China's lithium king, defeated overseas

Golden Horn Finance

2024-06-26 16:53Creator in the field of finance and economics

原创首发 | 金角财经（ID: F-Jinjiao)

作者 | Chong Lei, CFA

The more than 20 billion invested by China's lithium king in Chile in South America is about to be harvested.

Recently, the Chilean Financial Market Commission (CMF) rejected Tianqi Lithium's related complaints, which means that Tianqi Lithium's last hope to prevent the nationalization of Chile's chemical mining company (SQM) has been completely dashed.

This is a victory for Chilean populism. Back in 2018, Tianqi Lithium, which had a net worth of only 12 billion yuan at that time, acquired 23.77% of the latter's shares for US$4.066 billion (about 27.844 billion yuan).

Six years later, the gamble was met with populist sniping in Chile.

On May 31, 2024, SQM signed an agreement with Chile's National Copper Company (Codelco) to form a joint venture. To put it simply, SQM was "confiscated" by the Chilean state.

Due to a series of unequal treaties signed at the time of the acquisition, Tianqi Lithium had no choice but to act as an outsider in the nationalization process of SQM. Tianqi Lithium has repeatedly requested a shareholder vote on SQM's "public-private partnership" agreement with Codelco to change SQM's nationalisation process, but SQM's board of directors has ruthlessly rejected it.

Subsequently, Tianqi Lithium launched a last-ditch effort and submitted an application to the CMF to request SQM to convene a shareholders' meeting. However, the recent rejection of the CMF application also means that Tianqi Lithium's "last resort" has also failed.

What's even more tragic is that in order to acquire SQM, Tianqi Lithium was burdened with heavy debts, and was even forced to cut off the high-quality asset Australian lithium mine, which led to a serious decline in Tianqi's pricing power at the mine end, and tasted a huge loss of nearly 4 billion yuan in the first quarter of this year.

At the same time, the closing balance (book value) of Tianqi Lithium's long-term equity investment in SQM was 26.163 billion yuan, which formed an unusually large impairment pressure.

The Chinese lithium king, who used to buy and buy arrogantly, must not have expected to pay for his impulsiveness so soon.

The bulk of the profits were "confiscated"

The nationalization of SQM is a populist carnival in Chile, and Tianqi Lithium and SQM lose a farce.

In 2021, Gabriel Boric was elected as the new president of Chile. One of his political slogans was against the privatization of minerals. While running for president, he wrote on social media: "Chile cannot afford to make the historic mistake of privatizing resources again, we will create state-owned lithium companies." ”

In 2023, in his speech proposing a "public-private partnership" in the lithium industry, Boric cited Chile's 1971 push to nationalize the copper industry as an example, and the Chilean Congress passed a bill to nationalize large copper mines under the impetus of radicals, and copper mines owned by foreign companies were nationalized.

Subsequently, Boric pushed forward the first project to nationalize the lithium industry with substantial progress after taking office. On May 31, 2024, SQM signed an agreement with Chile's National Copper Company (Codelco) to form a joint venture. SQM and Codelco will merge their subsidiaries SQM Salar and Minera Tarar into a new joint venture, with Codelco holding a 51% stake in the joint venture and SQM holding the remaining 49%.

According to the cooperation agreement, 2030 will be a watershed year for both parties in terms of the voice of the joint venture. By the end of 2030, SQM, a private enterprise, will be responsible for the overall management of the joint venture, which will have six board seats, with Codelco and SQM each occupying three; SQM will have the right to have a majority of the voting rights at the general meeting of shareholders, the right to manage the company and the right to consolidate the results of the joint venture.

However, from 2031, the management of the joint venture will be taken over by the national team Codelco, and the number of seats on the board of directors will be increased by one to seven, with Codelco having four seats and a majority vote at the shareholders' meeting, and the results of the joint venture will be incorporated into Codelco's financial report.

In addition to management, in terms of profit distribution, from 2025 to 2030, the Chilean government will obtain 70% of the operating profit margin generated by the new lithium production of the joint venture during this period through Codelco, the Chilean Production Promotion Agency (Corfo) and the Ministry of Finance; From 2031 onwards, this proportion will rise further to 85%.

This means that most of the profits from SQM's lithium business will be taken by the Chilean government. As the second largest shareholder of SQM, the nationalization of SQM also means that Tianqi Lithium's income will be greatly reduced, which is equivalent to the "confiscation" of the majority of profits.

According to the financial report, in 2022, Tianqi Lithium's investment income on SQM recognized in the current period will be 5.641 billion yuan, accounting for about 23% of the company's net profit attributable to the parent company that year. In 2023, Tianqi Lithium's investment income on SQM recognized in the current period will be 2.931 billion yuan, accounting for 40% of the company's net profit attributable to the parent company that year.

At the same time that Tianqi Lithium encountered a black swan, another party, SQM, also unfortunately became a loser of populism.

Since lithium is a strategic metal in Chile that cannot be granted rights, SQM currently only obtains long-term lease leases and lithium resource extraction quotas from the Chilean Production Promotion Agency, and produces according to the agreed capacity plan. The current tenement lease expires in 2030.

With the "public-private partnership", the operating life of SQM will be extended from 2030 to 2060. Therefore, SQM's choice to accept a "public-private partnership" is also seen by the market as exchanging the dominance of the lithium business for a longer mining and operation right.

However, a person familiar with the Chilean lithium industry analyzed that the status of the two sides is not equal, and if SQM does not sign the agreement, it will completely lose the mining rights of the Atacama salt lake after 2030, "It is the difference between the worst option and the worse option, and it is better to have a choice than nothing." "

Goldman Sachs also believes that SQM will be a minority shareholder of a state-owned enterprise in the future, so the agreement "is not an excellent deal".

6 years ago, buried crocodile

Tianqi Lithium's passivity stems from the hidden dangers buried when it "gambled" on SQM in 2018.

In March of that year, the Chilean Production Promotion Agency submitted a complaint to the Chilean National Economic Prosecutor's Office (FNE), saying that the successful transaction between Tianqi Lithium and SQM would seriously affect the free competition in the lithium market and related markets, and hoped that the FNE would investigate and block the transaction.

In June, FNE issued an investigation notice against Tianqi Lithium. Subsequently, the parties entered into an out-of-court agreement, the terms of which included that the directors nominated or voted for by Tianqi Lithium to SQM shall not be directors, executives or employees of Tianqi Lithium; SQM does not require or obtain commercially sensitive information related to lithium business.

In order to earn the trust of SQM, the local community and the government, Tianqi Lithium entered into the above agreement with FNE and also promised not to incorporate SQM into Tianqi Lithium's financial statements. The out-of-court agreement between Tianqi Lithium and FNE was supposed to expire in June 2024, but SQM said in an April announcement that the agreement would be extended until October 2024.

A series of "unreasonable and unfair" clauses eventually led to Tianqi Lithium being in an embarrassing state of being an "outsider" in the SQM nationalization negotiations, and lost the initiative from the beginning.

In desperation, Tianqi Lithium can only try to make amends. Since 2024, Tianqi Lithium has repeatedly requested a shareholder meeting vote on SQM's "public-private partnership" agreement with Codelco to change the nationalization process of SQM.

Tianqi Lithium's complaint was based primarily on the fact that the "public-private partnership" would affect significant assets owned by SQM. Citing the relevant provisions of Chile's Company Law, Tianqi Lithium held that the shareholders' meeting had the power to decide on extraordinary matters that were beyond the scope of the company's management because of their importance.

Tianqi Lithium even hired three local Chilean law professors and legal experts to demonstrate whether the relevant deliberation procedures for the establishment of the joint venture were compliant, and all three law professors and legal experts believed that the transaction between SQM and Codelco should be approved by SQM's extraordinary general meeting of shareholders in accordance with the relevant local laws and regulations in Chile.

However, Tianqi Lithium's request to convene a shareholders' meeting was rejected by SQM's board of directors. Tianqi Lithium then made a last-ditch effort and submitted an application to Chile's securities regulator, the Financial Markets Commission (CMF), in March this year, asking SQM to convene a shareholders' meeting to vote on its cooperation agreement with Codelco, and to approve the deal only after a two-thirds vote at the shareholders' meeting.

But on June 18, the CMF rejected Tianqi Lithium's application to hold a general meeting of shareholders. According to the CMF announcement, the content of the "public-private partnership" agreement signed between SQM and Codelco does not meet the criteria for holding a shareholder meeting. The reason was that SQM did not sell 50% of its assets under the joint venture agreement and did not meet the condition that a special shareholders' meeting should be held and the consent of two-thirds of the shareholders was required.

The CMF's statement means that Tianqi Lithium's last ditch attempt to stop SQM's "public-private partnership" has failed.

was miserable

SQM was "confiscated", and Tianqi Lithium's overseas gamble was completely lost.

In the past, Tianqi Lithium became a star enterprise in the new energy industry chain because it had resource advantages at the mine end, and the lithium mines were 100% self-sufficient, all imported from the Greenbush lithium mine in Australia, which is the world's largest and lowest-cost spodumene mine.

In 2013, Tianqi Lithium acquired its first "snake swallowing elephant". Tianqi Group, which had total assets of only 3 billion yuan that year, acquired the upstream supplier Talison for 3.041 billion yuan, and indirectly obtained 51% of the shares of its Greenbush mine, and the other 49% was held by Albemarle of the United States.

The deal gave Tianqi Lithium a taste of sweetness at the mine end. At the end of 2023, Greenbush's lithium concentrate cost was just $357/t, while cash costs from other Australian lithium mines were concentrated at €600-A$800/t over the same period.

In 2018, after the success of the above-mentioned "snake swallowing elephant" merger, Tianqi made another similar operation.

At that time, Tianqi Lithium, which had a net worth of only 12 billion yuan, acquired a 23.77% stake in Chilean SQM for US$4.066 billion (about 27.844 billion yuan). To complete the deal, Tianqi Lithium borrowed a total of US$3.5 billion from a syndicate of domestic and foreign banks led by China CITIC Bank.

However, the ensuing downward cycle caused Tianqi Lithium to quickly fall into debt quagmire and had to give up part of its equity in Australia's core assets to repay the loan.

In July 2021, Tianqi Lithium introduced IGO, an Australian strategic investor, and sold nearly half of its stake in Greenbush to it for a transaction consideration of US$1.395 billion.

At that time, a person familiar with Tianqi Lithium's introduction of strategic investment process said that "cutting meat" half of the equity of the Greenbush mine is equivalent to killing the "chicken that lays golden eggs", which will seriously damage Tianqi Lithium's core competitiveness, and greatly reduce revenue, profit and cash flow.

A person familiar with Tianqi Lithium told the media that the current lithium concentrate selling price of Greenbush is first quoted internally by the three shareholders to arrive at a weighted average price, and then the final selling price is obtained by combining the quotations of third-party institutions, but the three companies have different attitudes towards lithium prices.

IGO does not have the right to underwrite, and does not do processing business itself, so it has a strong willingness to raise prices; Albemarle has a whole industry chain layout and is afraid of high lithium prices, but its shareholding in Greenbush is as high as 49%, and high lithium prices can share more profits; Tianqi Lithium's downstream smelting business is completely dependent on Greenbush supply, and naturally hopes that the price of lithium will not be set too high, but its voice has been greatly reduced.

As a result, Greenbush's internal supply price will be higher than the market price in 2023, and this "price disadvantage" is especially obvious in the second half of the year, when lithium prices have fallen, which ultimately led to two consecutive quarters of losses in Tianqi Lithium's smelting business.

According to IGO's financial report, Greenbush's lithium concentrate prices in the third and fourth quarters of 2023 will be $3,740/ton and $3,016/ton respectively; The market price of lithium concentrate according to Shanghai Nonferrous Metals Network fell below US$2,800/ton in October 2023 and only US$2,560/ton in the fourth quarter.

In 2023, although Tianqi Lithium's lithium salt plant has been purchasing raw materials at a price several percent higher than the market price, although it will receive a net income of 6.508 billion yuan from Winfield, the parent company of Greenbush, the Kwinana plant will lose 1.83 billion yuan, of which Tianqi Lithium will bear the loss of 933 million yuan according to the 51% shareholding ratio, and the wholly-owned lithium salt plants in China, Shehong Tianqi and Jiangsu Tianqi, will lose 5.4 billion yuan and 2.4 billion yuan respectively.

In addition, Tianqi Lithium also made an asset impairment of 729 million yuan due to the decline in inventory prices that year, of which 638 million yuan was provided for in the fourth quarter alone.

In the first quarter of 2024, Tianqi Lithium's high-priced inventory has not yet been digested, with a huge loss of nearly 4 billion yuan.

Tianqi Lithium said at the investor conference that as of the end of March 2024, the company still has an inventory of high-priced lithium concentrate raw materials priced in Q-1 in 2023, which continues to put pressure on the performance of its main products.

However, Tianqi Lithium paid such a heavy price to acquire the shares of SQM, but it is facing the fate of being confiscated. This is undoubtedly another huge blow to Tianqi Lithium, which has suffered huge losses.

In early June, Tianqi Lithium issued an announcement reminding that the implementation of the joint venture would cause SQM to lose control and consolidation of Chile's lithium business from 2031. Changes in SQM's future earnings may decrease, which in turn will affect Tianqi Lithium's investment income and dividends in SQM, which may result in the Company needing to make an impairment provision for the investment.

According to the 2023 financial report, the closing balance (book value) of Tianqi Lithium's long-term equity investment in SQM was 26.163 billion yuan. As of the end of last year, Tianqi Lithium conducted an impairment test on SQM based on the information and relevant assumptions available at that time, and the results showed that there was no impairment of SQM at the end of 2023.

This means that the huge impairment pressure may be reflected in this year's financial report after SQM is "confiscated". Coupled with the loss of nearly 4 billion yuan in the first quarter, Tianqi Lithium may release a loss that shocks the market this year.

The former "lithium king" may become the "loss king" of the industry.

Resources:

Caixin "Tianqi Lithium's Complaint Rejected and the Nationalization of Chile's Chemical and Mining Industry Settled"

Caixin "Chile's chemical and mining industry will be nationalized, and the second shareholder Tianqi Lithium is in an embarrassing situation"

Caixin: How did Tianqi Lithium change from a "profit king" to a "loss king"? 》

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