Business context and reporting period
SQM is a Chilean mining and chemicals company producing specialty plant nutrients, iodine, lithium products, potassium products, industrial chemicals and other fertilizers. Its main operations are in northern Chile, and it sells in more than 110 countries. This Form 20-F covers the fiscal year ended December 31, 2017; it is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under IFRS as issued by the IASB and presented in U.S. dollars.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | US$2,157.3 million | US$1,939.3 million | +11.2% |
| Gross profit / gross margin | US$762.5 million / 35.3% | US$611.0 million / 31.5% | +24.8%; +3.8 percentage points |
| Operating profit | US$618.1 million | US$448.8 million | +37.7% |
| Profit attributable to controlling interests | US$427.7 million | US$278.3 million | +53.7% |
| Net profit margin | 19.9% | 14.5% | +5.4 percentage points |
| Operating cash flow | US$758.3 million | US$633.7 million | +19.7% |
| Capital expenditures | US$142.1 million | US$131.3 million | +8.2% |
| Total assets / total liabilities / equity | US$4,296.2 million / US$2,048.8 million / US$2,247.5 million | US$4,218.0 million / US$1,910.7 million / US$2,307.3 million | Assets and liabilities increased; equity decreased |
Revenue by product line in 2017: specialty plant nutrition US$697.3 million (32%); lithium and derivatives US$644.6 million (30%); potassium US$379.3 million (18%); iodine and derivatives US$252.1 million (12%); industrial chemicals US$135.6 million (6%); and other products and services US$48.5 million (2%).
Cash, debt and liquidity
Cash and cash equivalents were US$630.4 million, with other current financial assets of US$367.0 million. Management reported US$989.7 million of cash, cash equivalents and time deposits, and US$248 million of unused, uncommitted working-capital credit lines. The current ratio was 3.29, down from 4.02. Total financial debt was US$1.203 billion; including the effects of derivatives, management reported US$1.252 billion. US$223 million was described as short-term debt. The company reported net debt of US$217.2 million under its cash-and-liquid-investments measure, compared with US$421.1 million in 2016. The total-liabilities-to-equity ratio rose to 0.91 from 0.83. Finance expense declined to US$50.1 million from US$57.5 million.
Net cash used in investing activities was US$248.1 million, compared with net cash from investing of US$162.4 million in 2016; the filing notes that investing cash flows include movements in time deposits and other financial instruments. Net cash used in financing was US$411.9 million, including US$373.9 million of dividends paid. Management reported EBITDA of US$894.6 million, up from US$796.1 million.
Material changes versus 2016
- Lithium revenue rose 25.3% to US$644.6 million, primarily on a 25% increase in average prices; sales volume was approximately unchanged at 49,700 metric tons.
- Specialty plant nutrition revenue increased 11.8%, supported by a 14.9% increase in sales volumes, while average prices declined about 2.7%.
- Iodine revenue increased 9.1% as sales volume rose 24%, despite average prices falling more than 12% to approximately US$20 per kilogram.
- Potassium revenue declined 5.9% to US$379.3 million as volumes fell about 12%; average prices increased approximately 7.4%. Management attributed lower output partly to prioritizing lithium production at Salar de Atacama.
- Industrial chemicals revenue increased 30.2% to US$135.6 million, mainly on higher solar-salt sales volumes.
- Cost of sales increased 5.0%, less than revenue growth, reducing cost of sales as a share of revenue to 64.7% from 68.5%. Other expenses fell to US$61.6 million from US$89.7 million, partly because 2016 included railway impairment and U.S. FCPA-related charges.
- Profit before tax increased 43.3% to US$594.6 million. Income tax expense rose to US$166.2 million, while the effective tax rate declined to 27.9% from 32.0%.
Outlook, commentary, risks and unusual items
Management’s 2018 capital expenditure framework was approximately US$517 million, including about US$360 million in Chile and US$157 million outside Chile. Planned work includes lithium capacity expansion, completion of lithium hydroxide capacity expansion, iodine and potassium nitrate projects, maintenance, and development of the Minera Exar project in Argentina and Mount Holland in Australia. SQM said it did not expect the program to require external financing.
- Management outlook: It expected specialty plant nutrition volumes to be similar in 2018 and prices broadly flat; iodine prices slightly higher and volumes growing with the market; and lithium prices higher on a full-year basis, with potential new supply in the second half. SQM expected lithium sales volumes of about 55,000 metric tons and potassium sales volumes of about one million metric tons in 2018. It forecast solar-salt sales of approximately 50,000 metric tons. These are forward-looking estimates, not guarantees.
- Salar de Atacama and Corfo: Products originating from Salar de Atacama represented 47% of 2017 consolidated revenue. In January 2018, SQM subsidiaries and Corfo agreed to end arbitration and amend the lease and project agreements, including higher progressive lease rates, annual community and regional-development contributions, and an expanded lithium quota through 2030. The agreement included a US$17.5 million payment plus agreed interest; SQM recorded a US$20.4 million charge in 2017. The Comptroller General approved the amendments in April 2018, but indigenous groups challenged them in court, and CCHEN authorization included a control-change condition that SQM was contesting. The amendments and increased extraction authorization therefore remained subject to legal and regulatory risks described in the filing.
- Compliance matters: The U.S. DOJ deferred prosecution agreement requires a US$15.5 million penalty and a compliance monitor; the SEC required an additional US$15 million penalty. These charges were reflected in 2016 and the U.S. penalties were paid in 2017. In January 2018, a Chilean deferred prosecution agreement, without an admission of responsibility, required aggregate payments equivalent to approximately US$4.3 million; these were accrued in the 2017 financial statements. Proceedings may be reinstated if agreement terms are not met. A U.S. securities class action remained pending, with class certification sought in January 2018.
- Other legal and environmental risks: The filing describes tax, labor, product-liability and other litigation, including groundwater claims in California. A court ordered temporary partial closure of certain Salar de Llamara water wells in December 2017; the wells represented about 15% of water used in the First Region operations. Water availability, environmental approvals, labor disputes, commodity-price volatility, customer concentration, currency movements and reserve-estimation uncertainty are material risks.
- Unusual items and controls: The 2017 other-expense line included the US$20.4 million Corfo-related charge. The company stated that a historical material weakness concerning payments directed by the former CEO’s office had been remediated. Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2017; the auditor issued unqualified opinions on the IFRS financial statements and internal controls.
- Dividends: The board recommended a final dividend representing 100% of 2017 net income, plus a special dividend of US$100 million, both subject to shareholder approval. The filing described the proposed remaining final dividend as US$0.41968 per share and the special dividend as US$0.37994 per share, after interim payments.
Important facts for investors to verify
- Confirm the final status and terms of Corfo’s lease amendments, CCHEN authorization, indigenous challenges and any conditions affecting the expanded lithium quota.
- Track lithium and iodine prices, production and sales volumes, new competitor supply, and the effect of higher Salar de Atacama lease payments on lithium margins.
- Compare the US$517 million 2018 capital plan and stated production expansions with actual spending, project approvals, schedules and funding.
- Review compliance-monitor obligations, completion of the U.S. and Chilean agreements, and progress and potential exposure in the U.S. class action and other litigation.
- Reconcile reported cash and financial assets, short-term debt, derivative effects and the company’s net-debt measure; monitor dividend approval and payment.
- Assess environmental restrictions and water availability, including the Salar de Llamara wells, and the reliability of internally prepared mineral reserve estimates.