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SQM: A stock to own as electric vehicles take over (NYSE: SQM)

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From the dusty, rocky landscape of the Atacama Desert in northern Chile, the Sociedad Química y Minera de Chile (New York stock market :NYSE: m²) product brine lithium carbonate. The company is the largest public company in Chile, highlighting the the importance of mining to the relatively prosperous Andean nation.

SQM business segments

SQM is not a pure lithium player as it derives only about 67% of its gross profits from the alkali metal, with the rest coming from four other operating divisions, including industrial chemicals and potassium. The company has soared in recent months on a number of positive catalysts that promise to maintain the upward momentum that has led SQM to a record market capitalization of just over $32 billion.

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The first catalyst came from the signing of the mammoth Inflation Reduction Act. This will result in an unprecedented level of US government budget spending on zero-carbon industries. A sizable $370 billion has been slated to be invested over the next decade through 2032 in any such initiative that brings the United States closer to its carbon reduction goals. The scope of the Act encompasses the main drivers of demand for SQM.

First, it will extend a $7,500 electric vehicle tax credit and also aims to catalyze greater expansion of wind and solar power projects. This will see greater demand for lithium from the storage of short-lived lithium-ion batteries needed to smooth out the intermittency of renewables. Also, because Chile has a free trade agreement with the United States, the country is on its way to becoming a major supplier to this massive US decarbonization effort.

Second, Chilean voters went to the polls to reject a proposed new constitution. Had it been enacted, the constitution would have placed greater emphasis on strong environmental protections and other ill-defined measures for climate justice to radically reform the country’s mining sector. Therefore, his defeat was seen as the removal of what could have quickly become regulatory hurdles to SQM’s operations in Chile.

SQM’s structural demand drivers are extremely powerful. Decarbonization has become the gospel for governments around the world who have now begun to lay the foundations for long-term decarbonization. The future is clear, the world is about to see lithium demand reach levels never seen before and SQM is likely to drive that demand to new heights.

Lithium prices hit new highs as a new clean energy orthodoxy is built

The company last reported earnings for its second quarter of fiscal 2022, which saw revenue of $2.6 billion, a 342.2% increase from the 2022 quarter. previous year and an overrun of $257 million over consensus estimates. This surge was driven by lithium prices growing in the quarter to $54,000 per MT from $38,000 per MT in Q1 2022 and $6,800 per MT in the prior year quarter. There was also an increase in sales volume to 34,000 MT from 24,000 MT a year ago, although down from 38,000 kMT in the previous quarter.

SQM Quarterly lithium sales volume and average price and

Net income jumped to $859.3 million, up 856% from $89.8 million in the year-ago quarter, but slightly below consensus estimate of $876.4 million. This resulted in a 108% increase in cash from operations over the prior year quarter to $412.6 million. A move that helped support a quarterly dividend payout of $1.85 per share. As SQM has a variable dividend policy, these large payouts are expected to continue as long as lithium prices remain strong and the company is able to meet its lithium production targets.

Indeed, the company has revised its lithium sales forecast upwards to 145,000 MT against a previous forecast of 140,000 MT. This was to reflect growing demand for lithium from automotive industries as the transition to electric vehicles accelerates.

Electric vehicles have become critical post-pandemic economic mainstays

The list of states and countries on a planned phase-out of combustion engine vehicles continues to grow. Recently, New York joins California by legislating for all new vehicle sales to be zero emissions by 2035. This puts two of America’s largest economies on the same path as the European Union, the United Kingdom, Japan and South Korea. Basically, these phase-outs send a signal to automakers to transition their production lineup ahead of time. This advances SQM’s total addressable market.

The historic growth of electric vehicles has been significant. For example, only 120,000 electric vehicles were sold globally in 2012. Last year, that figure was sold within a week, with 10% of cars sold in 2021 being electric, 4 times the market share in 2019 More generally, against strong sales momentum, electric vehicles are planned. reach at least 26.8 million by 2030, up from 6.6 million in 2021.

The demand for lithium is rapidly growing exponentially and all SQM has to do is sit back and let it generate outsized profits for years to come. The company faces a promising future with Chile’s draft constitution in the rearview mirror and the Inflation Reduction Law due to come into effect next year.