Due to persistently weak lithium prices, Sociedad Quimica Y Minera De Chile SA (SQM.US), one of the world's top lithium producers, delivered disappointing second-quarter results. Bank of America believes that despite rising leverage ratios, Sociedad Quimica Y Minera De Chile SA maintains a robust balance sheet - its highly competitive lithium production cost advantage enables the company to absorb weakness in the lithium market without significant credit deterioration, assigning an "overweight" rating to its 34-year bonds.
Sociedad Quimica Y Minera De Chile SA's second-quarter revenue declined 19% year-over-year to $1 billion. EBITDA fell 25% year-over-year to $308 million, with profit margins dropping to 29.5% (contracting 2.4 percentage points year-over-year). The lithium business segment remained under pressure, with revenue declining 33% year-over-year to $445 million despite relatively stable sales volumes of 53,100 tons (up 1% year-over-year).
China may become a key variable for short-term lithium price stabilization. Bank of America notes that China has clearly stated it will "orderly phase out" 100,000 tons of spodumene capacity this year. If fully implemented, this could theoretically re-anchor marginal cost pricing at $20,000 per ton. While execution pace still depends on local authorities, the policy signal has made market bears more cautious.
Considering Sociedad Quimica Y Minera De Chile SA has the world's lowest cash costs (approximately $4,000 per ton), even if prices rebound to the $12,000-$14,000 per ton range, its gross profit per ton can still maintain above 70%, with profit elasticity significantly superior to high-cost mines.
The bank assigns an "overweight" rating to the 34-year bonds, reflecting their attractive valuation relative to peers and other Chilean assets. It gives "market weight" ratings to the 29-year and 33-year bonds due to their reasonable relative valuations, while assigning "underweight" ratings to the 50-year and 51-year bonds because these bonds fail to provide sufficient spread to compensate for the additional duration risk they carry relative to medium-term bonds.