New Chilean lithium rules; Q1 earnings keep failing to lift sentiment New Chilean lithium rules; Q1 earnings keep failing to lift sentiment New Chilean lithium rules; Q1 earnings keep failing to lift sentiment

New Chilean lithium rules; Q1 earnings keep failing to lift sentiment

Peter Garnry

Head of Saxo Strats

Summary:  Lithium is one of the most important metals driving the electrification over the coming decade and investors are showing interest in the industry. Last week, it was announced that the Chilean government will soon release their new regulation framework for the lithium industry which will include a new state lithium mining company. The initial reaction in SQM and Albemarle shares was quite negative. We take a look at the industry and what it means for these two miners. We also provide a quick takeaway of today's earnings releases.


Lithium outlook is unchanged despite Chile’s state involvement

On Friday we published a bigger research note on the global lithium market focusing on the opportunities and risks involved. However, not long after publication a press release revealed that Chilean state-owned copper companies Codelco and Enami are in talks with the private sector to expand lithium production. The government participation in lithium through Codelco and Enami is the short-term involvement before Chile sets up a national lithium mining company. Gabriel Boric, the leftist President, is expected to soon deliver a new lithium development strategy for Chile which will mean a new state lithium mining company. Chile is attempting to attract capital to its lithium industry to expand production to ensure more tax revenues while protecting the environment. Today, Chile’s production is split between SQM and Albemarle, and the media news was laid out as a nationalization of lithium mining in Chile causing shares of SQM and Albemarle to fall 17.8% and 10% respectively on Friday.

SQM and Albemarle share price | Source: Bloomberg

The market’s initial reaction was negative for SQM and Albemarle, but the reality is that Chile is in need of new rules around its lithium resources. Lithium is classified as ‘a critical metal’ which under the current rules from the 1970s mean that the government is not issuing new exploration licenses. This naturally prevents production to increase to its full potential and as such Chile has been losing global market share to 25% and expected to see it dropping to just 10% by 2030 if nothing changes. While the media has portrayed the new rules as a nationalization it is more likely going to be a new hybrid model with government involvement but also private sector involvement. Several sell-side firms say that the new lithium framework may be marginal positive for SQM and Albemarle. Time will tell whether the market agrees. The only thing everyone can agree on is that the new Chilean lithium framework will mean more lithium supply by the end of the decade.

If we look at the outlook for lithium then it still looks strong. Lithium demand will mostly be driven by demand for lithium-ion batteries in the future which is driven by electric vehicles. There are many different demand forecasts and judging by the EV adoption rate our view is that the demand forecasts are too low and that the industry will continue to an explosive growth rate until 2030 constantly creating demand picture that is stronger than available supply. The growth in EV deliveries was around 52% y/y in Q4 and judging from forward looking indicators growth will slow but not by much this year.

The table below shows the largest publicly listed lithium mining stocks. Note the high revenue growth rate and very attractive operating margins. Sell-side analysts are also very positive on the industry and we know from statements from BHP Group and Rio Tinto that the biggest miners in the world are looking for acquisitions in the industry.

The biggest lithium mining countries in the world in 2021 were:

  1. Australia (53%)
  2. Chile (25%)
  3. China (13%)
  4. Argentina (6%)
  5. Others (3%)

Based on identified lithium resources the five biggest countries in 2021 are:

  1. Bolivia
  2. Argentina
  3. Chile
  4. United States
  5. Australia

Disclaimer: the analyst owns shares in SQM

Earnings take-aways

Many companies have reported earnings today and below are our short summary and views. Remember as well, that the two most important earnings releases today after those from Alphabet and Microsoft expected after the US market close. You can read our preview from yesterday here. The short summary of Q1 earnings so far and also judging from market reactions today, the Q1 earnings have not been the positive catalyst investors were hoping for.

  • Banco Santander: Q1 net income better than expected driven by strong net interest income growth leading to return on tangible equity of 14.4% vs est. 12.4%. So negative developments are deposit outflows in the Spanish business and a profit miss in Brazil. The banking trade is not coming back just yet.

  • Nestle: Higher than estimated organic revenue growth driven by strong pricing. The result shows that mega caps in the global consumer staple sector are strong defensive stocks for investors.

  • Novartis: Q1 revenue and earnings above estimates and the Swiss-based pharmaceutical company is raising its 2023 forecast. Planned Sandoz spin-off is on track for 2H. The results confirm the positive momentum in the industry and for Novartis.

  • UBS: Q1 net income is $1.03bn vs est. $1.86bn with revenue also disappointing against estimates. ROTE is down to 8.1% vs est. 14.6%. Some of it is driven by provisions for RMBS litigations of $665mn. Buybacks have been paused for now to manage liquidity and balance sheet while UBS absorbs Credit Suisse. The results show that there will be a lot of noise going forward and especially with the integration of Credit Suisse.

  • Spotify: Strong Q1 results with monthly active users growing 22% y/y to 515mn and premium subscribers growing 15% y/y to 210mn. Both figures are well above consensus estimates. On the negative side the streaming service delivered an operating loss of €156mn in Q1. Investors are pleased despite lower profits in the short-term as the Q2 outlook on paying and active users are above consensus suggesting growth is picking up. Overall, Spotify is still a company that is lacking to find its feet and become super profitable.

  • UPS: Weaker than estimated revenue and earnings in Q1 driven by lower pricing and weaker volume. Outlook on revenue and operating margin is at the low end and UPS expects volume to continue being under pressure. UPS is also indicating that US retail sales have disappointed. From a macro perspective this result is slightly worrying.

  • PepsiCo: Impressive Q1 results with both revenue and earnings easily beating estimates while increasing the fiscal year outlook for organic revenue growth to 8% from previously 6%. Unlike UPS, this result shows that the beverage and snacks segment is still doing great and consumers are not holding back despite of inflation.

  • GE: Better than expected Q1 earnings and GE is raising its free cash flow guidance for 2023 slightly at the low end of the forecast range. Renewables segment will still be operating at a loss in Q2 on par with Q1. Results underscore that industrial demand is quite stable at this point.

  • 3M: More senior leadership changes at 3M and announcement of additional 6,000 job cuts. The industrial company is still facing cost headwinds as it aims to restructure its business. Company still sees -2 to -6% revenue growth this year and consumer-facing end-markets are still weak. From a macro perspective not the most uplifting earnings release.

  • McDonald’s: Impressive Q1 results with both revenue and earnings significantly above estimates with comparative Q1 revenue growth of 12.6% vs est. 8.2% indicating that consumers are accepting higher prices with little demand destruction as a result. McDonald’s is expecting an operating margin of 45% this year. The results just underscores that McDonald’s is a fantastically well-run company.
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