Electric cars are on the rise worldwide. According to forecasts, around 116 million electric cars will be on the roads by 2030. This would mean that the electric fleet would increase more than tenfold within a decade. To achieve this growth, tens of thousands of tons of rare metals such as lithium are needed, which is at the heart of every electric car, the battery. A classic battery with 90 kilowatt hours requires a whopping 13.5 kilograms of the silvery-white light metal.
An important player in this area is the Chilean Sociedad Química y Minera, or SQM for short. The company describes itself as the global leader in the lithium market. The South Americans also play a leading role in other materials such as potassium nitrate, iodine and thermosolar salts. However, lithium is the company's most important material, accounting for almost three quarters of sales. This is hardly surprising given the company's geographical location, as the US Geological Survey estimates that Chile is the second largest lithium producer in the world after Australia.
However, even if the demand for electric cars remains high, and with it the demand for lithium, the chemical giant is currently in reverse gear. Sales fell by 6.6% in the first half of the year, and operating profit even slumped by more than a fifth. Falling average selling prices for the raw material were the main reason for the negative impact on business development. The second quarter, in particular, was marked by a major slowdown. In the period from April to June, the price of lithium fell by almost 37% compared to the previous year and by a third compared to the first quarter.
One reason for the fall in prices is lower demand from the e-car mecca of China. The People's Republic accounts for more than 60% of new registrations worldwide. However, SQM assumes that the low point has now been reached. After the first half of the year, CEO Ricardo Ramos predicted a relatively similar price for the third quarter as in the second quarter. Investors will find out how things actually went in the period from July to September when the figures are presented on November 15. The analyst consensus expects sales to have increased by around 4% and earnings per share to have improved by just over a third to USD 2.77 compared to the previous quarter. Nevertheless, the average estimates predict a decline in earnings for the year as a whole and also for 2024.
Although SQM does not publish any medium-term targets itself, it is clearly setting its sights on growth. The Chileans want to invest USD 2.2 billion in capacity expansion in the coming years, thereby increasing production capacity by 14% per year. Inorganic expansion, i.e. acquisitions, are also part of the company's strategic plan. As recently as October, the Australian lithium mining group Azure Minerals was acquired in full for USD 900 million. SQM previously held a one-fifth stake in Azure. Among other things, the Australians have a 60% stake in the Andover Lithium Project in West Pilbara, which, according to the company, has the potential to be one of the largest lithium projects in the world. The downside is that the project is associated with considerable time, cost and risk.
The stock market is not without risk. This is impressively demonstrated by SQM's chart. From May 2021 to May 2022, the share price more than doubled. This was followed by months of sideways movement, with seismographic swings of the highest order. The share price fluctuated wildly between USD 80 and USD 115, followed by a downward trend that has since taken the share price below the USD 50 mark. As a result, the share is now back at roughly the same level as before the rally. The analysts have now found this too much, with 11 out of 16 research studies resulting in a buy recommendation.
However, investors do not have to enter into a risky direct investment; instead, the high volatility can be used to structure highly attractive barrier reverse convertibles on SQM. This investment solution is also less nerve-wracking as it has a risk buffer and thus gives the underlying a predefined scope for movement. Leonteq has launched two new BRCs on the lithium giant, which are offered in CHF and USD. Both have a comfortable risk buffer of 35%. If the barrier remains intact during the maximum term of 15 months, the maximum profit is achieved. The coupons amount to an above-average 14.4% p.a. for the CHF variant and even 18.6% p.a. for the USD product. The issuer has the right to call the BRCs prematurely after six months at the earliest due to the soft callable function.
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