The Case For Sociedad Quimica y Minera de Chile (NYSE: SQM) By: Frank Calo (2/26/14)

Company Background: Chemical & Mining Company of Chile Inc. engages in the production and distribution of specialty plant nutrients, iodine and its derivatives, lithium and its derivatives, potassium chloride and potassium sulfate, industrial chemicals, and other commodity fertilizers. The company sells its products through a distribution network in approximately 100 countries worldwide. Chemical & Mining Company of Chile Inc. was founded in 1968 and is headquartered in Santiago, Chile. Price: $27.20 Market Cap: $7.3 billion USD 2012 10-K Revenue: $2,429,160,000 USD 2012 10-K Profit: $657,369,000 USD P/E Ratio: 11.1 Dividend: $1.20 (4.4%) Additional Company Information: 1. The company is the worlds largest producer of specialty chemicals. They are the world leader in iodine production used for LCDs and X-Ray machines and pharmaceuticals, with a 34% market share compared to under 5% for the average US company. 2. The company is the leading producer of Lithium in the world, most commonly used in batteries, electric vehicles, and as lubricants. It enjoys a 35% market share of this industry. 3. The company is also the worlds largest producer of sodium salts, which are used to store energy from solar thermal collectors and are significantly more efficient at converting electricity than its counter-part which is photovoltaics. 4. SQM is also a major supplier of potash, which is commonly used in plant fertilization, representing over 20% revenue and over 20% of its profits. 5. The company is the worlds leading producer of specialty plant nutrients from sodium nitrates, potassium nitrates, sodium potassium nitrates and specialty blends. These allow the agricultural industry to shift the way certain crops are given its nutrients to improve crop yields. It enjoys a 46% market share here. The Bull Case for SQM: 1. I think the company is poised for major growth in the lithium industry after Tesla Motors announcement to build the Gigawatt battery factory. The factorys plans will more than double the worlds current battery production capabilities. The most commonly sought battery for practical applications is the Lithium-Ion battery due to it being the lightest metal on the earth and most efficient for storage and recharging of energy. With SQM being a market leader here it stands to gain strongly from the increased demand of Lithium.

2. The company is also poised for major growth in the sodium salts sector as solar energy begins to take off. Sodium salts are significantly more efficient at converting energy than photovolatics, which make it more worthwhile for companies to utilize. The CEO of Tesla Motors also has a 25% stake in Solar City, which is the largest solar home installation company in the US. He envisions installing larger batteries in addition to solar panels at the house to store excess energy for usage either at night or to sell back to the national energy grid during peak times. This reduces the inefficiency currently seen in the U.S. utility industry that have to ride a thin line of producing enough power to satisfy peak times while not overproducing it to the point of waste. There could be an entire disruption of the utility industry to which SQM stands to benefit from. 3. SQM operates with USD as its official currency since it exports almost all of its products, but pays the majority of its staff in Chilean Pesos (CLP). They do utilize derivative instruments to hedge certain commodities and currencies. However, the US monetary policy is currently in a tightening stage with tapering expected to continue and fed interest rates expected to be raised in 2015. This will cause the CLP to decline in value, which actually works to SQMs advantage is its costs of production will b ecome cheaper relative to the value at which it sells its products. 4. Shareholders voted to require SQM permanently pay out 30% of its annualized net income as dividends bi-annually. This is representative of a shareholder friendly company. 5. Within the company bylaws, no single person or entity is allowed to own over 1/3 of the company at any given time. Potash Corp, (POT) the worlds largest potash producer, currently holds a large stake in SQM and appears interested in increasing its stake. Due to the restriction, it seems more plausible for a potential acquisition to occur in which case POT would have to initiate a significant premium in a tender offer to current shareholders. 6. Finally, the government is consistently increasing its air defense capabilities in the form of drones. They are currently in the testing phase of a drone with a HELLAD laser attached. Lithium Ion batteries could play a large role here in both powering the drones, as well as providing a power source for the laser itself. This would be significantly cheaper than producing missiles. Laser focused beams also reduce collateral damage caused by dropping bombs on a region. Beyond the Bull Case: The company is still highly profitable and debt free without any positive catalysts. It is also trading at a P/E ratio well below the current markets average, resulting in it appearing to be highly undervalued. The main reason for its decline in value is due to an issue relating to the potash industry, where prices were driven down considerably due to conflict in other nations. However, the global potash price seems to be increasing and due to the companys diversification into so many alternative indust ries this represents only a minority of the companys revenue and profit regardless. I believe it was highly oversold as a result of this. I anticipate this to be a long term buy and hold, as the primary catalyst coming from the Gigawatt factory wont begin to be realized until 2017 on its income statement/balance sheet. There should be momentum stock growth based around some of this analysis as people start to come to the realization of the growth potential at this company. Summary: A profitable, debt free company with consistent growth, with bi-annual dividends, and tremendous potential in their lithium mining and production for batteries, that may not even be as large as the growth potential in the solar sector for its sodium salts mining and production business.