SQM‘s (NYSE:SQM) recent first quarter earnings report includes some very positive guidance. The company experienced robust demand in the lithium market during the first three months of the year. This demand for lithium continues to be driven mainly by battery growth, the historical demand driver for the lithium market. Prices in this business line during the first quarter of the year were over 16 percent higher than average prices during the first three months of last year.
Positive lithium operating environment
The company offered encouraging forecasts for the lithium market in the current year, including the potential for battery demand to increase by over 20 percent. As a result, SQM anticipates sales volumes for lithium and derivatives to increase over 10 percent and reach sales levels higher than those recorded last year. SQM also anticipates rising lithium prices throughout the year.
Potential competition for lithium resources
During the quarterly conference call to discuss earnings, SQM CEO Patricio Contesse G. explained current demand for lithium, commenting, “[l]ithium has been very strong in China.” Industry stakeholders and analysts have observed that Asian strategic interests and sovereign wealth funds have been scouring the globe acquiring mineral and energy resources. Lithium is an area that has also generated some interest in the past. Yael Selfin, head of macro-consulting and a director on PwC’s economics team, indicated the potential for sovereign wealth funds to increase exposure to the lithium industry, stating, “[w]e are likely to see further increases in non-commodity funds such as those financed by trade or fiscal surpluses and changes in the types of commodities that finance Sovereign Wealth Funds. Different countries and commodities such as lithium may grow in importance. Chile, Argentina, and Bolivia are thought to have the world’s largest lithium reserves so may benefit from the rising popularity of electric cars.”
An encore performance
Last month, SQM delivered growing revenues from lithium sales amounting to $183.4 million, representing nine percent of the company’s total revenue. Expanded sales of 22.8 percent within the lithium business were due to higher sales volumes resulting from “healthy demand,” primarily the result of rechargeable battery products and applications related to construction, including ceramics and glass. The annual filing also indicates that other producers experienced some supply constraints during part of the year, allowing SQM to strengthen its position as the leader in lithium carbonate supply.
Sign of confidence
Guidance statements and earnings expectations have always played a critical role in market perception and the valuation of corporate securities. SQM’s first quarter report is relevant for investors and junior exploration companies because it demonstrates the leading lithium producer’s confidence in the value of lithium. As the lithium prices from other producers have been increasing, more projects may become economically feasible and companies may realize the improved investment opportunity. This interest could stimulate capital interest and result in increasing positive market valuations.
Securities Disclosure: I, Dave Brown, hold no direct investment interest in any company mentioned in this article.