New York, January 13, 2020 -- Moody's Investors Service, ("Moody's") has
assigned a Baa1 rating to Sociedad Química y Minera de Chile S.A.'s
("SQM") up to $500 million proposed senior unsecured notes.
The outlook is stable.
Net proceeds from the proposed issuance will be primarily used for liability
management and other general corporate purposes, including funding
the company's capital spending program.
The rating of the proposed notes assumes that the final transaction documents
will not be materially different from draft legal documentation reviewed
by Moody's to date and assume that these agreements are legally valid,
binding and enforceable.
Issuer: Sociedad Química y Minera de Chile S.A.
- Up to $500 million Senior Unsecured Notes: Baa1
SQM's Baa1 ratings are supported by the company's sound market position
in the lithium, iodine, potassium nitrate and thermos-solar
salts markets, with significant cost advantages relative to industry
peers as a result of its access to rich natural resources in northern
Chile. SQM benefits from a broad universe of industries and customers
for its products, which are sold globally for diverse applications
such as plant nutrition, X-ray contrast media, pharmaceuticals,
LCD polarizing film, batteries and alternative energy. SQM's
strong liquidity position also support its Baa1 rating. The company's
narrow commodity product line, relatively small size and high dividend
payout policy in 2015-19, are also incorporated into the
SQM's ratings also consider the company's significant lithium production
capacity expansion in Chile and Australia due in 2021-23.
SQM is undertaking a project in Chile to take lithium carbonate production
capacity to 120,000 MT/year by 2021, with an additional 40,000
MT/year by 2023, up from 70,000 MT today. This project
includes a whole new production facility and its construction will not
interfere with the existing capacity installed. In addition,
the new plant will meet the highest quality standards and requirements
from battery technology industry. Furthermore, SQM's
is also undertaking a project to expand lithium hydroxide capacity,
now working on the first of two new plants of 8,000 MT/year capacity,
that will increase SQM's 13,500 MT/year capacity today.
In addition, SQM's 50% working interest in the Mount Holland
lithium hydroxide project in Australia will contribute with additional
22,500 MT (45,000 MT total) of annual capacity expected by
Capital spending requirements have risen considerably for SQM since 2018
as the company embarked in large projects, mainly for its lithium
business. In this sense, SQM has a total budget of around
$2.1 billion for 2019-2023 capital spending,
$1.3 billion for lithium operations in Chile and Australia
and approximately $800 million for caliche ore operations (mainly
iodine and fertilizers).
The funds from the proposed notes issuance will be used for liability
management and to support funding of SQM's capital expenditures in Chile,
but the company aims to finance its capital spending program mostly with
its own cash generation. Additional cash sources could derive from
a lowering of SQM´s dividend distributions —100% pay-out
ratio in the last few years — or capital contributions, although
the company has made no announcements in this regard and we do not incorporate
any such scenario in our projections for the company. SQM's
dividend policy is approved every year by the Board of Directors.
SQM´s free cash flow has turned negative since the start of the
company's ambitious capital spending program in 2018, and
will likely remain so at least until 2021, because most of the new
capacity in lithium related projects is due in the second half of 2021.
Additionally, we expect SQM's credit metrics to weaken slightly
in 2020 as a result of a fall in the company's EBITDA stemming from
lower lithium prices, but higher sales volumes from its brine operations
—lithium and potassium products— and solar salts, together
with better prices for iodine products, will partially compensate
the fall. However, SQM´s good liquidity profile,
with $1.2 billion in cash and marketable securities as of
September 30, 2019, and the absence of significant debt maturities
until 2023 ($385 million), will support SQM´s cash
requirements until the new capacity comes on line in 2021. Additionally,
the company´s projects in lithium are carried out in separate modules,
which provides SQM´s flexibility over the timing of the disbursing
of capital spending if market conditions change.
Overall, we expect EBITDA as adjusted by Moody's to lower
to around $640 million in 2020, down from $670 expected
in 2019, before recovering to around $750 million in 2021.
Pro forma for the new issuance, we expect Moody's adjusted debt
to EBITDA ratio to rise to around to 2.9x by year-end 2020,
up from 2.6x as of year-end 2019, before lowering
to around 2.4x in 2021. Our projections incorporate a scenario
of lower lithium prices during 2020-21 ($7,800/MT
average for SQM´s lithium segment, down from $9,956/MT
as of the third-quarter of 2019), so the company could deleverage
faster if lithium prices recover or stabilize at higher levels than those
incorporated in our projections.
The stable outlook of SQM's Baa1 ratings is supported by the company's
strong liquidity profile and our expectation that the company will continue
to generate elevated cash flow from operations to support capital spending
derived from the expected capacity expansions in Chile in the coming years.
The ratings could be upgraded if the company were to (1) materially increase
its size; (2) expand its product profile such that it has stable
cash flow generation across industry and economic cycles; and (3)
maintain strong credit metrics, with Moody's-adjusted debt/EBITDA
below 1.0x, EBIT/interest expense higher than 15.0x
and retained cash flow/debt above 30%.
The rating could be downgraded if SQM's operations, size or profitability
is consistently and materially hurt in any way. A deterioration
in its liquidity or credit profile, such as debt/EBITDA above 2.5x
on a sustained basis, could also lead to a downgrade.
Headquartered in Santiago, Chile, Sociedad Quimica y Minera
de Chile S.A. produces fertilizers, iodine and its
derivatives, lithium and its derivatives, and industrial chemicals.
SQM's production assets are located in the northern part of Chile,
but the company sells mainly to export markets, and boasts large
world market shares in its specialty plant nutrition, iodine and
lithium product lines. SQM reported revenues of $2.0
billion for the last twelve months ended September 2019.
The principal methodology used in this rating was Chemical Industry published
in March 2019. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
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Martina Gallardo Barreyro
Corporate Finance Group
Moody's Latin America ACR
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Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
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