In the third quarter, the emerging markets investment committee initiated a position in Sociedad Quimica y Minera de Chile (NYSE:SQM). Founded in 1968 and headquartered in Santiago, Chile, SQM produces and distributes specialty plant nutrition solutions, potassium fertilizers, industrial chemicals, iodine and its derivatives, as well as lithium and its derivatives.
For much of 2014 and 2015, SQM’s reputation has been marred by governance concerns. In March 2015, Canada-based PotashCorp withdrew its board members after clashing with controller Julio Ponce over the handling of a tax probe and allegations of payments to politicians by SQM.
In May 2014, Production Development Corporation CORFO, a Chilean government agency, initiated arbitration against SQM. CORFO alleged that the company was underpaying a lease at its Atacama site, where some of SQM’s best mining assets are located, and was not in compliance with certain technical requirements. In June 2015, CORFO asked for early termination of the lease agreement and the lease payments that would have been paid plus punitive damages. Arbitration proceedings are in process.
We believe the negative pressure provided a good entry point for an investment in SQM. Year to date through September 30, the company’s share price fell over 30%. While the governance concerns present a near-term challenge, we believe the risk/reward proposition in the shares is favorable. Main features that made SQM an appealing investment candidate to us include:
- Attractive market share: SQM has a leading global market share in the production of iodine, nitrates and lithium (inputs used in a variety of chemicals and fertilizers).
- Cost advantage: SQM’s minerals are of good quality and have been inexpensive to extract because most are located very close to the surface.
- Geographic diversification: The company sells its products in 110 countries, with no individual client accounting for more than 10% of revenues. Sales are well diversified among Latin America, Asia, Europe and North America.
- Valuation: As of September 30, 2015, SQM’s shares traded at 1.6x price-to-book value and less than 8x cash flow. Both valuations were near their five-year lows.
From Brandes Emerging Markets Value Fund 3rd quarter commentary.
