SQM 2018 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual Form 20-F, not a standalone fourth-quarter report. Financial statements are prepared under IFRS as issued by the IASB and presented in U.S. dollars.
Business context
SQM is a Chilean producer of specialty plant nutrients, iodine, lithium, potassium products and industrial chemicals. Its operations are concentrated in northern Chile, drawing on caliche ore and Salar de Atacama brines. The company sells in more than 110 countries; 91.6% of 2018 sales were classified as foreign sales.
Financial and operating results
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $2,265.8 million | $2,157.3 million | +5.0% |
| Gross profit / margin | $782.3 million / 34.5% | $762.5 million / 35.3% | Profit +2.6%; margin down 0.8 percentage points |
| Profit for the year | $442.1 million | $428.4 million | +3.2% |
| Profit attributable to controlling interests | $439.8 million | $427.7 million | +2.8% |
| Basic earnings per share and ADS | $1.67 | $1.63 | Up |
| Cash from operating activities | $524.8 million | $758.3 million | Down $233.4 million |
| Capital expenditures | $244.7 million | $142.1 million | Up $102.6 million |
| Total financial debt | $1,354.0 million | $1,251.8 million | Up $102.1 million |
Cost of sales was $1,483.5 million, or 65.5% of revenue, versus 64.7% in 2017. Operating cash flow fell despite higher earnings; cash and cash equivalents declined to $556.1 million from $630.4 million. Cash, cash equivalents and other current financial assets totaled approximately $868.8 million. The company also reported $481 million of unused, uncommitted working-capital credit lines. Its current ratio was 4.32, and liabilities-to-equity was 1.00, compared with 3.29 and 0.91, respectively, in 2017. The company’s reported net debt measure was $471.8 million, up from $245.5 million.
Cash used in financing was $387.3 million, including $550.4 million of dividends paid; cash used in investing was $187.0 million. The company’s financial statements and internal control over financial reporting received unqualified auditor opinions. Management also concluded disclosure controls and internal control over financial reporting were effective as of year-end.
Material changes versus 2017
- Lithium: Revenue rose 14.0% to $734.8 million, as average prices increased 25.6%; sales volume fell 9% to 45,100 metric tons, partly because the expansion to 70,000 metric tons of annual lithium carbonate capacity ramped up later than expected. Lithium cost of sales rose sharply, reflecting higher Corfo lease payments and full-capacity operation.
- Specialty plant nutrients: Revenue increased 12.1% to $781.8 million, mainly on 12% higher sales volumes; average prices were essentially flat.
- Iodine: Revenue increased 28.9% to $325.0 million, with sales volume up about 5% and average prices up more than 22% to approximately $24/kg.
- Potassium: Revenue declined 29.5% to $267.5 million as sales volumes fell 38.1%. SQM prioritized lithium yields at Salar de Atacama; prices increased about 14%.
- Industrial chemicals: Revenue declined 20.1% to $108.3 million, primarily due to lower solar-salt sales: 47,000 metric tons versus more than 88,000 in 2017.
- Cash flow, leverage and margins: Operating cash flow decreased, debt increased and gross margin narrowed. Administrative expenses increased 16.7% to $118.1 million.
Outlook, risks and unusual items
- Investment plans: The board approved approximately $360 million of 2019 capital expenditures, primarily for maintenance, lithium carbonate and nitrate expansions in Chile, and the Mount Holland project in Australia. Management said external financing was not expected to be required for the 2019 program. SQM expected Chilean lithium carbonate capacity to reach approximately 120,000 metric tons per year by end-2020, with a longer-term target of 180,000; it expected to complete the Mount Holland feasibility study in the second half of 2019.
- Market outlook: Management expected 2019 lithium demand to be at least 20% above 2018 and forecast SQM lithium sales volumes slightly higher than 2018. It cautioned that new supply could pressure prices. Management expected 2019 potassium chloride and potassium sulfate sales below 500,000 metric tons, and solar-salt sales of approximately 50,000 metric tons.
- Salar de Atacama and environmental exposure: Products originating from the salar accounted for 44% of 2018 consolidated revenue. The Corfo lease and project agreements expire in 2030 and carry extensive payment, community, research and operating obligations. 2018 amendments raised lithium extraction and sales authorization, but legal challenges remained pending. A compliance plan reduced brine extraction temporarily; the filing estimated that a 250-liter-per-second annual reduction could reduce potassium chloride production and sales by about 170,000 metric tons annually, while not affecting current estimated lithium output.
- Legal and compliance matters: The Chilean deferred-prosecution process involving SQM and subsidiaries was terminated in August 2018 after agreed payments and compliance commitments. The U.S. DOJ deferred prosecution agreement and SEC order require ongoing compliance obligations; noncompliance could lead to renewed proceedings. A U.S. securities class action remained pending, including a class-certification motion. Other disclosed matters include Corfo-related challenges, tax disputes and environmental proceedings.
- Ownership and governance: Tianqi acquired 23.77% of SQM in December 2018 and competes in lithium. Measures intended to limit access to sensitive information were challenged by SQM as potentially inadequate and were revised after CMF comments. Board resignations left vacancies pending the 2019 shareholder meeting.
- Unusual items: SQM sold its Minera Exar lithium-project interest for $87.5 million in cash, with a further $50 million contingent on project sales goals; the transaction generated reported pretax income of about $14.5 million. Other gains included a $13.7 million reported net gain on investment sales, while an $8.8 million impairment was recorded for the Sichuan SQM-Migao joint venture. Corfo lease-related costs in cost of sales rose to $183.0 million from $46.3 million in 2017.
- Other risks: Management highlighted commodity-price and volume volatility, brine and water availability, permits and environmental rules, Chilean peso and other currency movements, labor disruption, reserve-estimation uncertainty, customer credit risk, competition, cybersecurity and LIBOR transition risk. A material weakness previously identified in controls over payments directed by a former CEO was reported as remediated; management said controls were effective at year-end 2018.
Most important facts for investors to verify
- Whether lithium pricing, sales volumes and expansion ramp-up meet management’s 2019 expectations as new market supply develops.
- How Corfo lease rates, environmental extraction limits and pending legal challenges affect Salar de Atacama output, costs and the 2030 operating horizon.
- Whether the $360 million 2019 capital program, Chilean capacity expansions and Mount Holland development remain on budget and schedule.
- How the decline in operating cash flow, higher debt, dividends and the 2020 bond maturity affect liquidity and capital allocation.
- Progress and remaining exposure under the DOJ/SEC compliance arrangements, the U.S. securities class action, Chilean tax matters and environmental proceedings.
- The final approval and payment of the proposed 2018 dividend: the board recommended a final dividend representing 100% of 2018 net income, subject to shareholder approval.