SQM's Q2 Revenue Drops 19% Amid Lithium Price Weakness

Despite the continued weakness in lithium prices, top global lithium producer Sociedad Química y Minera de Chile (SQM) has shown resilience in its second-quarter performance. Analysts from Bank of America (BofA) note that while SQM's leverage has increased, the company maintains a strong balance sheet. This is largely due to its highly competitive lithium production costs, which allow it to absorb market softness without significant credit deterioration. BofA has given its 34-year bond a "buy" rating.

SQM's second-quarter revenue decreased by 19% year-over-year to 10 billion Chilean pesos. EBITDA fell by 25% to $3.08 billion, with a profit margin of 29.5%, a 2.4 percentage point contraction from the previous year. The lithium business segment continued to face pressure, with revenue dropping by 33% to $4.45 billion despite a stable volume of 53,100 metric tons, a 1% increase year-over-year.

China is expected to play a crucial role in stabilizing lithium prices in the short term. BofA points out that China has committed to "orderly eliminating" 100,000 metric tons of lithium mica capacity this year. If fully implemented, this could theoretically re-anchor the marginal cost pricing at $20,000 per metric ton. Although the execution pace depends on local authorities, the policy signal has made market bears more cautious. Given SQM's lowest cash cost globally (around $4,000 per metric ton), even if prices rebound to the $12,000-$14,000 range, its gross margin per metric ton could still maintain above 70%, showing significant profit elasticity compared to high-cost mines.

BofA has given a "buy" rating to the 34-year bond, reflecting its attractive valuation relative to peers and other Chilean assets. The 29-year and 33-year bonds are rated "market weight" due to reasonable relative valuations. However, the 50-year and 51-year bonds are rated "sell" because they do not offer sufficient yield spread to compensate for the additional duration risk compared to medium-term bonds.