Lithium producers are expressing concerns about potential hindrances to their ability to meet the ambitious timelines for global electrification due to delays in mine permitting, staffing shortages, and inflation. Once considered a niche metal primarily used in ceramics and pharmaceuticals, lithium has now become one of the most sought-after metals worldwide, driven by the aggressive electric vehicle plans of major automakers such as Stellantis, Ford, and others. Albemarle, the world's largest lithium producer, anticipates a deficit of 500,000 metric tons in global lithium supply by 2030. While various consultancies and producers offer slightly different projections, all indicate an imminent shortage.
Fastmarkets reports that there were 45 lithium mines operational last year, with 11 expected to commence operations this year and seven in the following year. However, this pace falls significantly short of what industry consultants consider necessary to ensure an adequate global supply. Even if additional lithium mines are established, there remains a shortage of facilities capable of producing specialized types of lithium required for batteries. As a result, automakers may be compelled to accept lower-quality lithium, which could impact the range of electric vehicle batteries, according to industry executives.
This comes as Tesla (NASDAQ: TSLA), one of the largest electric vehicle producers in the world, is reportedly engaged in discussions with the Indian government regarding an investment proposal to establish a factory capable of producing around 500,000 electric vehicles annually in India, as per the Times of India. The article also mentions that Tesla is exploring the possibility of utilizing India as an export hub to supply vehicles to countries in the Indo-Pacific region. Tesla's plans to enter the Indian market faced setbacks last year when the government declined to lower import taxes on its vehicles, which can reach as high as 100% for electric cars. Although India encouraged Tesla to manufacture locally, the company expressed its interest in first testing demand by exporting cars to the country. In a recent meeting, Indian Prime Minister Narendra Modi urged Elon Musk to make a substantial investment in India. Renewed efforts are underway, with discussions held in May regarding government incentives for Tesla's cars and battery manufacturing. The Ministry of Commerce and Industry is leading the current talks and aims to strike a favorable deal while ensuring fairness between local manufacturing and exports, according to local media reports.
Despite this, it seems like the electric vehicle market, especially in China, has taken a hit in recent months due to weak demand. In response to market pressures and increasing competition in China's electric vehicle (EV) market, General Motors Co (GM) has reduced the starting price of the Cadillac Lyriq luxury crossover by nearly 14%. The Lyriq, built on GM's Ultium EV architecture, now starts at 379,700 yuan ($52,466), down from the previous price of 439,700 yuan ($60,784), as stated on GM's China website. Additionally, GM is offering an extra discount of approximately $2,500 for customers who place a deposit for the Lyriq in China before the end of August. This price adjustment follows Volkswagen's recent price cuts on their EV lineup in China, where domestically produced EV brands are gaining market share and intense price competition prevails. VW's joint venture with state-owned automaker FAW announced discounts ranging from 8% to nearly 27% for its ID-series EVs, while another VW joint venture with state-owned automaker SAIC offered a limited-time discount of over $5,100 for the ID.3 hatchback, positioning it below BYD's popular Qin EV, one of China's leading models.
Last week, Tesla followed suit by introducing a new incentive to bolster electric vehicle sales in China, while concurrently informing certain employees involved in battery pack production at its Shanghai facility of upcoming layoffs, as reported by both a company announcement and an affected worker. The cash rebate offer on new vehicles came one day after Tesla, along with 15 other companies including Chinese EV manufacturers Nio, Li Auto, and Xpeng, pledged to avoid engaging in "abnormal pricing." This move, interpreted by some as a sign of a truce in the price war that has posed a threat to industry-wide profitability, signifies the mounting pressure faced by Tesla and its competitors in China, the world's largest EV market. Orchestrated by the China Association of Automobile Manufacturers, the pricing commitment was a joint effort among industry executives. However, the workforce reductions will not impact production at Tesla's Shanghai Gigafactory, the company's largest and most productive hub, which currently employs approximately 20,000 workers, according to sources knowledgeable about the factory's operations. While earlier price reductions implemented by Tesla resulted in increased sales earlier this year, the intensifying competition has compelled automakers and suppliers across the board to focus on cost containment, as highlighted by analysts and executives. Tesla's latest announcement outlined a cash rebate of 3,500 yuan ($483) for new buyers of its Model Y and Model 3 vehicles who can provide a referral from an existing owner.
With depressed lithium prices, Sociedad Química y Minera de Chile (NYSE:SQM) is trading near all-time low valuations, and we believe that it is an interesting time to look into the fundamentals of the business and see why many investors are bullish. SQM’s stock performance is largely affected by lithium prices, and with an improving economy, there is a case to be made that rising lithium prices and a hot electric vehicle market will create strong tailwinds for SQM.
Founded in 1968, Sociedad Química y Minera is a Chilean company operating in the specialty chemicals and mining industry. Initially focused on iodine and nitrate production, SQM has emerged as a global leader in lithium extraction, capitalizing on the increasing demand for this mineral in electric vehicles and renewable energy. With extensive lithium reserves and advanced extraction techniques, SQM has become one of the world's largest lithium producers, supplying a significant share of lithium carbonate and lithium hydroxide globally. In addition to lithium, SQM produces specialty plant nutrients, including potassium nitrate and sodium nitrate, catering to the growing agricultural sector. SQM has strategically expanded its global reach through targeted acquisitions and partnerships, allowing the company to tap into the vast potential of the rapidly growing electric vehicle market. With a strong emphasis on sustainability and responsible mining practices, SQM sets itself apart as an industry leader committed to environmental stewardship. By maintaining a significant presence in critical sectors and prioritizing sustainable growth, SQM has established a solid foundation for its success and continued market prominence.
SQM is a very efficient business. SQM operates at a LTM gross margin of 51.5%, and an EBIT margin of 50%. Additionally, SQM operates at a ROIC of 62.5%, a ROE of 88.9%, and a ROA of 34.8%. SQM operates very efficiently, and with such a high ROIC, it is able to reinvest cash back into the business at very high rates of return, allowing the business to rapidly compound its intrinsic value over time and return value to shareholders. If you look at these metrics over a 10 year time frame, you can see their rapid expansion. For example, in 2013, ROIC stood at around 13.4%, compared to 62.5% today. The same can be said for ROA and ROE. In 2013, ROA stood at 8% and ROE at 20.5%, respectively. Today, ROA sits at 34.8% and ROE sits at 88.9% on a LTM basis.
Looking at SQM’s Income Statement, we can see some stellar sustained growth in revenue, EPS, EBITDA, and gross profit. Since 2013, total revenues have grown at a CAGR of 17%, gross profit at a CAGR of around 23%, EBITDA at a CAGR of around 22%, and EPS at a CAGR of around 22.5%. The impressive gross profit CAGR can largely be attributed to margin expansion. Gross margins sat at 32.7% in 2013 and LTM gross margins are now sitting at 51.5%. This margin expansion can be attributed to skyrocketing lithium prices over the past few years, as the EV transition further strains supplies.
Examining SQM’s balance sheet, we can see that the company looks very healthy. SQM holds around $2.08 billion dollars worth of cash and cash equivalents. Factoring in short term investments, they have around $2.8 billion dollars worth of total cash and short term investments. In comparison, they have around $2.4 billion dollars in long term debt, a very manageable cash to long-term debt ratio. Additionally, SQM sports an interest coverage ratio of around 60x, showing the long-term solvency and strong financial health of the business.
Analyzing SQM’s cash flow statement, we can see some impressive growth in net income and free cash flow. Since 2013, net income has grown at a CAGR of around 24%, while free cash flow has grown at a CAGR of around 18%.
Moving to valuation metrics, we can see that SQM looks to be valued more cheaply than some of its competitors. SQM is currently trading at a NTM P/E ratio of 7.08x earnings, compared to the 10-year average of 21.42x earnings and 5-year average of 22.18x earnings. Looking at free cash flow yield, we can see that SQM is trading at a very high premium compared to historical averages. Currently, SQM is trading at a 12.84% NTM levered free cash flow yield, compared to the 10-year average of 4.83% and 5-year average of 3.69%. With SQM’s business being highly correlated with lithium prices, it’s easy to see why multiples are so depressed. However, once lithium demand stabilizes and the electric vehicle market starts to heat back up, we could see some multiple expansion.
Looking at Quiver Quantitative’s Institutional Holdings Dashboard, we can see that hedge funds and asset managers like Capital Group, Susquehanna International Group (SIG), and Fidelity Investments (FMR LLC) have all added to their SQM positions. Most notably, Fidelity Investments increased shares held by 28% (as filed on 03/31), bringing their total SQM holdings to a whopping 1,794,556 shares worth around $140 million dollars at current market prices.
Keep an eye out for SQM stock’s latest news, data, and more with Quiver Quantitative.
