Can SQM’s share price survive a fall in lithium prices?

Chilean lithium miner SQM posted massive year-over-year revenue and earnings increases on Wednesday, with increased lithium prices underlying the strength of its Q4 results. However, Goldman Sachs analysts feel that lithium prices could continue falling this year as supply growth outstrips demand.

- SQM posts earnings and revenue beat.

- Analysts expect lithium price to fall as supply growth outpaces demand.

- The Amplify Lithium & Battery Technology ETF is up 11% year-to-date.

Sociedad Química y Minera de Chile’s (SQM) [SQM] share price rose as much as 2.5% in pre-market trading Thursday, after the lithium mining giant posted an earnings and revenue beat in its fourth quarter (Q4) and full-year 2022 earnings.

Full-year EPS rose over 567.3% year-over-year, with lithium revenues driving increased profits.

SQM’s share price has gained 45.3% in the past 12 months, fuelled by higher prices as global EV demand rose and supply chain challenges limited supply. The miner’s shares have gained 10.4% in the year to date, although there has been an 8.7% pull-back over the past month, with prices falling as supply catches up with flagging demand.

SQM expects to invest approximately $1.4bn into increasing its lithium production capacity over the next two years, but during this period Goldman Sachs analysts expect the spot price of lithium to fall as global supply grows faster than demand.

Lithium charged

SQM reported EPS of $4.03 for Q4, a 256.6% year-over-year increase and 8% above the consensus estimate of analysts polled by Refinitiv. Revenue of $3.1bn marked a 189% year-over-year increase, and exceeded analyst expectations by 4.7%. Q4 adjusted EBITDA margin rose slightly year-over-year to 53.2%, from 51.6%.

For the full year, SQM’s revenue rose 274.21% to $10.7bn, exceeding analyst expectations by 1.8%. Full-year EPS of $13.68 marked a 567.3% year-over-year increase, and exceeded analyst expectations by 3.1%. Adjusted EBITDA margin for the full year rose to 54.5% from 41.4%.

Quarterly lithium and lithium derivatives revenue rose 457.8% year-over-year to $2.5bn. Full-year lithium revenues increased 771% to $8.2bn.

The impact of higher lithium prices on these results is demonstrated by the fact that, for the quarter, SQM’s lithium production volumes only increased 38%, while for the full year they rose 55%. Lithium and derivatives made up approximately 79% of SQM’s consolidated gross profit for the full year.

Capital expenditure for the 2023-25 period is expected to total $3.4bn, with $1.4bn of this total going towards increasing its lithium production capacity in Chile to 210,000 metric tonnes from a current run rate of 180,000 metric tonnes. $450m of this expenditure will be spent on the Mt. Holland project, which is expected to begin producing spodumene (lithium ore) by the end of 2023, and lithium hydroxide in the first half of 2025.

Supply accelerating

SQM’s CEO Ricardo Ramos credited his company’s “extraordinary results” to increasing demand for electric vehicles.

“As electric vehicle sales continue to grow,” he wrote in the results release, “we now expect the lithium demand to reach almost 1.5 million metric tons by 2025.”

While lithium prices rose in 2022, however, they have reversed so far in 2023. Having reached a high of 425,000 Chinese yuan per tonne in November, Chinese lithium prices then fell 29% over the next three months.

Chinese battery maker CATL [300750.SZ] has recently offered discounts that imply a halving of global lithium carbonate prices. While demand for EVs in China has slowed, supply of lithium globally has picked up rapidly.

Analysts from Goldman Sachs expect the global supply of lithium to rise 34% by 2025, with demand only picking up 25% during that period, prompting the price to fall to $34,000 per tonne within the next 12 months.

SQM’s results predicted a 20% uptick in lithium demand during 2023 compared to 2022, driven in part by the incentives contained in the US Inflation Reduction Act. While this may not prevent a downturn in lithium prices, it is worth noting that current Chinese lithium prices are still eight times higher than they were two years ago, and well above the cost of production.

Funds in focus: Amplify Lithium & Battery Technology ETF

According to Amplify ETFs, the lithium-ion battery market will grow from approximately $44.2bn in 2020 to $94.4bn in 2025, at a CAGR of 16.4%.

Amplify ETFs aims to capture this growth potential with its Amplify Lithium & Battery Technology ETF [BATT]. As of 2 March, the fund has a 1.68% weighting in SQM.

BATT is down 17.9% in the past 12 months, but has gained 10.8% in the year to date.

Alternatively, investors can select the Global X Lithium & Battery Tech ETF [LIT], which offers greater exposure to SQM, the fund’s eighth-largest holding with a ​​4.43% weighting as of 1 March. CATL is the third largest holding in BATT and the fifth largest in LIT.

LIT has fallen 13.9% in the past 12 months, but is up 9.4% in the year to date.

Analysts polled by Refinitiv yield a consensus 12-month price forecast of $110.50 for SQM, implying 25.3% upside from its recent closing price of $88.16 on 1 March.