Sociedad Quimica y Minera (ADR) (SQM)

The run up in fertilizer stocks look to be heading for a bubble, it's hard to believe that they can keep running, but looking at fundamentals it is hard to argue that 2008 will be a great year for fertilizer. Potash and phosphate are through the roof and even China is making concessions with respect to pricing as shortages are crimping supplies all over the world. How far it will go is anyone's guess, but there is nothing that would indicate that the market will loosen anytime soon. Demand had been steady for many years and most of the players had maintained their position with little by the way of increases in earnings. These stocks use to be more dependable with little up or downside giving standard returns to investors. Most investors were farmers who used these stocks to hedge pricing with respect to their crops. That is all about to change. As fertilizer prices skyrocket, the United States is already planning a huge soybean crop next year as they are trying to get better margins, but we may find more corn will be grown than expected pushing fertilizer prices higher, even if we don't world demand will push the price without our help. Their stronger currencies give them an advantage over US buyers.





With the worldwide commodity boom we will see other specialty areas grow as well as demand increases. SQM seems to be very well suited in today's environment. They are an $8 billion market cap company that has 49% of their revenues from fertilizer and a 49% market share in that category. They also produce iodine and have a 29% market share while receiving 18% of their revenues from this group. Lastly, they produce lithium and have a 31% market share. 15% of their revenue comes from lithium. 18% of revenue comes from trading derivatives with respect to chemical and fertilizer markets. This company is also located in Chile which has a red hot economy now, and looks to continue to grow going forward. United States export growth to the country was incredible last year on the weak dollar as it grew close to 30%.





SQM is a world wide leader and exports its goods to over 100 countries. They have their business located in 22 countries and expanding. They export 24% of their goods to North America, 15% to Asia, 20% to Europe and 8% to Africa. This diversification protects them from any regional downturn. Their product diversification is also good with respect to downside. Their fertilizer business is great and the majority of their production. Their iodine is a very steady market that focuses on biocides, and in some cases is the only thing that will kill some of the super bugs out their. Lastly, lithium ion batteries were developed because they do not have a memory, which means that you can recharge at anytime without worrying about damaging the holding capacity of the battery. This technology looks to have continued growth going forward.





Their business has seen consistent growth with respect to revenue, over the last five years they have grown at 17% a year. In 2003, they had $692 million and now $1.2 billion. Over the same period, EBITDA has increased by 20% a year, from $149 million to $357 million. Net income is growing at 35% a year and has more than quadrupled. Net debt/EBITDA has seen a marked decrease and sits at .9.





Focusing on their different product lines plant nutrition is by far the most important. To understand their growth in this area we look at 1988 when SQM had 20% market share and had a production of 370,000 million tons. Last year their market share was at 49% and growing. On top of market share, demand is increasing at almost 5% a year. 40% of their nutrition is used with respect to vegetables, 25% fruits, 20% industrial crops and 15% other. Potassium nitrate has had steady growth with respect to pricing. It looks as though it has not seen its true pricing yet as it has been outpaced by potash. Advantages of their production are it is 100% natural, absorbs fast, fully water soluble, chlorine free, and reduces soil acidity. Since 2003 revenues have almost doubled. In 1995, both potash and potassium nitrate were selling for equal amounts, since then potash is up more than 100% more than potassium nitrate and it is only a matter of time before they see an equal amount.





Since 2000, SQM has taken 2% market share with respect to iodine. It's top usage is x-rays which are being done more all over the world with increased GDP in emerging countries. Biocides are second. Pharmaceuticals, nutrition and LCD screens all use this and it is increasing every day. On top of their market share gains they also realize world demand growth of over 6% a year. They have proven reserves of iodine that will last for over 30 years. These reserves are based on only 15% of their current mining estimates. Relative pricing of Iodine is up 50% in the last 7 years.





In the last ten years, SQM has picked up 15% market share with respect to lithium. World demand is 7.5% going forward and increasing on the current rechargeable and fuel cell market. This has made lithium revenues the star of this company. The second half of this year they plan to increase production by fewer than 30% on demand. In the past five years, revenues are up 350%. Even with Chinese producers increasing demand for the next three to four years, demand will outpace production. Since 2004, the price has increased over 3 times on uses such as batteries, grease, aluminum and pharmaceuticals. Even more positive is the switch to lithium for use in Toyota hybrids. Right now hybrids only make up 1% of vehicle production at 600,000 units, by 2015, we could see up to 3 million vehicles produced. Toyota plans to switch to lithium by 2010.





In my estimate, sometime this year this stock will really take off on increased usage of fertilizer. With all aspects of this company rolling it is a good short or long term play.