New York, September 01, 2020 -- Moody's Investors Service, ("Moody's") has
changed Sociedad Química y Minera de Chile S.A.'s
("SQM") outlook to negative from stable and affirmed the Baa1 of SQM's
senior unsecured notes.
The change in SQM's outlook to negative reflects our view of high
uncertainty over the future performance of the company's lithium
revenues given downward pressure on lithium prices, which are key
for the company to be able to deleverage and return to levels below our
downgrade trigger of 2.5x in the next 12-18 months (3.2x
as of the last twelve months as of June 2020). The negative outlook
also reflects our concern over SQM's large dividend payouts,
which have contributed to the company's negative free cash flow
generation since 2018.
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 broad diversification in terms of business segments,
clients and geographies have been supporting the company's operating
performance during the Coronavirus pandemic and partly offsetting the
very low lithium prices. For example, in the first half of
2020 SQM posted higher revenue and operating margin in its iodine and
industrial chemicals business segments. Although demand for iodine
declined as a result of the pandemic, the increase in prices more
than compensated the fall in units sold and gross profit rose by 30%
relative to a year earlier to $92 million. In addition,
higher solar salts sales, resulting from a three year contract to
supply solar energy plants in the Middle East, more than doubled
the industrial chemical segment´s revenue to $74 million
and gross profit to $21 million in same period.
However, falling lithium prices since mid-2018 have reduced
the segment's contribution to gross margin to 15% or $37
million in the first half of 2020 from 42% or $120 million
in the first half of 2019. Furthermore, lower demand from
Asia as a result of the coronavirus pandemic has prevented SQM from expanding
lithium sales volumes in 2020. Since mid-2018 lithium prices
have dropped considerably, to around $7.000/MT today
from around $16.300/MT in 2018 (SQM's realized price),
reflecting growing lithium production capacity (from Australia in particular),
that in turn led to excess supply in 2019. The fall in lithium
prices was also aided by lower than expected growth for Lithium-ion
batteries demand derived from lower than expected growth in electric vehicles´(EV)
sales in 2020 as a result of the coronavirus pandemic. It is highly
uncertain how the EV market will perform in the next few years,
particularly because the sector is highly dependent on government incentives
for new vehicle purchases, mostly in China. Therefore,
the trajectory for lithium prices is also very uncertain. Still,
SQM´s low cost position among lithium producers is a key competitive
advantage that will allow the company to remain profitable even under
a stressed lithium price environment.
SQM´s free cash flow generation has been negative since the start
of the company's ambitious capital spending program in 2018,
and we expect it will remain so at least until 2021-2022,
because most of the new capacity in lithium related projects is due in
the second half of 2021. Furthermore, SQM's high dividend
payout will also continue to contribute to negative cash flow generation.
SQM's has a significant lithium production capacity expansion underway.
The company plans to take lithium carbonate production capacity to 120,000
MT/year by the second half of 2021, from 70,000 MT/year 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 by
2021, now working on the first of two new plants of 8,000
MT/year capacity, that will increase SQM's 13,500 MT/year
We expect SQM's credit metrics to weaken in 2020 driven by weaker
performance in the lithium segment, partially compensated by higher
iodine and solar salts revenue. Overall, we expect EBITDA
as adjusted by Moody's to be around $630-650 million
in 2020, similar to the $646 million in 2019, ending
the year 2020 at around 3.0x debt to EBITDA ratio, up from
2.8x as of year-end 2019, which are above our downgrade
trigger of 2.5x. We expect EBITDA levels to recover in 2021-2022
as the company's lithium projects ramp-up and leverage metrics
lower to around 2.7x in 2021 and 2.1x in 2022.But
we believe there is downside risk to this scenario stemming from the uncertainty
over the performance of the lithium market in the next few years,
which is where SQM's is concentrating most of its investment efforts.
Our base case projections incorporate a scenario of lithium carbonate
prices at $6,800 /MT average during 2021-22,
so the company could deleverage at a slower pace if lithium prices fall
below these levels.
SQM´s good liquidity profile, with $1.1 billion
in cash and marketable securities as of June 30, 2020, and
the absence of significant debt maturities until 2023 ($383 million),
will support SQM´s cash requirements until the new capacity comes
online 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
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if the company were able 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%. SQM´s
negative outlook could be stabilized if the company is able to deleverage
debt to EBITDA to levels closer to 2.0x-2.5x and
increase interest coverage as measured by EBITDA to interest expense above
10.0x (7.6x as of the last twelve months ended June 2020),
while maintaining its overall good credit profile.
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 the inability to return to
debt to EBITDA closer to 2.0x-2.5x on a sustained
basis, could also lead to a downgrade.
The principal methodology used in these ratings was Chemical Industry
published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
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 $1.8
billion for the last twelve months ended June 2020.
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Martina Gallardo Barreyro
VP - Senior Analyst
Corporate Finance Group
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Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
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