Pardon me, Ma’am. We seem to have lost audio from your location.

Apurva Kilambi: Hello, can you hear us?

Operator: We can hear the main speaker, but we can’t hear the questioner.

Irina Axenova: Let’s go to the next question, please.

Operator: The next question will come from Isabella Simonato with Bank of America.

Isabella Simonato: So I have a couple of questions. First of all, on lithium. When you say, right, SQM is looking for good valuation, is it we’re evaluating the markets and what’s attractive at these levels? I wonder what exactly do you mean by that. And what things that are being taken into consideration here. And also, on the international expansion here, if — and you mentioned 100,000 tons by 2030. If you could give us a sense, what are the main regions focus, the main raw materials? And actually, what type of cost production should we be thinking about for these 100,000 tons?

Carlos Diaz: As we’re coming, we expect to produce a little bit more than 200,000 in Chile, 30,000 or 40,000 of those is produced at a lithium sulfate in Salar de Atacama that is then related to China to convert to lithium carbon and hydroxide. So that is something that we could reevaluate according to the market condition, the production that we are going to expect to produce in China in the second quarter — in the second semester. That’s this point.

Mark Fones: Regarding the future projects — Mark Fones here speaking. Regarding the future projects in Australia and what was mentioned in the press release regarding the 100,000 tons per year of everything carbon equivalent production into — looking into 2030. As you know, we’ve been pretty active in Australia. We now have gained access to 2 world-class lithium deposits, namely the Andover project and the Mt. Holland project, both of which were expected not only to have a significant scale, but also we are already discussing the expansion from Mt. Holland project. In addition to that, we continue to work on, monitor, and invest in various early exploration projects not only in Australia but also across the world. We have just recently announced a new partnership in Sweden with Talga Group.

All of them developed to — or aim to develop early stage innovative and marginal cost effective products into the long term. We intend to be a lithium chemical processor, not only in Chile but also outside. And leveraging on SQM’s knowledge, and also technology innovative process to be in a lower part of the marginal cost of production.

Operator: The next question is from Lucas Ferreira with JPMorgan.

Lucas Ferreira: So two questions. The first one, can you explain in — correct me if I’m wrong, but I’m seeing your average cost — cash cost per ton in lithium increasing like 8% quarter-over-quarter that’s driving your gross margin to be reduced. So can you explain the reason why? I was expecting actually the opposite things. I would imagine lease payments allocations will be lower given the lower prices. And also, higher volumes would imply maybe fixed cost dilution, the depreciation of the peso maybe helps you as well. So can you explain why this quarter specifically cost was higher? And the second question to Ricardo Ramos. Just to confirm. So obviously, you signed already the contract with Codelco for the JV. But you mentioned that certain conditions must be matched.

So just wanted to clarify that. So apart from the signing of the contract, what are the next steps for the JV to be actually formed and run smoothly? So — and how long that could take? If you can explain that, that would be great.

Ricardo Ramos: Ricardo Ramos speaking. We published the agreement with Codelco is available for everyone in our web page, and there’s a list of condition present are included in the contract, you can check it, but are mainly legal ones that we have to follow some steps in the companies and so on in — the by law, whatever. But it’s — we are working on that, and we are going to be ready as we speak in the first quarter of next year. But if you want to review in detail this condition present, those are included in the contract that are public.

Carlos Diaz: Lucas, this is Carlos Diaz speaking. Well, with respect to your first question about the cash cost of the lithium, this is mainly explained because of the inventory adjustment related to the lithium sulfate. The lithium sulfide that we export to China that we later is converted to carbon hydroxide was exported during the second quarter, where the price were higher. And the royalty are paid in the moment that we export. So we have an effect mainly related with that, the royalty that we baked to the CORFO sold in Chile.

Lucas Ferreira: So if I may, just a quick follow-up. What’s your lithium cash cost today? Is it — remains around 5,000? Is this something we can work with?

Carlos Diaz: Our cost is stable during this period. I mean, we don’t see a significant change. What do I comment before, it was mostly related with the priority that we pay, as we pay in the moment that we export and not we pay in the moment that we sell. And you know there is a lag because we have to export from Chile to China and we keep inventory there and so on. And that is the main effect that is in the lithium sulfate.

Lucas Ferreira: And apologies, one final on this topic of the royalty, if I may. Can you confirm if that quota, the quota — legacy quota of the previous contract with CORFO before 2017? So if not mistaken, as of this year, you should be already exploring part of the quota, something like 50,000 tons a year with that fixed flat rates. Is this already in place? So eventually, that comes to sort of flow into the P&L in future sales. If you can confirm this, please.

Gerardo Illanes: Lucas, this is Gerardo. Yes, what you’re saying is right. And for the ones that are not familiar, when we signed a new contract in 2018, we had a balance under the previous contract at a fixed rate of 6.8% with CORFO. According to the new contract, the balance that we had could be used from 2024 onwards, and it’s approximately 50,000 metric tons per year. So approximately 50,000 metric tons sold this year. We’ll pay a fixed rate of 6.8%, while the rest will pay based on the table that is publicly available.

Operator: The next question is from Alejandro Demichelis from Jefferies.

Alejandro Demichelis: Yes. Just one question on the Codelco agreement. If you — as you said, you get the condition of preference in the first half 2025. Then my understanding is there is a kickoff of extra capacity there. Are there any discussions with Codelco regarding what could happen to that extra capacity in 2025?

Mark Fones: No. We are not having marketing or commercial discussion with Codelco yet because the — part of the condition presence are some authorization and the following antitrust rules, we need to have the agreement ready before starting to talk about its commercial strategy.

Alejandro Demichelis: So if the current lithium market pricing conditions continue, is there a chance that the extra capacity for next year may not become available or you may choose to delay that?

Mark Fones: As someone said before, we’re a very disciplined company. It means that we will increase the capacity anyway, and we will sell more lithium carbonate next year as compared to this year. That’s for sure.

Operator: The next question is from Santhosh Seshadri with HSBC.

Santhosh Seshadri: Just a follow-up on cost. So how do you expect cost to pan out through rest of the year in light of electricity price increases announced in Chile? And do you have any cost mitigation program in place possibly by reducing production of your hydroxide volumes in Chile, which has a relatively higher cost base? Or maybe by slowing down ramp-up at Mt. Holland project?

Carlos Diaz: This is Carlos Diaz. Always, our focus is to reduce our cost and to look at our tendency to keep increasing the quality and reducing the cost and our carbon footprint and so on. So — but we’re not thinking really to reduce our capacity really in hydroxide. I don’t know if it was your question, but no, we continue with our plan to expand in the lithium carbon and hydroxide in Chile.

Santhosh Seshadri: And just a question on your Mt. Holland project. Are you planning to slow down ramp up given the adjust economics? And what would this mean for the sales contribution in 2024 and 2025?

Mark Fones: Mark Fones here. Thanks for your question. No, we continue full throttle managing the Mt. Holland project. We, as you know, are already producing spodumene concentrate from the mine and concentrator. We have already produced more than 100,000 tons of spodumene concentrate. We will continue to increase productivity, reduce costs and maintain quality into the future. On the refinery side, we have already above 80% construction completion. We are starting commissioning at the refinery, which we expect to have first product mid-2025, so mid next year. Once completed, we expect the play to be fully profitable, to increase and add value to SQM with respect to freight.

Santhosh Seshadri: Got it. And just a follow-up on that. So until commissioning of your refinery, are you looking at the tolling opportunities or selling spodumene to the market or maybe just holding on to your spodumene inventories until you commission the refinery?

Mark Fones: Yes, we do have tolling commitments. We are tolling spodumene concentrate, and we are also open to additional alternatives in that respect.

Operator: The next question is from Marcio Filho with Goldman Sachs.

Marcio Filho: A couple of questions on my side. Obviously, when you look at net income year-to-date, still negative by about $650 million. I understand it has been mainly explained by $1.1 billion in time early in the year. But just trying to understand how should we think about —

Ricardo Ramos: Marcio, sorry to interrupt you, but there is a problem with your microphone. So we will go to the next question, and then we can come back with you but —

Marcio Filho: Is it better now?

Ricardo Ramos: No. Please try to change to another microphone because there is a problem. We cannot hear anything of what you’re saying.

Operator: The next question is from Cesar Perez-Novoa with BTG Pactual.

Cesar Perez-Novoa: In the press release, I see that management reaffirmed their previously announced expansion plan for this year. But at the same time, you also suggested some certain reassessment of specific market and initiatives that may be “less attractive” in the short-term. Could you please provide further detail on that specific assessment and potential near-term impact?

Carlos Diaz: So there is, I think, 2 different projects connected, but we have — our long-term strategy is to keep on increasing our capacity in Chile. What I said before, as lithium carbon and hydroxide, to keep it growing at the same pace at the demand it’s doing. And — but it’s a tactic in short term, if we have to reduce the conversion, what I said before in China because the price are not convenient for us to do the bids we are doing. I mean, it is something that we would do in the short term, but it’s a little bit different than we’re planning for the long term because we still think that this market is going to keep growing in the future.

Operator: The next question is from Corinne Blanchard with Deutsche Bank.

Corinne Blanchard: The first question, just related to the pricing. Is there a scenario or is there are certain price, like spot price, at some point that you could be thinking actually of having contract with a negotiated price? So basically, the question is that are you considering at some point moving back maybe like fixed price contract or with having like a stronger like flow and selling price?

Felipe Smith: Corinne, this is Felipe. As we have been doing already in the past years, and we want to continue like this, we are a low-cost producer so we prefer to follow the indices. We think that this is the best way to contract our volumes is good both for the customer and for us.

Corinne Blanchard: Fair enough. The second question, can you please give an update on the Tianqi situation? I, mean we saw a lot of filing since there is not a lot of further options for them to do anything. But just trying to understand the view here that would be very helpful.

Felipe Smith: Okay. The — what you call Tianqi situation is a public situation. We don’t have different information than the one that is on the press. And it means that Tianqi, they have a different opinion of the regulator in Chile, the CMF that is regulator. They have an opinion about the transaction, Tianqi has a different opinion. And they appeal to the court with their position. We are participating in the appealing also with our opinion, and there’s nothing new about that. It means it’s public. Tianqi has been very public about their statements, their opinion. And the company has been also very public about what is our opinion of the situation. And the regulator, CMF also been very clear about their opinion about this specific situation.

Corinne Blanchard: Maybe differently, can they do — is there any other step that it can be taken? Or we’re just trying to understand what can further happen or this is just a static cost at this point?

Felipe Smith: Okay. Probably you have to ask a Tianqi about their potential future steps. I really don’t know. But of course, in this specific situation, we expect that after the court decision, that I — we are very optimistic about the court decision. I hope it’s going to be over. But again, if they are thinking something else, you have to ask Tianqi. I don’t have the answer.

Operator: The next question is from Camilla Barder with Bradesco.

Camilla Barder: So just a quick questions on my side. Regarding the deal with Codelco, could you please elaborate on the main challenges and discussions with local communities? And the second question is on CapEx. In case the market gets worse, would you consider flexibilizing CapEx? And if so, how much would it be?

Mark Fones: Okay. About the deal with Codelco, there’s a clear process in order to have a relation with the communities for the new agreement, and we are working on it. You have to go to the communities, ask their opinion that is not binding, but it’s a very important opinion for CORFO and for the companies. And for them, we are working very hard in order to do it as soon as we can. And our relation with the communities, I will say that is — are very good. We are open with them. They are open with us, and we are working in order to solve any difference that we may have. Regarding the CapEx. The CapEx informed by the company, it will continue. We are — we think that the CapEx we have today in the lithium industry is very good in the iodine and nitrates, it’s the right one.

And the projects that we have in Australia are the right one. As mentioned before, we don’t think that the long-term — really, we don’t think that the long-term pricing of lithium is that today’s price environment is a specific situation today of the price environment. But we are very clear that the price will be different in the future. That’s why we have a clear plan of investment in the lithium. We are really committed about that. And we are a very low-cost producer. That’s why we will continue to do our investment.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Irina Axenova.

Irina Axenova : Thank you, Garett. Just before we close, we had a question from Marcio who couldn’t connect. If there’s any dividend potential, maybe of negative net income so far? I don’t know, Gerardo, if you would like to take that?

Gerardo Illanes: The company has a dividend policy that has been approved by the Board and informed to the shareholders, and that dividend policy established that we will distribute the dividend as a fraction of the net income if certain conditions are met on our balance sheet. Since the net income is negative because of a onetime effect that hit the results because of the lithium mining tax that was applied in the first quarter. I mean, the result is negative. And because of that, the net income that the Board has approved as interim dividend has been zero. So it depends on what will happen in the rest of the year, but the policy is quite clear in that regard.

Irina Axenova: Thank you, Gerardo. And this concludes our call today. Thank you for joining us, and we look forward to having you in our next call. Have a great day, everyone. Bye.

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