Sociedad Química y Minera de Chile SA may have turned lemons into lemonade through its recent deal with Chile's Codelco, analysts told S&P Global Commodity Insights.

The company agreed to lower revenues and to a loss of operational control at the Salar de Atacama mine as part of an agreement announced Dec. 27, 2023, in exchange for cementing itself as a major global lithium producer.

The contract for the Salar de Atacama lithium mine owned by Sociedad Química y Minera de Chile (SQM) is set to expire in six years and, under President Gabriel Boric's April 2023 national lithium strategy, the Chilean government must hold majority shareholding in all future lithium contracts.

SQM secured long-term operations in the country by signing a memorandum of understanding (MOU) that would dissolve its contract and replace it with a deal to gradually bring in Codelco in exchange for authorizing additional extraction capacity and operations through 2060. The new deal would also increase the cap on the company's allowable lithium carbonate equivalent (LCE) extraction by 300,000 metric tons.

Although SQM will lose control of the mine's operating company and a larger portion of revenue to the Chilean state, analysts said the contract was the best outcome for SQM considering how much it has to lose. SQM's Salar de Atacama operation was the world's second-largest producing lithium mine in 2022 with 152,500 metric tons of LCE, S&P Global Market Intelligence data shows.

"It's a win-win situation," Amalia Bulacios, director of S&P Global's Latam Corporate Ratings, told Commodity Insights. "SQM was close to the end of its concession, so by signing the [contract], they basically secure their place as the number one company in [the Salar de Atacama]. They have all the infrastructure already in place."

Staking a claim

After eight months of negotiations, the recent preliminary agreement states that SQM and Codelco will create a new company to share ownership of the Salar de Atacama mine. Codelco will own 50% plus one share and SQM will own 50% minus 1 share.

SQM will also transfer its mining assets in the Salar de Maricunga region to Codelco at no cost and will share its lithium industry knowledge and technology. Codelco agreed to provide a renewed lease agreement and government approval for the additional allowable production through 2030.

"These partnership terms work for the specific case of the Salar de Atacama and SQM, which already has existing operations in place, known resources and reserves, and one of the most competitive assets in the world," Francisco Acuña, principal consultant at CRU Consulting, told Commodity Insights. "It is unlikely that the government will have such leverage over other areas or assets."

SQM was working to increase production well before the national lithium strategy was signed in 2023. The company increased its annual output of lithium carbonate and hydroxide from around 45,000 metric tons to around 150,000 metric tons from 2019 to 2022, and it expects production to reach 200,000 in 2023.

In addition, SQM announced a $1.5 billion sustainability project known as Salar de Futuro in September 2022 that would allow the company to increase annual production to around 280,000–300,000 metric tons after 2030. That increase would only be possible under a renewed deal.

"Since the moment SQM decided to increase its lithium production in the Salar de Atacama, the benefits [for the state] were already in view," Juan Carlos Guajardo, founder and executive director of Santiago-based mining consultancy Plusmining, told Commodity Insights.

Divvying up the goods

Codelco will only gain profits from a portion of the additional 300,000 metric tons of production authorized through 2030, when the previous mine contract would have ended, after which profits will be divided under the new shareholding structure. Revenue from the new company would be additional to the taxes and revenues already received by the government, which comprised slightly more than 60% of SQM's lithium revenue in 2022, according to an earnings report.

S&P Global Ratings' Bulacios noted that the royalty structure for the new contract has not been released, and the government's exact revenue stream is not yet known.

"Given that most of the assets are already built and just need to be operated, the government will receive larger returns from lithium operations through owning a little over 50% of the equity in the Salar de Atacama operation," Seth Goldstein, an equity strategist at Morningstar Research, told Commodity Insights.

After 2030, Codelco will also gain the right to elect the majority of directors for the new Salar de Atacama operating company, receive a majority of the votes in shareholding meetings and manage the business. The deal is the first public-private partnership to be outlined under Boric's new plan, but analysts do not expect it to be an exact outline for future deals as SQM's assets in the country far outweigh any other lithium company.

As part of the national lithium strategy, Codelco is also in charge of negotiating a contract renewal with US-based chemicals giant Albemarle Corp. Albemarle's Salar de Atacama mine produced 50,000 metric tons of lithium in 2022, Market Intelligence data shows, but the company's contract does not end until 2043.

A requirement for a pubic-private partnership for lithium projects in other salt flats, also known as salares, will be up to the government's discretion.

"The conditions for these negotiations are special, when there is an operator with a contract and they had to resolve what to do in the future. The other salares have different conditions. I do not clearly see that there is very much interest from the government to advance in other salares," Plusmining's Guajardo said.

Bulacios expects the final contract between SQM and Codelco to be complete "at some point during the first quarter of this year."