Santiago — The Chilean government’s plan to create public-private partnerships focused on lithium exploration and exploitation, under a strategy announced by President Gabriel Boric in April, is ‘neutral’ to ‘positive’ for the credit profiles of incumbent players in Chile, according to Fitch Ratings.
In a note, the ratings agency said it expects the national lithium strategy will not provide the expected boost to the industry, given that private companies are “unlikely to invest significant capital to develop lithium projects through state-controlled consortiums”.
The new policy aims at the creation of public-private companies for lithium production, to be controlled by the state through state-owned copper-mining company Codelco (A-/Stable).
According to Fitch, the plan seeks a “material and comprehensive” reorganization of the existing public-private agreement on the production of the key mineral for making electric vehicle batteries, but not a nationalization because the resource is already reserved for the state since it was declared non-concessionable in 1979.
However, the strategy must still be approved by Congress, where the ruling party lacks a majority.
“It is likely to undergo several changes before becoming law,” the ratings agency stated.
The government currently has lithium-extraction contracts with two private companies: Sociedad Química y Minera de Chile (SQM) and Albemarle.
Both companies, through leasing contracts, are allowed to extract and produce chemical lithium in the Salar de Atacama salt flats, producing a high-quality mineral with the lowest production costs in the world.
The contracts are conditioned to a maximum amount of lithium to be extracted until the contracts’ expiration, which would be in 2030 for SQM and in 2043 for Albemarle.
In addition, these contracts are revenue-based and consist of a progressive marginal fee on the price of lithium chemicals, which can reach up to 40% for the tranche in which the price of lithium carbonate exceeds $10,000 per ton.
These have been very profitable for the state, given the exceptionally high lithium prices in recent times, with no investment expenditure required and no operational risk taken, according to Fitch.
SQM contributed $5 billion to the Chilean treasury, including taxes, in 2022, when the spot price of lithium carbonate was $71,200 per ton, despite SQM’s long-term sales contracts at below spot prices.
This amount represents 1.3 times the net profit of the private mining company, and was double the amount contributed by state-owned Codelco.
SQM, the world’s largest lithium producer, has a robust negotiating position that is linked to the fact that it is producing “good quality” material, amid Chile’s anxiety to accelerate its lithium strategy to “capitalize on the extraordinary conditions” of this market before the end of this opportunity.
“Prices could be pressured by new global supply that is scheduled to come online from several ongoing projects, in addition to ongoing work to find lithium substitutes and increase recycling activity,” Fitch noted.
The agency expects SQM to be positively impacted by the national lithium strategy, which is in discussions around the new agreement.
Although the exact contours of the deal are still undefined, the rating agency projects that SQM securing lithium production at a very competitive cost beyond 2030 will likely offset negative considerations related to greater public participation in the company’s current operations at Chile Lithium.
“Conversely, in a negative negotiation outcome, SQM could continue to exploit the Salar de Atacama until 2030, but with greater future visibility that would allow the company to adjust its strategy to face what is to come at the end of the decade.”
Fitch Ratings also warns that the short to medium-term impact of the national lithium strategy on Albemarle is likely to be limited. Albemarle’s production rights expire 13 years after SQM’s contract.
“The diversification of Albemarle’s operations should provide some additional strategic flexibility in its future discussions with Codelco,” he explains.
The state-owned miner is the world’s largest copper company and, under the Chilean government’s new plan, would manage the world’s largest lithium reserves.
“The improved diversification is positive from a credit standpoint, and the move will continue to increase the company’s importance to the government,” Fitch stated.
Fitch believes that any benefits from controlling Chile’s lithium supply will likely accrue to the state, given the South American country’s growing social demands and given a 50-year history of the state extracting almost everything from Codelco.
Codelco has contributed around $169 billion to the nation’s budget, while the company has received less than $11 billion from the state.
