Chileans head to the polls Sunday, Dec. 17, to cast their votes in a tightly contested runoff election for president that has implications for the mining sector and the world's top lithium producer, Sociedad Quimica y Minera de Chile SA, in particular.
Analysts consider the election outcome as critical to the company, or SQM, in resolving its ongoing battle with the Chilean government's Production Development Corp., or Corfo, over ground leased by SQM in the Salar de Atacama for the production of lithium, among other things, and helping it secure a new contract over the ground.
Salar de Atacama, a brine deposit in Chile, is one of the world's key centers of lithium production that is increasingly important in the manufacture of rechargeable lithium-ion batteries that underpin accelerating growth in the electrical vehicles market.
For several years SQM and Corfo have been embroiled in a bitter dispute that has gone to arbitration over SQM's rights to the lithium-rich brine and issues involving water usage, financial disclosures and lease payments. And beyond the contract dispute SQM faces the looming expiry of the lease itself. SQM's lease extends to 2030 but looks set to expire much earlier as the contract contains a production limit. Analysts and Corfo expect SQM to hit the limit of 958,672 tonnes of lithium carbonate equivalent by around 2023.
If SQM does not eventually get a new contract covering the Salar de Atacama, its lithium production will drop off a cliff, assuming it does not develop other projects in the meantime. It would also lose a highly profitable revenue stream. SQM, which says it controls about 27% of the world's lithium market share, produces all of its lithium on ground it leases from Corfo in the Salar de Atacama with current capacity of about 48,000 tonnes of lithium carbonate and 6,000 tonnes of lithium hydroxide. In a corporate presentation, SQM estimated that 61% of its gross profit in the first nine months of 2017 came from lithium and lithium derivatives.
Election key
The ease of negotiations between SQM and the government will depend on the outcome of the upcoming election, according to analysts. The election, a runoff vote after a first round held Nov. 19 failed to produce a clear winner, pits center-right candidate and former president Sebastián Piñera against center-left candidate Alejandro Guillier, who is considered, policy-wise, the successor to current Chilean President Michelle Bachelet.
For SQM, negotiations might be tougher to resolve under a Guillier government than one led by Piñera, who is considered more pro-business, analysts say. Joe Mazumdar, an analyst and investor with Exploration Insights who has recently taken a close look at lithium investments in South America, sees it that way.
"The chances they could renegotiate ... suddenly changes if they've got a new government in place," Mazumdar said, referring to a possible Piñera government.
Another mining analyst based in Chile, who preferred not to be named, views it in a similar light. "If the left is in power they will continue the process," the analyst said, referring to Corfo's dispute with SQM over contractual obligations now under arbitration. "If it's Piñera they will continue with a [less combative] technical discussion and renew the Salar de Atacama contract, but definitely at a higher cost."
The Chilean analyst, while acknowledging the possibility that SQM could fail to get a new Salar de Atacama contract under a leftist government, expects SQM will eventually succeed in inking one. Like Mazumdar, he noted that lithium production at battery grade is highly technical — creating a high barrier to entry — and that SQM has developed expertise and a workforce with hard-to-come-by expertise.
"They could kill the brine, for sure," the analyst said, pointing to the government's power to decide on a new Salar de Atacama lease for SQM. "But with that you'll be firing a very large labor force, which I don't think is smart, and I don't think that will be good for any government. And the other thing is who going to replace SQM, the know-how?"
SQM declined a request for an interview and did not respond to a list of questions sent Dec. 13 about the lease negotiations and strategy should SQM lose production from the Salar de Atacama. Corfo could not be reached for comment.
But both Mazumdar and the Chilean analyst consider SQM as having started to hedge its bets through investments in other lithium projects, one in neighboring Argentina and the other in Australia. Knowing that production would drop without a new lease in the Salar de Atacama, "what they've been doing is going out and seeking other projects," Mazumdar said.
The Chilean analyst also saw the move as a warning to the government over competition in the lithium sector. That is to say, "If I don't get it here, I'll get the same volume right across the cordillera," the analyst said, referring to the Andes mountain range which, roughly speaking, separates Chile and Argentina.
For Mazumdar, SQM's push for projects outside Chile boosted his interest in lithium investing. Exploration Insights recently bought shares of Advantage Lithium Corp., which holds ground in Argentina in a brine deposit that neighbors a joint venture between Lithium Americas Corp. and SQM. "We just liked the competitive tension," he said.
No frontrunner
So who will win the Chilean election come Sunday, center-right Guillier or center-left Piñera?
To Kenneth Bunker, a political scientist based in Chile, it's a toss up that is impossible to predict. "If anybody says that they know, they're probably lying," he said. There are no recent polls to rely on, he noted, as by law, no polls can be done within 15 days of an election.
Piñera has been perceived as the front-runner, Bunker said, because he had a higher vote share in the first round. But Bunker pointed out that Piñera faced far less competition for right-leaning votes than Guillier did for left-leaning votes, which were spread out among more candidates than on the right.
If you tally votes on the left, Bunker suggested that it's Guillier's election to lose, not Piñera's to win. Still, given a more fractured vote on the left, it may also be tougher for Guillier to rally votes than it will be for Piñera.
"We expect a very close race on Sunday," Bunker said. "It could even be within 200,000 votes."
