Chile is a fast-growing emerging market with abundant natural resources. Yet many investors are not very familiar with this region, so they often miss out on great opportunities. For example, in northern Chile, a low-cost commodity and chemical producer has the lead on several product segments including specialty fertilizers, lithium and iodine. With decades of reserves, this company has the ability to generate solid returns over the long haul.
In fact, it's already been good for shareholders, producing an average return north of 40% for the past decade.
Despite this impressive run, I think the best is yet to come.
Sociedad Quimica y Minera de Chile SA (NYSE: SQM) is a well-diversified company with solid production of potassium chloride, or potash, making it a major player in the fertilizer market. Corn, sugar and palm oil prices have been rising rapidly with no signs of slowing. This gives farmers more of an incentive to use fertilizers to increase crop yields.
This company has an extensive sales and distribution network with sales offices in more than 20 countries, including its very own railroad system to carry product from mines and processing centers to a deep-water port on the Chilean coast. If that were its only claim to fame, then it would be an opportunity with good merit, but there is much more to this lesser-known producer.
For starters, there's lithium. Lithium is one of the main components for many of the rechargeable batteries being used in hybrid electric vehicles. As electric cars gain market share, this Chilean company could be a major benefactor of skyrocketing lithium prices. Furthermore, this firm's lithium sales could also receive a major boost as next-generation airplane models are increasing the usage of aluminum-lithium (Al-Li) alloy.
The company also has access to two highly-coveted mineral possessions: caliche ore and salar brines. These two resources allow it to produce a wide variety of products for industrial and farming clients including fertilizers, iodine, lithium and industrial chemicals.
The caliche ore deposit in Chile is the only place in the world where natural nitrates can be extracted on a commercial level, while high-quality salt brines can only be found in the United States, China and Chile. Because of the rarity of its natural resources, Sociedad Quimica has a major competitive advantage with its low extraction costs. This leads to impressive margins and free cash flow to the tune of $570 million.
Sociedad Quimica has a 50% worldwide market share of potassium nitrate, one of the highest-quality plant fertilizers produced in its specialty plant nutrition (SNP) business line. Through its SNP, the company produces specialty fertilizers used in advanced farming methods for high-value crops. These fertilizers are premium products and sold at higher prices than other fertilizers like potash. This means they are less susceptible to wild swings in demand, providing more stability for Sociedad Quimica's revenue.
As Nathan Slaughter, editor of StreetAuthority's Scarcity & Real Wealth newsletter has pointed out to his readers, there are three main factors that should keep fertilizer companies in high demand for decades to come:
1. As the global population increases, farmers will need their farmland to be much more productive.
2. Improving diets in the developing world will increase the demand for whole grains and other crops.
3. Biofuels demand is likely to increase.
Sociedad Quimica is not only one of the leaders in premium fertilizers, it is also the market leader in iodine and lithium production. It has a 25% market share in global iodine product and 30% of the global market share in lithium.
Iodine has wide usage in TVs via LCD screens and medical needs via X-ray materials. These two areas should see major growth as the LCD market expands and the baby boomer population ages, increasing the demand for X-ray machines. Lithium, on the other hand, is a key ingredient in computer batteries, cellphone batteries and rechargeable batteries in hybrid electric vehicles -- three major growth markets.
The company's strategy has been to compete mostly in markets where there is little competition. This allows it to control profit margins and combat irrational pricing that could negatively affect its bottom line. The rarity of its natural resources and limited competition should bode well for Sociedad Quimica's returns for quite some time.
Risks to Consider: Demand for Sociedad Quimica's products can be somewhat cyclical, carrying exposure to crop prices, as well as industrial output. A major economic downturn could severely impair its financial results. Additionally, its dominance as a lithium producer is being diluted as the Chilean government has increased efforts to open lithium production to new producers. Finally, natural gas shortages in Chile have led the company to seek higher priced energy sources at times, and this reduces its profitability.
Action to Take --> As I said before, Sociedad Quimica y Minera de Chile has seen an average annual return of 40% per year for the past 10 years. And there are no signs of slowing down as electric car and fertilizer usage continue to be booming trends. Buy the stock for up to $65 a share. With a 1% dividend yield, it is not a high-yielding investment. But the stock has amazing growth potential, and I think shares could hit $80 during the next 12 months for a 33% return from current prices.