SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 20-F
 |
REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
OR
 |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the fiscal year ended December 31, 2005
OR
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
OR
|
SHELL
COMPANY REPORT PURSUANT TO SECTION 23 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
Date
of
event requiring this shell company report_______________________________
.
For
the
transition period from _____________to__________
.
Commission
file number 33-65728
/ 33-99188
/ 333-10068
SOCIEDAD
QUIMICA Y MINERA DE CHILE S.A.
(Exact
name of registrant as specified in its charter)
CHEMICAL
AND MINING COMPANY OF CHILE INC.
(Translation
of registrant's name into English)
CHILE
(Jurisdiction
of incorporation or organization)
El
Trovador 4285, Piso 6, Santiago, Chile (562) 425-2000
(Address
of principal executive offices)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act.
|
Title
of each class
|
Name
of each exchange on which registered
|
|
Series
A shares, in the form of American Depositary Shares
Series
B shares, in the form of American Depositary Shares
|
New
York Stock Exchange
New
York Stock Exchange
|
Securities
registered or to be registered pursuant to Section 12(g) of the
Act.
NONE
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act.
NONE
Indicate
the number of outstanding shares of each of the issuer's classes of capital
or
common stock as of the close of the period covered by the annual
report.
|
Series
A shares
|
142,819,552
|
|
Series
B shares
|
120,376,972
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
rule 405 of the Securities Act:
YES
NOIf
this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d)
of
the Securities Exchange act of 1934:
YES
NOIndicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES
NO
YES
NOIndicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non accelerated filer. See definition of
“accelerated filer and large accelerated filer” in rule 12b-2 of the
Exchange Act.
Large accelerated filer
Accelerated filer
Non- accelerated filerIndicate
by check mark which financial statement item the registrant has elected to
follow.
Item 17
Item 18If
this
is an annual report, indicate by check mark whether the registrant is a sell
company (as defined in Rule 12b-2 of the Exchange Act):
YES
NO
|
Page
|
|||
| PRESENTATION OF INFORMATION | |||
| GLOSSARY | |||
| CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS | |||
| PART I | |||
| PART II |
91
|
||
| PART III |
94
|
||
| SIGNATURES | |||
| CONSOLIDATED FINANCIAL STATEMENTS | |||
| EXHIBIT 1.1 | |||
| EXHIBIT 8.1 | |||
| EXHIBIT 12.1 | |||
| EXHIBIT 12.2 | |||
| EXHIBIT 13.1 | |||
| EXHIBIT 13.2 | |||
ii
In
this
Annual Report on Form 20-F, unless the context requires otherwise, all
references to "we",
"us",
"Company"
or
"SQM"
are to
Sociedad Química y Minera de Chile S.A., an open stock corporation (sociedad
anónima abierta) organized under the laws of the Republic of Chile, and its
consolidated subsidiaries.
All
references to "$,"
"US$,"
"U.S.
dollars"
and
"dollars"
are to
United States dollars, references to "pesos"
or
"Ch$"
are to
Chilean pesos, and references to "UF"
are to
Unidades
de Fomento.
The UF
is an inflation-indexed, peso-denominated unit that is linked to, and adjusted
daily to reflect changes in, the previous month's Chilean consumer price index.
As of June 15, 2006, UF 1.00 was equivalent to US$ 33.30 and Ch$
18,133.27.
The
Republic of Chile is governed by a democratic government, organized in twelve
regions plus the Metropolitan Region (surrounding and including Santiago, the
capital of Chile). Our production operations are concentrated in northern Chile,
specifically in the First Region, also named Tarapacá Region, and in the Second
Region, also named Antofagasta Region.
Our
fiscal year ends on December 31.
We
use
the metric system of weights and measures in calculating our operating and
other
data. The United States equivalent units of the most common metric units used
by
us are as shown below:
1
kilometer equals approximately 0.6214 miles
1
meter
equals approximately 3.2808 feet
1
centimeter equals approximately 0.3937 inches
1
hectare
equals approximately 2.4710 acres
1
metric
ton equals 1,000 kilograms or approximately 2,205 pounds.
We
are
not aware of any independent, authoritative source of information regarding
sizes, growth rates or market shares for most of our markets. Accordingly,
the
market size, market growth rate and market share estimates contained herein
have
been developed by us using internal and external sources and reflect our best
current estimates. These estimates have not been confirmed by independent
sources.
Percentages
and certain amounts contained herein have been rounded for ease of presentation.
Any discrepancies in any figure between totals and the sums of the amounts
presented are due to rounding.
"assay
values"
Chemical result or mineral component amount that contains the
sample.
"average
global metallurgical recoveries"
Percentage that measures the metallurgical treatment effectiveness based on
the
quantitative relationship between the initial product contained in the
mine-extracted material and the final product produced in the
plant.
"average
mining exploitation factor"
Index
or ratio that measures the mineral exploitation effectiveness (defined below),
based on the quantitative relationship between (in-situ mineral minus
exploitation losses) / in-situ mineral.
"Corfo"
Corporation of Promotion of Production (Corporación de Fomento de la
Producción), formed in 1939, a national organization in charge of promoting and
facilitating Chile's manufacturing productivity and commercial
development.
"cut-off
grade"
The
minimal assay value or chemical amount of some mineral component above which
results in economical exploitability.
"dilution"
Loss of
mineral grade because of contamination with barren material (or waste)
incorporated in some exploited ore mineral.
"exploitation
losses"
Amounts
of ore mineral that have not been extracted in accordance with exploitation
designs.
"fertigation"
The
process by which plant nutrients are applied to the ground using an irrigation
system.
"geostatistical
analysis"
Statistical tools applied to mining planning, geology and geochemical data
that
allow estimation of averages, grades and quantities of mineral resources and
reserves.
iii
"heap
leaching pads"
Padding
or filling of rocks from which will be extracted the soluble mineral by
irrigation with water.
"horizontal
layering"
Rock
mass (stratiform seam) with generally uniform thickness that conform to the
sedimentary fields (mineralized and horizontal rock in these
cases).
"hypothetical
resources"
Mineral
resources that have limited geochemical reconnaissance, based mainly in
geological data and samples assays values spaced between 500-1000
meters.
"Indicated
Mineral Resource"
See
"Resources—Indicated Mineral Resource."
"Inferred
Mineral Resource"
See
"Resources—Inferred Mineral Resource."
"industrial
crops"
Refers
to crops that require processing after harvest in order to be ready for
consumption or sale. Tobacco, tea and seed crops are examples of industrial
crops.
"LIBOR"
London
Inter Bank Offered Rate.
"limited
reconnaissance"
Low or
limited level of geological knowledge.
"Measured
Mineral Resource"
See
"Resources—Measured Mineral Resource."
"metallurgical
treatment"
A set
of chemical and physical processes applied to rocks to extract their useful
minerals (or metals).
"old
waste ore deposits"
Ore
deposits that have been previously mined but not entirely depleted because
of
the low-grade quality of the ore the mine yields.
"ore
depth"
Depth
of the mineral that may be economically exploited.
"ore
type"
Main
mineral having economic value contained in the caliche ore (sodium nitrate
or
iodine).
"ore"
A
mineral or rock from which a substance having economic value may be
extracted.
"Probable
Mineral Reserve"
See
"Reserves—Probable Mineral Reserve."
"Proved
Mineral Reserve"
See
"Reserves—Proved Mineral Reserve."
"Reserves—Probable
Mineral Reserve"*
The
economically mineable part of an Indicated Mineral Resource and, in some
circumstances, Measured Mineral Resource. It includes diluting of materials
and
allowances for losses which may occur when the material is mined. Appropriate
assessments, which may include feasibility studies, have been carried out and
include consideration of and modification by realistically assumed mining,
metallurgical, economic, marketing, legal, environmental, social and
governmental factors. These assessments demonstrate at the time of reporting
that extraction is reasonably justified. A Probable Mineral Reserve has a lower
level of confidence than a Proved Mineral Reserve.
"Reserves—Proved
Mineral Reserve"*
The
economically mineable part of a Measured Mineral Resource. It includes diluting
materials and allowances for losses which may occur when the material is mined.
Appropriate assessments, which may include feasibility studies, have been
carried out and include consideration of and modification by realistically
assumed mining, metallurgical, economic, marketing, legal, environmental, social
and governmental factors. These assessments demonstrate at the time of reporting
that extraction is reasonably justified.
"Resources—Indicated
Mineral Resource"*
That
part of a Mineral Resource for which tonnage, densities, shape, physical
characteristics, grade and mineral content can be estimated with a reasonable
level of confidence. It is based on exploration, sampling and testing
information gathered through appropriate techniques from locations such as
outcrops, trenches, pits, workings, and drill holes. The locations are too
widely or inappropriately spaced to confirm geological continuity and/or grade
continuity but are spaced closely enough for continuity to be assumed. An
Indicated Mineral Resource has a lower level of confidence than that applying
to
a Measured Mineral Resource, but has a higher level of confidence than that
applying to an Inferred Mineral Resource.
|
A
deposit may be classified as an Indicated Mineral Resource when the
nature, quality, amount and distribution of data are such as to allow
the
Competent Person determining the Mineral Resource to confidently
interpret
the geological framework and to assume continuity of mineralization.
Confidence in the estimate is sufficient to allow the appropriate
application of technical and economic parameters and to enable an
evaluation of economic viability.
|
iv
"Resources—Inferred
Mineral Resource"*
Is
that part of a Mineral Resource for which tonnage, grade and mineral content
can
be estimated with a low level of confidence. It is inferred from geological
evidence and assumed but not verified geological and/or grade continuity. It
is
based on information gathered through appropriate techniques from locations
such
as outcrops, trenches, pits, workings and drill holes which is of limited or
uncertain quality and/or reliability. An Inferred Mineral Resource has a lower
level of confidence than that applying to an Indicated Mineral
Resource.
"Resources—Measured
Mineral Resource"
The
part of a Mineral Resource for which tonnage, densities, shape, physical
characteristics, grade and mineral content can be estimated with a high level
of
confidence. It is based on detailed and reliable exploration, sampling and
testing information gathered through appropriate techniques from locations
such
as outcrops, trenches, pits, workings, and drill holes. The locations are spaced
closely enough to confirm geological and/or grade continuity.
|
A
deposit may be classified as a Measured Mineral Resource when the
nature,
quality, amount and distribution of data are such as to leave no
reasonable doubt, in the opinion of the Competent Person determining
the
Mineral Resource, that the tonnage and grade of the deposit can be
estimated within close limits and that any variation from the estimate
would not significantly affect potential economic viability. This
category
requires a high level of confidence in, and understanding of, the
geology
and controls of the mineral deposit. Confidence in the estimate is
sufficient to allow the appropriate application of technical and
economic
parameters and to enable an evaluation of economic
viability.
|
"waste"
Rock or
mineral which is not economical for metallurgical treatment.
"waste-to-ore
ratio"
Relation or ratio between waste/ore.
"Weighted
Average Age"
In this
Annual Report means the sum of the product of the age of each fixed asset at
a
given facility and its current gross book value as of December 31, 2005 divided
by the total gross book value of the Company's fixed assets at such facility
as
of December 31, 2005.
*
The
definitions we use for resources and reserves are based on those provided by
the
“Instituto de Ingenieros de Minas de Chile” (Chilean Institute of Mining
Engineers).
SQM
will
provide without charge to each person to whom this Annual Report is delivered,
on the written or oral request of any such person, a copy of any or all of
the
documents incorporated herein by reference (other than exhibits, unless such
exhibits are specifically incorporated by reference in such documents). Written
requests for such copies should be directed to Sociedad Química y Minera de
Chile S.A., El Trovador 4285, Piso 6, Santiago, Chile, Attention: Investor
Relations Department. Requests may also be made by telephone (562-425-2000),
facsimile (562-425-2493) and e-mail (ir@sqm.com).
v
This
Form
20-F contains statements that are or may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements appear throughout this Form 20-F and include statements
regarding the intent, belief or current expectations of the Company and its
management, including but not limited to any statements concerning:
| · |
the
Company's capital investment program and development of new
products;
|
| · |
trends
affecting the Company's financial condition or results of
operations;
|
| · |
level
of production, quality of the ore and brines, and production
yields;
|
| · |
the
future impact of competition;
|
| · |
any
statements preceded by, followed by, or that include the words "believe,"
"expect," "predict," "anticipate," "intend," "estimate," "should,"
"may,"
"could" or similar expressions; and
|
| · |
other
statements contained in this Form 20-F that are not historical
facts.
|
Such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Actual results may differ materially from those
described in such forward-looking statements included in this Form 20-F,
including, without limitation, the information under Item 4. Information on
the
Company and Item 5. Operating and Financial Review and Prospects. Factors that
could cause actual results to differ materially include, but are not limited
to:
| · |
SQM's
ability to implement its capital expenditures, including its ability
to
arrange financing when required;
|
| · |
the
nature and extent of future competition in SQM's principal
markets;
|
| · |
political,
economic and demographic developments in the emerging market countries
of
Latin America and Asia where SQM conducts a large portion of its
business;
and
|
| · |
the
factors discussed below under Item 3. Key Information—Risk
Factors.
|
vi
Not
Applicable.
Not
Applicable.
3.A.
Selected
Financial Data
The
following table presents selected consolidated financial information for SQM
and
one or more of its subsidiaries, as applicable, for each of the periods
indicated. This information should be read in conjunction with, and is qualified
in its entirety by reference to, the Audited Consolidated Financial Statements
of the Company as for December 31, 2005 and 2004 and for each of the three
years
in the period ended December 31, 2005. The consolidated financial statements
as
of December 31, 2002 and 2001 and for the years then ended are not included
herein. The Company's Consolidated Financial Statements are prepared in
accordance with Chilean GAAP, which differs in certain material respects from
U.S. GAAP. Note 29 to the Consolidated Financial Statements as for December
31,
2005 and 2004 and for each of the three years in the period ended December
31,
2005 provides a description of the principal differences between Chilean GAAP
and U.S. GAAP and a reconciliation of net income for the years ended December
31, 2005, 2004 and 2003 and total shareholders' equity as of December 31, 2005
and 2004 to U.S. GAAP.
|
Year
ended December 31,
|
||||||||||||||||
|
|
||||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
|
|
|
|
|
||||||||||||
|
Income
Statement Data
|
(in
millions of US$) (1)
|
|||||||||||||||
|
Chilean
GAAP
|
||||||||||||||||
|
Total
Revenues
|
896.0
|
788.5
|
691.8
|
553.8
|
526.4
|
|||||||||||
|
Operating
Income
|
181.2
|
124.1
|
87.3
|
82.7
|
73.7
|
|||||||||||
|
Non-operating
results, net
|
(34.4
|
)
|
(17.6
|
)
|
(21.2
|
)
|
(30.0
|
)
|
(29.2
|
)
|
||||||
|
Net
income
|
113.5
|
74.2
|
46.8
|
40.2
|
30.1
|
|||||||||||
|
Net
earnings per share (2)
|
0.43
|
0.28
|
0.18
|
0.15
|
0.11
|
|||||||||||
|
Net
earnings per ADS (2)
|
4.31
|
2.82
|
1.78
|
1.53
|
1.14
|
|||||||||||
|
Dividend
per share (3)(4)
|
0.279
|
0.182
|
0.088
|
0.076
|
0.056
|
|||||||||||
|
|
|
|
|
|
||||||||||||
|
Weighted
average shares Outstanding (000s) (2)
|
263,197
|
263,197
|
263,197
|
263,197
|
263,197
|
|||||||||||
|
|
|
|
|
|
||||||||||||
|
U.S.
GAAP (4)
|
||||||||||||||||
|
Total
Revenues
|
896.0
|
788.5
|
691.8
|
553.8
|
526.4
|
|||||||||||
|
Operating
Income
|
163.9
|
117.1
|
76.4
|
86.4
|
74.6
|
|||||||||||
|
Non-operating
results, net
|
(6.1
|
)
|
(4.1
|
)
|
(4.0
|
)
|
(25.9
|
)
|
(41.6
|
)
|
||||||
|
Effect
of change in accounting principles
|
—
|
—
|
—
|
0.5
|
—
|
|||||||||||
|
Net
income
|
125.2
|
86.8
|
57.8
|
46.9
|
24.4
|
|||||||||||
|
Basic
and diluted earnings per share
|
0.48
|
0.33
|
0.22
|
0.18
|
0.09
|
|||||||||||
|
Basic
and diluted earnings per ADS
|
4.76
|
3.30
|
2.19
|
1.78
|
0.93
|
|||||||||||
|
|
|
|
|
|
||||||||||||
|
Weighted
average shares Outstanding (000s)(2)
|
263,197
|
263,197
|
263,197
|
263,197
|
263,197
|
|||||||||||
|
|
|
|
|
|
||||||||||||
1
|
Year
ended December 31,
|
||||||||||||||||
|
|
||||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
|
|
|
|
|
||||||||||||
|
Balance
Sheet Data:
|
(In
millions of US$) (1)
|
|||||||||||||||
|
Chilean
GAAP:
|
||||||||||||||||
|
Total
assets
|
1,640.6
|
1,361.4
|
1,363.5
|
1,322.3
|
1,413.4
|
|||||||||||
|
Long-term
debt
|
100.0
|
200.0
|
260.0
|
324.0
|
412.0
|
|||||||||||
|
Total
shareholders' equity
|
1,020.4
|
948.6
|
890.0
|
849.7
|
831.7
|
|||||||||||
|
Capital
Stock
|
477.4
|
477.4
|
477.4
|
477.4
|
477.4
|
|||||||||||
|
U.S.
GAAP
|
||||||||||||||||
|
Total
assets
|
1,609.0
|
1,318.5
|
1,319.4
|
1,274.6
|
1,354.8
|
|||||||||||
|
Long-term
debt
|
100.0
|
200.0
|
260.0
|
324.0
|
412.0
|
|||||||||||
|
Total
shareholders' equity
|
923.4
|
856.9
|
794.7
|
747.3
|
721.4
|
|||||||||||
|
Capital
Stock
|
479.3
|
479.3
|
479.3
|
479.3
|
479.3
|
|||||||||||
Note:
The
Company is not aware of any material differences between Chilean and U.S.
GAAP
that are not addressed in Note 29 to the Consolidated Financial Statements
of
December 31, 2005.
|
(1)
|
Except
shares outstanding, dividend and net earnings per share and net
earnings
per ADS.
|
|
(2)
|
There
are no authoritative pronouncements related to the calculation
of earnings
per share in accordance with Chilean GAAP. For comparative purposes
the
calculation has been based on the same number of weighted average
shares
outstanding as used for the U.S. GAAP
calculation.
|
|
(3)
|
Dividends
per share are calculated based on 263,197 thousand shares for the
periods
ended December 31, 2001, 2002, 2003, 2004 and
2005.
|
|
(4)
|
Dividends
may only be paid from net income before amortization of negative
goodwill
as determined in accordance with Chilean GAAP; see Item 8.A.8.
Dividend
Policy. For dividends in Ch$ see Item 8.A.8.Dividend Policy —
Dividends.
|
EXCHANGE
RATES
Chile
has
two currency markets, the Mercado Cambiario Formal, or Formal Exchange Market,
and the Mercado Cambiario Informal, or Informal Exchange Market. The Formal
Exchange Market is comprised of banks and other entities authorized by the
Chilean Central Bank. The Informal Exchange Market is comprised of entities
that
are not expressly authorized to operate in the Formal Exchange Market, such
as
certain foreign exchange houses and travel agencies, among others. The Chilean
Central Bank is empowered to determine that certain purchases and sales of
foreign currencies be carried out on the Formal Exchange Market.
Both
the
Formal and Informal Exchange Markets are driven by free market forces. Current
regulations require that the Chilean Central Bank be informed of certain
transactions and that they be effected through the Formal Exchange Market.
For
the purposes of the operation of the Formal Exchange Market, the Chilean Central
Bank sets a dólar acuerdo, or Reference Exchange Rate. The Reference Exchange
Rate is reset daily by the Chilean Central Bank, taking into account internal
and external inflation and variations in parities between the Chilean peso
and
each of the U.S. dollar, the Japanese yen and the Euro at a ratio of 80:5:15,
respectively. In order to keep the average exchange rate within certain limits,
the Chilean Central Bank may intervene by buying or selling foreign currency
on
the Formal Exchange Market.
The
dólar
observado, or Observed Exchange Rate, which is reported by the Chilean Central
Bank and published daily in the Chilean newspapers, is computed by taking the
weighted average of the previous business day’s transactions on the Formal
Exchange Market. On September 2, 1999, the Chilean Central Bank eliminated
the
band within which the Observed Exchange Rate could fluctuate, in order to
provide greater flexibility in the exchange market. Nevertheless, the Chilean
Central Bank has the power to intervene by buying or selling foreign currency
on
the Formal Exchange Market to attempt to maintain the Observed Exchange Rate
within a desired range.
The
Informal Exchange Market reflects transactions carried out at an informal
exchange rate, or the Informal Exchange Rate. There are no limits imposed on
the
extent to which the rate of exchange in the Informal Exchange Market can
fluctuate above or below the Observed Exchange Rate.
2
Since
1993, the Observed Exchange Rate and the Informal Exchange Rate have typically
been within less than 1% of one another.
The
following table sets forth the annual low, high, average and year-end Observed
Exchange Rate for U.S. dollars for each year starting in 2001 as reported by
the
Chilean Central Bank. The Federal Reserve Bank of New York does not report
a
noon buying rate for Chilean pesos.
On
June
15, 2006, the Observed Exchange Rate was Ch$544.51 = US$1.00.
|
Observed
Exchange Rate (1)
|
|||||||||||||
|
Ch$
per US$
|
|||||||||||||
|
|
|||||||||||||
|
Year/Month
|
Low
(1)
|
High
(1)
|
Average
(2)(3)
|
Year/Month
End
|
|||||||||
|
|
|
|
|
|
|||||||||
|
2001
|
557.13
|
716.62
|
634.76
|
654.79
|
|||||||||
|
2002
|
641.75
|
756.56
|
692.32
|
718.61
|
|||||||||
|
2003
|
593.10
|
758.21
|
687.50
|
599.40
|
|||||||||
|
2004
|
559.21
|
649.45
|
612.13
|
559.83
|
|||||||||
|
2005
|
509.70
|
592.75
|
559.27
|
514.21
|
|||||||||
|
December
2005
|
509.70
|
518.63
|
514.33
|
514.21
|
|||||||||
|
January
2006
|
512.00
|
535.36
|
524.48
|
524.78
|
|||||||||
|
February
2006
|
516.91
|
532.35
|
525.70
|
517.76
|
|||||||||
|
March
2006
|
516.75
|
536.16
|
528.77
|
527.70
|
|||||||||
|
April
2006
|
511.44
|
526.18
|
517.33
|
518.62
|
|||||||||
|
May
2006
|
512.76
|
532.92
|
520.79
|
531.11
|
|||||||||
Source: Central Bank of Chile
|
(1)
|
Observed
exchange rates are the actual high and low on a day-to-day basis,
for each
period.
|
|
(2)
|
The
yearly average rate is calculated as the average of the exchange
rates on
the last day of each month during the
period.
|
|
(3)
|
The
monthly average rate is calculated on a day-to-day basis for each
month.
|
3.B.
Capitalization
And Indebtedness
Not
applicable.
3.C.
Reasons
For The Offer And Use Of Proceeds
Not
applicable.
3
3.D.
Risk
Factors
Our
operations are subject to certain risk factors that may affect SQM's financial
condition or results of operations. In addition to other information contained
in this Annual Report on Form 20-F, you should consider carefully the risks
described below. These risks are not the only ones we face. Additional risks
not
currently known to us or that we currently believe are not significant may
also
affect our business operations. Our business, financial condition or results
of
operations could be materially affected by any of these risks.
Risks
Relating to our Business
Our
sales to emerging markets expose us to risks related to economic conditions
and
trends in those countries
We
sell
our products in more than 100 countries around the world. In 2005, approximately
39% of our sales were made to emerging market countries: (i) approximately
14%
in Central and South America, excluding Chile, specifically in countries such
as
Brazil, Argentina, Colombia and Peru; (ii) approximately 18% in Chile; and
(iii)
approximately 7% in Asia, excluding Japan. We expect to expand our sales in
these and other emerging markets in the future. The results and prospects for
our operations in these countries and other countries in which we establish
operations can be expected to be dependent, in part, on the general level of
political stability and economic activity and policies in those countries.
Future developments in the political systems or economies of these countries
or
the implementation of future governmental policies in those countries, including
the imposition of withholding and other taxes, restrictions on the payment
of
dividends or repatriation of capital or the imposition of new environmental
regulations or price controls, could have a material adverse effect on our
sales
or operations in those countries.
Volatility
of world fertilizer and chemical prices and changes in production capacities
could affect our business, financial condition and results of
operations
The
prices of our products are determined principally by world prices, which in
some
cases have been subject to substantial volatility in recent years. World
fertilizer and chemical prices vary depending upon the relationship between
supply and demand at any given time. Further, the supply of certain fertilizers
or chemical products, including certain products that we provide, varies
principally depending upon the production of the few major producers (including
us) and their respective business strategies.
In
particular, world iodine prices declined from approximately US$18.40 per
kilogram for large purchases in early 1990 to less than US$8.00 per kilogram
for
large purchases in June 1994. The price increased to approximately US$18.00
in
1999, and subsequently it began to decline, reaching approximately US$12.50
during early 2003. By late 2003 and during 2004 prices reversed the downward
trend and began to increase. The average price for 2004 reached approximately
US$14.50 per kilogram and it has continued to increase to an average of
approximately US$19.00 per kilogram for 2005. We cannot assure you that this
trend will continue.
We
started production of lithium carbonate from the Atacama Salar brines in October
1996 and started selling lithium carbonate commercially in January 1997. Our
entrance into the market created an oversupply of lithium carbonate, resulting
in a drop in prices from over US$3,000 per ton before our entrance to less
than
US$2,000 per ton. Currently, prices are higher than US$3,000 per ton. We believe
the increase in prices is mainly due to the high growth in demand that has
not
been fully balanced by the supply of lithium carbonate. We cannot assure you
that this trend will continue.
We
expect
that prices for the products we manufacture will continue to be influenced,
among other things, by similar supply and demand factors and the business
strategies of major producers. Some of the major producers (including us) have
increased or have the ability to increase production. As a result, the prices
of
our products may be subject to substantial volatility. A substantial decline
in
the prices of one or more of our products could have a material adverse effect
on our business, financial condition and results of operations.
4
We
have an ambitious capital expenditure program that is subject to significant
risks and uncertainties
Our
business is capital intensive. Specifically, the exploration and exploitation
of
reserves, mining and processing costs, the maintenance of machinery and
equipment and compliance with applicable laws and regulations require
substantial capital expenditures. We must continue to invest capital to maintain
or to increase the amount of reserves that we exploit and the amount of finished
products we produce. We require environmental permits for our new projects.
Obtaining permits in certain cases may cause significant delays in the execution
and implementation of such new projects and, consequently, may require us to
reassess the related risks and economic incentives. No assurance can be made
that we will be able to maintain our production levels or generate sufficient
cash flow, or that we will have access to sufficient investments, loans or
other
financing alternatives to continue our exploration, exploitation and refining
activities at or above present levels, or that we will be able to implement
our
projects or receive the necessary permits required for them in time. Any or
all
of these factors may have a material adverse impact on our business, financial
condition and results of operations.
Currency
fluctuations may have a negative effect on our financial
results
The
Chilean peso has been subject to large devaluations and revaluations in the
past
and may be subject to significant fluctuations in the future. We transact a
significant portion of our business in U.S. dollars, and the U.S. dollar is
the
currency of the primary economic environment in which we operate and is our
functional currency for financial statement reporting purposes. A significant
portion of our operating costs, however, are related to the Chilean peso.
Therefore, an increase or decrease in the exchange rate between the Chilean
peso
and the U.S. dollar would affect our costs of production. Additionally, as
an
international company operating in Chile and several other countries, we
transact a portion of our business and have assets and liabilities in Chilean
pesos and other non-U.S. dollar currencies, such as the Euro, the South African
Rand and the Mexican Peso. As a result, fluctuation in the exchange rate of
such
foreign currencies to the U.S. dollar may affect our business, financial
condition and results of operations.
Sustained
high raw material and energy prices increase our production costs and cost
of
goods sold
We
rely
on certain raw materials and various sources of energy (diesel, electricity,
natural gas and others) to manufacture our products. Purchases of raw materials
that we do not produce and energy constitute a significant part of our cost
of
sales (approximately 11.7% in 2005). To the extent we are unable to pass on
increases in raw materials and energy prices to our customers, our business,
financial condition and results of operations could be adversely affected.
Our
reserves estimates could significantly vary
Our
mining reserves estimates are prepared by our geologists. Estimation methods
involve numerous uncertainties as to the quantity and quality of the reserves,
and these could change, up or down. A downward change in the quantity and/or
quality of our reserves could affect future volumes and cost of production
and
therefore have a negative impact on our business, financial condition and
results of operations.
Quality
standards in markets where we sell our products could become stricter over
time
Governments
and customers in several of the markets where we do business impose quality
standards on our products. As a result, we may not be able to sell our
products if we cannot meet such standards. In addition, our cost of production
may
increase in order to meet any such newly-promulgated standards. Failure
to sell
our products in one or more markets or to important customers could materially
affect our financial condition or results of operations.
Our
business is subject to many operational and other risks for which we may not
be
fully covered in our insurance policies
Our
facilities located in Chile and abroad are insured against losses, damages
or
other risks by insurance policies that are standard for the industry and that
would reasonably be expected to be sufficient by prudent and experienced persons
engaged in a business or businesses similar to those of our business.
Nonetheless, we may be subject to certain events that may not be covered under
the insurance policies, and that could materially affect our financial condition
or results of operations.
The
continuity of our natural gas supply is dependent on Argentinean authorities’
policy
As
part
of a cost reduction effort, in 2001 we interconnected our facilities to a
natural gas network. The natural gas, which originates in Argentina and is
subject to a 10-year agreement, is used mainly for heat generation at our
industrial facilities. Due to energy shortages in Argentina, local authorities
decided to restrict exports of natural gas to Chile in order to increase the
supply to their domestic markets. Additionally, even though we have long-term
price agreements related to natural gas, the Argentinean government increased
taxes on gas exports and there can be no assurance that they will not do it
again in the future.
We
suffered partial shortages of natural gas during 2004 and 2005, and the
shortages have increased and continued in the second quarter of 2006, reaching
more than 50% of the normal supply. Considering what has happened in the second
quarter of 2006 and the public statements made by Argentina and Bolivia -which
in turn supplies natural gas to Argentina-, we believe further cutbacks in
the
supply of natural gas are likely in the future. To mitigate this, we have
adopted measures intended to limit the effects of any further decrease in the
natural gas supply. Most of our industrial equipment that uses natural gas
can
also operate on fuel oil and the remaining equipment can operate on diesel.
The
costs of using fuel oil and diesel are significantly higher than natural gas.
The
extent to which we incur increased costs as a result of decreases in the natural
gas supply will depend on the volume of such a decrease and on the duration
of
the period during which natural gas supplies are restricted, and therefore,
we
cannot estimate the exact economic impact of future natural gas supply
reductions. However, further increases in prices of natural gas or a sustained
reduction in our natural gas supply could have an adverse effect on our
business, financial condition and results of operations. During 2005, purchases
of natural gas represented approximately 1.4% of our cost of sales.
Decline
in the supply of natural gas and increasing global oil prices could negatively
affect our electricity contracts
As
natural gas supply continues to be uncertain, as discussed above, and oil prices
continue to increase, we are faced with potential revisions to our long-term
electricity supply agreements. We maintain contracts with two main utilities
in
Chile, Electroandina S.A. and AES Norgener S.A., and both have requested
revision of the tariffs involved. As a result of such request we have commenced
arbitration between us and Electroandina and Norgener.
Although
we believe tariffs should not be modified, to the extent that our electricity
contracts are in fact revised and modified, we may suffer increased costs,
thereby negatively affecting our results of operations. During 2005, purchases
of electricity represented approximately 2.8% of our cost of sales.
We
are exposed to labor strikes and liabilities that could impact our production
levels and costs
Of
our
permanent employees in Chile, 72% are represented by 31 labor unions, which
represent their members in collective bargaining negotiations with the Company.
Accordingly, we are exposed to labor strikes that could impact our production
levels. Should a strike occur and extend for a sustained period of time, we
could be faced with increased costs and even disruption in our product flow
that
could have a material adverse effect on our financial condition or results
of
operations.
6
The
Chilean Congress has amended the Labor Code and some of such amendments will
be
soon clarified or re-amended through a Presidential veto. Nevertheless, the
new
wording will contemplate that the work-owner shall be jointly liable for some
benefits of the subcontractor’s employees being hired for the performance of
such work and thus increasing the owner’s responsibilities and
costs.
Our
water supply could be affected by regulatory changes and/or natural
problems
Although
we have not experienced significant difficulties obtaining the necessary water
to conduct our operations, there can be no assurance that we will not have
problems in securing our water supply due to new environmental regulations
or
natural depletion of water resources that could affect our operations,
negatively affecting our business, financial condition and results of
operations.
Pending
lawsuits could adversely impact us
We
are
party to lawsuits and arbitrations involving commercial matters. Although we
intend to defend our position vigorously, our defense of these actions may
not
be successful. Some judgment in or settlement of these lawsuits may have a
material adverse effect on our financial condition or results of operations.
See
Item 8.A.7. Legal Proceedings and Note 22 to the Consolidated Financial
Statements. Furthermore, our strategy of being a world leader includes carrying
out commercial and production alliances, joint ventures and acquisitions to
improve our global competitive position. As these operations increase in
complexity and are carried out in different jurisdictions, our Company might
be
subject to legal proceedings that, if settled against us, may have a significant
impact in the Company’s financial condition or results of
operations.
Risks
Relating to Chile
As
we are a Chilean-based company, we are exposed to Chilean political
risks
The
prospects and results of operations of the Company could be affected by changes
in policies of the Chilean government, other political developments in or
affecting Chile, and regulatory and legal changes or administrative practices
of
Chilean authorities, over which the Company has no control.
Changes
in mining and water rights laws or in regulations affecting port concessions
could affect our operating costs
We
conduct our mining (including brine extraction) operations under exploitation
and exploration concessions granted pursuant to judicial proceedings in
accordance with provisions of the Chilean Constitution and the Constitutional
Mining Law and related statutes. Our exploitation concessions essentially grant
a perpetual right to conduct mining operations in the areas covered by the
concessions, provided that we pay annual concession fees (with the exception of
the Atacama Salar rights, which have been leased to us until 2030). Our
exploration concessions permit us to explore for mineral resources on the land
covered thereby for a specified period of time, and to subsequently request
a
corresponding exploitation concession. We also hold water rights obtained from
the Chilean Water Authority for a supply of water from rivers and wells near
our
production facilities, which we believe is sufficient to meet current and
anticipated operational requirements. We operate port facilities at Tocopilla,
Chile, for the shipment of our products and the delivery of certain raw
materials, pursuant to concessions granted by Chilean regulatory authorities.
These concessions are renewable provided that we use such facilities as
authorized and pay annual concession fees. Any significant changes to these
concessions could have a material adverse impact on our business, financial
condition and results of operations.
The
following recent changes in Chilean law are also likely to affect our
operations:
The
Chilean Congress recently approved a modification to Chilean laws relating
to
water rights (the “Water Code”). The changes to the Water Code include
establishing annual fee payments for owners of water rights that do not use
the
water associated with them. This fee does not affect the holder’s right to use
aquifers. The criteria used to determine what rights or what part of such rights
would be subject to this annual fee relate to whether the resource is consumed
or re-injected into the stream after its use (defined as the water right’s
“consumptive condition”), whether the use of the resource is sporadic or
permanent (frequency of use) and the geographical location of the intake points
relative to an area’s overall water supply. The referred changes will not have a
material adverse effect on our business, financial condition and results of
operations. Nevertheless, as the Company maintains water rights that
are key to its business development, further changes to the Water Code could
have a material adverse impact on our business, financial condition and results
of operations.
7
On
May
18, 2005, the Chilean Congress approved Law No. 20,026, also known as the
“Royalty Law,” which established a royalty to be applied to mining activities
developed in Chile, levied on mining companies whose sales are equal to or
greater than the equivalent value of 12,000 metric tons of fine copper (MFT),
as
determined according to the London Metal Exchange Grade A copper cash quotation.
This new mining royalty, which will be applied from 2006 onwards, is levied
on
the “taxable operating income” (as this term is defined in Law No. 20,026) of
the mining company, at a rate that varies from 0.5% up to 5%, depending on
the
consolidated annual sales.
If
similar changes are enacted in the future they may have a material adverse
impact on our business, financial condition and results of
operation.
Environmental
laws and regulations could expose us to higher costs, liabilities, claims and
failure to meet current and future production targets
Our
operations in Chile are subject to a variety of national and local regulations
relating to environmental protection. The main environmental laws in Chile
are
the Health Code and Law No. 19,300, which we refer to as the “Chilean
Environmental Framework Law.” The Chilean Environmental Framework Law created
the Comisión Nacional del Medio Ambiente (National Environmental Commission or
CONAMA), which is the governmental agency in charge of supervising the due
compliance with the Chilean Environmental Framework Law. Under this law, we
are
required to conduct environmental impact studies of any future projects or
activities (or their significant modifications) that may affect the environment.
CONAMA evaluates environmental impact studies submitted for its approval and
oversees the implementation of projects. The Chilean Environmental Framework
Law
also enables private citizens, public agencies or local authorities to challenge
projects that may affect the environment, either before these projects are
executed or once they are already operating. Enforcement remedies available
include temporary or permanent closure of facilities and fines.
Chilean
environmental regulations have become increasingly stringent in recent years,
both in respect of the approval of new projects and in connection with the
implementation and development of projects already approved. This trend is
likely to continue. Furthermore, recently implemented environmental regulations
have created uncertainty because rules and enforcement procedures for these
regulations have not been fully developed. Given public interest in
environmental enforcement matters, these regulations or their application may
also be subject to political considerations that are beyond our
control.
We
continuously monitor the impact of our operations on the environment and have,
from time to time, made modifications to our facilities to minimize any adverse
impact. Except for particulate matter levels exceeding permissible levels in
María Elena facilities (see “Business—Chilean Government Regulations” and
“Business—Environmental Regulations”), we are currently in compliance in all
material respects with applicable environmental regulations in Chile that we
are
aware of. Future developments in the creation or implementation of environmental
requirements, or in their interpretation, could result in substantially
increased capital, operation or compliance costs or otherwise adversely affect
our business, financial condition and results of operations.
In
connection with our current investments at the Atacama Salar we have submitted
an environmental impact assessment study. The success of these investments
is
dependent on the approval of said submission by the pertinent governmental
authorities. Failure to obtain approval of this submission could seriously
impair our ability to maintain our current production levels or increase
production capacities in the near future, thus having a material adverse effect
on our financial condition or results of operations.
8
Additionally,
in connection with our future investments in the nitrate and iodine operations,
we have submitted and expect to submit several environmental impact assessment
studies. The success of these investments is dependent on the approval of said
submissions by the pertinent governmental authorities. Failure to obtain
approval for one or more of these submissions could seriously impair our ability
to maintain our future production levels or increase production capacities
in
the near future, thus having a material adverse effect on our financial
condition or results of operations.
Furthermore,
the future development of the Company depends on our ability to sustain future
production levels, which require additional investments and the submission
of
the corresponding environmental impact assessment studies. Again, if we fail
to
obtain approval, our ability to maintain production at specified levels will
be
seriously impaired, thus having a material adverse effect on our financial
condition or results of operations.
Our
worldwide operations are also subject to environmental regulations. Since laws
and regulations in the different jurisdictions in which we operate may change,
we cannot guarantee that future laws, or changes to existing ones, will not
materially impact our financial condition or results of operations.
Our
financial statements are reported, and our dividends are declared, based on
Chilean GAAP, which generally differs from U.S. GAAP
There
are
important differences between Chilean GAAP and U.S. GAAP. As a result, Chilean
financial statements and reported earnings generally differ from those that
are
reported based on U.S. GAAP. In particular, our earnings and the amount of
dividends that we declare under Chilean GAAP may be subject to a higher degree
of fluctuation as compared to U.S. GAAP, due to accounting pronouncements or
other modifications required under Chilean GAAP. Note 29 to the consolidated
Financial Statements includes a description of differences and a reconciliation
of the net income and shareholder’s equity amounts reported under Chilean GAAP
to U.S. GAAP.
Risks
related to our financial activities
Interest
rate fluctuations may have a material impact on our financial
results
We
maintain short and long-term debt priced at Libor, plus a spread. As we do
not
have derivative instruments to hedge the Libor, we are subject to fluctuations
in this rate. As of December 31, 2005, we had approximately 47% of our financial
debt priced at Libor, and therefore significant increases in the rate could
impact our financial condition.
Risks
related to our shares and to our ADSs
The
price of our ADSs and the U.S. dollar value of any dividends will be affected
by
fluctuations in the U.S. dollar/Chilean peso exchange
rate
Chilean
trading in the shares underlying our ADSs is conducted in Chilean pesos. The
depositary will receive cash distributions that we make with respect to the
shares in pesos. The depositary will convert such pesos to U.S. dollars at
the
then prevailing exchange rate to make dividend and other distribution payments
in respect of ADSs. If the value of the peso falls relative to the U.S. dollar,
the value of the ADSs and any distributions to be received from the depositary
will decrease.
Developments
in other emerging markets could materially affect our ADSs
value
The
Chilean financial and securities markets are, to varying degrees, influenced
by
economic and market conditions in other emerging market countries or regions
of
the world. Although economic conditions are different in each country or region,
investor reaction to developments in one country or region can have significant
effects on the securities of issuers in other countries and regions, including
Chile and Latin America. Events in other parts of the world may have an adverse
effect on Chilean financial and securities markets and on the value of our
ADSs.
9
The
volatility and low liquidity of the Chilean securities markets could affect
the
ability of our shareholders to sell our ADSs
The
Chilean securities markets are substantially smaller, less liquid and more
volatile than the major securities markets in the United States. The volatility
and low liquidity of the Chilean markets could increase the price volatility
of
our ADSs and may impair the ability of a holder to sell our ADSs into the
Chilean market in the amount and at the price and time he or she wishes to
do
so.
Our
share price may react negatively to future acquisitions and
investments
As
part
of our strategy as world leaders in our core businesses, we are constantly
looking for opportunities that will allow us to consolidate and strengthen
our
competitive position. Pursuant to this strategy, we may from time to time,
evaluate and eventually carry out acquisitions in any of the businesses in
which
we are. Depending on our then current capital structure, we may need to raise
significant debt and/or equity which will affect our financial condition and
future cash flows. Any change in our financial condition could affect our
results of operations, negatively impacting our share price.
You
may be unable to enforce rights under U.S. Securities Laws
Because
we are a Chilean company subject to Chilean law, the rights of our shareholders
may differ from the rights of shareholders in companies incorporated in the
United States, and you may not be able to enforce or may have difficulty
enforcing rights currently in effect on U.S. Federal or State securities
laws.
Our
Company is a “sociedad
anónima abierta”
(open stock corporation) incorporated under the laws of the Republic of Chile.
Most of SQM’s directors and officers reside outside the United States,
principally in Chile. All or a substantial portion of the assets of these
persons are located outside the United States. As a result, if any of our
shareholders, including holders of our ADSs, were to bring a lawsuit against
our
officers or directors in the United States, it may be difficult for them to
effect service of legal process within the United States upon these persons.
Likewise, it may be difficult for them to enforce against them in United States
courts judgments obtained in United States courts based upon the civil liability
provisions of the federal securities laws of the United States.
In
addition, there is no treaty between the United States and Chile providing
for
the reciprocal enforcement of foreign judgments. However, Chilean courts have
enforced judgments rendered in the United States, provided that the Chilean
court finds that the United States court respected basic principles of due
process and public policy. Nevertheless, there is doubt whether an action could
be brought successfully in Chile in the first instance on the basis of liability
based solely upon the civil liability provisions of the United States federal
securities laws.
As
preemptive rights may be unavailable for our ADS holders, they have the risk
of
being diluted if we issue new stock
Chilean
laws require companies to offer their shareholders preemptive rights whenever
selling new shares of capital stock. Preemptive rights permit holders to
maintain their existing ownership percentage in a company by subscribing for
additional shares. If we increase our capital by issuing new shares, a holder
may subscribe for up to the number of shares that would prevent dilution of
the
holder’s ownership interest.
If
we
issue preemptive rights, United States holders of ADSs would not be able to
exercise their rights unless a registration statement under the Securities
Act
were effective with respect to such rights and the shares issuable upon exercise
of such rights or an exemption from registration were available. We cannot
assure holders of ADSs that we will file a registration statement or that an
exemption from registration will be available. We may, in our absolute
discretion, decide not to prepare and file such a registration statement. If
our
holders were unable to exercise their preemptive rights because SQM did not
file
a registration statement, the depositary would attempt to sell their rights
and
distribute the net proceeds from the sale to them, after deducting the
depositary’s fees and expenses. If the depositary could not sell the rights,
they would expire and holders of ADSs would not realize any value from them.
In
either case, ADS holders’ equity interest in SQM would be diluted in proportion
to the increase in SQM’s capital stock.
10
4.A.
History
And Development Of The Company
Historical
Background
Sociedad
Química y Minera de Chile S.A. “SQM”
is an open stock corporation (sociedad anónima abierta) organized under the laws
of the Republic of Chile. The Company was constituted by public deed issued
on
June 17, 1968 by the Public Notary of Santiago, Mr. Sergio Rodríguez Garcés. Its
existence was approved by Decree No. 1.164 of June 22, 1968 of the Ministry
of
Finance, and it was registered on June 29, 1968 in the Business Registry of
Santiago, on page 4.537 No. 1.992. SQM’s headquarters are located at El Trovador
4285, Piso 6, Las Condes, Santiago, Chile. The Company’s telephone number is
562-425-2000.
Commercial
exploitation of the caliche ore deposits in northern Chile began in the 1830s,
when sodium nitrate was extracted from the ore for use in the manufacture of
explosives and fertilizers. By the end of the nineteenth century, nitrate
production had become the leading industry in Chile and the country was the
world’s leading supplier of nitrates. The accelerated commercial development of
synthetic nitrates in the 1920s and the global economic depression in the 1930s
caused a serious contraction of the Chilean nitrate business, which did not
recover significantly until shortly before the Second World War. After the
war,
the widespread commercial production of synthetic nitrates resulted in a further
contraction of the natural nitrate industry in Chile, which continued to operate
at depressed levels into the 1960s.
SQM
was
formed in 1968 through a joint venture between Compañía Salitrera Anglo Lautaro
S.A. (“Anglo Lautaro”) and Corporación de Fomento de la Producción (“Corfo”), a
Chilean state-owned development corporation. Three years after our formation,
in
1971, Anglo Lautaro sold all of its shares to Corfo and we were wholly owned
by
the Chilean Government until 1983. In 1983, Corfo began a process of
privatization by selling our shares to the public and subsequently listing
such
shares on the Santiago Stock Exchange. By 1988, all of our shares were publicly
owned. Our Series B ADRs have traded on the NYSE under the ticker symbol “SQM”
since 1993.
Between
the years 1994 to 1999, we participated in the biggest non-metallic mining
project ever carried out in Chile, the development of the Atacama Salar project
in northern Chile. During this period, the project required an investment of
approximately US$300 million, which was used in the construction of a
500,000-ton capacity potassium chloride plant, a 22,000-ton capacity lithium
carbonate plant, a close to 200,000-ton capacity potassium sulfate plant and
a
close to 10,000-ton capacity boric acid plant. The potassium chloride, lithium
carbonate, potassium sulfate and boric acid plants are currently in
operation.
To
help
finance the above projects, we accessed the international capital markets by
issuing more ADRs on the New York Stock Exchange in 1995 (Series B ADR issuance)
and in 1999 (by issuing our Series A ADRs
on
the NYSE under the ticker symbol “SQM-A”).
During
the period from 2000 through 2004 we principally consolidated the investments
carried out in the preceding five years. We focused on reducing costs and
improving efficiencies throughout the organization.
11
Capital
Expenditure Program
We
are
constantly reviewing different opportunities for improving our production
methods, increasing production capacity of current products and developing
new
products and markets. Additionally, significant maintenance of capital
expenditures are required every year in order to sustain our production
capacity. We are focused on developing new products in response to identified
customer demand and products that can be derived as part of our existing
production. Our capital expenditures in the past five years were mainly related
to the acquisition of new assets, construction of new facilities and renewal
of
plant and equipment.
SQM’s
capital expenditures in the 2003-2005 period were the following:
|
|
|
2005(4)
|
|
2004(3)
|
|
2003(2)
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
(in
millions of US$)
|
||||||||||
|
Expenditures
(1)
|
|
|
198.1
|
|
|
91.4
|
|
|
57.4
|
|
|
(1)
|
Includes
investments in related companies. These amounts will not match
the
consolidated statements of cashflows, as the Company does not consolidate
development stage companies.
|
|
(2)
|
Includes
acquisition of La Coruña. (US$13
million).
|
| (3) |
Includes
acquisition of PCS Yumbes (US$35 million). The Yumbes mine is not
currently being mined and we expect that part of the facilities will
be
relocated to the first Region, to be used in the development of the
nitrates expansion project.
|
| (4) |
Includes
acquisition of Kefco in Dubai (US$9.3
million)
|
We
have
developed a capital expenditure program calling for investments totaling
approximately US$660 million (not including acquisitions) between 2005-2008
of
which approximately US$190 million was spent in 2005. The main purpose of our
capital expenditure program is to increase production capacity of iodine by
approximately 25% (without giving effect to the DSM iodine business
acquisition), natural nitrates by approximately 25%, and lithium carbonate
by
more than 30%. Depending on market conditions, the capital expenditure program
may be increased during 2007 and 2008 by up to a total of approximately US$140
million to further expand capacity.
Most
of
our expansion capital expenditure program requires environmental approval after
completion of environmental impact studies. We currently have under
consideration with the environmental authorities environmental impact studies
for production capacity increases at the Atacama Salar and Nueva Victoria.
Capital expenditures for 2005 were approximately US$190 million (not including
the Dubai acquisition described below) primarily for (i) iodine production
increases at the Nueva Victoria facility, a project that we expect to put online
during the first half of 2006; (ii) a new granular and prilling facility located
at Coya Sur, which will allow us to replace the old Pedro de Valdivia facility,
to increase capacity, improve quality and develop new products; (iii) the
purchase, replacement and upgrade of mining equipment, reflecting our decision
to operate with new equipment in order to lower our maintenance costs in the
future and to increase capacity; (iv) a new lithium hydroxide facility located
at Salar del Carmen near our lithium carbonate facility; (v) the completion
of
the capacity increase at our lithium carbonate facility; (vi) the initial
investment in the María Elena project oriented to replace our current crushing
facilities and to develop a new mining area; and (vii) various projects designed
to maintain capacity, increase yields and lower costs. Additionally during
2005,
we bought a urea-phosphate facility in Dubai for approximately US$9.3 million
to
expand our product offering of specialty plant nutrition in the Middle
East.
For
2006,
we have budgeted total capital expenditures of approximately US$210 million
(not
including the DSM iodine business acquisition mentioned below) primarily for
(i)
the completion of the María Elena project described above; (ii) the initial
investment in a potassium nitrate production facility at Nueva Victoria; (iii)
the completion of the granular and prilling facility located at Coya Sur; (iv)
a
new drying facility for soluble potassium nitrate at Coya Sur; (v) the
development of new mining areas at Pedro de Valdivia; and (vi) various projects
designed to maintain capacity, increase yields and lower costs, and to develop
new NPK( nitrogen, phosphate and potassium), soluble blending
facilities.
Additionally,
we bought the iodine business of DSM for approximately US$72.0 million in
January 2006.
12
For
2007
and 2008, we estimate total capital expenditures of approximately US$260
million, which can be increased depending on market conditions, primarily for
(i) the increase in lithium carbonate production capacity at the Atacama Salar;
(ii) the completion of the potassium nitrate production facility at Nueva
Victoria; (iii) the upgrade of our railroad system to handle expanded capacity;
(iv) the replacement of the iodine facilities at María Elena to improve
technology in order to lower costs and increase yields; and (v) various projects
designed to maintain capacity, increase yields and lower costs, and to develop
new NPK-soluble blending facilities.
4.B.
Business
Overview
The
Company
We
believe we are the world’s largest integrated producers of potassium nitrate,
iodine and lithium carbonate. We also produce other specialty plant nutrition
products, iodine and lithium derivatives, and certain industrial chemicals,
including industrial nitrates. Our products are sold in over 100 countries
through our worldwide distribution network and we generate approximately 83%
of
our revenues from countries outside Chile. Our products are mainly derived
from
mineral deposits found in the first and second regions of northern Chile, where
we mine and process caliche ore and brine deposits. The caliche ore in northern
Chile contains the largest known nitrate and iodine deposits in the world and
is
the world’s only commercially exploited source of natural nitrates. The brine
deposits of the Atacama Salar, a salt-encrusted depression within the Atacama
Desert in northern Chile, contain high concentrations of lithium and potassium
as well as significant concentrations of sulfate and boron.
From
our
caliche ore deposits, we produce a wide range of nitrate-based products, used
for specialty plant nutrition and industrial applications, as well as iodine
and
iodine derivatives. At the Atacama Salar, we extract brines rich in potassium,
lithium and boron, and produce potassium chloride, potassium sulfate, lithium
solutions, boric acid and bischofite. We produce lithium carbonate and lithium
hydroxide at a plant near the city of Antofagasta, Chile, from the solutions
brought from the Atacama Salar. We market all these products through an
established worldwide distribution network.
Our
products are divided into five main categories: specialty plant nutrition
products, iodine and derivatives, lithium and derivatives, industrial chemicals
and other products. Specialty plant nutrition is comprised of specialty plant
nutrition products that are fertilizers having certain characteristics that
enable farmers to improve yields and quality of certain crops. Iodine, lithium
and their derivatives are used in human nutrition, pharmaceuticals and other
industrial applications. Specifically, iodine and its derivatives are mainly
used in x-ray contrast media and biocides industries and a growing application
is in the production of polarizing film, which is an important component in
Liquid Crystal Displays (“LCDs”) screens, and lithium and its derivatives are
mainly used in batteries, greases and frits for production of ceramics.
Industrial chemicals have a wide range of applications in certain chemical
processes such as the manufacturing of glass, explosives and ceramics. Other
products include potassium chloride and other commodity fertilizers that are
bought from third parties and sold mostly in Chile and Mexico.
For
the
year ended December 31, 2005, we had revenues of approximately US$896.0 million,
operating income of approximately US$181.2 million and net income of
approximately US$113.5 million.
Specialty
Plant Nutrition:
We
produce five principal types of specialty plant nutrients: sodium nitrate,
potassium nitrate, sodium potassium nitrate, potassium sulfate and specialty
blends. All of these specialty plant nutrients are used in either solid or
liquid form mainly in high value crops such as fruits, vegetables, industrial
crops (mainly tobacco and coffee), cereals and cotton, and are widely used
in
crops that employ modern agricultural techniques such as hydroponics,
greenhousing, fertigation (where fertilizer is dissolved in water prior to
irrigation) and foliar application. According to the type of use or application
the products are marketed under the brands: Ultrasol™ (fertigation), Qrop™
(field application), Speedfol™ (foliar application), Allganic™ (organic farming)
and Nutrilake™ (acquaculture). Specialty plant nutrition has certain advantages
over commodity fertilizers, such as rapid and effective absorption (without
requiring nitrification), superior water solubility, alkaline pH (which reduces
soil acidity) and low chlorine content. These advantages, plus customized
specialty blends that meet specific needs and the technical service provided
by
us, may be considered as plant nutrients solutions adding value to crops through
higher yields and better quality production. Because our products are natural
or
derived from natural nitrate compounds or natural potassium brines (in the
case
of potassium sulfate), they have certain advantages over synthetically produced
fertilizers, such as the presence of certain beneficial trace elements and
their
organic nature, which makes them more attractive to customers who prefer
products of natural origin. As a result, our specialty plant nutrients enable
our customers to achieve higher yields and better quality crops. Consequently,
specialty plant nutrients are sold at a premium price compared to commodity
fertilizers.
13
Iodine:
We are
the world’s leading producer of iodine and iodine derivatives, which are used in
a wide range of medical, pharmaceutical, agricultural and industrial
applications, including x-ray contrast media, antiseptics, biocides and
disinfectants, human and animal nutritional supplements, in the synthesis of
pharmaceuticals, herbicides, electronics, pigments, dye components and heat
stabilizers.
Lithium:
We are
the world’s leading producer of lithium carbonate, which is used in a variety of
applications, including batteries, frits for the ceramic and enamel industries,
heat resistant glass (ceramic glass), primary aluminum, lithium bromine for
air
conditioner equipment, continuous casting powder for steel extrusion,
pharmaceuticals, and lithium derivatives. We are also a leading supplier of
lithium hydroxide, which is used primarily as a raw material in the lubricating
grease industry.
Industrial
Chemicals:
We
produce four industrial chemicals: sodium nitrate, potassium nitrate, boric
acid
and potassium chloride. Sodium nitrate is used primarily in the production
of
glass, explosives, charcoal briquettes and metal treatment. However, other
uses,
such as adhesives and wastewater treatment also account for important sales
volumes. Potassium nitrate, while also used in the manufacture of specialty
glass, is consumed primarily in cathode ray tubes for TV’s and computer
monitors. In addition, potassium nitrate is an important raw material for the
production of frits for the ceramics and enamel industries. Boric acid is used
in the manufacture of frits for the ceramics and enamel industries, glass,
and
fiberglass. Potassium chloride is used as an additive in oil drilling as well
as
in the production of carragenine.
Other
Products:
We
produce and market granular potassium chloride, which is distributed through
our
subsidiary Soquimich Comercial S.A. in Chile. We have close to 100% of the
market share for this product in Chile. In addition, we import fertilizers
that
are distributed through Soquimich Comercial S.A. in Chile and Fertilizantes
Olmeca S.A. de C.V. in Mexico, offering a complete fertilizing service to our
customers.
The
following table sets forth the percentage breakdown of our revenues in the
2001-2005 period according to our product lines:
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
|
|
|
|
|
||||||||||||
|
Specialty
Plant Nutrition
|
54
|
%
|
54
|
%
|
52
|
%
|
51
|
%
|
49
|
%
|
||||||
|
Iodine
and derivatives
|
17
|
%
|
14
|
%
|
12
|
%
|
15
|
%
|
16
|
%
|
||||||
|
Lithium
and derivatives
|
9
|
%
|
8
|
%
|
7
|
%
|
7
|
%
|
7
|
%
|
||||||
|
Industrial
Chemicals
|
8
|
%
|
9
|
%
|
11
|
%
|
13
|
%
|
13
|
%
|
||||||
|
Other
Products
|
12
|
%
|
15
|
%
|
18
|
%
|
14
|
%
|
15
|
%
|
||||||
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
|||||||
Business
Strategy
Our
general business strategy is to:
|
(1)
|
participate
in businesses where we are or will be a cost leader supported by
strong
fundamentals;
|
|
(2)
|
differentiate
ourselves from commodity producers by manufacturing, marketing and
distributing specialty products that sell at high
value;
|
|
(3)
|
continually
increase the efficiency of our production processes and reduce costs
in
order to increase our productivity;
|
|
(4)
|
maintain
leadership in our principal business areas –
specialty
plant nutrients, iodine and lithium – in terms of installed capacity,
costs, production, pricing and development of new products; and
|
14
|
(5)
|
vertically
integrate towards more value added
markets.
|
We
have
identified market demand in each of our major product lines, both within our
existing customer base and in new markets, for existing products and for
additional products that can be extracted from our natural resources. In order
to take advantage of these opportunities, we have developed a specific strategy
for each of our product lines, as set forth below:
Specialty
Plant Nutrition
Our
strategy in our specialty plant nutrition business is to (i) continue expanding
our sales of natural nitrates by continuing to exploit the advantages of our
products over commodity nitrates and ammonia-based nitrogen and potassium
chloride fertilizers; (ii) increase our sales of higher margin specialty plant
nutrition products based on natural nitrates, particularly soluble potassium
nitrate and NPK-soluble blends; (iii) pursue investment opportunities in
complementary businesses to increase production, reduce costs and add value
to
and improve the marketing of our products; (iv) emphasize development of locally
produced new specialty nutrient blends and customized products intended to
meet
local specific customer needs in all of our principal markets; (v) focus more
on
the soluble and foliar plant nutrient market in order to establish a leadership
position; (vi) further develop our global distribution and marketing system
directly and through strategic alliances with other producers and global or
local distributors; and (vii) reduce our production costs through improved
processes and higher labor productivity so as to compete more
effectively.
Iodine
Our
strategy in our iodine business is to (i) maintain our leadership in the iodine
market by encouraging demand growth and expanding our production capacity in
line with the demand growth; (ii) develop new iodine derivatives and participate
in the iodine recycling projects; and (iii) reduce our production costs through
improved processes and higher labor productivity so as to compete more
effectively.
Lithium
Our
strategy in our lithium business is to (i) maintain our leadership in the
lithium industry as the largest producer and distributor of lithium carbonate
and lithium hydroxide; (ii) selectively pursue downstream opportunities in
the
lithium derivatives business; and (iii) reduce our production costs through
improved processes and higher labor productivity so as to compete more
effectively.
Industrial
Chemicals
Our
strategy in our industrial chemical business is to (i) maintain our leadership
position in sodium nitrate and potassium nitrate; (ii) develop new industrial
markets for our current products; (iii) focus our sales of boric acid in
industrial niche markets; and (iv) reduce our production costs through improved
processes and higher labor productivity so as to compete more
effectively.
New
Business Ventures
From
time
to time we evaluate opportunities to expand our business, both within and
outside Chile, and we expect to continue to do so in the future. We may decide
to acquire part or all of the equity of, or undertake joint ventures or other
transactions with, other companies involved in our businesses or in other
businesses.
Production
Process
Our
integrated production process can be classified according to our natural
resources:
| · |
Caliche
ore deposits: contain nitrates, iodine and sodium sulfate.
|
15
| · |
Atacama
Salar brines: contain potassium, lithium, sulfates and
boron.
|
Caliche
Ore Deposits
We
mine
caliche ore from open pit deposits located in northern Chile. Caliche deposits
are the largest known source of natural nitrates in the world. The geological
origin of caliche ore deposits in northern Chile is uncertain, there being
a
number of different geological formation theories. The most agreed upon is
that
a volcanic formation of deposits was followed by water runoff, leaching and
depositing in existing sediments.
Caliche
deposits are located in northern Chile, where we currently operate four mines:
Pedro de Valdivia, María Elena, Pampa Blanca and Nueva Victoria (including Iris
operation, formerly the DSM Iodine business mine)
Caliche
ore is found under a layer of barren overburden, in seams with variable
thickness from twenty centimeters to five meters, with the overburden varying
in
thickness from half a meter to one and a half meters.
Before
proper mining begins, a full exploration stage is accomplished, including full
geological reconnaissance and dust recovery drill holes to determine the
features of each deposit and its quality. Drill hole samples properly identified
are tested at our chemical laboratories. With the exploration information on
a
closed grid pattern of drill holes the ore evaluation stage provides information
for mine planning purpose. Mine planning is done on a long-term basis (10
years), medium-term basis (3 years) and short-term basis (1 year). A mine
production plan is a dynamic tool that details daily, weekly and monthly
production plans. Following the production of drill holes, information is
updated to offer the most accurate ore supply schedule to the processing
plants.
Generally,
bulldozers first rip and remove the overburden in the mining area. This process
is followed by production drilling and blasting to break the caliche seams.
Front-end loaders load the ore on off-road trucks. In the Pedro de Valdivia
mine, trucks deliver the ore to stockpiles next to rail loading stations. The
stockpiled ore is later loaded on to railcars that take the mineral to the
processing plant. In the María Elena mine, trucks haul the ore and dump it
directly to a primary crushing installation, after which a 14-kilometer long
overland conveyor belt system delivers the ore to the processing
plant.
The
ore
in Pedro de Valdivia and María Elena plants is crushed and leached to produce
concentrated solutions carrying the nitrate, iodine and sodium sulfate. The
crushing of the ore delivers two products, a coarse fraction that is leached
in
a vat system and a fine fraction that is leached by agitation. These are
followed by liquid-solid separation, where solids precipitate as sediment and
liquids concentrated in nitrate and iodine are sent to processing.
In
Pampa
Blanca and Nueva Victoria the run of mine ore is loaded in heaps and leached
to
produce concentrated solutions.
Caliche
Ore-Derived Products
Caliche
ore derived products are: sodium nitrate, potassium nitrate, sodium potassium
nitrate, sodium sulfate and iodine and iodine derivatives.
Sodium
Nitrate
Sodium
nitrate for both agricultural and industrial applications is produced at the
María Elena and Pedro de Valdivia facilities using the Guggenheim method, which
was originally patented in 1921. This closed circuit method involves adding
a
heated leaching solution to the crushed caliche in the vats to selectively
dissolve the valuable contents. The concentrated solution is then cooled,
causing the sodium nitrate to crystallize. Part of the unloaded solution is
then
recycled to the leaching vats. The other part of the solution is stripped of
its
iodine content at the proper treatment plants. The crystallized sodium nitrate
is separated from the remaining solution by centrifuging. The residue resulting
from the crushing of the caliche ore is leached at ambient temperature with
water, producing a weak solution that is pumped to solar evaporation ponds
at
our Coya Sur facilities, nearby María Elena, for concentration. While the
process of extracting sodium nitrate from caliche ore is well established,
variations in chemical content of the ore, temperature of the leaching solutions
and other operational features require a high degree of know-how to manage
the
process effectively and efficiently.
The
remaining materials from the sodium nitrate crystallization process are vat
leach tailings and a weak solution. The ore tailings are unloaded from the
leaching vats and deposited at sites near the production facilities. The weak
solution is re-cycled for further leaching and for the extraction of
iodine.
Crystallized
sodium nitrate is processed further at Pedro de Valdivia and María Elena to
produce prilled sodium nitrate, which is transported to our port facilities
in
Tocopilla for shipping to customers and distributors worldwide. Our current
crystallized sodium nitrate production capacity at Pedro de Valdivia and María
Elena is approximately 770,000 metric tons per year. A significant part of
the
sodium nitrate produced at María Elena and Pedro de Valdivia is used in the
production of potassium nitrate at Coya Sur, sodium potassium nitrate at María
Elena and a highly refined industrial grade sodium nitrate at Coya
Sur.
Potassium
Nitrate
Potassium
nitrate is produced at our Coya Sur facility using production methods developed
by us. The solutions from the leaching of the fine fraction of the ore, once
the
iodine is extracted, is pumped to the Coya Sur plant. These solutions loaded
with nitrate are concentrated in solar evaporation ponds. Once an adequate
level
of concentration is reached, the solution is combined with potassium chloride
to
produce potassium nitrate and discard sodium chloride. The resulting rich
potassium nitrate in solution is crystallized using a cooling and centrifuging
process. The crystallized potassium nitrate is either processed further to
produce prilled potassium nitrate or used for the production of sodium potassium
nitrate. The weak solution of the process is re-used for further production
of
potassium nitrate. A portion of the potassium nitrate is used in the production
of a high purity technical grade potassium nitrate.
As
explained in Item 4.A. History and Development of the Company - Capital
Expenditure Program, the operation of our potassium nitrate plant in Yumbes
is
halted. We are currently planning to relocate this plant to Coya Sur.
Concentrated
nitrate salts are produced at Pampa Blanca by leaching caliche ore in leach
pads
from which we extract rich iodine and nitrate solutions that are sent to iodine
plants for iodine extraction. After iodine has been extracted, the solutions
are
sent to solar evaporation ponds where solutions are evaporated, where rich
nitrate salt is produced. These concentrated nitrate salts are sent to Coya
Sur
or other of our salt processing facilities where they are leached and the
resulting rich nitrate solution is used in the production of potassium
nitrate.
Our
current potassium nitrate production capacity at Coya Sur is more than 650,000
metric tons per year, including 260,000 metric tons per year of technical grade
potassium nitrate. We expect by the end of 2007 to increase that capacity by
approximately 250,000 metric tons per year.
Crystallized
or prilled potassium nitrate produced at Coya Sur and María Elena is transported
to Tocopilla for shipping to customers and distributors worldwide.
Sodium
Potassium Nitrate
Sodium
potassium nitrate is a mixture of approximately two parts sodium nitrate per
one
part potassium nitrate. We produce sodium potassium nitrate at our María Elena
facilities using standard, non-patented production methods developed by us.
Crystallized sodium nitrate is mixed with the crystallized potassium nitrate
to
make sodium potassium nitrate, which is then prilled. The prilled sodium
potassium nitrate is transported to Tocopilla for bulk shipment to
customers.
The
production process for sodium potassium nitrate is basically the same as that
for sodium nitrate and potassium nitrate.
Our
aggregate current production capacity is 1,100,000 metric tons per year. With
certain production restraints and following market conditions we may supply
sodium nitrate, potassium nitrate or sodium potassium nitrate either in prilled
or crystallized form.
Sodium
Sulfate
Although
we have the capability to produce sodium sulfate at our facility in Coya Sur,
we
are not currently doing so, due to a current company decision to prioritize
the
production of nitrates over sodium sulfate. We are currently importing product
from third parties to satisfy our customers’ needs. When our plant is in
production, we extract crystallized sodium sulfate decahydrate (Glauber salt)
from the leaching solutions after the iodine production process at Pedro de
Valdivia and María Elena. The salt is transported to Coya Sur, where it reacts
with sodium chloride salt harvested from the solar evaporation ponds to produce
anhydrous sodium sulfate. The sodium sulfate is shipped in 1 metric tons
maxibags directly to customers and distributors in Chile. The remaining solution
is recycled back to the solar evaporation pond system.
17
Iodine
and Iodine Derivatives
We
produce iodine at our Pedro de Valdivia, Nueva Victoria and Iris production
facilities, extracting it from the solutions resulting from the leaching of
caliche ore at the Pedro de Valdivia, María Elena, Nueva Victoria, Iris and
Pampa Blanca facilities. As in the case of nitrate, the process of extracting
iodine from the caliche ore is well established, but variations in the iodine
and other chemical contents of the treated ore and other operational parameters
require a high level of know-how to manage the process effectively and
efficiently.
The
solutions from the leaching of caliche will carry iodine in iodate form. Part
of
the iodate in solution is reduced to iodide using sulfur dioxide, which is
produced by burning sulfur. The resulting iodide is combined with the rest
of
untreated iodate solution to release elemental iodine. The solid iodine is
then
refined through a smelting process and prilled. We have obtained patents in
Chile and in the United States for our iodine prilling process.
Prilled
iodine is tested for quality control purposes, then packed in 20 or 50 kilogram
drums, 350 kilogram or 700 kilogram maxibags and transported by truck to
Antofagasta or Iquique for export. Our iodine and iodine derivative production
plants have qualified under the ISO-9002 program, providing third-party
certification of the quality management system and international quality control
standards that we have implemented.
Our
total
iodine production in 2005 was approximately 7.7 thousand metric tons:
approximately 2.6 thousand metric tons from Pedro de Valdivia, 1.4 thousand
metric tons from María Elena, 1.5 thousand metric tons from Pampa Blanca and 2,2
thousand metric tons from Nueva Victoria. The Nueva Victoria facility is also
used for tolling iodine delivered from Pampa Blanca and María Elena. We have the
flexibility to adjust our production according to market conditions.
We
also
produce iodine at our recently acquired facility in Iris, adjacent to Nueva
Victoria. The total production capacity at this facility is slightly higher
than
2.0 thousand metric tons per year.
As
we had
anticipated, the various projects oriented to significantly increase our iodine
production capacity, together with the recent DSM iodine business acquisition,
have allowed us to have, from the second quarter of 2006 onwards, an aggregate
production capacity higher than 11,400 metric tons per year, which is higher
than our expected sales for 2006. This will allow us to have the capability
to
respond to sudden changes in demand and the expected future demand growth.
Consistent with SQM strategy, during the first half of 2006 we have been using
our facilities at maximum capacity in order to recover our operational
inventories, which had been reduced in the past two years. During the second
half, however, we expect to reduce our production rates to levels more in line
with our expected sales, leaving approximately 2,000 metric tons per year on
stand-by. We are currently evaluating different alternatives to carry out this
reduction in our production facilities located in the first Region.
We
use a
portion of the produced iodine to manufacture inorganic iodine derivatives,
which are intermediate products used for manufacturing agricultural and
nutritional applications, at facilities located near Santiago, Chile, and also
produce inorganic and organic iodine derivative products together with Ajay
North America L.L.C., “Ajay,”
a U.S.-based Company that purchases iodine from us. We had in the past primarily
marketed our iodine derivative products in South America, Africa and Asia,
while
Ajay and its affiliates had primarily sold their iodine derivative products
in
North America and Europe.
Atacama
Salar Brine Deposits
The
Atacama Salar, located approximately 250 kilometers east of Antofagasta, is
a
salt-encrusted depression within the Atacama Desert, within which lies an
underground deposit of brines contained in porous sodium chloride rock fed
by an
underground inflow of water from the Andes Mountains. The brines are estimated
to cover a surface of approximately 2,900 square kilometers and contain
commercially exploitable deposits of potassium, lithium, sulfates and boron.
Concentrations vary at different locations throughout the salar. Our production
rights to the Atacama Salar are pursuant to a contract with the Chilean
government, expiring in 2030.
18
Brines
are pumped from depths between 1.5 and 60 meters below surface, through a field
of wells that are located in areas of the salar that contain relatively high
concentrations of potassium, lithium, sulfate, boron and other
minerals.
We
process these brines to produce potassium chloride, lithium carbonate, lithium
hydroxide, potassium sulfate, boric acid and bischofite (magnesium chloride).
Potassium
Chloride
We
use
potassium chloride in the production of potassium nitrate. Production of our
own
supplies of potassium chloride provide us with substantial raw material cost
savings.
In
order
to produce potassium chloride, brines from the Atacama Salar are pumped to
solar
evaporation ponds. Evaporation of the brines results in a complex crystalized
mixture of salts of potassium chloride and sodium chloride, of which one portion
is harvested and stored and the other portion of which is reprocessed and the
remaining salts are transferred by truck to a processing facility where the
potassium chloride is separated by a grinding, flotation, and filtering process.
Potassium chloride is sent approximately 300 kilometers to our Coya Sur
facilities via a dedicated dual transport system (rail/truck), where it is
used
in the production of potassium nitrate. We sell potassium chloride produced
at
the Atacama Salar and in excess of our needs to third parties. Our production
facilities currently have a production capacity up to 650,000 metric tons per
year. Actual capacity will depend on volumes and quality of the mining resources
pumped from the Salar.
The
by-products of the potassium chloride production process are (i) brines
remaining after removal of the potassium chloride, which are used to produce
lithium carbonate as described below, and the excess of our needs is reinjected
into the Atacama Salar, (ii) sodium chloride, which is identical to the surface
material of the Atacama Salar and is deposited at sites near the production
facility, and (iii) other salts containing magnesium chloride.
Lithium
Carbonate
A
portion
of the brines remaining after the production of potassium chloride is sent
to
additional solar concentration ponds adjacent to the potassium chloride
production facility. Following additional evaporation, the remaining lithium
chloride concentrated solution is transported by truck to a production facility
located near Antofagasta, approximately 250 kilometers from the Atacama Salar.
At the production facility, the solution is purified and treated with sodium
carbonate to produce lithium carbonate, which is dried then, if necessary,
compacted and finally packaged for shipment. Our lithium carbonate facility
production capacity is approximately 28,000 metric tons per year. A project
is
currently under way to increase our production capacity to 40,000 metric tons
per year and will be completed by 2008. Future production will depend on the
actual volumes and quality of the lithium solutions sent by the Salar
Operations.
Lithium
Hydroxide
By
the
end of 2005 we completed the construction of a processing facility for producing
lithium hydroxide monohydrate. This facility, with a capacity of 6,000 metric
tons per year, is located at Salar del Carmen, adjacent to our existing lithium
carbonate operations. Raw material for this operation is lithium carbonate
which
is reacted with a lime solution to produce lithium hydroxide brine and calcium
carbonate salt, which is filtered and piled in reservoirs. The brine is
evaporated in a multiple effect evaporator and crystallized to produce the
lithium hydroxide monohydrate which is dried and packaged for dispatch to
customers.
Potassium
Sulfate and Boric Acid
Approximately
12 kilometers northeast of the potassium chloride facilities at the Atacama
Salar, we produce potassium sulfate and boric acid from the salar brines. The
plant stands on an area of the salar where higher sulfate and potassium
concentrations are found in the brine. Brines are pumped to pre-concentration
solar evaporation ponds where waste sodium chloride salts are removed by
precipitation. After further evaporation, the sulfate and potassium salts are
harvested and sent for treatment at the potassium sulfate plant. Potassium
sulfate is produced using a flotation, concentration and reaction processes,
after which it is crystallized, dried and packaged for shipment. Boric acid
is
produced in crystallized form by acidulation of the final concentrated brines,
dried and packaged for shipment at the same facility.
The
principal by-products of the production of potassium sulfate are (i)
non-commercial sodium chloride, which is deposited at sites near the production
facility, and (ii) remaining solutions, which are reinjected into the Atacama
Salar or returned to the evaporation ponds. The principal by-products of the
boric acid production process are remaining solutions that after treatment
with
sodium carbonate to neutralize acidity, are reinjected into the Atacama
Salar.
Specialty
Plant Nutrition
We
believe we are the world’s largest producers of potassium nitrate. We also
produce the following specialty plant nutrients: sodium nitrate, potassium
nitrate, sodium potassium nitrate, potassium sulfate, natural boron (ulexite),
urea phosphate (since 2005) and specialty blends (containing various
combinations of nitrogen, phosphate and potassium and generally known as “NPK
blends”).
These specialty plant nutrients have specific characteristics that increase
productivity and enhance quality when used on certain crops and soils.
Additionally, these plant nutrients are well suited for high-yield agricultural
techniques such as hydroponics, fertigation, greenhousing and foliar
applications. High value crop farmers are promted to invest in specialty plant
nutrients due to their technical advantages over commodity fertilizers (such
as
urea and potassium chloride), which in turn translate into products and crops
with higher yields and added quality. Our specialty plant nutrients have
significant advantages for certain applications over commodity based nitrogen
and potassium fertilizers, such as the before mentioned urea and potassium
chloride.
In
particular, our specialty plant nutrients:
| · |
are
fully water soluble, allowing their use in hydroponics, fertigation,
foliar applications and other advanced agricultural
techniques;
|
| · |
are
absorbed more rapidly by plants because they do not require nitrification
like ammonia based fertilizers;
|
| · |
are
free of chlorine content, reducing the risk of scorching
roots;
|
| · |
do
not release hydrogen after application, avoiding increased soil
acidity;
|
| · |
possess
trace elements, which promote disease resistance in plants and have
other
beneficial effects;
|
| · |
are
more attractive to customers who prefer products of natural origin;
and
|
| · |
are
more efficient than commodity fertilizers because they deliver more
plant
nutrients per unit of nutrient
applied.
|
In
2005,
our revenues from specialty plant nutrients were approximately US$487.8 million,
representing approximately 54% of our total revenues for that year.
Specialty
Plant Nutrition: Market
The
target market for our specialty plant nutrients are high value crops such as
fruits, vegetables, and crops raised using modern agricultural techniques.
Since
1990, the international market for specialty plant nutrients has grown at a
faster rate than the international market for commodity-type fertilizers. This
is mostly due to (i) the application of new agricultural technologies such
as
fertigation and hydroponics and increasing use of greenhousing; (ii) the
increase in the cost of land which has forced farmers to improve their yields;
(iii) the scarcity of water; (iv) the increase of consumption of vegetables
per
capita, and (v) the increasing demand for higher quality crops.
Worldwide
scarcity of water forces farmers to develop new agricultural techniques such
as
fertigation that minimize water requirements. These applications require fully
water soluble plant nutrients.
Increasing
land costs near urban centers also forces
farmers
to maximize their yields per surface area. Specialty plant nutrients, when
applied to certain crops, help to increase productivity for various reasons.
In
particular, since our nitrate-based specialty plant nutrients provide nitrogen
in nitric form, as opposed to ammonium form provided by urea, they are absorbed
faster by the crop. Crops absorb nitrogen in nitric form; thus nitrogen in
ammonium form has to be converted into nitric form in the soil first. This
is
not an immediate process and releases hydrogen into the soil, increasing soil
acidity, which in most cases is harmful to the soil and the crop. Nitric
nitrogen application facilitates a more efficient application of nutrients
to
the plant, thereby increasing the crop’s yield and improving its
quality.
Our
potassium-based specialty plant nutrients are chlorine free, unlike potassium
chloride, which is the most commonly used potassium-based commodity fertilizer.
In certain crops, chlorine has negative effects, which translates
into
lower yield and quality.
The
most
important agricultural applications of sodium nitrate, potassium nitrate,
potassium sulfate and sodium potassium nitrate plant nutrients are: tobacco,
coffee, vegetables, fruits, horticulture, sugar beet, cotton and other high
value crops.
Specialty
Plant Nutrition: Our Products
Potassium
nitrate, sodium potassium nitrate and specialty blends are higher-margin
products derived from, or consisting of, sodium nitrate, all of which are
produced in crystallized or prilled form. Specialty blends are produced using
our own specialty plant nutrients and other components at blending plants
operated by the Company or its affiliates and related companies in Chile, USA,
Mexico, United Arab Emirates, Belgium, Holland, South Africa, Turkey and
Egypt.
During
2005, SQM acquired Kemira Emirates Fertilizers Company (Kefco), a United
Arab Emirates-based producer of water soluble urea phosphate
fertilizer.
The
following table shows our sales volume of specialty plant nutrient fertilizer
products and the revenues during the 2001-2005 period.
|
Sales
Volume
(in
metric tons)
|
2005
|
2004(3)
|
2003
|
2002
|
2001
|
|||||||||||
|
|
|
|
|
|
||||||||||||
|
Sodium
nitrate
|
63,300
|
58,900
|
62,500
|
59,500
|
63,100
|
|||||||||||
|
Potassium
nitrate and sodium potassium nitrate(1)
|
690,200
|
707,600
|
696,500
|
558,600
|
544,800
|
|||||||||||
|
Potassium
Sulfate
|
178,600
|
157,700
|
143,200
|
161,000
|
156,600
|
|||||||||||
|
Blended
and other specialty plant nutrients(2)
|
350,700
|
374,400
|
377,100
|
276,600
|
241,800
|
|||||||||||
|
Revenues
(in US$ millions)
|
487.8
|
426.8
|
362.8
|
281.4
|
259.1
|
|||||||||||
|
(1)
|
Includes
re-sales of potassium nitrate purchased from PCS Yumbes.
|
| (2) |
Includes
blended and other specialty plant nutrients. It also includes Yara’s
products sold pursuant to our commercial
agreement.
|
| (3) |
2004
figures have been restated to reflect a reclassification affecting
specialty plant nutrients. Products that used to be included under
SPN
were relocated to reflect their industrial
status.
|
Specialty
Plant Nutrition: Marketing and Customers
In
2005,
we sold our specialty plant nutrients to more than 100 countries. During the
same year, approximately 91% of the Company’s specialty plant nutrients sales in
2005 was exported: approximately 29% was sold to customers in Central and South
America, 22% to customers in North America, 20% to customers in Europe and
20%
to customers in other regions. Without considering any sales to related parties,
no single customer represented more than 3% of SQM’s specialty plant nutrients
sales during 2005, and our 10 largest customers accounted in the aggregate
for
approximately 24% of sales during that period.
|
Sales
Breakdown
|
2005
|
2004
|
2003
|
2002
|
2001
|
|||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Central
and South America
|
29
|
%
|
29
|
%
|
26
|
%
|
30
|
%
|
24
|
%
|
||||||
|
North
America
|
22
|
%
|
22
|
%
|
18
|
%
|
17
|
%
|
18
|
%
|
||||||
|
Europe
|
20
|
%
|
19
|
%
|
20
|
%
|
15
|
%
|
14
|
%
|
||||||
|
Others
|
20
|
%
|
20
|
%
|
27
|
%
|
27
|
%
|
31
|
%
|
||||||
|
Chile
|
9
|
%
|
10
|
%
|
9
|
%
|
11
|
%
|
13
|
%
|
||||||
21
We
sell
our specialty plant nutrition products outside Chile mainly through our own
worldwide network of representative offices and through our sales, technical
support and distribution affiliates.
In
November 2001 we signed an agreement with Yara International ASA (“Yara”, ex
Norsk Hydro ASA). This agreement allows us to make use of Yara’s distribution
network in countries where its presence and commercial infrastructure are larger
than ours. Similarly, in those markets where our presence is larger, both our
specialty plant nutrients and Yara International ASA’s are marketed through our
offices. Both parties, however, maintain an active control in the marketing
of
their own products.
We
also
signed a joint venture agreement (JVA) with Yara and Israel Chemicals Limited
at
the end of 2001. Under this JVA, SQM, Yara, and Israel Chemicals Limited are
developing the liquid and soluble plant nutrient blends business through their
participation in a Belgian company called NU3 N.V. (“NU3”), to which SQM and
Israel Chemicals Limited contributed their blending facility in Belgium, and
Yara International ASA contributed its blending facility in Holland. With this
JVA, important synergies have been achieved, particularly in production costs,
administration and the marketing of soluble blends, strengthening the
development of new products and improving custumer services.
We
maintain stocks of our specialty plant nutrients in the main markets of the
Americas, Europe, Middle East and Africa, in order to facilitate prompt
deliveries to customers. In addition, we sell specialty plant nutrients directly
to some of our large customers. Sales are made pursuant to spot purchase orders
and short-term contracts.
In
connection with our marketing efforts, we provide technical and agronomical
assistance and support to our customers. By working closely with our customers,
we are able to identify new higher value added products and markets. Our
specialty plant nutrition products are used on a wide variety of crops,
particularly higher value-added crops that allow our customers to increase
yield
and command a premium price.
Our
customers are located in the northern and southern hemispheres. Consequently,
there are no material seasonal or cyclical factors that can materially affect
the sales of our specialty plant nutrient products.
Specialty
Plant Nutrition: Fertilizer Sales in Chile
We
market
specialty plants nutrients in Chile through Soquimich Comercial S.A. which
sells
these products either alone or in blends with other imported products, mainly
urea, triple super phosphate (TSP) and diammonium phosphate (DAP). Soquimich
Comercial sells imported fertilizers to farmers in Chile mainly for application
in the production of sugar beets, cereals, industrial crops, potatoes, grapes
and other fruits. Most of the fertilizers that Soquimich Comercial imports
are
purchased on a spot basis from different countries in the world.
We
believe that all contracts and agreements between Soquimich Comercial and third
party suppliers, with respect to imported fertilizers, contain standard and
customary commercial terms and conditions. During the preceding ten years,
Soquimich Comercial has experienced no material difficulties in obtaining
adequate supplies of such fertilizers at satisfactory prices, and we expect
continuing to do so in the future.
We
estimated that Soquimich Comercial’s joint sales of fertilizers represented
approximately 35% of total fertilizer sales in Chile during 2005, of which
no
single customer represented more than 3% of total fertilizer sales revenues,
and
of which the 10 largest customers in total represented less than 12% of
revenues.
Revenues
generated by Soquimich Comercial and its subsidiary Comercial Hydro S.A. – formerly
known as
Norsk Hydro Chile S.A. – represented
16.04% of the Company’s 2005 consolidated revenues. Soquimich Comercial’s
consolidated revenues were approximately US$144 million, US$140 million and
US$121 million in 2005, 2004 and 2003, respectively.
In
2003,
Soquimich Comercial acquired Norsk Hydro Chile S.A., a Chilean subsidiary of
Yara International ASA. Due to the similar nature of Norsk Hydro Chile S.A.’s
commercial operations compared to those carried out by Soquimich Comercial,
this
acquisition allowed the latter to improve its fertilizer distribution business
in Chile. Soquimich Comercial will continue with the distribution of fertilizers
produced by Yara International ASA and its affiliates in Chile.
22
Specialty
Plant Nutrition: Competition
We
believe we are the world’s largest producer of sodium and potassium nitrate for
agricultural use. S.C.M. Virginia, a Chilean nitrate and iodine company
ultimately controlled by Inverraz S.A., produces sodium nitrate as raw material
for potassium nitrate. S.C.M. Virginia is currently producing small amounts
of
sodium nitrate for agricultural use. Our sodium nitrate products compete
indirectly with specialty and commodity-type substitutes, which may be used
by
some customers instead of sodium nitrate depending on the type of soil and
crop
to which the product will be applied. Such substitute products include calcium
nitrate, ammonium nitrate and calcium ammonium nitrate.
In
the
potassium nitrate market we have one significant competitor: Trans Resources
International Inc., with its subsidiary Haifa Chemicals Ltd. in Israel. We
estimate that sales of potassium nitrate by Trans Resources International and
Haifa Chemicals accounted for approximately 37% of total world sales during
the
year 2005. The principal means of competition in the sale of potassium nitrate
are product quality, customer service, location, logistic and agronomic
expertise and price.
S.C.M.
Virginia produces potassium nitrate from caliche ore at a facility in northern
Chile. We believe that we have certain advantages over S.C.M. Virginia due
to,
among other factors, our greater experience with the processing of caliche
ore,
our proven processes, the size and nature of our caliche ore reserves, our
experience in marketing fertilizers, our efficient and proven logistics and
our
own production of potassium chloride in the north of Chile, which is an
essential raw material in the production of potassium nitrate.
ACF,
another Chilean producer, mainly oriented to iodine production, begun production
of potassium nitrate during 2005. We believe that ACF production will be lower
than S.C.M. Virginia.
Kemira,
a
Finnish producer, produces and sells potassium nitrate jointly with Arab Potash
through the company Kemapco in Jordan.
In
December 2004, we acquired the potassium nitrate facilities of Potash Corp.
in
Chile.
In
the
potassium sulfate market, we have several competitors of which the most
important are Kali und Salz GmbH (Germany), Tessenderlo Chemie (Belgium) and
Great Salt Lake Minerals Corp. (United States). We believe that those three
producers account for a majority of the world production of potassium sulfate.
We estimate that once we reach full production of potassium sulfate, we will
account for approximately 6% of total world sales.
Through
a
partially owned facility, NU3, we also produce soluble and liquid fertilizers
using our potassium nitrate as a raw material. Through this activity, we have
acquired production technology and marketing know-how, which we believe will
be
useful for selling our products to greenhouse growers and for use in certain
high-technology processes such as fertigation and hydroponics.
We
believe we are the largest Chilean producer of bulk specialty blends. In Chile,
our products mainly compete with imported fertilizer blends that use calcium
ammonium nitrate or potassium magnesium sulfate. Our specialty plant nutrients
also compete indirectly with lower-priced synthetic commodity-type fertilizers
such as ammonia and urea, which are produced by many producers in a highly
price-competitive market. Our products compete on the basis of advantages that
make them more suitable for certain applications as described
above.
Iodine
We
believe we are the world’s largest producer of iodine. In 2005, our revenues
from iodine and iodine derivatives amounted to approximately US$149.1 million,
representing approximately 17% of our total revenues in that year. We estimate
that our sales accounted for approximately 30% of world iodine sales by volume
in 2005. In January 2006, we acquired the iodine business of DSM, which
represented approximately 8% of worldwide iodine production in
2005.
Iodine:
Market
Iodine
and iodine derivatives are used in a wide range of medical, agricultural and
industrial applications as well as in human and animal nutrition products.
Iodine and iodine derivatives are used as a raw materials or catalysts in the
formulation of products, such as x-ray contrast media, biocides, antiseptics
and
disinfectants, pharmaceutical intermediates, polarizing films for Liquid Crystal
Displays (LCD), chemicals, herbicides, organic compounds, pigment and ink dyes.
Iodine is added in the form of potassium iodate or potassium iodide to edible
salt to prevent iodine deficiency disorders.
Iodine:
Our Products
We
produce iodine and, through a joint venture with Ajay, organic and inorganic
iodine derivatives. Through our joint venture with Ajay, we are also actively
participating in the iodine recycling business using iodinated side-streams
from
a variety of chemical processes in Europe and the United States.
Ajay-SQM
Group (ASG) was formed in mid 1990s, as a joint venture between SQM and Ajay
Chemical, a U.S.-based company. ASG has currently production plants in USA,
Chile and France and is the world’s leading inorganic and organic iodine
derivatives producer. In 2005, approximately 29% of SQM’s iodine sales were made
to ASG.
Consistent
with our business strategy, we are constantly working on the development of
new
applications for our iodine-based products, pursuing a continuing expansion
of
our businesses and maintaining our market leadership. In January 2006 SQM
acquired the iodine and iodine derivatives business of DSM Group. The
transaction included DSM’s iodine and iodine derivatives facilities located in
the first region of Chile and the mining reserves located in the first and
second region of Chile. Additionally, SQM acquired DSM’s iodine and iodine
derivatives commercial operation in Europe. The agreement involved a base
payment of US$ 72 million plus all the cash, accounts receivable and final
product inventories minus total liabilities. With a production capacity higher
than 2.0 th. metric tons, DSM reached an 8% global market share in 2005.
We
manufacture our iodine and iodine derivatives in accordance with international
quality standards and have qualified our iodine facilities and production
processes under the ISO-9001:2000 program, providing third party certification
of the quality management system and international quality control standards
that we have implemented.
The
following table sets forth our total sales and revenues from iodine and iodine
derivatives in the 2001-2005 period:
|
Sales
Volume
(in
metric tons)
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|||||||
|
|
|
|
|
|
|
|||||||||||
|
Iodine
and iodine derivatives
|
8,100
|
7,700
|
6,600
|
6,400
|
5,600
|
|||||||||||
|
Revenues
(in US$ millions)
|
149.1
|
110.5
|
84.6
|
84.1
|
81.4
|
|||||||||||
Iodine:
Marketing and Customers
In
2005,
we sold our iodine products to more than 300 customers in more than 80
countries. During the same year, most of our iodine production was exported:
approximately 30% was sold to customers in Europe, 37 % to customers in North
America, 13% to customers in Central and South America and 20% to customers
in
Asia, Oceania and other regions. Not considering sales to related parties,
no
single customer accounted for more than 10% of the Company’s iodine sales in
2005, and our ten largest customers accounted in the aggregate for approximately
44% of sales.
|
Sales
Breakdown
|
2005
|
|
2004
|
2003
|
2002
|
2001
|
||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Europe
|
30
|
%
|
27
|
%
|
34
|
%
|
36
|
%
|
37
|
%
|
||||||
|
North
America
|
37
|
%
|
38
|
%
|
40
|
%
|
41
|
%
|
45
|
%
|
||||||
|
Central
and South America
|
13
|
%
|
13
|
%
|
6
|
%
|
13
|
%
|
9
|
%
|
||||||
|
Others
|
20
|
%
|
22
|
%
|
20
|
%
|
10
|
%
|
9
|
%
|
||||||
We
sell
iodine through our own worldwide network of representative offices and through
our sales, support and distribution affiliates. We maintain stocks of iodine
at
our facilities throughout the world to facilitate prompt delivery to customers.
Iodine sales are made pursuant to spot purchase orders and short, medium and
long-term contracts. Long-term contracts generally specify annual minimum and
maximum purchase commitments, and prices which vary according to prevailing
market prices and in some cases with price caps.
24
Iodine:
Competition
SQM
and
several producers in Chile, Japan and the USA are the world’s main iodine
producers.
Japanese
producers extract iodine from underground brines, which are mainly obtained
together with the extraction of natural gas. Several Japanese producers have
also recycling facilities where they recover iodine and iodine derivatives
from
iodine waste streams.
We
estimate that eight Japanese iodine producers accounted for approximately 31%
of
world iodine sales in the year 2005. We estimate that the largest Japanese
producer, Ise Chemicals Ltd., accounted for approximately 9% of such world’s
iodine sales.
We
estimate that iodine producers in the United States (one of which is owned
by
Ise Chemicals) accounted for approximately 6% of world iodine sales in the
year
2005, while five Chilean companies, including SQM and DSM iodine business,
accounted for approximately 59% of such sales (30% by SQM and 29% by the other
Chilean producers including DSM iodine business).
The
prices of our iodine and iodine derivative products are determined by world
iodine prices, which are subject to market conditions. World iodine prices
vary
depending upon, among other things, the relationship between supply and demand
at any given time. The supply of iodine varies principally depending upon the
production of the few major iodine producers (including us) and their respective
business strategies. As a result of a steady growing demand, iodine prices
have
been increasing since the end of 2003. While prices were around US$13 per
kilogram in 2003, they reached an average of approximately US$19 per kilogram
in
2005.
Demand
for iodine varies depending upon overall levels of economic activity and the
level of demand in the medical, pharmaceutical, industrial and other sectors
that are the main users of iodine and iodine derivative products. Prices for
iodine and iodine derivative products in the future are expected to be
influenced by similar supply and demand factors and the business strategies
of
major producers, some of whom either have or can acquire additional production
capacity.
The
main
factors of competition in the sale of iodine and iodine derivative products
are
reliability, price, quality, customer services and the price and availability
of
substitutes. We believe we have competitive advantages compared to other
producers due to the size of our mining reserves, the installed capacity and
relatively lower production costs (as most part of our iodine is produced as
part of a process for other products -mainly sodium nitrate and potassium
nitrate for agricultural and industrial purposes). We believe our iodine is
competitive with that produced by other manufacturers in certain advanced
industrial processes. We also believe we have benefited competitively from
the
long-term relationship we have established with our larger customers. While
there are substitutes for iodine available for certain applications, such as
coloring processes and for use as antiseptics and disinfectants, there are
no
cost-effective substitutes currently available for the main nutritional,
pharmaceutical, animal feed, and main chemical uses of iodine, which together
account for most iodine sales.
Lithium
We
believe we are the world’s largest producer of lithium carbonate and one of the
world’s largest producers of lithium hydroxide. In 2005, our revenues from
lithium sales amounted to approximately US$81.4 million, representing
approximately 9% of our total revenues. We estimate that our sales accounted
for
approximately 36% of world’s lithium units used in production of lithium
chemicals. Lithium is also available in the form of lithium minerals. However,
there is virtually no overlapping among the markets demanding lithium minerals
and lithium chemicals.
Lithium:
Market
Lithium
carbonate is used in a variety of applications, including batteries, frits
for
the ceramic and enamel industries, heat resistant glass (ceramic glass), primary
aluminum, air conditioning chemicals, continuous casting powder for steel
extrusion, pharmaceuticals, and lithium derivatives. Lithium hydroxide is
primarily used as a raw material in the lubricating grease industry, as well
as
in the dyes and battery industries. Butyllithium is used as a catalyst in the
synthetic rubber and pharmaceutical industries.
Lithium:
Our Products
We
produce lithium carbonate at the Salar del Carmen facilities, near Antofagasta,
Chile, from solutions with high concentrations of lithium coming from the
potassium chloride production at the Atacama Salar. The technologies we use,
together with the high concentrations of lithium we obtain from the Atacama
Salar, allow us to be one of the lowest cost producers worldwide.
SQM
used
to produce lithium hydroxide through tolling operations in the United States
and
Russia. During the second half of 2005, we began to produce it at our lithium
hydroxide facility, at the Salar del Carmen next to our lithium carbonate
facility in Antofagasta. The lithium hydroxide facility has a production
capacity of 6,000 TM/per year and is one of the largest plants in the
world.
SQM
produces butyl lithium in its own plant located in Pasadena, Texas. Curreently,
this product is sold principally in the U.S. market. Shipments to overseas
markets started during the second quarter of 2006.
The
following table sets forth our total sales and revenues from lithium carbonate
and derivatives in the 2001-2005 period:
|
Sales
Volume
(in
metric tons)
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|||||||
|
|
|
|
|
|
|
|||||||||||
|
Lithium
carbonate and derivatives
|
27,800
|
31,200*
|
27,400
|
22,300
|
21,700
|
|||||||||||
|
Revenues
(in US$ millions)
|
81.4
|
62.6
|
49.7
|
37.3
|
37.0
|
|||||||||||
*
2004
volumes have been restated to reflect a reclassification from lithium brines
to
lithium carbonate. Revenues were not affected by this change.
Lithium:
Marketing and Customers
In
2005,
we sold our lithium products to approximately 240 customers in approximately
40
countries. Virtually all of our lithium products were sold overseas:
approximately 33% to customers in Europe, 25% to customers in North America,
31%
to customers in Asia and Oceania and 11% to customers in other regions. No
single customer accounted for more than 11% of the Company’s sales in 2005, and
our ten largest customers accounted in the aggregate for approximately 39%
of
sales.
|
Sales
Breakdown
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
||||||
|
|
|
|
|
|
|
|||||||||||
|
Europe
|
33
|
%
|
32
|
%
|
31
|
%
|
40
|
%
|
31
|
%
|
||||||
|
North
America
|
25
|
%
|
26
|
%
|
29
|
%
|
37
|
%
|
43
|
%
|
||||||
|
Asia
and Oceania
|
31
|
%
|
37
|
%
|
37
|
%
|
21
|
%
|
25
|
%
|
||||||
|
Others
|
11
|
%
|
5
|
%
|
3
|
%
|
2
|
%
|
1
|
%
|
||||||
Lithium:
Competition
Our
main
competitors in the lithium carbonate and lithium hydroxide businesses are
Chemetall GmbH (“Chemetall”, subsidiary of Rockwood Specialties Group Inc.) and
FMC Corporation (“FMC”). We estimate that they together sold approximately 49%
of lithium in the lithium chemicals market (excluding lithium minerals) in
2005.
Chemetall produces lithium carbonate in its operations located in Chile
(Sociedad Chilena del Litio Limitada) and Nevada, USA. Its production of
downstream lithium products is mostly performed in the United States, Germany
and Taiwan. FMC has production facilities in Argentina (Minera del Altiplano),
where they produce lithium chloride and lithium carbonate. Production of its
downstream lithium products is mostly performed in the United States and the
United Kingdom.
Additionally
lithium carbonate is being produced in China and we believe this production
will
increase in the near future.
We
estimate that world-wide sales of lithium chemicals expressed as lithium
carbonate equivalent (excluding lithium minerals) amounted to approximately
75,000 metric tons in 2005.
Industrial
Chemicals
In
addition to producing sodium nitrate for agricultural applications, we produce
three grades of sodium nitrate for industrial applications: industrial, refined
and technical grades. The three grades differ mainly in purity. Our industrial
grades of potassium nitrate also differ from agricultural grade potassium
nitrate in its degree of purity. We enjoy certain operational flexibility when
producing industrial sodium nitrate because it is produced from the same process
as its equivalent agricultural grade, needing only an additional step of
purification. We may, with certain constraints, shift production from one grade
to the other depending on market conditions. This flexibility allows us to
maximize yields as well as to reduce commercial risk. In addition to producing
industrial nitrates, we produce boric acid. Boric acid is a by-product of the
production of potassium sulfate. In 2005, our revenues from industrial chemicals
were approximately US$73.9 million, representing approximately 8% of our total
revenues for that year.
Industrial
Chemicals: Market
Industrial
sodium nitrate and potassium nitrate are used in a wide range of industrial
applications, including the production of glass, ceramics, explosives and
charcoal briquettes and various chemical processes and metal treatments. Boric
acid is mainly used in the glass, ceramics, fiberglass, enamels and as a raw
material in the fabrication of LCDs.
We
estimate that our sales of industrial sodium nitrate (excluding production
in
China and India, which is consumed internally) and potassium nitrate in 2005
accounted for 62%, and 30%, respectively, of worldwide sales in that
period.
Industrial
Chemicals: Our Products
We
produce technical potassium nitrate and three grades of industrial sodium
nitrate in crystallized and prilled form. We market our refined grade sodium
nitrate under the brand name "Niterox." We produce boric acid in crystalline
form.
The
following table sets forth our sales volumes of industrial chemicals and total
revenues in the 2001-2005 period:
|
Sales
Volume
(in
metric tons)
|
2005
|
|
2004(1)
|
|
2003
|
|
2002
|
|
2001
|
|
||||||
|
|
|
|
|
|
|
|||||||||||
|
Industrial
nitrates
|
176,300
|
192,800
|
193,200
|
187,300
|
186,999
|
|||||||||||
|
Sodium
Sulfate
|
25,300
|
29,900
|
54,200
|
63,200
|
66,742
|
|||||||||||
|
Boric
Acid
|
6,300
|
6,120
|
10,700
|
11,300
|
12,822
|
|||||||||||
|
Revenues
(in US$ millions)
|
74.0
|
73.1
|
73.7
|
70.8
|
69.6
|
|||||||||||
| (1) |
2004
figures have been restated to reflect a reclassification affecting
Industrial nitrates. Products that used to be included under SPN
were
relocated to reflect their industrial
status.
|
Our
aggregate current sodium nitrate production capacity is approximately 740,000
metric tons per year (agricultural and industrial grades). Within certain
production constraints, we may use our production capacity to produce either
agricultural or industrial sodium nitrate. We have a plant capacity to produce
approximately 260,000 metric tons per year of technical potassium nitrate and
10,000 metric tons per year of boric acid.
Industrial
Chemicals: Marketing and Customers
We
sold
our industrial nitrate products in approximately 50 countries in 2005.
Approximately 42% of our sales of industrial chemicals were made to customers
in
North America, 28% to customers in Europe, 17% to customers in Central and
South
America and 13% to customers in Asia, Oceania and other regions. No single
customer accounted for more than 7% of the Company’s sales of industrial
chemicals in 2005, and our ten largest customers accounted in the aggregate
for
approximately 37% of such sales.
27
|
Sales
Breakdown
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
||||||
|
|
|
|
|
|
|
|||||||||||
|
North
America
|
42
|
%
|
38
|
%
|
39
|
%
|
31
|
%
|
37
|
%
|
||||||
|
Europe
|
28
|
%
|
23
|
%
|
25
|
%
|
17
|
%
|
20
|
%
|
||||||
|
Central
and South America
|
17
|
%
|
24
|
%
|
12
|
%
|
24
|
%
|
27
|
%
|
||||||
|
Others
|
13
|
%
|
15
|
%
|
24
|
%
|
28
|
%
|
16
|
%
|
||||||
We
sell
our industrial chemical products mainly through our own worldwide network of
representative offices and through our sales and distribution affiliates. We
maintain inventories of our industrial sodium nitrate and technical potassium
nitrate products at our facilities in Europe, North America and South America
to
achieve prompt deliveries to customers. Industrial sodium nitrate and technical
potassium nitrate sales are made pursuant to spot purchase orders. Our Research
and Development department, together with our foreign affiliates, provide
technical support to our customers and work with them to develop new products
or
applications for our products.
Industrial
Chemicals: Competition
We
believe we are the world’s largest producer of industrial sodium nitrate. We
estimate that we accounted for approximately 62% of world production of
industrial sodium nitrate in 2005 (excluding China and India, for which reliable
estimates are not available). Our competitors are mainly in Europe and Asia.
These producers together represent 38% of total production and produce sodium
nitrate as a by-product of other production processes. In the refined grade
sodium nitrate market, Badische Anilin und Soda Fabrik AG (BASF), a German
corporation, and several producers in Japan (the largest of which is Mitsubishi
& Co. Ltd.), are highly competitive in the European and Asian markets. Our
industrial sodium nitrate products also compete indirectly with substitute
chemicals, including sodium carbonate, sodium hydroxide, sodium sulfate, calcium
nitrate and ammonium nitrate, which may be used in certain applications instead
of sodium nitrate and are available from a large number of producers
worldwide.
Our
main
competitor in the technical potassium nitrate market is Haifa Chemicals Ltd.,
which we estimate has a 30% market share. We estimate our market share at
approximately 30% for 2005.
Producers
compete in the market for industrial sodium nitrate and technical potassium
nitrate based on reliability, product quality, price and customer service.
We
believe that we are a low cost producer of industrial sodium nitrate and are
able to produce high quality products.
Raw
Materials
The
principal raw material we require for the production of nitrate, sulfate and
iodine products is caliche ore, which is obtained from surface mines. The
principal raw material for the production of potassium chloride, lithium
carbonate, potassium sulfate and boric acid is the brine extracted from the
Atacama Salar.
We
require water (for the leaching process and general purposes), sodium
carbonate (soda ash,
in lithium carbonate production and for neutralization of iodine solutions),
anti-caking, sulfur (in iodine production), ammonium nitrate (in the preparation
of the anfo that is used in explosives for mining operations), diesel (mainly
in
mining equipment), natural gas (in heat generation and fusion processes)
and electricity acquired from electric utilities (to supply the power
needs at
Pedro
de Valdivia, María Elena, Coya Sur, Pampa Blanca, Nueva Victoria,
Atacama Salar and the lithium carbonate plant in Salar del Carmen). Our
raw material costs
(excluding caliche ore and salar brines) represented approximately 11.7%
of our
cost of sales in 2005.
Most
of
our raw materials, especially energy-related raw materials, have experienced
significant price increases in the last year.
The
main
sources of water for our nitrate, sulfate and iodine facilities at Pedro de
Valdivia, María Elena and Coya Sur are the Loa and San Salvador rivers, which
run near our production facilities. Water for our Pampa Blanca, Nueva Victoria
and Atacama Salar facilities is obtained from wells near the production
facilities. We have permits from the Chilean Water Authority to explore for
additional non-potable water and permits to use granted water rights for an
indefinite period of time (based on specified maximum volumes) without charge.
In addition, we purchase potable water from local utility companies. We have
not
experienced significant difficulties obtaining the necessary water to conduct
our operations.
28
In
1998
we entered into a long-term (fifteen years) electricity supply agreement with
Norgener, a major Chilean electricity producer. During 1999, we entered into
a
long-term (ten years) electricity supply agreement with Electroandina S.A.,
also
a major Chilean electricity producer. Since April 2000, the Company has been
connected to the Sistema Interconectado del Norte Grande, (SING), which is
our
current electricity supplier and is the supplier for most cities and industrial
facilities in northern Chile. We are currently party to arbitration proceedings
with Electroandina and Norgener. For a discussion of risks related to
electricity supply, see Item 3. Key Information—Risk Factors.
In
May
2001, we entered into a 10-year gas supply contract with Distrinor S.A., which
we have estimated covers approximately 3,850,000 million Btu per year. This
gas
supply is sufficient to satisfy the requirements for the facilities that are
connected to a gas supply. Nonetheless, we are currently facing important
shortages in the supply of natural gas. For a discussion of risks related to
natural gas supply see Item 3. Key Information—Risk Factors.
We
obtain
ammonium nitrate, sulfur and soda ash from several large suppliers, principally
in Chile, Canada and the United States, respectively, under long-term contracts
or general agreements, some of which contain provisions for annual revisions
of
prices, quantities and deliveries. Currently we acquire potassium chloride
from
Sociedad Chilena del Litio Limitada, a local Chilean supplier, pursuant to
a
contract that expires in 2009. Diesel fuel is obtained under contracts
terminable upon specified notice by either party and which generally provide
for
sales of fuel at international market prices.
We
believe that all of the contracts and agreements between SQM and third-party
suppliers with respect to our principal raw materials contain standard and
customary commercial terms and conditions.
Government
Regulations
We
are
subject to the full range of government regulations and supervision generally
applicable to companies engaged in business in Chile, including labor laws,
social security laws, public health laws, consumer protection laws,
environmental laws, securities laws and anti-trust laws. These include
regulations to ensure sanitary and safe conditions in manufacturing plants.
We
conduct our mining operations pursuant to exploration concessions and
exploitation concessions granted pursuant to applicable Chilean law.
Exploitation concessions essentially grant a perpetual right to conduct mining
operations in the areas covered by the concessions, provided that annual
concession fees are paid (with the exception of the Atacama Salar rights, which
have been leased to us until 2030). Exploration concessions permit us to explore
for mineral resources on the land covered thereby for a specified period of
time, and to subsequently request a corresponding exploitation
concession.
We
also
hold water rights obtained from the Chilean water regulatory authority for
a
supply of water from rivers or wells near our production facilities sufficient
to meet our current and anticipated operational requirements. See Item 3. Key
Information for a discussion under "Risk Factors" of how changes in mining
and
water rights laws could affect our operating costs. We operate port facilities
at Tocopilla for shipment of products and delivery of certain raw materials
pursuant to maritime concessions, under applicable Chilean laws, which are
normally renewable on application, provided that such facilities are used as
authorized and annual concession fees are paid.
Under
Law
No. 16,319, the Company has an agreement with the Chilean Commission of Nuclear
Energy (the “CCHEN”) regarding the exploitation and sale of lithium from the
Atacama Salar. The agreement sets yearly quotas for the tonnage of lithium
authorized to be sold for each year of the Atacama Salar, as determined by
the
agreement.
The
following recent changes in Chilean law are likely to affect our
operations:
29
The
Chilean Congress recently approved modifications to the Water Code. The changes
to the Water Code include establishing annual fee payments for owners of water
rights that do not use the water associated with them. This fee does not affect
the holder’s right to use aquifers. The criteria used to determine what rights
or what part of such rights would be subject to this annual fee relate to
whether the resource is consumed or re-injected into the stream after its use
(defined as the water right’s “consumptive condition”), whether the use of the
resource is sporadic or permanent (frequency of use) and the geographical
location of the intake points relative to an area’s overall water
supply.
On
May
18, 2005, the Chilean Congress approved Law No. 20,026, also known as the
“Royalty II Law,” which established a royalty to be applied to mining activities
developed in Chile, levied on mining companies whose sales are equal to or
greater than the equivalent value of 12,000 metric tons of fine copper (MFT),
as
determined according to the London Metal Exchange Grade A copper cash quotation.
This new mining royalty, which will be applied from 2006 onwards, is levied
on
the “taxable operating income” (as this term is defined in Law No. 20,026) of
the mining company, at a rate that varies from 0.5% up to 5% depending on the
consolidated annual sales.
There
are
currently no material legal or administrative proceedings pending against the
Company with respect to any regulatory matter, except as discussed under
“Environmental Regulations” below, and we believe that we are in compliance in
all material respects with all applicable statutory and administrative
regulations with respect to our business.
Environmental
Regulations
Our
operations in Chile are subject to both national and local regulations related
to the environment’s protection. The fundamental environmental laws in Chile are
the Health Code and the Chilean Environmental Framework Law.
The
Chilean Environmental Framework Law created CONAMA, which is the governmental
agency in charge of supervising the due compliance with the Chilean
Environmental Framework Law. Under the Chilean Environmental Framework Law,
we
are required to conduct environmental impact studies of any future projects
or
activities (or their significant modifications) that may affect the environment.
CONAMA evaluates environmental impact studies submitted for its approval and
also oversees the implementation of projects. The Chilean Environmental
Framework Law also enables private citizens, public agencies or local
authorities to challenge projects that may affect the environment, either before
these projects are executed or once they are already operating. Enforcement
remedies available include temporary or permanent closure of facilities and
fines.
Chilean
environmental regulations have become increasingly stringent in recent years,
both in respect of the approval of new projects and in connection with the
implementation and development of projects already approved. This trend is
likely to continue and, furthermore, recently implemented environmental
regulations in Chile have created uncertainty because rules and enforcement
procedures for these regulations have not been fully developed. Given public
interest in environmental enforcement matters, these regulations may also be
subject to political considerations that are beyond our control.
On
August
10, 1993, the Ministry of Health published in the Official Gazette a
determination pursuant to applicable air quality standard regulations stating
that atmospheric particulate levels at our production facilities in María Elena
and Pedro de Valdivia exceeded quality standards for breathable air affecting
the nearby towns. The high particulate matter levels are principally from dust
produced during the processing of caliche ore, particularly the crushing of
the
ore before leaching. Subsequently, residents of the town of Pedro de Valdivia
were relocated to the town of María Elena, practically removing Pedro de
Valdivia from the scope of the determination of the Ministry of Health. A plan
to reduce the atmospheric particulate levels below permissible levels by July
2000 was approved, with certain amendments, by Decree Nº164/2000. Although we
followed the plan and reduced substantially the atmospheric particulate levels
at our principal production facilities, as a result of the investments and
processes implemented, we were not able to fully comply with the July 2000
timetable. Resolution Nº384, published in the Official Gazette on May 16, 2000,
initiated the revision and reformulation of the plan. The new plan was published
by Decree N°37/2004 on March 2004, and it demands to reduce 80% of the emissions
for atmospheric particulate material in two years. We design a new project
that
modifies the milling and screening systems used in the processing of the caliche
ore at María Elena facilities, which should allow for the necessary reduction of
particulate material emissions. An environmental impact study for the project
was presented to the Environment Commission and it was approved through
Resolution Nº270 on October 2005. Upon issuing the approval for the
environmental impact study, the Environmental Commission issued Decree N°53975,
which authorizes this project as the one through which we will comply with
the
emission reductions asked for in Decree N° 37/2004. The project is under
construction and its start up is scheduled for third quarter 2006.
30
We
continuously monitor the impact of our operations on the environment and have
made, from time to time, modifications to our facilities trying to eliminate
any adverse impact. Also, over time, new environmental standards and regulations
have been enacted, which have required minor adjustments or modifications of
our operations for full compliance. We anticipate that additional laws and regulations
will be enacted over time with respect to environmental matters. While we believe
that we will continue to be in compliance with all applicable environmental
regulations of which we are now aware, there can be no assurance that future
legislative or regulatory developments will not impose material restrictions
on our operations. We are both committed to complying with all applicable environmental
regulations and applying an Environmental Management System (EMS) to continuously
improve our environmental performance.
We
have
submitted and will continue to submit several environmental impact assessment
studies related to our projects to the governmental authorities. We require
the
authorization of these submissions in order to maintain and to increase our
production capacity.
31
4.C. Organizational
Structure
All
of
our principal operating subsidiaries are essentially wholly-owned, except for
Soquimich Comercial, which is 61% owned by SQM and whose shares are listed
and
traded on the Chilean Stock Exchanges, and Ajay SQM Chile S.A., which is 51%
owned by SQM. The following is a summary of our main subsidiaries as of March
31, 2006. For a list of all our consolidated subsidiaries see Note 2(a) to
the
Consolidated Financial Statements.
|
Main
subsidiaries
|
|
Activity
|
|
Country
of Incorporation
|
SQM
Beneficial
Ownership
Interest (Direct/Indirect)
|
|
|
|
|
|
|
|||
|
SQM
Nitratos S.A.
|
Extracts
and sells Caliche ore to
subsidiaries and affiliates of SQM
|
Chile
|
100%
|
|||
|
SQM
Industrial S.A.
|
Produces
and markets the Company’s products directly and through other
subsidiaries and affiliates of SQM
|
Chile
|
100%
|
|||
|
SQM
Salar
S.A.
|
Exploits
the Atacama Salar to produce and market the Company’s products directly
and through other subsidiaries and affiliates of SQM
|
Chile
|
100%
|
|||
|
Minera
Nueva Victoria S.A.
|
Produces
and markets the Company’s products directly and through other subsidiaries
and affiliates of SQM
|
Chile
|
100%
|
|||
|
Servicios
Integrales de Tránsitos y Transferencias S.A. (SIT)
|
Owns
and operates a rail transport system and also owns and operates the
Tocopilla port facilities
|
Chile
|
100%
|
|||
|
Soquimich
Comercial S.A.
|
Markets
domestically the Company’s specialty plant nutrition products and imports
fertilizers for re-sale in Chile
|
Chile
|
61%
|
|||
|
Ajay-SQM
Chile S.A.
|
Produces
and markets the Company’s iodine and iodine derivatives
|
Chile
|
51%
|
|||
|
Sales
and distribution affiliates in the United States, Belgium, Brazil,
Venezuela, Ecuador, Peru, Argentina, Mexico, South Africa and other
locations.
|
Market
the Company’s products throughout the world
|
Various
|
32
4.D.
Property,
Plants And Equipment
Discussion
of our mining rights is organized below according to the geographic location
of
our mining operations. SQM's mining interests located throughout the valley
of
the Tarapacá and Antofagasta regions of northern Chile (el Norte Grande),
referred to collectively as the "Caliche Ore Mines" are discussed first. Second
are the company's mining interests within the Atacama Desert in the eastern
region of el Norte Grande (the "Atacama Salar Brines") are then
dicussed.
DESCRIPTION
OF THE CALICHE ORE MINES
As
of
December 31 2005, we hold exploration rights or exploitation rights to mineral
resources representing approximately 2,082,000 hectares. We have six mines
covering an area of approximately 380,700
hectares. Of these six mines, four are being exploited and two are without
current operations. We have also submitted applications for exploration and
exploitation rights for more than 358,500 additional hectares. Additionally,
at
the beginning of 2006 we incorporated the Iris mine as described
below.
Pedro
de Valdivia
The
mine
and facilities that we operate at Pedro de Valdivia are located 170 kilometers
northeast of Antofagasta and are accessible by highway. These facilities have
been in operation for approximately 76 years and were previously owned and
operated by Anglo Lautaro. The area currently being mined is located
approximately 25 kilometers west of the Pedro de Valdivia production facilities.
Our mining facilities at Pedro de Valdivia have a Weighted Average Age of
approximately 9.1 years. Electricity, diesel and natural gas, and fuel oil
are
the primary source power for this operation.
María
Elena
The
mine
and facilities that we operate at María Elena are located 220 kilometers
northeast of Antofagasta and are accessible by highway. These facilities have
been in operation for approximately 81 years and were previously owned and
operated by Anglo Lautaro. The area currently being mined is located
approximately 14 kilometers north of the María Elena production facilities. The
power source utilized is mainly electricity, diesel, natural gas and fuel oil.
The Weighted Average Age of the Company's mining facilities at María Elena is
approximately 11 years.
Pampa
Blanca
We
currently conduct caliche ore operations at Pampa Blanca, which is located
100
kilometers northeast of Antofagasta and is accessible by highway. Beginning
in
1987, the output from Pampa Blanca was derived from old waste ore deposits.
In
1997 we began mining new caliche ore deposits at Pampa Blanca. Ore from this
mine is transported by truck to nearby heap leaching pads where it is used
to
produce iodine and nitrate salts. Various companies conducted mining operations
at the site in the late 1920s. The Weighted Average Age of the ore recovery
facilities at Pampa Blanca is approximately 11.5 years. The power source
utilized is mostly electricity, produced by diesel mobile
generators.
Nueva
Victoria
At
the
end of 2002, we restarted our caliche ore operations at Nueva Victoria. This
site is located 180 kilometers north of María Elena and is accessible by
highway. Ore from Nueva Victoria is transported by truck to heap leaching pads
where it is then used to produce iodine. The Weighted Average Age of the ore
recovery facilities at Nueva Victoria is approximately 4.6 years. The power
source utilized is mostly electricity, obtained from the SING.
Mapocho—Inactive
The
Mapocho mine is located 67 kilometers northeast of Iquique in the First Region
and is accessible by highway. During its years of operation, Mapocho was mined
for caliche ore. Production started in 1996 from old waste deposits and then
shifted to new caliche ore deposits in 1997. The ore in Mapocho was transported
by truck to heap leaching pads and then used to produce iodine. We shut down
the plant and dismantled it in 1999. This mine represents a future extension
of Nueva Victoria mining operations.
33
Soronal—Stand
By
We
have
proven and probable reserves at Soronal, which is located 35 kilometers to
the
north of Nueva Victoria and is accessible by highway. This area has not been
exploited yet, but represents a future extension of Nueva Victoria mining
operations.
Iris
Formerly
the mine used by DSM, it is not currently in operation. This mine was in
operation during the first half of 2006 and it is not expected to be in
operation during the rest of the year. This area has not been further explored
by us since its acquisition at the beginning of 2006, therefore we have not
carried out an estimation of proven or probable reserves. This mine represents
a
future extension of Nueva Victoria mining operations, or a continuity of
operations of the Iris iodine operations.
Description
of the Atacama Salar Brines
Atacama
Salar Brines
We
hold
rights to exploit the mineral resources in an area covering approximately
196,000 hectares of land in the Atacama Salar in northern Chile, and have
applied for additional rights to exploit and explore approximately 975 hectares
and 141,000 hectares, respectively. The Weighted Average Age of our mining
facilities at Atacama Salar is approximately 7.7 years. The main source of
power
used by the operation is electricity.
Additional
Mining Operations Leased in the Atacama Salar Region
SQM
Salar
S.A. holds exclusive rights to exploit the mineral resources in an area covering
approximately 196,000 hectares of land in the Atacama Salar in northern Chile.
These rights include 147,000 hectares that are owned by Corfo and leased to
SQM
Salar S.A. pursuant to a lease agreement between Corfo and SQM Salar S.A.,
(the
Lease Agreement). Corfo may not unilaterally amend the Lease Agreement and
the
rights to exploit the resources cannot be transferred. The Lease Agreement
provides that SQM Salar S.A. is responsible for the maintenance of Corfo´s
exploitation rights and for annual payments to the Chilean government and
expires on December 31, 2030. SQM Salar S.A. is required to make lease-royalty
payments to Corfo according to specified percentages of the value of production
of minerals extracted from the Atacama Salar brines. In the years
2005, 2004 and 2003, royalty payments amounted to approximately US$ 6.8 million,
US$4.9 million and US$4.0 million, respectively.
In
addition to the mining rights leased to SQM Salar S.A. described above, Corfo
has exclusive mining rights covering a total area of approximately 58,000
additional hectares in the Atacama Salar. Under the terms of the Atacama Salar
Project Agreement between Corfo and SQM Salar S.A., (the Project Agreement),
Corfo has agreed that it will not permit any other person to explore, exploit
or
mine any mineral resources in those 58,000 hectares of the Atacama Salar. The
Project Agreement expires on December 31, 2030.
Concessions,
Extraction Yields and Reserves for the Caliche Ore Mines and Salar
Brines
Concessions
Generally
Caliche
ore.
We hold
our mineral rights pursuant to one of two types of exclusive concessions granted
pursuant to applicable law in Chile:
(1)
"Exploitation Concessions" These are concession whereby we are legally entitled
to use the land in order to exploit the mineral resources contained therein
on a
perpetual basis subject to annual payments to the Chilean government;
or
34
(2)
"Exploration Concessions" These are concession whereby we are legally entitled
to use the land in order to explore for mineral resources for a period of two
years, at the expiration of which the concession may be extended one time only
for two additional years if the area covered by the concession is reduced by
half.
An
Exploration Concession is generally obtained for purposes of evaluating the
mineral resources in an area. Generally, after the holder of the Exploration
Concession has determined that the area contains exploitable mineral resources,
such holder will apply for an Exploitation Concession for the area. Such
application will give the holder absolute priority with respect to such
Exploitation Concession against third parties. If the holder of the Exploration
Concession determines that the area does not contain commercially exploitable
mineral resources, the concession is usually allowed to lapse, although it
is
our policy to convert substantially all Exploration Concessions to Exploitation
Concessions. An application also can be made for an Exploitation Concession
without first having obtained an Exploration Concession for the area
involved.
Concessions
for the Caliche Ore Mines and Salar Brines
Approximately
72% of our total mining concessions are held pursuant to Exploitation
Concessions and 28% pursuant to Exploration Concessions, not including areas
within the Atacama Salar Mines. Of the exploitation concessions, approximately
84% have been already granted pursuant to applicable Chilean law, and
approximately 16% are in the process of being granted. Of the exploration
concessions, approximately 95% have been already granted pursuant to applicable
Chilean law, and approximately 5% are in the process of being granted. Chile
owns substantially all the surface land covering our Exploration and
Exploitation Concessions.
We
made
payments to the Chilean government for our Exploration and Exploitation
Concessions of approximately US$4,924 million in the year 2005.
The
following table sets forth our exploitation and exploration concessions on
December 31, 2005:
|
Exploitation
Concessions
|
Exploration
Concessions
|
||||||||||||||||||
|
|
|
||||||||||||||||||
|
Mines(*)
|
Total
number
|
hectares
|
Total
number
|
hectares
|
Total
number
|
hectares
|
|||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
|
Pedro
de Valdivia
|
698
|
93,252
|
15
|
619
|
713
|
93,871
|
|||||||||||||
|
Maria
Elena
|
651
|
126,000
|
29
|
1,102
|
680
|
127,102
|
|||||||||||||
|
Pampa
Blanca
|
513
|
96,908
|
5
|
340
|
518
|
97,248
|
|||||||||||||
|
Nueva
Victoria
|
63
|
8,128
|
7
|
1,369
|
70
|
9,497
|
|||||||||||||
|
Mapocho
|
61
|
8,240
|
11
|
367
|
72
|
8,607
|
|||||||||||||
|
Soronal
|
311
|
42,605
|
18
|
1,824
|
329
|
44,429
|
|||||||||||||
|
Atacama
Salar
|
133
|
197,708
|
487
|
141,000
|
620
|
338,708
|
|||||||||||||
|
Sub
total mines
|
2,430
|
572,841
|
572
|
146,621
|
3,002
|
719,462
|
|||||||||||||
|
Other
caliche areas
|
5,277
|
1,425,147
|
2,401
|
635,429
|
7,678
|
2,060,576
|
|||||||||||||
|
Salars
and other areas
|
267
|
50,008
|
126
|
33,500
|
393
|
83,508
|
|||||||||||||
|
Sub
total other areas
|
5,544
|
1,475,155
|
2,527
|
668,929
|
8,071
|
2,144,084
|
|||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
|
Total
|
7,974
|
2,047,996
|
3,099
|
815,550
|
11,073
|
2,863,546
|
|||||||||||||
(*)As
Iris was acquired at the beginning of 2006, we have not included its
concessions
35
Extraction
Yields
The
following table sets forth certain operating data relating to each of our mines
(1):
(Values
in thousands unless otherwise stated)
|
|
2005
|
|
2004
|
|
2003
|
|
||||
|
|
|
|
||||||||
|
Pedro
de Valdivia
|
|
|
|
|||||||
|
|
|
|
|
|||||||
|
Metric
tons of ore mined
|
12,362
|
12,029
|
11,583
|
|||||||
|
Average
grade Nitrate (% by weight)
|
7.2
|
7.2
|
6.9
|
|||||||
|
Iodine
(parts per million (ppm))
|
402
|
378
|
391
|
|||||||
|
Metric
tons of Crystallized Nitrate Produced
|
476
|
458
|
430
|
|||||||
|
Metric
tons of Iodine Produced
|
2.6
|
2.3
|
2.0
|
|||||||
|
|
||||||||||
|
|
|
|
||||||||
|
María
Elena (2)
|
||||||||||
|
|
||||||||||
|
Metric
tons of ore mined
|
5,917
|
5,835
|
5,783
|
|||||||
|
Average
grade Nitrate (% by weight)
|
8.0
|
8.6
|
8.5
|
|||||||
|
Iodine
(ppm)
|
428
|
485
|
468
|
|||||||
|
Metric
tons of Crystallized Nitrate Produced
|
479
|
480
|
440
|
|||||||
|
Metric
tons of Iodine Produced (Eq. 97%)
|
1.4
|
1.5
|
1.4
|
|||||||
|
|
||||||||||
|
|
|
|
||||||||
|
Pampa
Blanca
|
||||||||||
|
|
||||||||||
|
Metric
tons of ore recovered
|
5,309
|
4,976
|
4,838
|
|||||||
|
Iodine
(ppm)
|
520
|
560
|
560
|
|||||||
|
Metric
tons of Iodine Produced
|
1.5
|
1.4
|
1.3
|
|||||||
|
|
||||||||||
|
|
|
|
||||||||
|
Nueva
Victoria
|
||||||||||
|
|
||||||||||
|
Metric
tons of ore recovered
|
7,140
|
6,776
|
5.010
|
|||||||
|
Iodine
(ppm)
|
504
|
505
|
549
|
|||||||
|
Metric
tons of Iodine Produced
|
2.2
|
2.0
|
1.6
|
|||||||
|
|
||||||||||
|
|
|
|
||||||||
|
SQM
Salar
|
||||||||||
|
|
||||||||||
|
Metric
tons of Lithium Carbonate Produced
|
27
|
27
|
24
|
|||||||
|
Metric
tons of Potash Produced
|
632
|
638
|
651
|
|||||||
|
Metric
tons of Potassium Sulfate Produced
|
162
|
178
|
157
|
|||||||
|
Metric
tons of Boric Acid
|
9
|
9
|
9
|
|||||||
| (1) |
Note
that because the Mapocho and Soronal mines are not currently
being mined,
there is no data to report with respect to extraction Yields.
Additionally
the DSM iodine business acquisition was not
included.
|
| (2) |
Includes
production at Coya Sur from treatment of fines and nitrates from
pile
treatment at Pampa Blanca, María Elena and Pedro de
Valdivia.
|
36
Reserves
Caliche
ore
Our
in-house staff of geologists and mining engineers prepares our estimates of
caliche ore reserves. The proven and probable reserve figures presented below
are estimates, and no assurance can be given that the indicated levels of
recovery of nitrates and iodine will be realized. See Item 3. D. Risk
factors.
We
estimate ore reserves based on engineering evaluations of assay values derived
from sampling of drill-holes and other openings. Several drill-hole spacing
have
been used for recognizing mining resources. Normally, we start with 400 x 400
meters and then we reduce spacing to 200x200 meters and 100x100 meters and
50x50
meters. The geological occurrence of caliche mineral is unique and different
from other metallic and non-metallic minerals. Caliche ore is found in large
horizontal layers at depths ranging from 1 to 4 meters and has an overburden
between 0 to 2 meters. This horizontal layering is a natural geological
condition and allows the Company to estimate the continuity of the caliche
bed
based on surface geological reconnaissance and analysis of samples and trenches.
Mining resources can be calculated using the information from the drill-hole
sampling.
According
to our experience in caliche ore, the grid pattern drill-holes with spacing
equal to or less than 100 meters produce data on the caliche resources that
is
sufficiently defined to consider them measured resources and then, adjusting
for
economic and legal aspects, as proven reserves. Similarly, the information
obtained from detailed geologic work and samples taken from grid pattern
drill-holes with spacing equal to or less than 200 meters can be considered
indicated resources and then, adjusting for economic and legal aspects, as
probable reserves. The degree of certainty of probable reserves, although lower
than that of proven reserves, is high enough to assume continuity between points
of observation.
The
updated estimates of our proven reserves of caliche ore at each of our mines,
as
of December 2005, are as follows:
|
Mine
|
Proven
Reserves
(millions
of metric tons)
|
Nitrate
Average Grade
(percentage
by weight)
|
Iodine
Average Grade
(parts
per million)
|
|||
|
|
|
|
|
|||
|
Pedro
de Valdivia
|
144.0
|
7.2%
|
387
|
|||
|
María
Elena
|
146.8
|
7.3%
|
415
|
|||
|
Pampa
Blanca
|
81.4
|
6.3%
|
546
|
|||
|
Nueva
Victoria
|
95.3
|
4.2%
|
467
|
|||
|
Mapocho
|
4.6
|
5.3%
|
436
|
|||
|
Soronal
|
158.9
|
7.1%
|
405
|
In
addition, the updated estimates of our probable reserves of caliche ore at
each
of our principal mines as of December 2005, are the following:
|
Mine
|
Probable
Reserves
(millions
of metric tons)
|
Nitrate
Average Grade
(percentage
by weight)
|
Iodine
Average Grade
(parts
per million)
|
|||
|
|
|
|
|
|||
|
Pedro
de Valdivia
|
134.7
|
6.9%
|
441
|
|||
|
María
Elena
|
97.6
|
7.3%
|
380
|
|||
|
Pampa
Blanca
|
423.1
|
6.0%
|
526
|
|||
|
Nueva
Victoria
|
66.0
|
3.7%
|
443
|
|||
|
Soronal
|
59.1
|
7.6%
|
362
|
Additionally,
Mapocho, an area farther to the north of our current operations in Nueva
Victoria has estimated probable reserves, based on 400x400 sampling, of
approximately 234 million metric tons of Caliche with an average nitrate grade
of approximately 6.9% and an average iodine grade of approximately 524
ppm.
The
proven and probable reserves shown above are the result of exploration and
evaluation in approximately 15% of the total caliche-related mining property
of
our Company. However, we have explored those areas in which we believe there
is
a higher potential of finding high-grade caliche ore minerals. The remaining
85%
of this area has not been explored yet or has limited reconnaissance as inferred
or hypothetical resources.
Proven
and probable reserves are determined using extensive drilling, sampling and
mine
modeling which attempts to account for restrictions for cut-off grades, ore
type, dilution, waste-to-ore-ratio and ore depth from which economic feasibility
has been determined. Nonetheless, metric tons of nitrates and iodine contained
in the proven and probable caliche ore reserves are shown before exploitation
losses and prior to any losses from metallurgical treatment.
37
Considering
the normal lower degree of certainty in probable reserves compared to proven
reserves, and in accordance with caliche ore continuity, sampling and reserves
calculations, it is possible to transform the values calculated as probable
reserves in order to show them at similar basis of proven reserves. The
transforming factors depend on the different geologic conditions and continuity
recognized mine by mine, but on average are higher than 60%.
Additionally,
proven and probable reserves could be affected by mining exploitation methods
which result in differences between reserves estimates that are available for
exploitation in the mining plan and recoverable material that is finally
transferred to the leaching vats or heaps. The average mining exploitation
factor for our different mines ranges between 80% and 90%. Additionally, the
average global metallurgical recoveries of processes for nitrate and iodine
contained in the recovered material varies between 55% to 65%.
Exploration
Program.
We
maintain a permanent program of exploration and resource evaluation on the
land
surrounding the mines at Pedro de Valdivia and María Elena and at other sites
for which we have the appropriate concessions. In 2005,
we
continued a basic reconnaissance program on the new mining properties including
a geological mapping of the surface and spaced drill-holes campaign covering
approximately 73,000 hectares. Additionally, we conducted general explorations
based on a closer grid pattern drill-holes in a total area of approximately
3,938 hectares and, in addition, carried out in-depth sampling of approximately
871 hectares (627 hectares at Pedro de Valdivia, 42 hectares at María Elena, 202
hectares at Pampa Blanca). The exploration and development program in 2006
calls
for a basic reconnaissance program over a total area of 150,000 hectares,
general exploration over a total area of about 1,257 hectares and, in addition,
in-depth sampling of approximately 1,659 hectares.
Reserves
and Concessions for the Atacama Salar Brines
Reserves
for the Atacama Salar Brines
Our
in-house staff of geologists and mining engineers prepares our estimates of
potassium, sulfate, lithium and boron reserves at the Atacama Salar. We have
explored 52% of the land (to a depth between 40 and 100 meters) to which we
hold
exploitation rights in the Atacama Salar mines and estimate that our proven
and
probable reserves, based on economic restrictions, geostatistical analysis
and
brine sampling up to a depth of 30 and 50 meters, are as
follows:
|
Proven
Reserves
(millions
of metric tons)
|
Probable
Reserves
(millions
of metric tons)
|
|||
|
|
|
|||
|
Potassium
|
39.8
|
5.0
|
||
|
Sulfate
|
35.9
|
1.6
|
||
|
Lithium
|
2.0
|
1.4
|
||
|
Boron
|
1.1
|
0.2
|
The
proven and probable reserves are based on drilling, brine sampling and
geo-statistic reservoir modeling in order to estimate brine volumes and their
composition. This procedure considers process restrictions from which economic
feasibility has been determined to produce commercial products like potassium
chloride, potassium sulfate, lithium carbonate and boric acid. Nonetheless,
metric tons of potassium, sulfate, lithium and boron considered in the proven
and probable reserves are shown before losses from evaporation processes and
metallurgical treatment.
The
recoveries of each ion depend on brine composition, which changes in time,
and
the process applied to produce the desired commercial products. Ponds and
metallurgical recoveries for potassium vary from 67% to 29% while for sulfate
vary from 34% to 28%. The recoveries for lithium vary from 29% to 25% and for
boron is approximately 30%.
38
PORTS
AND WATER RIGHTS
We
operate port facilities at Tocopilla for shipment of products and delivery
of
certain raw materials pursuant to renewable concessions granted by Chilean
regulatory authorities, provided that such facilities are used as authorized
and
annual concession fees are paid by us. We also hold water rights for a supply
of
water from rivers and wells near our production facilities sufficient to meet
our current and anticipated operational requirements.
39
The
map
below shows the location of SQM's principal mining operations and land
concessions.
40
PRODUCTION
FACILITIES
Our
principal production facilities are located near our mines and extraction
facilities in northern Chile. The following table sets forth the principal
production facilities as of December 31, 2005:
|
Location
|
Type
of Facility
|
Approximate
Size (1) (Hectares)
|
||
|
|
|
|
||
|
Pedro
de Valdivia
|
Nitrate,
sulfate and iodine production
|
126
|
||
|
María
Elena
|
Nitrate,
sulfate and iodine production
|
110
|
||
|
Coya
Sur
|
Nitrate,
sulfate and iodine production
|
232
|
||
|
Pampa
Blanca
|
Concentrated
nitrate salts and iodine production
|
86
|
||
|
Nueva
Victoria
|
Iodine
production
|
11
|
||
|
Atacama
Salar(2)
|
Potassium
chloride, lithium chloride, potassium sulfate and boric
acid
|
2,288
|
||
|
Salar
del Carmen, Antofagasta
|
Lithium
carbonate and lithium hydroxide production
|
28
|
||
|
Salar
del Carmen, Antofagasta
|
Boron
production
|
4
|
||
|
Tocopilla
|
Port
facilities
|
24
|
| (1) |
Includes
production facilities, solar evaporation ponds and leaching heaps,
if
any.
|
| (2) |
We
lease
the exploitation rights used at the Atacama Salar from
Corfo.
|
We
own,
directly or indirectly through Subsidiaries, all of the facilities, free of
any
material liens, pledges or encumbrances, and believe that they are suitable
and
adequate for the business we conduct in them. As of December 31, 2005, the
gross
book value of the property and associated plant and equipment at the Pedro
de
Valdivia, María Elena, Coya Sur, Pampa Blanca, Nueva Victoria, Atacama Salar,
Salar del Carmen and Tocopilla was approximately US$179.15 million, US$284.50
million, US$120.99 million, US$16.47 million, US$137.64 million, US$366.32
million, US$96.84 million and US$59.95 million, respectively.
In
addition to the above-listed facilities, we operate a computer and information
system linking our principal subsidiaries to our operating facilities throughout
Chile via a local area network. The computer and information system is used
mainly for accounting, monitoring of supplies and inventories, billing, quality
control and research activities. The system's mainframe computer equipment
is
located at our offices in Santiago.
The
Weighted Average Age of our production facilities at Pedro de Valdivia, María
Elena, Coya Sur, Nueva Victoria, Atacama Salar and Salar del Carmen is
approximately 9.1 years, 11.0 years, 6.7 years, 4.6 years, 7.7 years and 5.6
years, respectively. The Weighted Average Age of our iodine facilities at Pampa
Blanca is approximately 11.5 years. Our railroad line between our production
facilities and Tocopilla was originally constructed in 1890, but the rails,
locomotives and rolling stock have been replaced and refurbished as needed.
The
Tocopilla port facilities were originally constructed in 1961 and have been
refurbished and expanded since that time. The Weighted Average Age of the
Tocopilla port facilities is approximately 12.5 years. We consider the condition
of our principal plants and equipment to be good.
We
maintain different projects to improve our production methods, to increase
production capacity of current products and to develop new products and markets.
Therefore, we have developed a capital expenditure program calling for
investments totaling approximately US$660 million. For further discussion see
item 4.A History And Development Of The Company - Capital Expenditure
Program.
TRANSPORTATION
AND STORAGE FACILITIES
We
own
and operate railway lines and equipment, as well as port and storage facilities,
for the transport and handling of finished products and consumable
materials.
The
main
center for our production and storage of raw material is the hub composed by
the
facilities in Coya Sur, Pedro de Valdivia and María Elena. Our Salar de Atacama
facilities constitute the second largest concentration of plants and raw
material storage. Other facilities include Nueva Victoria, Pampa Blanca, the
Yumbes nitrates plant and the finished product plants of Boron, Lithium
Carbonate and Lithium Hydroxide. The Tocopilla Port Terminal, which we own,
is
the main facility for storage and shipment of our products. In Juanuary 2006
the
company acquired, a new facility in Iris, near Nueva Victoria, containing
nitrates and iodine ores as well as iodine and iodine derivatives finished
product plants.
Nitrates
raw materials are produced and first stored at our Pampa Blanca, Pedro de
Valdivia and María Elena mines, and then transported by rail (Pedro de
Valdivia), conveyor belt (María Elena) and truck (others) to the plants
described in the next paragraph, for further production processes.
Nitrates
finished products are produced at our facilities in Pedro de Valdivia, María
Elena and Coya Sur and then transported by our rail system to Tocopilla Port
Terminal, where they are stored and shipped, either bagged or in bulk.
Potassium
chloride is produced at our facilities in the Salar de Atacama and transported
either to Tocopilla Port Terminal or Coya Sur by a dedicated dual transport
system (rail/truck) owned by a third party dedicated contractor. Product going
to Coya Sur is used as raw material for the production of potassium nitrate
or
for potassium chloride finished product.
Potassium
sulfate and boric acid are both produced at our facilities in the Salar de
Atacama and then are transported to Tocopilla Port Terminal to follow the rest
of the process. Potassium sulfate is transported by the same dual mode system
as
potassium chloride, and boric acid is transported, already bagged at the Salar
de Atacama, by contracted truck company.
Lithium
solutions, produced at our facilities in the Salar de Atacama, are transported
to the lithium carbonate facility in the Salar del Carmen area where finished
lithium carbonate is produced. Part of the lithium carbonate is fed to the
adjacent lithium hydroxide plant, where finished lithium hydroxide is produced.
These two products are bagged and stored in the premises and are subsequently
transported by truck to Tocopilla Port Terminal or to the Antofagasta Terminal
for shipment in charter vessel or container vessels.
Boron
raw
material (ulexite) is produced in the Salar de Ascotán near Ollague and then
transported to the boron facility 15 km north of the lithium complex in Salar
del Carmen. In this plant our boron products are produced and then handled
in
the same way as the lithium products.
Sodium
Sulfate production was stopped mid 2005 as production efforts were focused
on
the more important nitrates products.
Iodine
raw material, obtained in the same mines as nitrates, is processed, bagged
and
stored exclusively in the facilities of Pedro de Valdivia, Iris and Nueva
Victoria, and then shipped by truck to Antofagasta or Iquique for container
vessel transport or by truck to Santiago, where iodine derivatives are
produced.
The
facilities at Tocopilla Port Terminal are located approximately 186 kilometers
north of Antofagasta and approximately 124 kilometers west of Pedro de Valdivia,
84 kilometers west of María Elena and Coya Sur and 372 kilometers west of the
Atacama Salar. SIT operates the facilities under maritime concessions granted
pursuant to applicable Chilean laws. The port also complies with ISPS
(International Ship and Port Facility Security Code) regulation. The Tocopilla
Port Terminal facilities include a railcar dumper to transfer bulk product
into
the Conveyor Belt system used to store and ship bulk product.
Storage
facilities consist of a six silo system, with a total capacity of 54,000 metric
tons, and an open storage area for approximately 180,000 metric tons. A bagging
station capable of bagging both small and maxi bags, is also connected to the
conveyor system.
For
shipping bulk product, the conveyor belt system extends over the coast line
to
deliver product directly inside bulk carrier hatches. Using this system, the
loading capacity is 1,200 tons per hour. Bags are loaded to bulk vessels using
barges that are loaded in Tocopilla Port Terminal dock and unloaded by vessel
cranes into the hatches. Both bulk and bagged trucks are loaded in Tocopilla
Port Terminal for transferring product directly to customers or for container
vessels shipping from another port, mainly Antofagasta, San Antonio and Iquique.
Bulk
carrier loading in Tocopilla Port Terminal are mostly contracted by us to
transfer the product to our hubs around the world or for shipping to customers,
which in very few cases use their own contracted vessels for delivery. Trucking
is provided by a mix of spot, contracted and customer owned
equipment.
A
fuel
oil storage facility at Tocopilla, owned by SQM, was closed and dismantled
during February 2006, as a part of a rationalization plan for the terminal.
The
space was destined for bag storage and a new container loading
facility.
ITEM
4A. UNRESOLVED STAFF COMMENTS
Not
applicable
43
CRITICAL
ACCOUNTING POLICIES
Critical
accounting policies are defined as those that are reflective of significant
judgments and uncertainties, which would potentially result in materially
different results under different assumptions and conditions.
We
believe that our critical accounting policies in the preparation of our Chilean
GAAP financial statements are limited to those described below. It should be
noted that in many cases, Chilean GAAP specifically dictates the accounting
treatment of a particular transaction, with no need for management's judgment
in
their application. Additionally, significant differences can exist between
Chilean GAAP and U.S. GAAP, as explained below in the Notes to the Financial
Statements at Note 29—Differences between Chilean and United States Generally
Accepted Accounting Principles. There are also areas in which management's
judgment in selecting available alternatives would not produce materially
different results. For a summary of significant accounting policies and methods
used in the preparation of the financial statements, see Note 2 to the
Consolidated Financial Statements (as
of
December 31, 2005 and 2004, and for the three years in the period ended December
31, 2005).
Allowance
for doubtful accounts
We
maintain allowances for doubtful accounts for estimated losses resulting from
the assessed inability of our customers to make required
payments. If the financial condition of our customers were to deteriorate
unexpectedly, impacting their ability
to make
payments, additional allowances may be required. We routinely review the
financial condition of our customers and make assessments of
collectibility.
Deferred
tax asset valuation allowance
Our
Company and each of its subsidiaries compute and pay tax on a separate basis,
except for the U.S. subsidiaries. We estimate our tax exposure and assess
temporary differences resulting from differing treatment of various items for
tax and accounting purposes. These differences result in deferred tax assets
and
liabilities, which are reflected in our consolidated balance sheet.
We
record
a valuation allowance to reduce deferred tax asset to the amount that we believe
is more likely than not to be realized. The valuation of the deferred tax asset
is dependent on, amongst other things, the ability of the Company to generate
a
sufficient level of future taxable income.
Inventories
Inventories
of finished products and work in process are valued at average production cost.
Raw materials and products acquired from third parties are stated at average
cost and materials-in-transit are valued at cost. We regularly review inventory
for impairment and record an obsolescence provision so that carrying values
do
not exceed net realizable values.
Staff
severance indemnities
We
have
significant staff severence indemnity liabilities, which are recognized on
accrual basis. Inherent in the valuations of these obligations are key
assumptions, including discount rates and expected returns on plan assets.
We
are required to consider current market conditions, including changes in
interest rates, in selecting these assumptions. Changes in the related benefit
plan liabilities may occur in the future due to changes resulting from
fluctuations in our related headcount or to changes in the
assumptions.
Mining
development costs
Expenses
associated with mineral reserves under exploitation are capitalized as part
of
production cost to inventories. Expenses associated with future reserves are
presented within Other long-term assets and are amortized according to estimated
reserves of minerals.
44
Long-lived
assets and their impairment
We
estimate the useful lives of property, plant and equipment in order to determine
the amount of depreciation expense to be recorded during any reporting period.
The estimated useful lives are based on the historical experience with similar
assets taking into account anticipated technological or other changes. If
technological changes are expected to occur more rapidly or in a different
way
than previously anticipated, the useful lives assigned to these assets may
need
to be reduced, resulting in the recognition of increased depreciation expense
in
future periods.
We
evaluate the recoverability of our long-lived assets (other than
intangibles and
deferred tax assets) in accordance with Technical Bulletin No. 33 “Accounting
treatment of Property, Plant and Equipment”, issued by the Chilean Association
of Accountants, and SFAS No. 144 "Accounting for the Impairment or Disposal
of
Long-Lived Assets". Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset
may not be recoverable. The rules require recognition of impairment of
long-lived assets in the event that the net book value of such assets exceeds
the future undiscounted net cash flows attributable to such assets. Impairment,
if any, is recognized in the period of identification to the extent the carrying
amount of an asset exceeds the fair value of such asset. We believe that the
accounting estimate related to asset impairment is critical because it requires
us to make assumptions about future cash flows generated from the use of the
assets over their estimated useful lives.
Impairment
of goodwill
We
have
intangible assets related to goodwill. Under Chilean GAAP, goodwill should
be
reviewed for impairment when events or circumstances, such as recurrent losses
for two or more periods, indicate a possible inability to realize the carrying
amount. Under SFAS No. 142, goodwill must be allocated to reporting units and
tested for impairment at least annually or more frequently if events or
circumstances, such as adverse changes in the business climate, indicate that
there may be justification for conducting an interim test. The first part of
the
test is a comparison, at the reporting unit level, of the fair value of each
reporting unit to its carrying amount, including goodwill. If the fair value
is
less than the carrying value, then the second part of the test is needed to
measure the amount of potential goodwill impairment. The implied fair value
of
the reporting unit goodwill is calculated and compared to the carrying amount
of
goodwill recorded in the Company’s financial records. If the carrying value of
reporting unit goodwill exceeds the implied fair value of that goodwill, then
we
would recognize an impairment loss in the amount of the difference, which would
be recorded as a charge against net income.
The
fair
values of the reporting units are determined using discounted cash flow models
based on each reporting unit’s internal forecasts.
The
impairment analysis requires management to make subjective judgments concerning
estimates of how the assets will perform in the future using a discounted cash
flow analysis. Additionally, estimated cash flows may extend beyond ten years
and, by their nature, are difficult to determine. Events and factors that may
significantly affect the estimates include, among others, competitive forces,
customer behavior and attrition, changes in revenue growth trends, cost
structures and technology and changes in interest rates and specific industry
or
market sector conditions. Impairment is recognized earlier whenever warranted.
Accounting
Changes
During
the year ended December 31, 2005, the Company changed the discount rate
used for
the determination of staff severance indemnities provision from 9% applied
in
the years ended December 31, 2003 and 2004 to 8%. This change gave rise
to a
higher charge to income for the year ended December 31, 2005 of
ThUS$678.2.
During
the year ended December 31, 2005, our subsidiary SQM Industrial S.A. (ex PCS
Yumbes SCM that was acquired in December 2004) changed the method of
depreciation of certain assets from the unit of production to the straight-line
method based on the estimated remaining technical useful lives of the different
classes of assets.
Introduction
The
following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto included in Item 18.
Consolidated Financial Statements Certain calculations (including percentages)
that appear herein have been rounded.
Our
Consolidated Financial Statements are prepared in accordance with Chilean GAAP,
which differ in certain material respects from U.S. GAAP. Note 29 to the
Consolidated Financial Statements provides a description of the material
differences between Chilean GAAP and U.S. GAAP and a reconciliation to U.S.
GAAP
of net income for the years ended December 31, 2005, 2004 and 2003 and of total
shareholders' equity as of December 31, 2005, 2004 and 2003. Our Consolidated
Financial Statements are prepared in U.S. dollars. The U.S. dollar is the
primary currency in which we operate.
We
operate as an independent corporation and are not a "controlled corporation",
as
that term is defined under Chilean law. See Item 6.E. Share
Ownership.
Certain
segment information by products group and by geographical area is provided
at
Note 29 -Differences between Chilean and United States Generally Accepted
Accounting Principles— II. k) Industry segment and geographic area
information.
Overview
Of Our Results Of Operations
We
divide
our operations into the following four product lines:
| · |
Specialty
plant nutrition: production and commercialization of fertilizers
with
unique characteristics.
|
| · |
Iodine
and derivatives: production and commercialization of iodine and
derivatives.
|
| · |
Lithium
and derivates: production and commercialization of lithium and
derivatives.
|
| · |
Industrial
chemicals: production and commercialization of industrial nitrates,
sodium
sulfate and boric acid.
|
Additionally
we sell other products, including imported commodity fertilizers that we
distribute mainly in Chile and Mexico and potassium chloride, which complement
our product portfolio.
We
sell
our products through three primary channels: our own sales offices, a network
of
distributors and, with respect to our fertilizer products, through Yara
International ASA pursuant to a commercial agreement.
FACTORS
AFFECTING OUR RESULTS OF OPERATIONS
Our
results of operations substantially depend on:
| · |
Trends
in demand for our products. See Item 5.D. Trend
Information;
|
| · |
Our
efficiency in operating our facilities as they are generally running
at
nameplate capacity;
|
| · |
Our
ability to accomplish our capital expenditures program in a timely
manner,
as we are the main supplier in our core
businesses;
|
| · |
Trends
in the exchange rate between the US dollar and Chilean peso, as a
significant portion of the cost of sales is related to the Chilean
peso;
|
46
| · |
Logistics,
raw materials and maintenance costs, which have been increasing in
the
last two years; and
|
| · |
Energy
costs, which have increased due to the high cost of oil and the potential
interruption of our natural gas
supply.
|
The
following table sets forth our revenues (in millions of U.S. dollars) and the
percentage accounted for by each of our product lines for each of the periods
indicated:
|
Year
ended December 31,
|
|||||||||||||||||||
|
|
|||||||||||||||||||
|
2005
|
2004
|
2003
|
|||||||||||||||||
|
|
|
|
|||||||||||||||||
|
US$
|
%
|
US$
|
%
|
US$
|
%
|
||||||||||||||
|
|
|
|
|
|
|
||||||||||||||
|
Specialty
plant nutrition
|
487.8
|
54
|
426.8
|
54
|
362.8
|
52
|
|||||||||||||
|
Iodine
and derivatives
|
149.1
|
17
|
110.5
|
14
|
84.6
|
12
|
|||||||||||||
|
Lithium
and derivatives
|
81.4
|
9
|
62.6
|
8
|
49.7
|
7
|
|||||||||||||
|
Industrial
chemicals
|
74.0
|
8
|
73.1
|
9
|
73.7
|
11
|
|||||||||||||
|
Other
products(1)
|
103.7
|
12
|
115.5
|
15
|
121.0
|
18
|
|||||||||||||
|
|
|
|
|
|
|
||||||||||||||
|
Total
|
896.0
|
100
|
788.5
|
100
|
691.8
|
100
|
|||||||||||||
|
|
|
|
|
|
|
||||||||||||||
| (1) |
Primarily
imported fertilizers distributed in Chile and Mexico and potassium
chloride sold to third parties.
|
The
following table sets forth certain financial information of the Company (in
millions of U.S. dollars) for each of the periods indicated, as a percentage
of
revenues:
|
Year
ended December 31,
|
|||||||||||||||||||
|
|
|||||||||||||||||||
|
2005
|
2004
|
2003
|
|||||||||||||||||
|
|
|
|
|||||||||||||||||
|
US$
|
%
|
US$
|
%
|
US$
|
%
|
||||||||||||||
|
|
|
|
|||||||||||||||||
|
Total
revenues
|
896.0
|
100.0
|
788.5
|
100.0
|
691.8
|
100.0
|
|||||||||||||
|
Cost
of goods sold
|
(652.9
|
)
|
(72.9
|
)
|
(608.7
|
)
|
(77.2
|
)
|
(554.0
|
)
|
(80.1
|
)
|
|||||||
|
|
|
|
|
|
|
||||||||||||||
|
Gross
margin
|
243.1
|
27.1
|
179.8
|
22.8
|
137.8
|
19.9
|
|||||||||||||
|
Selling
and administrative expenses
|
(61.9
|
)
|
(6.9
|
)
|
(55.7
|
)
|
(7.1
|
)
|
(50.6
|
)
|
(7.3
|
)
|
|||||||
|
|
|
|
|
|
|
||||||||||||||
|
Operating
income
|
181.2
|
20.2
|
124.1
|
15.7
|
87.2
|
12.6
|
|||||||||||||
|
Non-operating
income
|
16.4
|
1.8
|
20.8
|
2.7
|
18.7
|
2.7
|
|||||||||||||
|
Non-operating
expenses
|
(50.8
|
)
|
(5.7
|
)
|
(38.4
|
)
|
(4.9
|
)
|
(39.8
|
)
|
(5.8
|
)
|
|||||||
|
|
|
|
|
|
|
||||||||||||||
|
Income
before income taxes
|
146.8
|
16.3
|
106.5
|
13.5
|
66.1
|
9.5
|
|||||||||||||
|
Income
tax
|
(32.5
|
)
|
(3.6
|
)
|
(27.3
|
)
|
(3.5
|
)
|
(16.0
|
)
|
(2.3
|
)
|
|||||||
|
Minority
interest
|
(1.0
|
)
|
(0.1
|
)
|
(5.1
|
)
|
(0.6
|
)
|
(3.7
|
)
|
(0.5
|
)
|
|||||||
|
Amortization
of negative goodwill
|
0.2
|
0.0
|
0.2
|
0.0
|
0.4
|
0.1
|
|||||||||||||
|
|
|
|
|
|
|
||||||||||||||
|
Net
income
|
113.5
|
12.7
|
74.2
|
9.4
|
46.8
|
6.8
|
|||||||||||||
|
|
|
|
|
|
|
||||||||||||||
47
Results
of Operations - 2005 compared to 2004
During
2005, we generated total revenues of approximately US$896.0 million, which
is
approximately 14% higher than the US$788.5 million recorded for the year ended
December 31, 2004.
The
main
factors that explain the increase in revenues and the operational variations
in
the different product lines are the following:
Specialty
Plant Nutrition
Revenues
from sales of specialty plant nutrition products increased 14.3% to US$487.8
million in 2005 from US$426.8 million in 2004. Set forth below are sales volume
data in the specified year by product category.
|
|
|
Year
2005
|
|
Year
2004 (1)
|
|
%
Change
|
|||||||
|
|
|
|
|
|
|||||||||
|
Sodium
nitrate
|
Th.
Ton
|
63.3
|
58.9
|
8
|
%
|
||||||||
|
Potassium
nitrate and sodium potassium nitrate
|
Th.
Ton
|
690.2
|
707.6
|
-3
|
%
|
||||||||
|
Blended
and other specialty fertilizers
|
Th.
Ton
|
217.5
|
243.3
|
-11
|
%
|
||||||||
|
Other
non - SQM Specialty plant nutrients (2)
|
Th.
Ton
|
133.2
|
131.1
|
2
|
%
|
||||||||
|
Potassium
sulfate
|
Th.
Ton
|
178.6
|
157.7
|
13
|
%
|
||||||||
|
|
|
|
|
|
|||||||||
| (1) | 2004
figures have been restated to reflect a reclassification affecting
specialty plant nutrients. Products that used to be included under
Specialty Plant Nutrition were relocated to reflect their industrial
status.
|
| (2) |
Includes resales of purchased products.
|
The
14.3%
increase in specialty plant nutrition product revenues was mainly driven by
improved pricing conditions. The increase in prices resulted from two main
factors: increased demand and the favorable pricing conditions for
potassium-related fertilizers.
Potassium nitrate and sodium potassium nitrate sales volumes were slightly lower than in the previous year with a different product mix increasing soluble potassium nitrate sales volumes, consistent with our strategy of focusing on more profitable markets.
The
lower
sales volume of blended fertilizers was mainly related to the lower sales in
the
Chilean market.
Demand
for specialty plant nutrition products continues to be strong, but our sales
volume is constrained by current production capacity. SQM expects to increase
its nitrate production capacity between 20% and 30% from the second half of
2007
onwards.
Iodine
and iodine derivatives
Revenues
for iodine and iodine derivatives increased 34.9% to US$149.1 million in 2005
from US$110.5 million in 2004. Set forth below are sales volume data in the
specified year by product category.
|
|
|
Year
2005
|
Year
2004
|
%
Change
|
|||||||||
|
|
|
|
|||||||||||
|
Iodine
and derivatives
|
Th.
Ton
|
8.1
|
7.7
|
5
|
%
|
||||||||
The
increase in revenue is due primarily to higher prices related to growing demand
combined with the high capacity utilization rates in the industry, which put
an
upward pressure on prices.
48
The
applications of iodine and iodine derivatives that contributed to a significant
portion of the growth in demand are: x-ray contrast media, the utilization
of
iodine in the production of polarizing film, which is an important component
in
LCD screens and iodo-fluoride compounds used in the synthetic fiber
industry.
During
2005, SQM increased its volume sales in proportion to the market’s growth, which
allowed SQM to preserve its market share at approximately 30%.
On
average, prices for iodine increased by approximately US$4.00 per kilogram
as
compared with the previous year. Considering the tight supply situation, we
believe that these positive pricing trends will continue during
2006.
In
January 2006, SQM acquired the iodine and iodine derivatives business of the
Dutch company DSM N.V., or DSM. The transaction included the iodine and iodine
derivatives facilities and the mining reserves located in northern Chile.
Additionally, SQM acquired DSM’s iodine and iodine derivatives commercial
operations in Europe. Currently, DSM’s iodine production capacity is higher than
2.0 th. metric tons per year.
This
acquisition will provide SQM with logistics, commercial and productive synergies
and reflects SQM’s commitment to the development and strengthening of its core
businesses and its strategy to be a long-term reliable iodine
supplier.
The
agreement involved a base payment of US$72.0 million plus all the cash, accounts
receivable and final product inventories minus the total liabilities of the
Chilean and Dutch companies involved in the transaction.
Lithium
and lithium derivatives
Revenues
for lithium and lithium derivatives increased 29.9% to US$81.4 million in 2005
from US$62.6 million in 2004. Set forth below are sales volume data in the
specified year by product category.
|
|
|
Year
2005
|
|
Year
2004
|
|
%
Change
|
|||||||
|
|
|
|
|
|
|||||||||
|
Lithium
carbonate and derivatives
|
Th.
Ton
|
27.8
|
31.2*
|
-11
|
%
|
||||||||
|
|
|
|
|
|
|||||||||
*
2004
volumes have been restated to reflect a reclassification from lithium brines
to
lithium carbonate. Revenues were not affected by this change.
The
increase in revenues in this business line was mainly due to better price
conditions. The strong demand during the last few years, with a growth of
approximately 5% during 2005, positively affected pricing conditions and we
expect this trend to continue.
During
2005 the most important applications driving market growth were batteries,
greases and frits. Regarding lithium-ion batteries, during 2004 certain
producers overstocked, leading to a lower demand at the beginning of 2005.
This
situation was reversed during the first half of 2005.
The
lower
sales volume during 2005 was due to production capacity constraints. Current
production capacity is approximately 28.5 th. metric tons per year. SQM expects
to increase its lithium carbonate production capacity from 2008
onwards.
Demand
continued to increase for lithium hydroxide. Our new lithium hydroxide plant
has
a total capacity to satisfy approximately 50% of that market.
Industrial
Chemicals
Revenues
for industrial chemicals increased 1.2% to US$74.0 million in 2005 from US$73.1
million in 2004. Set forth
below are sales volume data in the specified year by product
category.
49
|
|
|
Year
2005
|
|
Year
2004(1)
|
|
%
Change
|
|||||||
|
|
|
|
|
|
|||||||||
|
Industrial
nitrates
|
Th.
Ton
|
176.3
|
192.9
|
-9
|
%
|
||||||||
|
Soum
Sulfate
|
Th.
Ton
|
25.3
|
29.9
|
-15
|
%
|
||||||||
|
Boric
acid
|
Th.
Ton
|
6.3
|
6.1
|
3
|
%
|
||||||||
|
|
|
|
|
|
|||||||||
|
(1)
|
2004
figures have been restated to reflect a reclassification affecting
Industrial nitrates. Products that used to be included under Specialty
Plant Nutrition were relocated to reflect their industrial
status.
2004 boric acid volumes have been restated to reflect a reclassification from Industrial Chemicals to Specialty Plant Nutrition. Revenues were also reclassified. |
The
slight increase in revenues from sales of industrial chemicals was mainly due
to
a continued increase in prices for most of our industrial products, which more
than offset lower sales volumes during this period.
Industrial
nitrates saw a reduction in sales volume in 2005, mainly due to lower demand
for
potassium nitrate from the CRT industry (TV screens). In spite of a 9% decrease
in volume, the increased price for industrial nitrates led to higher revenues
in
this product line.
Other
Products
Potassium
chloride
Revenues
from sales of potassium chloride decreased 12.9% to US$32.4 million in 2005
from
US$37.2 million in 2004. Set forth below are sales volume data in the specified
year by product category.
|
|
|
Year
2005
|
|
Year
2004
|
|
%
Change
|
|||||||
|
|
|
|
|
|
|||||||||
|
Potassium
Chloride
|
Th.
Ton
|
128.7
|
211.9
|
-39
|
%
|
||||||||
Lower
revenues from potassium chloride are mainly due to the acquisition of PCS Yumbes
S.C.M. (today, SQM Industrial S.A.) at the end of 2004, which led to a decrease
in third party sales of potassium chloride and an increase in internal
consumption for the production of potassium nitrate.
We
plan
to continue using potassium chloride internally for the production of potassium
nitrate.
Other
commodity fertilizers
Sales
of
other commodity fertilizers decreased to US$71.3 million in 2005 from US$78.3
million in 2004.
The
2005
results of SQM’s subsidiary in charge of the trading of special plant nutrients
and commodity fertilizer in Chile were negatively affected by lower sales
volumes and lower margins than in 2004. The continuous rains that affected
the
fertilizer season in Chile and the high inventory of commodity fertilizers
put a
downward pressure, significantly affecting its trading margins.
Production
Costs
Production
costs during 2005 were higher than 2004, mainly in iodine and nitrate
production. The main factors that affected the production costs were the
following:
| · |
higher
energy and raw materials costs;
|
| · |
less
favorable exchange rates; and
|
| · |
maintenance
and depreciation cost increase.
|
50
Gross
Profit
As
a
result of the factors described above, gross profit increased 35.2% to US$243.1
million in 2005 from US$179.8 million in 2004.
Selling
and Administrative Expenses
Selling
and administrative expenses increased to US$61.9 million (6.9% of revenues)
during 2005 compared to US$55.7 million (7.1% of revenues) recorded during
2004.
Operating
Income
As
a
result of the factors described above, operating income increased 46% to
US$181.2 million in 2005 from US$124.1 million in 2004.
Non-Operating
Income and Expenses
For
2005,
net non-operating expenses amounted to US$34.4 million, compared to US$17.6
million during 2004. The main changes in non-operating income and expenses
were
due to the following:
| · |
During
2004, SQM sold its 14.05% stake in Empresas Melón S.A., or Empresas Melón, at a
public auction carried out in the Santiago Stock Exchange on August 18, 2004.
The transaction resulted in a before-tax profit of approximately US$8.2
million.
|
| · |
The
income derived from the investments in related companies decreased to US$2.6
million in the year 2005 from US$4.5 million during 2004 (including Empresas
Melón).
|
| · |
During
2005 there were exchange losses of approximately US$3.8 million compared to
approximately US$0.5 million during 2004. This was due to the Chilean peso
exchange rate and Euro exchange rate.
|
| · |
Other
losses were approximately US$4.0 million greater in 2005 than those of 2004,
including writeoff of investments, amortization of goodwill and
others.
|
Income
Taxes
In
2005,
income taxes were US$32.5 million, resulting in an effective consolidated tax
rate of 22.1%, compared to income taxes of US$27.3 million and an effective
consolidated tax rate of 25.6% in 2004. In accordance with Chilean law, SQM
and
each of its Chilean subsidiaries compute and pay taxes on an individual basis,
not on a consolidated basis. We had tax loss carry-forwards of US$232.6 million
at December 31, 2005, the majority of which have no expiration dates and are
expected to be utilized in the future.
The
corporate income tax rate in Chile was 17% for 2005 and 2004.
The
19.1%
increase in income taxes is mainly due to the increase in our taxable
income.
For
a
more detailed analysis of the Company’s income and deferred taxes see Note 13 to
the Consolidated Financial Statements.
51
Results
of Operations - 2004 compared to 2003
During
2004, we generated total revenues of US$788.5 million, which is approximately
14% higher than the US$691.8 million recorded for the year 2003.
The
main
factors that explain the increase in revenues and the operational variations
in
the different product lines are the following:
Specialty
Plant Nutrition
Revenues
from sales of specialty plant nutrition increased 18% to US$426.8 million in
2004 from US$362.8 million in 2003. Set forth below are sales volume data by
product category.
|
|
|
Year
2004(1)
|
|
Year
2003 (2)
|
|
%
Change
|
|
||||||
|
|
|
|
|
|
|||||||||
|
Sodium
nitrate
|
Th.
Ton
|
58.9
|
62.5
|
-6
|
%
|
||||||||
|
Potassium
nitrate and sodium potassium nitrate
|
Th.
Ton
|
707.6
|
696.5
|
2
|
%
|
||||||||
|
Blended
and other specialty fertilizers
|
Th.
Ton
|
243.3
|
252.1
|
-3
|
%
|
||||||||
|
Other
non- SQM specialty plant nutrients (3)
|
Th.
Ton
|
131.1
|
125.0
|
5
|
%
|
||||||||
|
|
|
|
|||||||||||
|
Potassium
sulfate
|
Th.
Ton
|
157.7
|
143.2
|
10
|
%
|
||||||||
|
|
|
|
|
|
|||||||||
|
(1)
|
2004
figures have been restated to reflect a reclassification affecting
specialty plant nutrients. Products that used to be included under
Specialty Plant Nutrition were relocated to reflect their industrial
status.
|
| (2) |
2003
figures have been restated to reflect a reclassification affecting
specialty plant nutrients. Products that used to be included under
Other
Products were
reallocated to reflect their specialty
status.
|
| (3) |
Includes
resales of purchased products.
|
The
increase in specialty plant nutrition revenues was mainly driven by a different
product mix, our strategy to increase our sales volume in markets that offer
higher returns, and generally improved pricing conditions in the
market.
The
increase in prices responds mainly to two factors: the strong demand, which
for
the last five years has experienced annual growth of approximately 7%, and
the
tight conditions on the supply side. Considering this, we are actively carrying
out the necessary investments to increase our production capacity.
Changes
in sales volume were due to the following:
| · |
The
decrease in sodium nitrate sales only reflects the availability of
this
product to be sold as agricultural sodium nitrate, as we have the
alternative of using it to produce potassium nitrate or industrial
sodium
nitrate. During 2004 more of this product was destined to produce
potassium nitrate.
|
| · |
The
increase in potassium-related plant nutrients reflects an increase
in
shipments to Europe, North America and Latin America, especially
to
Brazil, which was partially offset by lower volumes delivered to
China.
The decrease in shipments to China is the result of our decision,
facing a
tight supply situation, to focus on markets with higher
returns.
|
| · |
The
increase in non-SQM product sales reflects an overall increase in
market
demand.
|
| · |
The
increase in potassium sulfate shipments was due to our ability to
produce
greater quantities and thereby keep pace with growing market
demand.
|
52
Iodine
and derivatives
Revenues
from sales of iodine and derivatives increased 30.7% to $110.5 million in 2004
from US$84.6 million in 2003. Set forth below are sales volume
data.
|
|
|
Year
2004
|
|
Year
2003
|
|
%
Change
|
|||||||
|
Iodine
and derivatives
|
Th.
Ton
|
7.7
|
6.6
|
17
|
%
|
||||||||
The
increase both in revenues and sales volume was mainly due to the
following:
| · |
Sales
of iodine to the x-ray contrast media, biocides and pharmaceutical
markets
on average experienced growth of approximately
7%.
|
| · |
We
increased sales to the Chinese markets, mainly to the pharmaceutical
and
disinfectant industries.
|
| · |
We
increased our sales of iodine for use in LCD screens, a relatively
new
development in iodine applications. Iodine destined to this market
increased by approximately 50% in 2004. Though iodine sales to this
market
constituted only approximately 3% of iodine sales volume in 2004,
we
expect that the demand for iodine for use in LCD screens may contribute
significantly to the worldwide demand for iodine in the next few
years.
|
During
2004, we slightly increased our market share of iodine and derivatives. We
are
currently expanding our iodine production capacity.
Full
year
average prices for iodine, excluding iodine salts that react somewhat slower
to
iodine pricing, increased by approximately US$1.9 per kilogram, or approximately
14%.
Lithium
and derivatives
Revenues
from sales of lithium and derivatives increased 26.0% to US$62.6 million in
2004
from US$49.7 in 2003.
Set
forth below are sales volume data.
|
|
|
Year
2004
|
|
Year
2003
|
|
%
Change
|
|||||||
|
|
|
|
|
|
|||||||||
|
Lithium
carbonate and derivatives
|
Th.
Ton
|
31.2*
|
27.4
|
14
|
%
|
||||||||
|
|
|
|
|
|
|||||||||
*
2004
volumes have been restated to reflect a reclassification from lithium brines
to
lithium carbonate. Revenues were not affected by this change.
The
increase both in revenues and sales volume was mainly due to the
following:
| · |
The
increase in revenues in 2004 was mainly due to a strong increase
in sales
to the lithium ion battery market, continuing the trend of the previous
two years. Lithium carbonate sales destined to this market accounted
for
approximately 20% of volume sales.
|
| · |
Other
important lithium carbonate markets were the Asia-Pacific markets,
where
uses related to infrastructure growth, such as glass, frits and air
conditioning, have been growing at higher rates than the world economy
growth.
|
| · |
Our
lithium hydroxide sales grew in volume by approximately 20% during
2004,
as a consequence of the increased global demand for lithium-based
lubricating greases.
|
| · |
Pricing
conditions also improved in 2004. The average increase in lithium
carbonate sales prices was approximately 8% during 2004. Similarly,
lithium hydroxide sales prices increased by approximately 10% during
the
year 2004.
|
53
Industrial
Chemicals
Revenues
from sales of industrial chemicals decreased by 3.4% to US$73.1 million in
2004
from US$73.7 million in 2003. Set forth below are sales volume data by product
category.
|
|
|
Year
2004(1)
|
Year
2003
|
%
Change
|
|||||||||
|
|
|
|
|
|
|||||||||
|
Industrial
nitrates
|
Th.
Ton
|
192.9
|
193.2
|
0
|
%
|
||||||||
|
Sodium
sulfate
|
Th.
Ton
|
29.9
|
54.2
|
-45
|
%
|
||||||||
|
Boric
acid
|
Th.
Ton
|
6.1
|
10.7
|
-43
|
%
|
||||||||
|
|
|
|
|
|
|||||||||
|
(1)
|
2004
figures have been restated to reflect a reclassification affecting
Industrial nitrates. Products that used to be included under Specialty
Plant Nutrition were relocated to reflect their industrial
status.
2004 boric acid volumes have been restated to reflect a reclassification from Industrial Chemicals to Specialty Plant Nutrition. Revenues were also reclassified. |
The
decrease in revenues from sales of industrial chemicals in 2004 was mainly
due
to the following:
| · |
Industrial
nitrates have seen a slight reduction in sales volumes, mainly in
Asia,
due to high logistical costs and low prices. Despite a decrease in
volumes
of industrial nitrates, an increase by approximately 10% in industrial
nitrates prices allowed us to obtain higher revenues for this
product.
|
| · |
The
significant decrease in sodium sulfate and boric acid sales was due
to
lower production. Prices for these two product lines have increased
on
average by approximately 7% due to increased demand for raw materials
in
the pulp and paper and detergent industries.
|
| · |
World
demand for industrial chemicals is growing at a moderate pace of
2%,
mainly driven by increased mining activity and infrastructure
development.
|
Other
Products
Revenues
from other products were US$115.5 million, including US$37.2 million from
potassium chloride and US$78.3 million from commodity fertilizers.
Total
revenues from other products decreased 4.6% from US$121.0 million in
2003.
Potassium
Chloride revenues decreased by 7.1% to US$37.2 million in 2004 from US$40.0
million in 2003.
|
|
|
Year
2004
|
|
Year
2003
|
|
%
Change
|
|||||||
|
|
|
|
|||||||||||
|
Potassium
Chloride
|
Th.
Ton
|
211.9
|
284.1
|
-25
|
%
|
||||||||
|
|
|
|
|
|
|||||||||
As
sales
of potassium chloride are directly related to its consumption as raw material
in
the production of potassium nitrate, the 25% decrease in third party sales
volumes was mainly due to the increase in its use in potassium nitrate
production. The significant increase in prices partially offset this
decrease.
Sales
of
commodity fertilizers remained relatively constant during the year, reaching
US$78.3 million compared to the US$81.0 million in 2003.
54
Cost
of Sales
Cost
of
sales during 2004 was approximately US$608.7 million, an increase of 9.9%
compared to the US$554.0 million recorded during 2003. Cost of sales consists
primarily of production related expenses, depreciation, raw material costs,
logistics expenses and the cost of imported fertilizers and blends used both
for
resale and in the production of other products. As a percentage of revenues,
cost of sales were 77.2% in the year 2004 compared to 80.1% in
2003.
The
higher costs of sales in 2004 reflect the increased trading of commodity and
specialty fertilizers as well as the trading of lithium hydroxide. We expect
to
replace the trading of certain specialty fertilizers and lithium hydroxide
with
our own production within the next few years, increasing the gross margin
derived from those operations.
The
main
factors affecting our costs of sales were the following:
| · |
Logistics
costs increased by approximately 15% due to a worldwide low shipping
capacity in the world and higher oil
prices;
|
| · |
The
Chilean peso strengthened against the U.S. dollar by approximately
13% on
average (calculated as the percentage change between the average
exchange
rates for the years 2004 and 2003), thereby increasing the U.S. dollar
amount of our costs denominated in Chilean pesos, mainly salaries
and
certain local contracts;
|
| · |
Natural
gas shortages, extending through a period of approximately six weeks
in
2004, increased our operation costs because we had to replace the
natural
gas with higher cost diesel.
|
Gross
Profit
As
a
result of the factors described above, gross profit increased 30.4% to US$179.8
million in 2004 from US$137.8 million in 2003.
Selling
and Administrative Expenses
Selling
and administrative expenses (SG&A) were US$55.7 million (7.1% of revenues)
in 2004 compared to US$50.6 million (7.3% of revenues) in 2003. The decrease
of
SG&A as a percentage of sales responds to our efforts to optimize the use of
our sales affiliates, especially those acquired during 2003, SQM Mexico and
Mineag.
Operating
Income
As
a
result of the factors described above, operating income increased 42.3% to
US$124.1 million in 2004 from US$87.2 million in 2003.
Non-Operating
Results (net)
The
principal components of our non-operating results were as follows:
|
|
Year
ended December 31,
|
||||||
|
|
|||||||
|
|
2004
|
2003
|
|||||
|
|
(in
millions of US$)
|
||||||
|
|
|
||||||
|
Net
Financial income (expense) (1)
|
-15.1
|
-18.8
|
|||||
|
Exchange
gain (loss)
|
-0.5
|
6.6
|
|||||
|
Others
|
-1.9
|
-8.9
|
|||||
|
|
|
||||||
|
Total
Non-Operating
|
-17.6
|
-21.2
|
|||||
55
During
2004, we had non-operating expenses of US$17.6 million, 17% lower than the
US$21.2 million of expenses in 2003. The main reasons for this reduction in
non-operating expenses were:
| · |
On
August 18, 2004, we sold our 14.05% stake in Empresas Melón at a public
auction carried out on the Santiago Stock Exchange. We recorded a
pretax
profit of approximately US$8.2 million. This non-core asset had been
held
by us since 1998 when we sold our cement project to Empresas Melón. The
sale of our investment in Empresas Melón is consistent with our strategy
to focus on our core businesses.
|
| · |
Net
financial expenses decreased from US$(21.0) million in 2003 to US$(16.8)
million in 2004. The Company reduced its net financial debt by
approximately US$106.7 million, partly as a result of the sale of
our
stake in Empresas Melón S.A.
|
| · |
Partially
offsetting the
positive effects of the foregoing, during 2003 we recorded exchange
gains
of approximately US$6.6 million, whereas during
2004 we recorded exchange losses of approximately US$0.5 million.
|
Income
Taxes
In
2004
income taxes were US$27.3 million, resulting in an effective consolidated tax
rate of 25.6%, compared to income taxes of US$16.0 million and an effective
consolidated tax rate of 24.3% in 2003. In accordance with Chilean law, SQM
and
each of its chilean subsidiaries compute and pay taxes on an individual basis,
not on a consolidated basis. We had tax loss carry-forwards of US$198.2 million
at December 31, 2004, the majority of which have no expiration dates and are
expected to be utilized in the future.
The
corporate income tax rates in Chile were 17 % and 16.5% for 2004 and 2003
respectively.
The
71%
increase in income taxes is mainly due to the increase in our net profits.
For
a
more detailed analysis of the company's income and deferred taxes see Note
13 to
the Consolidated Financial Statements
56
Foreign
Exchange Rates - Inflation
We
transact a significant portion of our business in U.S. dollars, and the U.S.
dollar is the currency of the primary economic environment in which we operate
and our functional currency for financial statement reporting purposes. A
significant portion of our operating costs is related to the Chilean peso,
therefore an increase or decrease in the exchange rate between the Chilean
peso
and the U.S. dollar affects our costs of production. Additionally, as an
international company operating in Chile and several other countries, we
transact a portion of our business and have assets and liabilities in Chilean
pesos and other non-dollar currencies, such as the Euro, the South African
Rand
and the Mexican Peso. As a result, fluctuations in the exchange rate of such
local currencies to the U.S. dollar affect our financial condition and results
of operations.
The
following is a summary of the aggregate net monetary assets and liabilities
that
are subject to foreign exchange gain or loss by currency at December 31, 2005
and 2004:
|
|
2005
|
|
2004
|
|
|||
|
|
|
Th
US$
|
|
Th
US$
|
|||
|
|
|
|
|||||
|
Chilean
pesos
|
53,167
|
66,980
|
|||||
|
Brazilian
real
|
(941
|
)
|
(448
|
)
|
|||
|
Euro
|
19,373
|
20,069
|
|||||
|
Japanese
yen
|
6,333
|
3,693
|
|||||
|
Mexican
pesos
|
8,101
|
(2,770
|
)
|
||||
|
South
African rand
|
7,529
|
7,074
|
|||||
|
Dirhams
|
11,543
|
|
|||||
|
Other
currencies
|
3,282
|
2,224
|
|||||
We
monitor and attempt to maintain our non-dollar assets and liabilities position
in balance and make use of foreign exchange contracts and other hedging
instruments to try to minimize our exposure to the risks of changes in foreign
exchange rates. As of December 31, 2005, for this purpose we had open forward
exchange contracts and options to buy U.S. dollars and sell foreign currency
for
approximately Euros 26 million (US$30.6 million), South African Rands 50 million (US$ 7.9 million)
and Mexican Pesos 60 million (US$5.6 million).
The
net
impact of price level adjustments to non-monetary assets and liabilities and
equity for those subsidiaries that maintain their accounting records in Chilean
pesos is presented in the Chilean GAAP financial statements as part of the
net
foreign exchange gains and losses and is affected by the level of inflation
in
Chile. Although other income statement accounts are not affected by monetary
correction adjustments, operating expenses that are denominated in UF or are
linked to inflation in some manner increase their U.S. dollar values in the
same
way inflation increases (considering that the exchange rate remains
unchanged).
The
prospects and results of operations of SQM could be adversely affected by
changes in policies of the Chilean government, other political developments
in
or affecting Chile, and regulatory and legal changes or administrative practices
of Chilean authorities, over which we have no control.
U.S.
GAAP Reconciliation
This
discussion on our operating and financial results and condition presented above
is based on our primary financial statements prepared in accordance with Chilean
GAAP. Chilean GAAP differs significantly in certain aspects from U. S. GAAP.
The
principal differences between Chilean GAAP and U.S. GAAP as they relate to
our
Company are (i) the elimination of the effects of reappraisal of property,
plant
and equipment undertaken in 1988, (ii) the effects of elimination of monetary
correction (price-level restatement) and conversion of financial statements
of
subsidiaries that keep their accounting records in currencies other than U.S.
dollars, (iii) the accounting for derivative contracts, (iv) the treatment
of
the investment in Empresas Melón S.A., (v) the treatment of companies in
development stage, (vi) the accounting for staff severance indemnities, (vii)
tratament of goodwill, and (viii) the elimination of deferred tax complementary
accounts. For further details of these differences between Chilean GAAP and
U.S.
GAAP, see Note 29 to the Consolidated Financial Statements.
57
Net
income under U.S. GAAP for 2005, 2004 and 2003 was US$125.2 million, US$86.8
million and US$57.8 million, respectively, compared to that reported under
Chilean GAAP of US$113.5 million, US$74.2 million and US$46.8 million,
respectively.
Total
shareholders' equity under U.S. GAAP at December 31, 2005 and 2004 was US$923.4
million and US$856.9 million, respectively, compared to that reported under
Chilean GAAP of US$1,020.4 million and US$948.6 million,
respectively.
5.B.
Liquidity
and Capital Resources
We
operate a capital-intensive business that requires significant investments
in
revenue-generating assets. Our growth strategy has included the purchase of
production facilities and equipment and has also entailed the improvement and
expansion of existing facilities. Funds for capital expenditures and working
capital requirements have been obtained from net cash provided by operating
activities, corporate borrowing under credit facilities and issuance of debt
securities.
The
current ratio (current assets divided by current liabilities) decreased from
4.4
as of December 31, 2004 to 1.7 as of December 31, 2005, primarily due to an
increase in short-term borrowings and the reclassification from long-term to
short-term of the US$200 million debt to be repaid in September
2006.
As
of
December 31, 2005, we had total debt (short-term borrowings, current portion
of
long-term bank debt and long-term bank debt) of US$390.9 million, as compared
to
total debt of US$213.6 million as of December 31, 2004. Of the total debt
of US$390.9 million at December 31, 2005, US$289.9 million was short-term
debt
plus
the current portion of long-term bank debt. All of our long-term bank debt
(including the current portion) as of December 31, 2005 was denominated
in U.S.
dollars. The following table sets forth the maturities of our long-term
bank debt as of December 31, 2005:
|
Years
|
Amount
(millions
of US$)
|
|||
|
|
|
|||
|
2006
|
200.0
|
|||
|
2010
|
100.0
|
|||
We
borrowed US$200 million in September 1996, which is due in September 2006 and
bears interest at a fixed rate of 7.7%.
In
February 2005, our wholly-owned Aruban subsidiary, Royal Seed Trading
Corporation A.V.V., entered into a loan agreement with Banco BBVA to refinance
future debt maturities and part of the capital expenditures program. The 5-year
loan is for US$100 million and bears interest at an initial rate of Libor +
0.325%. SQM is guarantor of the borrower’s obligations under the loan agreement.
The financial covenants include: (i) minimum net worth, (ii) limitation on
net
financial debt to EBITDA ratio on a consolidated basis, and (iii) limitation
on
interest indebtedness of operating subsidiaries.
In
January 2006 we issued a Chilean bond at a re-offer yield 4.18% in UF, for a nominal amount of UF3 million
(approximately US$102.6 million), due 2026, amortizing on a semi-annual
basis from year 2 onwards. The principal and interest payable on the bond are
fully hedged in U.S. dollars for both principal and interest (approximately
5.4%). The financial covenants include: (i) limitation on the ratio of total
liabilities to equity (including minority interest) on a consolidated basis,
and
(ii) limitation on the ratio of total liabilities to equity (including minority
interest) on an individual basis.
In
April
2006 we issued in the US market a bond of US$ 200 million with an annual
interest rate of 6.125%. The interest will be paid semi-annually and the capital
will be paid in a single amortization during April, 2016. This amount will
be
used by SQM to refinance existing indebtedness at maturity in September 2006.
We
believe that the terms and conditions of our debt agreements are
standard and customary and that we are in compliance in all material respects
with such terms and conditions.
58
As
of
December 31, 2005, we had US$148.0 million of cash and cash equivalents,
including marketable securities. In addition, as of December 31, 2005, we had
unused uncommitted credit lines amounting to approximately US$469 million.
Shareholders’
equity increased from US$948.6 million in 2004 to US$1,020.4 million in 2005.
Our ratio of total liabilities to equity (including minority interest) increased
from 0.44:1 in December 31, 2004 to 0.61:1 as of December 31, 2005 due to the
increase in our consolidated debt.
Our
capital expenditures in 2005, defined as net cash used in investing activities,
amounted to US$188.8 million (excluding the acquisition of Kefco in Dubai
described in “Business-Capital Expenditure Program”).
For
2006,
we expect total capital expenditures of approximately US$210 million, plus
the
acquisition of DSM’s iodine business for US$72.0 million. We have currently
budgeted capital expenditures of a total of US$260 million for 2007 and
2008 that can be increased depending on market conditions.
Our
other
major use of funds is the payment of dividends. Our current dividend policy,
as
adopted by the shareholders’ meeting, is to pay 65% of our net income for each
fiscal year in dividends. Under Chilean law, the minimum dividend payout is
30%
of net income for each fiscal year.
For
a
description of the items included in our capital expenditures in previous years
as well as future plans, see Item 4. Information on the Company—Capital
expenditure program.
We
evaluate from time to time our cash requirements to fund capital expenditures,
dividend payouts and increases in working capital. If we find that resources
coming from our internally generated cash flows (including depreciation and
retained earnings) will not be enough, we evaluate and choose the best financial
alternative available for the company. As debt requirements also depend on
the
increase or decrease of accounts receivables and inventories, we cannot
accurately determine the amount of debt we will require, but we believe that
cash flow generated by internal operations, cash balances and available credit
lines, will enable us to meet our working capital, capital expenditure and
debt
services requirements for 2006, 2007 and 2008.
Pension
Plan
Our
wholly owned subsidiary SQM North America Corporation has a defined benefit,
noncontributory pension plan covering substantially all employees who qualify
as
to age and length of service. Plan benefits are based on years of service and
the employee's highest five-year average compensation during the last ten years
of employment. The plan's assets consist primarily of equity mutual funds and
group annuity contracts. Assumptions used in determining the actuarial present
value of the projected benefit obligation as of December 31 are as
follows:
|
|
2005
|
2004
|
|||||
|
|
|
|
|||||
|
Weighted-average
discount rate
|
7.5
|
%
|
7.5.
|
%
|
|||
|
Rate
of increase in compensation levels
|
0.0
|
%
|
0.0
|
%
|
|||
|
Cost
of living
|
2.5
|
%
|
2.5
|
%
|
|||
|
Long-term
rate of return on plan assets
|
8.5
|
%
|
8.5
|
%
|
|||
For
further discussion see Note 29 Differences between Chilean and United States
Generally Accepted Accounting Principles—II.m) Post retirement obligations and
staff severance indemnities.
Environmental
Projects
In
2006
we plan to make disbursements amounting to US$5.3 million related to
environmental projects. This amout forms part of capital expenditure program
discussed above. Regarding the María Elena Project as well as our other major
environmental projects see Item 4. Information on the Company—Environmental
Regulations.
59
5.C.
Research
and Development, Patents and Licenses, etc
One
of
the main objectives of our Research and Development team consists of developing
new processes and products in order to maximize the returns obtained from the
resources that we exploit. The areas of research cover topics such as chemical
process design, phase chemistry, chemical analysis methodologies and physical
properties of finished products. This unit, which reports to VP of
Technology, provides technical advice to productive, quality and commercial
areas.
Our
research and development activities are conducted principally at our
Antofagasta Research and Development Center. The center has a total staff of
41
people, including seven Ph.Ds, three MScs, and three professionals in the fields
of engineering and chemistry conducting research on various projects. Our
research and development policy emphasizes the following: (i) optimization
of
current processes in order to decrease costs and improve product quality through
the implementation of new technology, (ii) development of higher-margin products
from current products through vertical integration or different product
specifications, (iii) development of new products.
Our
research and development activities have been instrumental in improving our
production processes and developing new value added products. As a result
of research and development activities new methods of extraction and finishing
have been developed, including methods for heap leaching nitrates and a method
to produce mono-granular blends of fertilizers that permit the incorporation
of
different nutrients (including micro-nutrients) into one grain. In recent years,
we have also been focusing on the development of processes for lithium compounds
coming out of the brines from the Atacama Salar.
We
have
patented several production processes for nitrate, iodine, and lithium products.
These patents have been filed mainly in the U.S. and Chile, and other countries
when necessary.
For
the
years ended December 31, 2005, 2004, and 2003, we spent approximately US$ 2.4
million, US$1.8 million and US$1.4 million respectively, on research and
development activities.
5.D.
Trend
Information
In
2005,
iodine prices continued to increase following the positive trend of the previous
year. We expect this trend to continue during 2006 due to sustained growth
in
demand accompanied by the relative equilibrium between production and demand.
Additionally, we expect higher sales volume due to the acquisition of DSM’s
iodine business in January 2006.
We
expect
the increased demand for lithium carbonate observed in the past years to
continue. Demand is mostly driven by lithium batteries. Further price increases
are forecasted during 2006. We are restrained, however, from increasing our
sales volume due to the Company’s production capacity constraint.
Potassium
nitrate and sodium potassium nitrate sales volumes slightly decreased during
2005 compared with 2004. However, prices increased during 2005, and we expect
higher average prices during 2006.
During
2005, production costs were higher than 2004, mainly due to the higher cost
of
energy and raw materials, together with the increase in maintenance and
depreciation costs. Additionally, since a significant portion of our costs
is
related to the Chilean peso, production costs were negatively affected by the
appreciation of the Chilean peso. Considering the current energy market and
exchange rate expectations, we expect that 2006 production costs will be higher
than in 2005.
5.E.
Off-Balance
Sheet Arrangements
We
have
not entered into any transactions with unconsolidated entities whereby we have
financial guarantees, retained or contingent interests in transferred assets,
derivative instruments or other contingent arrangements that would expose us
to
material continuing risks, contingent liabilities, or any other obligation
arising out of a variable interest in an unconsolidated entity that provides
financing, liquidity, market risk or credit risk support to us or that engages
in leasing, hedging or research and development services with us.
60
5.F.
Tabular
Disclosure Of Contractual Obligations
The
following table sets forth our material expected obligations and commitments
as
of December 31, 2005:
|
Total
ThUS$
|
Less
Than
1
year
ThUS$
|
1
- 3
years
ThUS$
|
3
- 5
years
ThUS$
|
More
Than
5
years
ThUS$
|
||||||||||||
|
|
|
|
|
|
||||||||||||
|
Long-
and Short-Term Debt
|
389,902
|
289,902
|
—
|
100,000
|
—
|
|||||||||||
|
Capital
lease obligations
|
1,249
|
184
|
416
|
490
|
159
|
|||||||||||
|
Operating
leases
|
98,630
|
3,945
|
7,890
|
7,890
|
78,905
|
|||||||||||
|
Purchase
commitments
|
64,046
|
64,046
|
—
|
—
|
—
|
|||||||||||
|
Staff
severance indemnities
|
16,415
|
—
|
—
|
—
|
16,415
|
|||||||||||
|
|
|
|
|
|
||||||||||||
|
Total
Contractual Obligations and Commitments
|
570,242
|
358,077
|
8,306
|
108,380
|
95,479
|
|||||||||||
61
6.A.
Directors
And Senior Management
We
are
managed by our executive officers under the direction of our Board, which,
in
accordance with the Company's By-laws, consists of eight directors who are
elected at the annual ordinary shareholders' meeting. The Board consists of
seven members elected by shareholders of the Series A shares, and one member
elected by shareholders of the Series B shares. The entire Board of Directors
is
regularly elected every three years at our ordinary shareholders meeting.
Cumulative voting is allowed for the election of directors. The current members
of the Board of Directors were elected on April 29, 2005 and their terms expire
in 2008. The Board of Directors may appoint replacements to fill any vacancies
that occur during periods between elections. If a vacancy occurs, the entire
Board must be elected or re-elected at the next regularly scheduled meeting
of
shareholders. Our Chief Executive Officer is appointed by the Board of Directors
and holds office at the discretion of the Board. The Chief Executive Officer
appoints our executive officers. There are regularly scheduled meetings of
the
Board of Directors once a month. Extraordinary meeting may be called by the
Chairman when requested by (i) the director elected by holders of the Series
B
shares, (ii) any other director with the assent of the Chairman or (iii) an
absolute majority of all directors. The Board has a Directors' Committee and
its
regulations are discussed below.
Our
directors and executive officers as of June 20, 2006 are as
follows:
|
Directors
Name
|
|
Position
|
|
Current
position held since
|
|
|
|
|
||
|
Julio
Ponce L. (1)
|
Chairman
of the Board and Director
|
September
1987
|
||
|
Mr.
Ponce is a Forestry Engineer from the Universidad de Chile. He joined
the
Company in 1981. He is also Chairman of the Board of the following
corporations: Sociedad de Inversiones Pampa Calichera S.A., Sociedad
de
Inversiones Oro Blanco S.A., Norte Grande S.A. and Soquimich Comercial
S.A. He is the brother of Luis Eugenio Ponce.
|
||||
|
Wayne
R. Brownlee
|
Vice
Chairman of the Board and Director
|
May
2002
|
||
|
Mr.
Brownlee is Executive Vice-President, Treasurer and Chief Financial
Officer of Potash Corporation of Saskatchewan, Inc. Mr. Brownlee
earned
degrees in Science and Business Administration from the University
of
Saskatchewan. He is on the Board of Great Western Brewing Company
as well
as PhilomBios, an agricultural biotechnology company. He became director
at SQM on December 2001.
|
||||
|
Hernán
Büchi B.
|
Director
|
April
1993
|
||
|
Mr.
Büchi is a Civil Engineer from the Universidad de Chile. He served
as Vice
Chairman of SQM's Board from January 2000 to April 2002. He is currently
a
Board member in Quiñenco S.A., P y S S.A., Alto Palermo S.A., S.A.C.I.
Falabella and Madeco S.A., among others.
|
||||
62
|
José
María Eyzaguirre B.
|
Director
|
December
2001
|
||
|
Mr.
Eyzaguirre is a lawyer, partner of the Chilean law firm Claro y Cia.
He obtained his law degree from the Universidad de Chile and was
admitted
to the Chilean Bar in 1985. In 1987, he obtained a Master's Degree
from New York University School of Law. He was admitted to the New
York
Bar in 1988. He is also a member of the board of directors of Gasoducto
del Pacífico S.A., a transandean gas pipeline, and Chairman of the Board
of directors of Club de Golf Valle Escondido.
|
||||
|
Daniel
Yarur E. (2)
|
Director
|
April
2003
|
||
|
Mr.
Yarur is an Information Engineer from the Universidad de Chile and
holds
an MSc in Finance at the London School of Economics and an AMP at
Harvard
Business School. He is a member of the Board of Banco de Credito
e
Inversiones, Antofagasta P.L.C. (based in London), Antogasta Minerals
and
Invertec Pesquera Mar de Chiloe S.A. Mr Yarur was Chairman of the
Chilean
Securities and Exchange Commission from 1994 to 2000 and was also
Chairman
of the Council Organization of the Securities Regulators of America.
He is
also a Professor at the Faculty of Economic and Administrative Sciences,
Universidad de Chile.
|
||||
|
Wolf
von Appen
|
Director
|
May
2005
|
||
|
Mr.
Von Appen is an entrepreneur. He is currently a Board member of Sociedad
de Fomento Fabril and Vice president of Centro de Estudios
Publicos.
|
||||
|
José
Antonio Silva B.
|
Director
|
December
2001
|
||
|
Mr.
Silva is a lawyer from the Pontificia Universidad Católica de Chile and
holds a Master's Degree in law at Harvard Law School. Currently,
he is
Senior Partner of the Chilean law firm Silva, Rencoret, Schultz &
Lehuedé Abogados. He is also a sustitute member of the board of directors
of HQI Transelec Chile S.A. and Embotelladora Andina
S.A.
|
||||
63
|
Kendrick
T. Wallace
|
Director
|
December
2001
|
||
|
Mr.
Wallace is a lawyer who graduated from Harvard Law School. He is
now
Senior Vice President and General Counsel of Yara International ASA
in
Oslo, Norway. Prior to the spin-off of Yara International ASA from
Norsk
Hydro ASA, he was the chief legal counsel of Norsk Hydro ASA for
North and
South America in Tampa, Florida. Before that he was a partner in
the law
firm of Bryan Cave LLP in Kansas City, Missouri. Mr. Wallace is a
member
of the Board of Directors of Adubos Trevo S.A. in Brasil, OAO
Minudobreniya (Rossosh) in Russia and of a number of subsidiaries
of Yara
International ASA. He is also on the Board of Directors of Norte
Grande
S.A., Sociedad de Inversiones Oro Blanco S.A. and Sociedad de Inversiones
Pampa Calichera S.A.
|
||||
64
|
Executive
Officers
Name
|
Position
|
Current
position held since
|
||
|
|
|
|
||
|
Patricio
Contesse G. (2)
|
Chief
Executive Officer
|
March
1990
|
||
|
Mr.
Contesse is a Forestry Engineer from the Universidad de Chile. He
joined
the Company in 1981 as CEO, a position he held until 1982, and again
in
1988. In the past, he was CEO of Celco Limitada, Schwager S.A. and
Compañía de Aceros del Pacífico S.A. He has also served as Operations
Senior Executive Vice President of Codelco Chile, President of Codelco
USA
and Executive President of Codelco Chile. Mr. Contesse is also a
member of
the Board of Soquimich Comercial.
|
||||
|
Patricio
de Solminihac T. (2)
|
Chief
Operating Officer and
Executive
Vice President
|
January
2000
|
||
|
Mr.
de Solminihac is a Chemical Engineer from the Pontificia Universidad
Católica de Chile and holds a Master in Business Administration from
the
University of Chicago. He joined the Company in 1988 as Business
Development Vice President. In 1989, he became General Manager and
later
on he became Vice Chairman of the Board of SQM, a position he held
from
1989 through January 2000. Mr. de Solminihac was Country Manager
for
Raychem Corporation. Currently he is a member of the Board of Empresas
Melón S.A. and CEM. Mr. de Solminihac is also a member of the Board of
Soquimich Comercial.
|
||||
|
Matías
Astaburuaga S. (2)
|
General
Counsel
|
February
1989
|
||
|
Mr.
Astaburuaga is a lawyer from the Pontificia Universidad Católica de Chile.
He joined the Company in 1989. Before that, he was Regional Counsel
of The
Coca Cola Export Corporation, Andean Region and Regional Counsel
of
American Life Insurance Company, Latin America Region.
|
||||
|
Ricardo
Ramos R. (2)
|
Chief
Financial Officer and
Business
Development Senior Vice President
|
November
1994
|
||
|
Mr.
Ramos is an Industrial Engineer from the Pontificia Universidad Católica
de Chile. He joined SQM in 1989 as an advisor in the Finance area.
In
1991, he moved to the Sales department, where he was in charge of
the
coordination between operations and sales. In 1993, he returned to
the
Finance department and became deputy CFO. Mr. Ramos is also a member
of
the Board of Soquimich Comercial.
|
||||
65
|
Jaime
San Martín L. (2)
|
Mine
Affairs and Internal Audit Senior Vice President
|
June
2005
|
||
|
Mr.
San Martín is a Transportation Engineer from the Pontificia Universidad
Católica de Chile. He joined the Company in 1995 as Project Manager.
He
became Metallic Mining Development Manager in 1997, and Development
Manager in 1998, Business Development and Mining Property Vice President
in 1999 and Technical Senior Vice President in 2001.
|
||||
|
Luis
Eugenio Ponce L.
|
Corporate
Commercial Senior Vice President
|
March
1999
|
||
|
Mr.
Ponce is a Mechanical Engineer from the Universidad Católica de
Valparaíso. In 1981, he joined the Company as a Sales Manager. He became
Commercial Manager in 1982, Commercial and Operations Manager in
1988 and
Chief Executive Officer of SQM Nitratos S.A. in 1991. In the past
he was
member of the Board of IANSA. Currently he is a member of the board
of
Cerámicas Florencia S.A. Mr. Ponce is also a member of the Board of
Soquimich Comercial. He is the brother of Julio
Ponce.
|
||||
|
Carlos
Nakousi S. (2)
|
Salar-Lithium
Operations Senior Vice President
|
May
2003
|
||
|
Mr.
Nakousi is an Industrial Engineer from the Pontificia Universidad
Católica
de Chile and a Harvard Business School alumni, after completing the
Advanced Management Program in 2002. He joined the Company in 1989
as Head
of Process Development. He became Deputy Development Manager in 1993,
Development Manager of SQM Salar S.A. in 1995, Senior Vice President
Salar
Operations of SQM in 1999 and Operations Senior Vice President in
2003
|
||||
|
Camila
Merino C. (2)
|
Human
Resources and Administration
Senior Vice President Senior
Vice President
|
|
March
2001
|
|
|
Mrs.
Merino is an Industrial Engineer from the Pontificia Universidad
Católica
de Chile and holds a Master in Business Administration degree from
the
Sloan School of Management at MIT. She joined the Company in 1991,
and
after a two-year period at MIT, she re-joined the Company in 1998
as
Nitrates Operations Manager. In the same year she became Finance
and
Administration Manager of SQM Nitratos S.A. and later on, in 1999,
Corporate Services Manager.
|
||||
66
|
Mauricio
Cabello.
|
Nitrates-Iodine
Operations Senior Vice President
|
June
2005
|
||
|
Mr.
Cabello is a Mechanical Engineer from the Universidad de Santiago
de
Chile. He joined the Company in 2000 as Maintenance Superintendent
of SQM
Salar. He became Maintenance Manager of SQM Nitratos- Yodo in 2002
and
Production Manager of SQM Nitratos-Yodo in 2004. He previously worked
in
various engineering-related positions in Pesquera San José S.A., Pesquera
Coloso S.A. and Cintac S.A.
|
||||
|
Pauline
de Vidts S. (2)
|
Safety,
Health & Environment and Technology Senior Vice
President
|
June
2005
|
||
|
Mrs.
De Vidts is an Industrial Engineer from the Pontificia Universidad
Católica de Chile and holds a Ph.D. in Chemical Engineering from Texas
A&M University. She joined the company in 1996 to work in process
development for the Salar de Atacama Operations, becoming Development
Manager for this operations in 1998, and later on, in 2001, she became
Corporate R&D and Environmental Issues Vice
President.
|
| (1) |
Mr. Julio
Ponce’s ownership interest in SQM is explained in Item 6.E. Share
Ownership.
|
| (2) |
The
individual beneficially owns less than one percent of the Company’s
shares.
|
6.B.
Compensation
Directors
are paid a monthly fee (UF 300 to the Chairman and UF 50 to each of the
remaining seven Directors), which is independent of the number of Board sessions
held per month. In addition, the Directors receive additional compensation
(in
Chilean pesos) each year based on a profit-sharing program approved by the
shareholders in an amount equal to 0.65% of the net income (after
amortization of negative goodwill) for the Chairman of the Board and of 0.65%
of
the net income (after amortization of negative goodwill) for the remaining
seven
Directors, divided equally among those Directors. Profit-sharing payments are
paid in the year following the fiscal year in respect of which they are earned.
67
During
2005, the total compensation paid to each of our directors under the foregoing
was as follows:
|
Total
per subsidiaries Ch$
|
Annual
Total Ch$
|
|||||||||||||||
|
|
|
|||||||||||||||
|
SQM
S.A.
|
SQMC
|
|||||||||||||||
|
|
|
|||||||||||||||
|
Name
|
Meeting
|
Committee
|
Meeting
|
Committee
|
||||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Ponce
Lerou, Julio
|
343,650,861
|
63,194,463
|
406,845,324
|
|||||||||||||
|
Büchi
Buc, Hernán
|
50,597,279
|
50,597,279
|
||||||||||||||
|
Brownlee,
Wayne R.
|
50,597,279
|
10,530,061
|
61,127,340
|
|||||||||||||
|
Eyzaguirre,
José María
|
50,597,279
|
50,597,279
|
||||||||||||||
|
Silva,
José Antonio
|
50,597,279
|
10,530,061
|
61,127,340
|
|||||||||||||
|
Wallace,
Kendrick T.
|
50,597,279
|
50,597,279
|
||||||||||||||
|
Yarur,
Daniel
|
50,597,279
|
8,804,534
|
59,401,813
|
|||||||||||||
|
Von
Appen Wolf
|
7,081,298
|
7,081,298
|
||||||||||||||
|
Milstein,
Avi (1)
|
40,931,363
|
864,145
|
41,795,508
|
|||||||||||||
|
|
|
|
|
|
||||||||||||
|
Total
|
695,247,196
|
30,728,801
|
63,194,463
|
0
|
789,170,460
|
|||||||||||
(1)
On January 18, 2005 Mr. Avi Milstein presented his resignation to the
Board of Directors.
For
the
year ended December 31, 2005, the aggregate compensation paid to our 82 main
executives based in Chile was approximately Ch$ 5,405.2 million. We do not
disclose to our shareholders or otherwise make available public information
as
to the compensation of our individual executive officers.
We
do not
maintain any pension or retirement programs for the members of the Board or
our
officers in Chile.
6.C.
Board
Practices
Information
regarding the period of time each of SQM's current Board of Directors has served
in their respective office is provided in the discussion of each member of
the
board above at Item 6.A Directors and Senior Managers.
The
date
of expiration of the term of the current Board of Directors is April 2008.
The
contracts of our executive officers are indefinite.
The
members of the Board are remunerated in accordance with the information provided
above in Item 6.B. Compensation. There exist no contracts between SQM, or any
of
its subsidiaries, and the members of the Board providing for benefits upon
termination of their term.
Directors'
Committee - Audit Committee
As
required by Chilean Law, we have a Comité de Directores (Directors' Committee)
composed of three directors, which performs many of the functions of an Audit
Committee.
The
members of our Directors' Committee are Hernán Büchi B., José Antonio Silva B.
and Daniel Yarur E.. This Committee operates in accordance with article 50
bis
of Law Nº18.046, which provides that the Committee shall:
|
(a)
|
Examine
and issue an opinion regarding the external auditor's report including
financial statements prior to its final presentation for approval
at the
Ordinary Shareholders Meeting
|
|
(b)
|
Propose
to the Board of Directors the external auditors and the rating agencies
that will be presented to the Ordinary Shareholders
Meeting
|
|
(c)
|
Examine
and elaborate a report concerning the operations covered by articles
44
and 89 of Law Nº18.046
|
|
(d)
|
Examine
the remuneration and compensation plans of the senior
management
|
68
Pursuant
to the above, these were the main activities of our Directors' Committee during
2005:
a)
Analysis of un-audited reports and financial conditions.
b)
Analysis of audited reports and financial conditions.
c)
Analysis of external auditors’, accounts inspectors’ and risk analysts’ reports,
and the proposal to the Board of Directors of the external auditors and risk
analysts that could be designated by the respective Shareholders Meeting.
d)
Analysis of functions, objectives and working programs of the Internal Auditing
Department.
e)
Analysis of the Company’s Top Executives remuneration and compensation plans.
f)
Analysis of contracts with related people, subsidiary and allied companies
in
Chile and abroad.
g)
Analysis of subjects related to the rules of the "Sarbanes-Oxley Act" of the
U.S.A., especially to Section 404.
h)
Investment Analysis.
On
April
29 2005, the SQM S.A. Shareholders General Meeting agreed to pay a monthly
remuneration of 50UF to each member of the Directors Committee. That,
independent of the number of sessions held by the Board of Directors during
the
period between the months of May 2005 and April 2006, both months included.
This
remuneration is also independent from what the Board members obtain as members
of the Company’s Directory. In this same meeting, an operational budget for the
Board of Directors of 1.800UF was approved.
Article
50 bis states that the Committee should consist of three directors, of which
the
majority should preferably be independent from the controller (i.e. any person
or entity who “controls” the company for Chilean law purposes), if any, and that
their functions are remunerated. Considering the effective share structure
up to
December 31st, 2005, the Company does not have a controller; therefore, the
three members of the Directors Committee stand as independents.
The
activities carried out by the Committee, as well as the expenses incurred by
it,
are to be disclosed at the General Shareholders Meeting. During year 2005,
the
Directors Committee did not incur any consulting expenses.
On
June
21, 2005, the Board of Directors approved the establishment of an audit
committee to comply with the requirements of the NYSE corporate governance
rules.
The
members of the audit committee are Hernán Büchi B., José Antonio Silva B. and
Daniel Yarur E. Each of the three members meets the NYSE independence
requirements for audit committee members.
Under
the
NYSE corporate governance rules, the audit committee of a U.S. company must
perform the functions detailed in the NYSE Listed Company Manual Rules 303A.06
and 303A.07. Non-U.S. companies are required to comply with Rule 303A.06
beginning July 31, 2005, but are not at any time required to comply with Rule
303A.07.
Comparative
Summary Of Differences In Corporate Governance Standards
The
following table provides a comparative summary of differences in corporate
governance practices followed by us under our home-country rules and those
applicable to U.S. domestic issuers pursuant to Section 303A of the New York
Stock Exchange (NYSE) Listed Company Manual.
Listed
Companies that are foreign private issuers, such as SQM, are permitted to follow
home country practices in lieu of the provisions of Section 303A, except that
such companies are required to comply with the requirements of Section 303A.06,
303A.11 and 303A.12(b) and (c),
69
|
Section
|
NYSE
Standards
|
SQM
practices pursuant to Chilean regulations
|
||
|
|
|
|
||
|
303A.01
|
The
majority of the listed company directors must be
independent.
|
There
is no legal obligation to have a majority of independent directors
on the
Board.
|
||
|
303A.02
|
Independence
Test
|
A
Director is considered independent if he would have been elected
without
the vote of the controlling shareholder and related persons and
entities.
|
||
|
303A.03
|
Non-management
directors must meet at regularly scheduled executive sessions without
management.
|
These
meetings are not needed given that directors do not also serve
as
executive officers.
|
||
|
303A.04
|
Listed
companies must have a nominating/corporate governance
committee composed
entirely of independent directors, and must have a written charter.
|
This
committee is not contemplated as such in the Chilean regulations.
Pursuant
to Chilean regulations SQM has a Directors' Committee (see Board
practices
above).
|
||
|
303A.05
|
Listed
companies must have a compensation committee composed entirely
of
independent directors, and must have a written charter
|
This
committee is not contemplated as such in the Chilean regulations.
Pursuant
to chilena regulations SQM has a Director’s Committee (see Board practices
above) that is in charge of reviewing management’s
compensation.
|
||
|
303A.06
|
Listed
companies must have an audit committee.
|
This
committee is not contemplated as such in the Chilean regulations.
On june
21, 2005, the Board of directors approved the establishment of
an audit
committee to comply with the requirements of the NYSE corporate
governance
rules.
|
||
|
303A.07
|
The
audit committe must have a minimum of three members. Each of them
must
satisfy requirements of independence and the committee must have
a written
charter.
|
Pursuant
to Section 303A.00, SQM is not required to comply with requirements
in
303A.07. Pursuant to Chilean Regulations SQM has a Director’ Committee(
see Board practices above) with Certain requirements of
independence.
|
||
|
303A.08
|
Shareholders
must have the opportunity to vote on all equity-compensation plans
involving directors, executives, employees, or other service
providers.
|
SQM
does not have equity compensation plans. Directors and executives
may only
acquire SQM shares by individual purchases. The purchaser must
give notice
of such purchases to the Company and the Superintendence of Securities
and
Insurance.
|
||
|
303A.09
|
Listed
companies must adopt and disclose corporate governance
guidelines.
|
Chilean
law does not require that corporate governance guidelines be adopted.
Directors' responsibilities and access to management and independent
advisors are directly provided for by applicable law. Directors'
compensation is approved at the annual meeting of shareholders,
pursuant
to applicable law.
|
||
|
303A.10
|
Listed
companies must adopt and disclose a code of business conduct and
ethics
for directors, officers and employees.
|
Not
contemplated in the Chilean regulations. SQM has adopted and disclosed
a
Code
of Business Conduct and Ethics, available at the company's website,
www.sqm.com.
|
||
|
303A.11
|
Listed
foreing private issuers must disclose any significant ways in which
their
corporate governance practices differ from those followed by domestic
companies under NYSE listed standards.
|
Pursuant
to 303A.11, This table sets forth a comparative summary of differences
in
corporate governance practices followed by SQM under Chilean regulations
and those applicable to U.S. domestic issuers pursuant to Section
303A.
|
||
|
303A.12
|
Each
listed company CEO must (a) certify to the NYSE each year that
he or she
is not aware of any violation by the company of NYSE corporate
governance listing
standards.(b) promptly notify the NYSE in writing after any executive
officer becomes aware of any material non- compliance with any
applicable
provisions of Section 303A; (c) must submit an executed Written
Affirmation annually to the NYSE.
|
Not
contemplated in the Chilean regulations. The CEO must only comply
with
Section 303A.12 (b) and (c).
|
70
As
of
December 31, 2005, we had 3,672 permanent employees, of whom 322 were employed
outside of Chile. The average tenure of our full time employees is approximately
8.6 years.
|
2005
|
2004
|
2003
|
2002
|
||||||||||
|
|
|
|
|
||||||||||
|
Permanent
employees
|
3,672
|
3,418
|
3,455
|
3,050
|
|||||||||
|
Employees
in Chile
|
3,350
|
3,138
|
3,154
|
2,869
|
|||||||||
|
Employees
outside of Chile
|
322
|
280
|
301
|
181
|
|||||||||
Of
our
permanent employees in Chile, 72.2% are represented by 31 labor unions, which
represent their members in collective bargaining negotiations with the Company.
Compensation for unionized personnel is established in accordance with the
relevant collective bargaining agreements. The terms of most such agreements
currently in effect are three years, and expiration dates of such agreements
vary from contract to contract. Under these agreements, employees receive a
salary according to a scale that depends upon job function, seniority and
productivity. Unionized employees also receive certain benefits provided for
by
law and certain benefits, which vary depending upon the terms of the collective
bargaining agreement, such as housing allowances and additional death and
disability benefits.
In
addition, the Company owns all of the equity of Institución de Salud Previsional
Norte Grande Limitada, (Isapre Norte Grande), which is a health maintenance
organization that provides medical services primarily to our employees. We
make
specified contributions to Isapre Norte Grande in accordance with Chilean laws
and the provisions of our various collective bargaining agreements but we are
not otherwise responsible for its liabilities.
Non-unionized
employees receive individually negotiated salaries, benefits provided for by
law
and certain additional benefits provided by us.
We
provide housing and other facilities and services for employees and their
families at the María Elena site.
We
do not
maintain any pension or retirement programs for our Chilean employees. Most
workers in Chile are subject to a national pension law, adopted in 1980, which
establishes a system of independent pension plans that are administered by
the
corresponding Sociedad Administradora de Fondos de Pensiones, (AFP). We have
no
liability for the performance of any of these pension plans or any pension
payments to be made to our employees. We however sponsor staff severance
indemnities plan for employees in our Chilean subsidiaries whereby we commit
to
provide a lump sum payment to each employee at the end of his/her employment,
whether due to death, termination, resignation or retirement.
We
have
experienced no strikes or significant work stoppages in the last eleven years
and consider the relationship with our employees to be good.
6.E.
Share
Ownership
Mr.
Julio
Ponce L., Chairman of the Board of SQM, and related persons control Inversiones
SQ Holding S.A. Inversiones SQ Holding S.A. and Yara International ASA
beneficially own 51% and 49%, respectively, of Inversiones SQYA S.A. Inversiones
SQYA S.A. indirectly controls and beneficially owns Sociedad de Inversiones
Pampa Calichera S.A., which in turn owns 100% of Global Mining Investments
(Chile) S.A. Therefore, Mr. Ponce and related persons beneficially own through
the above entities 65,702,424 Series A Shares, constituting 46% of the
outstanding Series A Shares and 24.96% of the total shares of SQM. See Item
7.A.
Major Shareholders.
Pursuant
to the Company's By-laws, as amended, as of May 25, 2005, no holder of Series
A
or Series B shares will have the right to exercise for itself or on behalf
of
other holders of Series A or Series B shares the right to vote more than 37.5%
of the outstanding shares of each such class entitled to vote. For
purposes of calculating such percentage, shares owned by persons related to
such
shareholder shall be added to shares held by such
shareholder.
71
|
%
Beneficial ownership
|
||
|
|
||
|
2006
(1)
|
24.96%
|
|
|
2005
|
24.96%
|
|
|
2004
|
22.63%
|
|
|
2003
|
20.35%
|
(1)
As of
June 15 2006
On
June
3, 2006, Sociedad de Inversiones Pampa Calichera S.A. announced its intention
to
acquire up to 2% of the series B shares (approximately 0.91% of the total
shares) in a public tender offer. As the outcome of the tender offer will be
known in July, we may not anticipate whether it will succeed or not.
Nevertheless, should the tender offer be carried out in the amount publicly
announced, Mr. Julio Ponce and Yara International ASA would have a combined
beneficial ownership of approximately 25.87%. In addition, pursuant to Chilean
law, Sociedad de Inversiones Pampa Calichera S.A. would be deemed to control
SQM.
No
other
director or executive officer owns more than 1% of each share class of the
Company as of June 15, 2006. See Item 6. Directors, Senior Management and
Employees—footnote (1). Individual ownership has not been publicly disclosed.
Directors and executive officers as a group own 0,453% of total shares
We
do not
grant stock options or other arrangement involving the capital of SQM to
directors, managers or employees.
72
7.A.
Major
Shareholders
Taking
into account the ownership structure of the stockholders, the Company does
not
have a controlling entity. The following table sets forth certain information
concerning beneficial ownership of the Series A shares and Series B shares
of
SQM as of June 15, 2006 with respect to each shareholder known by us to
beneficially own more than 5% of the outstanding Series A shares or Series
B
shares and with respect to all of our directors and executives officers as
a
group. The following information is derived from our records and reports filed
by certain of the persons named below with the Superintendencia de Valores
y
Seguros (the Superintendency of Securities and Insurance or SVS) and the Chilean
Stock Exchange.
|
Shareholder
|
Number
of
Series
A
Shares
Beneficially
Owned
|
%
Series
A
Shares
|
Number
of
Series
B
Shares
Beneficially
Owned
|
%
Series
B
Shares
|
%
Total
Shares
|
|||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Sociedad
de Inversiones Pampa Calichera S.A. (1) (2)
|
52,434,256
|
36.71
|
%
|
—
|
0.00
|
%
|
19.92
|
%
|
||||||||
|
Inversiones
El Boldo Ltda. (3)
|
43,861,795
|
30.71
|
%
|
—
|
0.00
|
%
|
16.67
|
%
|
||||||||
|
The
Bank of New York
|
146,370
|
0.10
|
%
|
32,924,920
|
27.35
|
%
|
12.57
|
%
|
||||||||
|
Inversiones
RAC Chile Ltda. (3)
|
19,200,242
|
13.44
|
%
|
2,699,773
|
2.24
|
%
|
8.32
|
%
|
||||||||
|
A.F.P.
Habitat S.A. (4)
|
—
|
0.00
|
%
|
8,426,384
|
7.00
|
%
|
3.20
|
%
|
||||||||
|
A.F.P.
Provida S.A. (4)
|
—
|
0.00
|
%
|
8,325,985
|
6.92
|
%
|
3.16
|
%
|
||||||||
|
Larrain
Vial S.A.
|
3,005,558
|
2.10
|
%
|
4,725,709
|
3.93
|
%
|
2.94
|
%
|
||||||||
|
Global
Mining Investments (Chile ) S.A.
|
7,123,076
|
4.99
|
%
|
—
|
0.00
|
%
|
2.71
|
%
|
||||||||
|
Inversiones
SQYA S.A. (1)
|
6,145,092
|
4.30
|
%
|
—
|
0.00
|
%
|
2.33
|
%
|
||||||||
|
A.F.P.
Cuprum S.A. (4)
|
—
|
0.00
|
%
|
5,167,609
|
4.29
|
%
|
1.96
|
%
|
||||||||
| (1) |
Mr.
Julio Ponce L., Chairman of the Board of SQM, and related persons
control
Inversiones SQ Holding S.A, which in turn, together with Yara
International ASA beneficially own 51% and 49%, respectively, of
Inversiones SQYA S.A. Inversiones SQYA S.A. indirectly controls
and
beneficially owns Sociedad de Inversiones Pampa Calichera S.A.,
which in
turn owns 100% of Global Mining Investments (Chile) S.A. Therefore,
Mr.
Ponce and related persons beneficially own through the above entities
65,702,424 Series A Shares, constituting 46% of the outstanding
Series A
Shares and 24.96% of the total shares of SQM. This stake resulted
from
successive purchases carried out in the Santiago Stock Exchange
during the
last part of 2004 and the first months of 2005. The stake held
by Mr.
Ponce and related parties as of December 31, 2004, 2003, and 2002
was,
respectively, 24.96%, 20.35% and 20.35% of the total shares of
SQM.
|
| (2) |
Pampa
Calichera is an open stock corporation whose shares are traded
on the
Santiago Stock Exchange. Originally, the shareholders of Pampa
Calichera
were employees of SQM. Pampa Calichera was formed to hold the capital
stock of SQM contributed by such employees or later acquired in
the open
market. Approximately 53 of our employees are shareholders of Pampa
Calichera, either directly or
indirectly.
|
| (3) |
Potash
Corporation of Saskatchewan Inc. owns 100% of Inversiones el Boldo
Limitada and 100% of Inversiones RAC Ltda., being therefore the
beneficial
owner of 65,761,810 SMQ's shares that represent 24.99% of SQM's
total
shares. This stake resulted from successive purchases carried out
in the
Santiago Stock Exchange during the last part of 2004 and the first
months
of 2005. The stake held by Potash Corporation of Saskatchewan as
of
December 31, 2004, 2003, and 2002 was respectively 24.99%, 20.
35%, and
20.35% of the total shares of SQM.
|
| (4) |
A.F.P.s
are legal entities that manage pension funds and are the registered
holders of Series A shares and Series B shares acquired with pension
funds
resources.
|
Series
A
and Series B shares have the same economic rights (i.e. both Series are entitled
to share equally in any dividends declared on the outstanding stock) and
voting
rights at any shareholders meeting, whether ordinary or extraordinary. One
share
equals one vote, with the sole exception of the election of the Board of
Directors, in which the Series A shareholders elect seven members and the
Series
B shareholders elect one member. Additionally, Series B shares cannot exceed
50%
of our issued and outstanding stock, shareholders of at least 5% of this
Series
may call an ordinary or extraordinary Shareholders Meeting and the director
elected by this Series may request an extraordinary Board of Directors Meeting
without the authorization of the Chairman of the Board of Directors. These
preferences will remain until 2043. Maximum individual voting power personally
and/or in representation of other shareholders per Series is 37.5% of the
subscribed shares of each Series with voting rights and 32% of the total
subscribed shares of the Company with voting rights. To calculate these
percentages, shares that belong to the voting shareholder’s related persons must
be added. In addition, the director elected by the Series B shares cannot
vote
in the election of the Chairman of the Board of Directors after a tie vote
has
occurred in the prior voting process. There are currently 142,819,552 Series
A
shares and 120,376,972 Series B shares outstanding.
73
7.B.
Related
Party Transactions
Article
89 of Law No. 18,046, or the Chilean Corporations Act requires that our
transactions with related parties be on a market basis or on terms similar
to
those customarily prevailing in the market. Directors and executive officers
of
companies that violate Article 89 are liable for losses resulting from
such
violations. In addition, Article 44 of the Chilean Corporations Act provides
that any transaction in which a director has a personal interest or is
acting on
behalf of a third party may be implemented only after the same is approved
by
the Board of Directors under terms similar to those prevailing in the market.
Resolutions approving such transactions must be reported to the Company's
shareholders at the next shareholders' meeting. Violation of Article 44
may
result in administrative or criminal sanctions and civil liability may
be sought
by the Company, shareholders or interested third parties that suffer losses
as a
result of such violations. We believe that we have complied with the
requirements of Article 89 and Article 44 in all transactions with related
parties.
Accounts
receivable from and payable to related companies are stated in U.S. dollars
and
accrue no interest. Transactions are made under terms and conditions that
are
similar to those offered to unrelated third parties.
We
further believe that we could obtain from third parties all raw materials
now
being provided by related parties. The provision of such raw materials
by new
suppliers could initially entail additional expenses.
For
additional information concerning our transactions with affiliates and
other
related parties, see Note 5 of the Consolidated Financial
Statements.
7.C.
Interests
Of Experts And Counsel
Not
applicable
8.A.
Consolidated
Statements And Other Financial Information
8.A.1 See
Item
18. Consolidated Financial Statements for our consolidated financial
statements.
8.A.2 See
Item
18. Consolidated Financial Statements.
8.A.3 See
Item
18. Consolidated Financial Statements—Report of Independent Registered Public
Accounting Firm.
8.A.4 Not
applicable.
8.A.5 Not
applicable.
8.A.6
Export Sales
We
derive
most of our revenues from sales outside of Chile. The following is the
composition of the consolidated sales for the periods ending on December
31:
|
Th.
US$
|
2005
|
|
2004
|
|
2003
|
|||||
|
|
|
|
||||||||
|
Foreign
sales
|
739,924
|
629,671
|
534,651
|
|||||||
|
Total
sales
|
895,970
|
788,516
|
691,806
|
|||||||
|
%
of foreign sales
|
82.6
|
79.9
|
77.3
|
|||||||
8.A.7
Legal Proceedings
We
are or
were during 2005 a party to the following legal proceedings:
During
the first quarter of 2001, the Company filed an arbitration claim against
its
insurers, ACE Seguros S.A. and Chubb de Chile Compañía de Seguros Generales
S.A., for payment of ThUS$36,316 in indemnifications related to the leak
of
brines from the pre-concentration ponds that were built by the Company in
the
Salar de Atacama, which caused losses to the Company of boron, lithium,
potassium sulfate and other salts that were to be obtained from such ponds
and
used in production. The insurance companies argued that the leak was caused
by a
defect in the design of the ponds attributable to SQM and, therefore, have
denied payment of all amounts. During 2005, the Santiago Court of Appeals
ruled
in favor of the insurance companies. This litigation is not subject to further
appeal.
During
the last quarter of 2002, the French companies Compagnie Du Guano de Poisson
Angibaud S.A. ("Angibaud") and Generale de Nutrition Vegetale SAS
("GNV" -in which Angibaud and the Company had a 50% share ownership-) filed
an arbitration claim under French arbitration laws (Association Francaise
d'Arbitrage) against the Company requesting indemnification for the alleged
early termination of a contract with GNV, through which the
latter held the distribution rights to certain of the Company's products in
France. Angibaud -GNV have since then filed
additional claims against the Company for payment of GNV's debts, recovery
of
invoiced amounts and other matters. The total amount demanded was Euro$
30.3 million, approximately US$40 million. On July 27, 2005 SQM was notified
about the ruling of the French Arbitration Association, wich
requested SQM to make a net total payment to Angibaud
and GNV, including the costs and expenses of the process, of approximately
US$6
million. As SQM had provisioned expenses associated to this judgement for
approximately US$1.5 million, the net non-operating accounting charge before
tax, which was reflected during the second quarter of 2005, was approximately
US$4.5million.
In
October 2004, Tallepsen Services Company L.P. commenced an arbitration
proceeding against SQM Lithium Specialties Limited Partnership LLP seeking
an
award of Th. US$900 for professional fees allegedly owed. In June 2005 the
three-member arbitration court designated by both parties ruled that SQM
was not
required to make any payment to Tallepsen.
In
September 2005, Electroandina, one of our main electricity suppliers, commenced
an arbitration proceeding against us. The complaint mainly seeks the early
termination, partial amendment or temporary suspension of the electricity
supply
agreement entered into between Electroandina and SQM on February 12, 1999,
and
the revision of the tariffs agreed to in such electricity supply agreement.
The
basis of Electroandina’s claim is that certain unforeseen events have restricted
the supply of and increased the price of gas from Argentina. Currently, this
proceeding is in the stage of evidence collection.
A
similar
claim was announced by Norgener at the end of 2005, our other main electricity
supplier, and the related arbitration proceeding has begun early in
2006.
8.A.8.
Dividend Policy
As
required by Chilean law and regulations, our dividend policy is decided upon
from time to time by our Board of Directors and is announced at the Annual
Ordinary Shareholders' Meeting, which is generally held in April of each year.
Shareholder approval of the dividend policy is not required. However, each
year
the Board must submit to the annual ordinary shareholders' meeting for approval
the declaration of the final dividend or dividends in respect of the preceding
year, consistent with the then-established dividend policy. Dividends are not
price-level adjusted between the end of the preceding year and the date of
the
declaration of the final dividend. As required by the Chilean Companies Act,
unless otherwise decided by unanimous vote of the holders of issued shares,
we
must distribute a cash dividend in an amount equal to at least 30% of our
consolidated net income for that year (determined on a Chilean GAAP basis),
unless and except to the extent it has a deficit in retained
earnings.
The
Board
of Directors has followed a policy of paying a single dividend ranging from
50
to 65% of our consolidated net income for the year (determined on a Chilean
GAAP
basis), and dividends for each year have been paid not later than May of the
following year. During 2006, and considering our capacity to deliver increasing
cash flows, at the Annual Ordinary Shareholders' Meeting held on April 28,
2006,
the shareholders approved a single dividend with respect to 2005 of US$0.27981
per share, equal to 65% of the net income, before amortization of negative
goodwill for that year, which was paid on May 11, 2006. The Board of Directors
also reaffirmed for 2006 a dividend policy that authorizes distribution of
cash
dividends in an amount equal to 65% of our net income before amortization of
negative goodwill for the year. The Board of Directors currently expects to
recommend that such dividend be paid in a single distribution in May
2007.
We
generally declare dividends in U.S. dollars (but may declare dividends in
Chilean Pesos), and pay such dividends in Chilean Pesos. If a dividend is
declared in U.S. dollars, the exchange rate to be used to convert the dividend
into Chilean Pesos is decided by the shareholders at the meeting that approves
the dividend, which has usually been the Observed Exchange Rate on the date
the
dividend is declared.
Although
the Board of Directors has no current plan to recommend a change in the dividend
policy, the amount and timing for payment of dividends is subject to revision
from time to time, depending upon our then-current level of sales, costs, cash
flow and capital requirements, as well as market conditions. Accordingly, there
can be no assurance as to the amount or timing of declaration or payment of
dividends in the future. Any change in dividend policy would ordinarily be
effective for dividends declared in the year following adoption of the change,
and a notice as to any such change of policy must be filed with Chilean
regulatory authorities and would be publicly available information.
Dividends
are paid to shareholders of record on the fifth business day preceding the
date
set for payment of the dividend. The applicable record dates for the payment
of
dividends to holders of ADRs will be determined by the
Depositary.
Dividends
Each
Series A Share and Series B Share is entitled to share equally in any dividends
declared on the outstanding capital stock of SQM.
76
The
following table sets forth the U.S. dollar equivalent of dividends per
share and per ADS paid in each of the years indicated, based on the Observed
Exchange Rate for the date on which the dividend was declared.
|
Dividends
|
Per
Share
|
Per
ADS
|
Per
Share
|
Per
ADS
|
||||||||||||
|
|
|
|
|
|
||||||||||||
|
Declared
for the business year
|
Paid
on
|
Ch$
|
Ch$
|
US$
|
US$
|
|||||||||||
|
|
|
|
|
|
|
|||||||||||
|
2001
|
2002
|
37.03
|
370.3
|
0.056
|
0.56
|
|||||||||||
|
2002
|
2003
|
53.31
|
533.1
|
0.076
|
0.76
|
|||||||||||
|
2003
|
2004
|
55.05
|
550.5
|
0.088
|
0.88
|
|||||||||||
|
2004
|
2005
|
106.56
|
1,065.6
|
0.182
|
1.82
|
|||||||||||
|
2005
|
2006
|
145.11
|
1,451.1
|
0.279
|
2.79
|
|||||||||||
Dividends
payable to holders of ADRs will be paid net of conversion expenses of the
Depositary and will be subject to Chilean withholding tax, currently imposed
at
the rate of 35% (subject to credits in certain cases).
As
a
general requirement, a shareholder who is not a resident of Chile must register
as a foreign investor under one of the foreign investment regimes contemplated
by Chilean law to have dividends, sale proceeds or other amounts with respect
to
its shares remitted outside Chile through the Formal Exchange Market. Under
the
Foreign Investment Contract, the Depositary, on behalf of ADR holders, will
be
granted access to the Formal Exchange Market to convert cash dividends from
Chilean Pesos to U.S. dollars and to pay such U.S. dollars to ADR holders
outside Chile net of taxes, and no separate registration of ADR holders is
required.
8.B. Significant
Changes
No
significant change has occurred since the date of the financial statements
set
forth in Item 18.
9.A
Offer And Listing Details
Price
History
The
table
below sets forth, for the periods indicated, the reported high and low closing
prices for our shares on the Santiago Stock Exchange and the high and low
closing prices of the ADSs as reported by the NYSE, as the two main Exchanges
on
which our shares are traded.
|
(a)
|
Last
5 years
|
|
Santiago
Stock Exchange
Per
Share (2)
|
NYSE
per
ADS
|
||||||||||||||||
|
|
|
||||||||||||||||
|
Series
A
|
Series
B (1)
|
Series
A (3)
|
Series
B (1)
|
||||||||||||||
|
|
|
|
|
||||||||||||||
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
||||||||||
|
Ch$
|
Ch$
|
Ch$
|
Ch$
|
US$
|
US$
|
US$
|
US$
|
||||||||||
|
|
|
|
|
|
|
|
|
||||||||||
|
2001
|
1,940
|
1,310
|
1,635
|
1,150
|
28.55
|
22.60
|
24.20
|
16.00
|
|||||||||
|
2002
|
3,000
|
1,620
|
1,660
|
1,305
|
44.75
|
23.00
|
24.44
|
18.41
|
|||||||||
|
2003
|
3,050
|
1,630
|
2,995
|
1,580
|
47.10
|
22.00
|
46.26
|
21.60
|
|||||||||
|
2004
|
3,900
|
2,350
|
3,580
|
2,160
|
68.00
|
37.05
|
62.75
|
32.98
|
|||||||||
|
2005
|
7,000
|
3,600
|
7,170
|
3,269
|
129.40
|
66.80
|
133.37
|
57.50
|
|||||||||
|
(b)
|
Last
10 quarters
|
|
Santiago
Stock Exchange
Per
Share (2)
|
NYSE
per
ADS
|
||||||||||||||||
|
|
|
||||||||||||||||
|
Series
A
|
Series
B (1)
|
Series
A (3)
|
Series
B (1)
|
||||||||||||||
|
|
|
|
|
||||||||||||||
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
||||||||||
|
Ch$
|
Ch$
|
Ch$
|
Ch$
|
US$
|
US$
|
US$
|
US$
|
||||||||||
|
|
|
|
|
|
|
|
|
||||||||||
|
2004
|
|||||||||||||||||
|
First
quarter
|
2,500
|
2,350
|
2,610
|
2,229
|
43.99
|
40.25
|
44.10
|
37.25
|
|||||||||
|
Second
quarter
|
2,600
|
2,380
|
2,590
|
2,160
|
42.75
|
37.05
|
41.10
|
32.98
|
|||||||||
|
Third
quarter
|
3,000
|
2,575
|
2,935
|
2,530
|
48.25
|
40.90
|
48.20
|
39.23
|
|||||||||
|
Fourth
quarter
|
3,900
|
3,000
|
3,580
|
2,955
|
68.00
|
48.75
|
62.75
|
43.51
|
|||||||||
|
2005
|
|||||||||||||||||
|
First
quarter
|
4,900
|
3,600
|
4,760
|
3,269
|
83.50
|
66.80
|
80.55
|
57.50
|
|||||||||
|
Second
quarter
|
6,010
|
4,900
|
5,900
|
4,597
|
103.00
|
84.95
|
101.75
|
78.98
|
|||||||||
|
Third
quarter
|
7,000
|
6,000
|
7,170
|
5,889
|
127.25
|
101.50
|
128.38
|
101.45
|
|||||||||
|
Fourth
quarter
|
6,800
|
5,600
|
6,989
|
5,382
|
129.40
|
103.18
|
133.37
|
104.23
|
|||||||||
|
2006
|
|||||||||||||||||
|
First
quarter
|
6,000
|
5,599
|
6,390
|
5,540
|
115.50
|
105.02
|
122.53
|
109.88
|
|||||||||
|
Second
quarter
(through
May 31)
|
5,950
|
5,599
|
6,001
|
5,390
|
109.01
|
95.70
|
120.31
|
100.58
|
|||||||||
| c) |
Last
6 months
|
|
Santiago
Stock Exchange
Per
Share (2)
|
NYSE
per
ADS
|
||||||||||||||||
|
|
|
||||||||||||||||
|
Series
A
|
Series
B (1)
|
Series
A (3)
|
Series
B (1)
|
||||||||||||||
|
|
|
|
|
||||||||||||||
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
||||||||||
|
|
|
|
|
|
|
|
|
||||||||||
|
Ch$
|
Ch$
|
Ch$
|
Ch$
|
US$
|
US$
|
US$
|
US$
|
||||||||||
|
December
2005
|
6,450
|
5,600
|
6,168
|
5,382
|
115.05
|
103.18
|
120.10
|
104.23
|
|||||||||
|
January
2006
|
6,000
|
5,599
|
6,251
|
5,540
|
112.02
|
105.02
|
119.82
|
109.88
|
|||||||||
|
February
2006
|
5,901
|
5,860
|
6,390
|
6,050
|
115.50
|
108.04
|
122.53
|
114.28
|
|||||||||
|
March
2006
|
5,955
|
5,901
|
6,300
|
6,050
|
113.51
|
109.53
|
120.95
|
113.50
|
|||||||||
|
April
2006
|
5,950
|
5,730
|
6,001
|
5,640
|
109.01
|
103.01
|
116.25
|
109.30
|
|||||||||
|
May-06
|
5,800
|
5,680
|
5,951
|
5,390
|
104.10
|
95.70
|
116.03
|
100.58
|
|||||||||
| (1) |
Series
B shares began trading on the New York Stock Exchange on September
1993.
|
| (2) |
Pesos
per share of Common Stock reflect nominal price at trade
date.
|
| (3) |
Series
A shares started trading on the New York Stock Exchange in April
9,
1999.
|
As
of
June 15, 2006, there were 14,637 Series A and 3,292,492 Series B ADSs
(equivalent to 146,370 Series A shares and 32,924,920 Series B shares
respectively) outstanding held by 3 holders of record for Series A ADSs and
11
holders of record for the Series B ADSs. As of June 15, such ADSs represented
approximately 12.57% of the total number of issued and outstanding shares of
our
Company.
9.B
Plan
Of Distribution
Not
Applicable
9.C
Markets
The
Series A shares and the Series B shares are currently traded on the Santiago
Stock Exchange, the Bolsa Electrónica de Chile Bolsa de Valores S.A., (the
Electronic Stock Exchange), and the Bolsa de Corredores Bolsa de Valores S.A.,
(the Valparaíso Stock Exchange). Each series also is traded on the New York
Stock Exchange in the form of ADSs, each representing 10 Series B and 10 Series
A shares respectively. The Bank of New York (the Depositary) is the Depositary
of both Series. The ADSs representing Series A shares have traded on the NYSE
since April 9, 1999; the ADSs representing Series B shares have traded on
the NYSE since September 21, 1993.
9.D Selling
Shareholders
Not
applicable
9.E
Dilution
Not
applicable
9.F
Expenses
Of The Issue
Not
applicable
10.A.
Share
Capital
Not
applicable
SQM,
headquartered at El Trovador Nº 4285, Piso 6, Santiago, Chile, is an open stock
corporation (sociedad
anónima, abierta)
organized under the laws of the Republic of Chile. The Company was constituted
by public deed issued on June 17, 1968 by the Notary Public of Santiago Mr.
Sergio Rodríguez Garcés. Its existence was approved by Decree No. 1.164 of
June 22, 1968 of the Ministry of Finance, and it was registered on June 29,
1968
in the Business Registry of Santiago, on page 4.537 Nº 1.992.
Corporate
purposes
Our
specific purposes, which appear on article 4 of our By-laws, are to:
(a)
perform
all kinds of chemical or mining activities and businesses and, among others,
those related to researching, prospecting, extracting, producing, working,
processing, purchasing, disposing of, and commercializing properties, as
applicable, of all metallic and non-metallic and fossil mining substances and
elements of any type or nature, to be obtained from them or from one or more
concessions or mining deposits, and in their natural or converted state, or
transformed into different raw materials or manufactured or partially
manufactured products, and of all rights and properties thereon; (b)
manufacture, produce, work, purchase, transfer ownership, import, export,
distribute, transport, and commercialize in any way, all kinds of fertilizers,
components, raw materials, chemical, mining, agricultural, and industrial
products, and their by-products; (c)
generate, produce, distribute, purchase, transfer ownership, and commercialize,
in any way, all kinds of electrical, thermal, or other type of power, and hydric
resources or water rights in general; (d)
request,
manifest, claim, constitute, explore, work, lease, transfer ownership, and
purchase, in any way, all kinds of mining concessions; (e)
purchase, transfer ownership, and administer, in any way, any kind of
telecommunications, railroads, ships, ports, and any means of transport, and
represent and manage shipping companies, common carriers by water, airlines,
and
carries in general; (f)
manufacture, produce, commercialize, maintain, repair, assemble, construct,
disassemble, purchase and transfer ownership, and in any way, any kind of
electromechanical structure, and substructure in general, components, parts,
spares, or parts of equipment, and machines, and execute, develop, advice,
and
commercialize, any kind of electromechanical or smelting activities;
(g)
purchase, transfer ownership, lease, and commercialize any kind of
agroindustrial and farm forestry activities, in any way; (h)
purchase, transfer ownership, lease, and commercialize, in any way, any kind
of
urban or rural real estates; (i)
render
any kind of health services and manage hospitals, private clinics, or similar
facilities; (j)
construct, maintain, purchase, transfer ownership, and manage, in any way,
any
kind of roads, tunnels, bridges, water supply systems, and other required
infrastructure works, without any limitation, regardless of whether they may
be
public or private, among others, to participate in bids and enter into any
kind
of contracts, and to be the legal owner of the applicable concessions; and
(k)
purchase, transfer ownership, and commercialize, in any way, any kind of
intangible properties such as stocks, bonds, debentures, financial assets,
commercial papers, shares or rights in corporations, and any kind of bearer
securities or instruments, and to administer such investments, acting always
within the Investment and Financing Policies approved by the applicable General
Shareholders Meeting. We may comply with the foregoing acting ourselves or
through or with other different legal entities or natural persons, within the
country or abroad, with properties of our own or owned by third parties, and
additionally, in the ways and territories, and with the aforementioned
properties and purposes, we may also construct and operate industrial or
agricultural facilities or installations; constitute, administer, purchase,
transfer ownership, dissolve, liquidate, transform, modify, or form part of
partnerships, institutions, foundations, corporations, or associations of any
kind or nature; perform all actions, enter into all contracts, and incur in
all
obligations convenient or necessary for the foregoing; perform any business
or
activity related to its properties, assets, or patrimony, or with that of its
affiliates, associated companies, or related companies, and render financial,
commercial, technical, legal, auditing, administrative, advisory, and other
pertinent services.
The
Company's By-laws, in articles 16 and 16 bis, essentially establishes that
the
transactions in which a Director has a material interest must comply with the
provisions set forth in articles 44 and 136 of Law Nº 18.046 and the applicable
regulations of such Law. Notwithstanding the above, the said operations must
be
approved by two thirds of the Board of Directors.
The
Board
of Directors' duties are remunerated, as stated in article 17 of the Company's
By-laws, and the amount of that compensation is fixed yearly by the General
Ordinary Shareholders Meeting. Therefore, Directors can neither determine nor
modify their compensation.
Directors
cannot authorize Company loans on their behalf.
As
stated
in article 10 of the Company's By-laws, Directors can be reelected indefinitely;
thus, there is no age limit for their retirement.
As
stated
in article 9 of the Company's By-laws, the possession of shares is not a
necessary condition to become a Director of our Company.
Shares
Dividends
are annually distributed to the Series A and Series B shareholders of record
on
the fifth business day prior to the date for payment of the dividends. The
By-laws do not specify a time limit after which dividend entitlement elapses
but
Chilean regulations establish that after 5 years, unclaimed dividends are to
be
donated to the Fire Department.
Article
5
of the Company's By-laws establishes that Series B shares may in no case exceed
fifty percent of our issued, outstanding and paid shares. Series B shares have
a
restricted right to vote as they can only elect one Director of the Company,
regardless of its capital stock's share and the preferences. An Ordinary or
Extraordinary Shareholders Meeting may be called when the shareholders of at
least 5% of Series B issued shares request so and an Extraordinary Board of
Directors Meeting may be called without the Chairman's authorization when it
is
requested by the Director elected by the shareholders of the Series B shares.
Series A shares have the option to exclude the Director elected by Series B
shareholders from the voting process in which the Chairman of the Board is
to be
elected, if there is a tie in the first voting process. However, articles 31
and
31 bis establish that in General Shareholders Meetings each shareholder will
have a right to one vote for each share he owns or represents and that no
shareholder will have the right to vote for himself or on behalf of other
shareholders of the same Series A or Series B shares representing more than
37.5% of the outstanding shares with right to vote of each Series. In
calculating a single shareholder's ownership of Series A or B shares, the
shareholder's stock and those pertaining to third parties related to them are
to
be added.
Article
5
bis of the Company's By-laws establishes that no person may directly or by
means
of related third persons, state-owned companies, decentralized, autonomous,
municipal, or other institutions, concentrate more than 32% of our total shares
with right to vote.
Each
Series A Share and Series B Share is entitled to share equally in the Company's
profits, i.e., they have the same rights on any dividends declared on the
outstanding shares of SQM.
Our
By-laws do not contain any provision relating to: (i) redemption provisions,
(ii) sinking funds or (iii) liability to capital calls by the
Company.
As
established in Article 103 of Law 18.046, a company subject to the supervision
of the Chilean Securities and Exchange Commission may be liquidated in the
following cases:
(a)
Expiration of the duration term, if any, as established in its
By-laws;
(b)
All
the shares end up in the possession of one individual;
(c)
By
agreement of an Extraordinary Shareholders Meeting;
(d)
By
abolition, pursuant to applicable laws, of the decree that authorized its
existence;
(e)
Any
other reason contemplated in its By-laws.
81
The
only
way to change the rights of the holders of our shares is by modifying the
By-laws, which can only be carried out by an Extraordinary Shareholders Meeting,
as set forth in article 28 of the Company By-laws.
Shareholders
meetings
Article
29 of the Company's By-laws states that the call to a Shareholders Meetings,
either Ordinary or Extraordinary, will be by means of a highlighted public
notice that will be published at least three times, and on different days,
in
the newspaper of the legal address determined by the Shareholders Meeting,
and
in the way and under the conditions indicated by the Regulations. Additionally,
a notice will be sent by mail to each shareholder at least fifteen days prior
to
the date of the Meeting, which note shall include a reference of the matters
to
be addressed thereat. However, those meetings with the full attendance of the
shares with right to vote may be legally held, even if the foregoing formal
notice requirements are not met. Notice of any Shareholders Meeting shall be
delivered to the Chilean Securities Commission (SVS), at least fifteen days
in
advance of such meeting.
Any
holder of Series A and/or Series B shares registered in the Company's
shareholder registry on or before the fifth business day prior to the date
of
the meeting will have a right to participate at that meeting.
Foreign
shareholders
There
exists no restriction on ownership or share concentration, or limiting the
exercise of the related right to vote, by local or foreign shareholders other
than those discussed under Item 10.B. Memorandum and Articles of Association
-Shares above.
Change
in Control
Our
Company By-laws provide that no shareholder may concentrate more than 32% of
our
shares, unless the by-laws are modified at an extraordinary shareholders
meeting. Moreover, on December 12, 2000, the government published the Ley de
Oferta Pública de Acciones (Public Share Offering law) or (OPA law) that seeks
to protect the interests of minority shareholders of open stock corporations
in
transactions involving a change in control, by requiring that the potential
new
controller purchase the shares owned by the remaining shareholders either in
total or pro rata. The law applies to those transactions in which the
controlling party would receive a material premium price compared with the
price
that would be received by the minority shareholders.
There
are
three conditions that would make it mandatory to operate under the OPA
law:
|
(1)
|
When
an investor wants to take control of a company's
stock.
|
|
(2)
|
When
a controlling shareholder holds two-thirds of the company's stock.
If such
shareholder buys one more share, it will be mandatory to offer to
acquire
the rest of the outstanding stock within 30 days of surpassing that
threshold.
|
|
(3)
|
When
an investor wants to take control of a corporation, which, in turn,
controls an open stock corporation that represents 75% or more of
the
consolidated assets of the former
corporation.
|
Parties
interested in taking control of a company must (i) notify the company of such
intention in writing, and notify its controllers, the companies controlled
by
it, the SVS and the markets where its stocks are traded and (ii) publish a
highlighted public notice in two newspapers of national circulation at least
10
business days prior to the date of materialization of the OPA.
The
Company's By-laws do not provide for a minimum threshold at which share
ownership must be disclosed.
10.C.
Material
Contracts
As
mentioned elsewhere in this document, we connected our production facilities
in
the north of Chile to the SING power grid with the purpose of reducing our
power
generation related costs. As a result, we entered into three long-term supply
contracts with two electric power companies: Electroandina S.A. and Norgener
S.A. Additionally, we replaced the fuel oil used in heat generation and in
fusion processes by connecting our facilities to international natural gas
pipelines, for which there is also a long term supply contract. We believe
that
the terms and conditions of these contracts are standard for the
industry.
The
following summarizes the terms and conditions of the main contracts to which
SQM
or any subsidiary is a party:
| · |
On
February 12, 1999, SQM S.A. entered into an Electrical Energy Supply
contract with Electroandina S.A. The term of this contract runs through
February 12, 2009 and the anticipated termination is subject to payment
of
non amortized investments.
|
| · |
On
March 21, 1997, SQM Salar S.A. entered into an Electricity Supply
agreement with Norgener S.A. The term of this contract runs through
July 31, 2017, and anticipated termination is subject to fines for
un-received income.
|
| · |
On
January 13, 1998, SQM Nitratos S.A. entered into an Electrical Energy
Supply agreement with Norgener S.A. The term of this contract runs
through
January 31, 2013 and the anticipated termination is subject to payment
of
non amortized investments.
|
| · |
On
May 22, 2001, SQM S.A. entered into a Natural Gas Supply agreement
with
Distrinor S.A. The term of this contract runs through May 21, 2011
and the
anticipated termination is subject to payment of non amortized
investments.
|
We
are
currently in arbitration processes with Electroandina and Norgener and face
risks regarding the continuity of natural gas supply. For further information
see Item 3. D. Risk factors.
In
addition, our Company, during the normal course of business, has entered into
different contracts - some of which have been described herein - related to
its
production, commercial and legal operations. All of these contracts are standard
for this type of industry and none of them is expected to have a material effect
on the Company's results of operations.
10.D.
Exchange
Controls
The
Central Bank of Chile is responsible for, among other things, monetary policies
and exchange controls in Chile. Appropriate registration of a foreign investment
in Chile permits the investor access to the Formal Exchange Market. Foreign
investments can be registered with the Foreign Investment Committee under Decree
Law Nº600 of 1974 or can be registered with the Central Bank of Chile under the
Central Bank Act, Law Nº18840 of October 1989. The Central Bank Act is an
organic constitutional law requiring a "special majority" vote of the Chilean
Congress to be modified.
Our
1993,
1995 and 1998 capital increases were carried out under and subject to the then
current legal regulations, whose summary is hereafter included:
A
'Convención
Capítulo XXVI del Título I del Compendio de Normas de Cambios
Internacionales'
or
Compendium of Foreign Exchange Regulations of the Central Bank of Chile,
"Foreign Investment Contract" was entered into and among the Central Bank of
Chile, our Company and the Depositary, pursuant to Article 47 of the Central
Bank Act and to Chapter XXVI of the Compendium of Foreign Exchange Regulations
of the Central Bank of Chile, "Chapter XXVI", which addresses the issuance
of
ADSs by a Chilean company. Absent the Foreign Investment Contract, under
applicable Chilean exchange controls, investors would not be granted access
to
the Formal Exchange Market for the purposes of converting from Chilean Pesos
to
U.S. dollars and repatriating from Chile amounts received in respect to
deposited Series A or B shares or Series A or B shares withdrawn from deposit
on
surrender of ADRs (including amounts received as cash dividends and proceeds
from the sale in Chile of the underlying Series A and Series B shares and any
rights arising therefrom). The following is a summary of the material provisions
contained in the Foreign Investment Contract. This summary does not purport
to
be complete and is qualified in its entirety by reference to Chapter XXVI and
the Foreign Investment Contract.
83
Chapter
XXVI provided that access to the Formal Exchange Market in connection with
dividend payments will be conditioned upon certification by the Company to
the
Central Bank of Chile that a dividend payment has been made and any applicable
tax has been withheld. Chapter XXVI also provides that access to the Formal
Exchange Market in connection with the sale of Withdrawn Shares or distributions
thereon will be conditioned upon receipt by the Central Bank of Chile of
certification by the Depositary that such shares have been withdrawn in exchange
for ADRs and receipt of a waiver of the benefit of the Foreign Investment
Contract with respect thereto until such Withdrawn Shares are
redeposited.
Chapter
XXVI and the Foreign Investment Contract provided that a person who brings
certain types of foreign currency into Chile, including U.S. dollars, to
purchase Series A shares and/or Series B shares with the benefit of the Foreign
Investment Contract must convert it into Chilean Pesos on the same date and
has
5 banking business days within which to invest in Series A shares and/or Series
B shares in order to receive the benefits of the Foreign Investment Contract.
If
such person decides within such period not to acquire Series A shares and/or
Series B shares, he can access the Formal Exchange Market to reacquire foreign
currency, provided that the applicable request is presented to the Central
Bank
within 7 banking business days of the initial conversion into pesos. Series
A
shares and/or Series B shares acquired as described above may be deposited
for
ADSs and receive the benefits of the Foreign Investment Contract, subject to
receipt by the Central Bank of Chile of a certificate from the Depositary that
such deposit has been effected and that the related ADRs have been issued and
receipt by the Custodian of a declaration from the person making such deposit
waiving the benefits of the Foreign Investment Contract with respect to the
deposited Series A shares and/or Series B shares.
Access
to
the Formal Exchange Market under any of the circumstances described above is
not
automatic. Pursuant to Chapter XXVI, such access required approval of the
Central Bank of Chile based on a request presented through a banking institution
established in Chile. The Foreign Investment Contract will provide that if
the
Central Bank of Chile has not acted on such request within seven banking days,
the request will be deemed approved.
Under
current Chilean law, foreign investments abiding by the Foreign Investment
Contract cannot be changed unilaterally by the Central Bank of Chile. No
assurance can be given, however, that additional Chilean restrictions applicable
to the holders of ADRs, the disposition of underlying Series A shares and/or
Series B shares or the repatriation of the proceeds from such disposition could
not be imposed in the future, nor can there be any assessment of the duration
or
impact of such restrictions if imposed.
84
The
Central Bank is also responsible for controlling incurrence of loan obligations
to be paid from Chile and by a Chilean borrower to banks and certain other
financial institutions outside Chile. The following is a summary of the relevant
portions of Chapter XIV regarding the incurrence of loan obligations and does
not purport to be complete and is qualified in its entirety by reference to
the
provisions of Chapter XIV.
The
Central Bank must be informed of any incurrence of loan obligations to be paid
from Chile and by a Chilean borrower to banks and certain other financial
institutions outside of Chile. As of December 31, 2005, we had one long-term
loan outstanding obtained in the international markets ( through a Rule 144A
offering of US$200 million). Additionally Royal Seed Trading Corporation, a
wholly owned subsidiary fully guaranteed by us, has a US$100.0 million
syndicated loan outstanding that is fully guaranted by us.
The
Central Bank authorized our 144A long-term loan, and was duly informed about
the
guaranty given to Royal Seed. Additionally, on April 2006 we informed the
Central Bank about the issuance of new Rule 144A bonds for an amount of US$200
million. Accordingly, all purchases of U.S. dollars in connection with payments
on these loans will occur in the Formal Exchange Market. There can be no
assurance, however, that restrictions applicable to payments in respect of
the
loans could not be imposed in the future, nor can there be any assessment of
the
duration or impact of such restrictions if imposed.
10.E.
Taxation
Chilean
Tax Considerations
The
following describes the material Chilean income tax consequences of an
investment in the ADRs by an individual who is not domiciled or resident in
Chile or any legal entity that is not organized under the laws of Chile and
does
not have a permanent establishment located in Chile, a "foreign holder." This
discussion is based upon Chilean income tax laws presently in force, including
Ruling No. 324 (1990) of the Chilean Internal Revenue Service and other
applicable regulations and rulings. The discussion is not intended as tax advice
to any particular investor, which can be rendered only in light of that
investor's particular tax situation.
Under
Chilean law, provisions contained in statutes such as tax rates applicable
to
foreign investors, the computation of taxable income for Chilean purposes and
the manner in which Chilean taxes are imposed and collected may only be amended
by another statute. In addition, the Chilean tax authorities issue rulings
and
regulations of either general or specific application and interpret the
provisions of Chilean tax law. Chilean tax may not be assessed retroactively
against taxpayers who act in good faith relying on such rulings, regulations
and
interpretations, but Chilean tax authorities may change said rulings,
regulations and interpretations prospectively.
Cash
Dividends and Other Distributions
Cash
dividends paid by the Company with respect to the shares, including shares
represented by ADSs held by a U.S. holder will be subject to a 35% Chilean
withholding tax, which is withheld and paid by the Company, the "Withholding
Tax.” If the Company has paid corporate income tax, the "First Category Tax", on
the income from which the dividend is paid, a credit for the First Category
Tax
effectively reduces the rate of Withholding Tax. When a credit is available,
the
Withholding Tax is computed by applying the 35% rate to the pre-tax amount
needed to fund the dividend and then subtracting from the tentative withholding
tax so determined the amount of First Category Tax actually paid on the pre-tax
income. Under Chilean income tax law, dividends are assumed to have been paid
out of our oldest retained tax profits for purposes of determining the rate
at
which the First Category Tax was paid.
The
effective Withholding Tax rate, after giving effect to the credit for First
Category Tax, generally is:
(Withholding
Tax rate) - (First Category Tax effective rate)
1
-
(First Category Tax effective rate)
85
Dividend
distributions made in property (such as distribution of cash equivalents) would
be subject to the same Chilean tax rules as cash dividends. Stock dividends
are
not subject to Chilean taxation.
Capital
Gains
Gains
from the sale or other disposition by a foreign holder of ADR outside Chile
will
not be subject to Chilean taxation . The deposit and withdrawal of the shares
in
exchange for ADSs will not be subject to any Chilean taxes.
The
tax
basis of the shares received in exchange for ADSs (repatriation) will be the
acquisition value of the shares. The shares exchanged for ADSs are valued at
the
highest price at which they trade on the Chilean Stock Exchange on the date
of
the exchange or on either of the two business days preceding the exchange.
Consequently, the conversion of ADSs into the shares and the immediate sale
of
such shares at a price equal to or less than the highest price for Series A
shares or Series B shares on the Chilean Stock Exchange on such dates will
not
generate a gain subject to Chilean taxation.
Gain
recognized on a sale or exchange of shares (as distinguished from sales or
exchanges of ADSs representing such shares) will be subject to both the First
Category Tax and the Withholding Tax if either (i) the foreign holder has held
the shares for less than one year since exchanging the ADSs for the shares,
(ii)
the foreign holder acquired and disposed of the shares in the ordinary course
of
its business or as a regular trader of shares, or (iii) the foreign holder
and
the purchaser of the shares are related parties within the meaning of Chilean
tax law. The amount of the First Category Tax may be credited against the amount
of the Withholding Tax. In all other cases, gain on the disposition of the
shares will be subject only to a capital gains tax, which is assessed at the
same rate as the First Category Tax. Gain recognized in the transfer of common
shares that have a high presence in the stock exchange, however, is not subject
to capital gains tax in Chile, provided that the common shares are transferred
in a local exchange, in other authorized stock exchanges, or within the process
of a public tender of common shares governed by the Chilean Securities Market
Act. The common shares must also have been acquired either in a stock exchange
,
within the referred process of a public tender of a common shares governed
by
the Chilean Securities Market Act, in an initial public offer of common shares
resulting from the formation of a corporation or a capital increase of the
same,
or in an exchange of convertible bonds. Common shares are considered to have
a
high presence in the stock exchange when they: a) are registered in the
Securities Registry b) are registered in a Chilean Stock Exchange, c) have
an
adjusted presence equal to or above 25%.
As
of
June 19, 2001 capital gains obtained in the sale of common shares that are
publicly traded in a stock exchange are also exempt from capital gains tax
in
Chile when the sale is made by "foreign institutional investors" such as mutual
funds and pension funds, provided that the sale is made in a stock exchange
or
in accordance with the provisions of the securities market law (law 18.045),
or
in any other form authorized by the SVS. To qualify as foreign institutional
investors, the referred entities must be formed outside of Chile, not have
domicile in Chile, and they must be an "investment fund" in according with
the
Chilean tax law
The
exercise of preemptive rights relating to shares will not be subject to Chilean
taxation. Any gain on the sale or assignment of preemptive rights relating
to
shares will be subject to both the First Category Tax and the Withholding Tax
(the former being creditable against the latter).
No
Chilean inheritance, gift or succession taxes apply to the transfer or
disposition of the ADSs by a foreign holder, but such taxes generally will
apply
to the transfer at death or by gift of the shares by a foreign holder. No
Chilean stamp, issue, registration or similar taxes or duties apply to foreign
holders of ADSs or shares.
Withholding
Tax Certificates
Upon
request, the Company will provide to foreign holders appropriate documentation
evidencing the payment of Chilean withholding taxes.
United
States Tax Considerations
The
following discussion summarizes the material U.S. federal income tax
consequences to beneficial owners arising from the acquisition, ownership
and
disposition of the Series A shares and the Series B shares (together the
"shares" and the ADSs. The discussion which follows is based on the United
States Internal Revenue Code of 1986, as amended, the "Code", the Treasury
regulations promulgated thereunder, and judicial and administrative
interpretations thereof, all as in effect on the date hereof, and is subject
to
any changes in these or other laws occurring after such date. In addition,
the
summary is based in part on representations of the depositary and assumes
that
each obligation provided for in or otherwise contemplated by the Deposit
Agreement or any other related document will be performed in accordance with
its
terms.
For
purposes of this summary, the term "U.S. Holder" means a beneficial owner
of
shares or ADSs that is, for U.S. federal income tax purposes, (a) an individual
who is a United States citizen or resident, (b) a corporation or partnership
(other than a partnership that is not treated as a U.S. person under any
applicable Treasury regulations and certain partnerships that have one or
more
partners who are not U.S. persons) created or organized under the laws of
the
United States or any political subdivision thereof, or (c) an estate or trust
that is subject to United States federal income tax on a net basis with respect
to its worldwide income. The term "Non-U.S. Holder" means a beneficial owner
of
shares or ADSs that is, for U.S. federal income tax purposes, a (a) nonresident
alien individual, (b) foreign corporation, or (c) nonresident alien fiduciary
of
a foreign estate or trust.
The
discussion that follows is not intended as tax advice to any particular investor
and is limited to investors who will hold the shares or ADSs as "capital
assets"
within the meaning of Section 1221 of the Code and whose functional currency
is
the United States dollar. The summary does not address the tax treatment
of U.S.
Holders and Non-U.S. Holders that may be subject to special U.S. federal
income
tax rules, such as insurance companies, tax-exempt organizations, banks,
U.S.
Holders who are subject to the alternative minimum tax, or U.S. Holders and
Non-U.S. Holders who are broker-dealers in securities, who hold the shares
or
ADSs as a hedge against currency risks, as a position in a "straddle" for
tax
purposes, or as part of a conversion or other integrated transaction, or
who own
(directly, indirectly or by attribution) 10% or more of the total combined
voting power of all classes of the Company's capital stock entitled to vote
or
10% or more of the value of the outstanding capital stock of the
Company.
There
exist no reciprocal tax treaties between the Republic of Chile and the United
States.
The
discussion below does not address the effect of any United States state,
local,
estate or gift tax law or foreign tax law on a U.S. Holder or Non-U.S. Holder
of
the shares or ADSs. U.S. HOLDERS AND NON-U.S. HOLDERS OF SHARES OR ADSs SHOULD
CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE CONSEQUENCES UNDER ANY SUCH
LAW
OF INVESTING IN THE SHARES OR ADSs.
For
purposes of applying U.S. federal income tax law, any beneficial owner of
an ADS
will be treated as the owner of the underlying shares represented
thereby.
Cash
Dividends and Other Distributions
The
gross
amount of a distribution with respect to shares or ADSs (other than
distributions in redemption or liquidation) will be treated as a taxable
dividend to the extent of the Company's current and accumulated earnings
and
profits, computed in accordance with U.S. federal income tax principles.
A
dividend distribution will be so included in gross income when received by
(or
otherwise made available to) (i) the U.S. Holder in the case of the shares
or
(ii) the depositary in the case of the ADSs, and in either case will be
characterized as ordinary income for U.S. federal income tax purposes.
Distributions in excess of the Company's current and accumulated earnings
and
profits will be applied against and will reduce the U.S. Holder's tax basis
in
the shares or ADSs and, to the extent distributions exceed such tax basis,
the
excess will be treated as gain from a sale or exchange of such shares or
ADSs.
U.S. Holders that are corporations will not be allowed a deduction for dividends
received in respect of distributions on the shares or the ADSs. For example,
if
the gross amount of a distribution with respect to the shares or ADSs exceeds
the Company's current and accumulated earnings and profits by US$10.00, such
excess will generally not be subject to a U.S. tax to the extent the U.S.
Holder's tax basis in the shares or ADSs equals or exceeds
US$10.00.
87
A
dividend distribution will be treated as foreign source income and will
generally be classified as "passive income" or "financial services income"
for
U.S. foreign tax credit purposes. If Chilean withholding taxes are imposed
on a
dividend, U.S. Holders will be treated as having actually received the amount
of
such taxes (net of any credit for the First Category Tax) and as having paid
such amount to the Chilean taxing authorities. As a result, the amount of
dividend income included in gross income by a U.S. Holder will be greater
than
the amount of cash actually received by the U.S. Holder with respect to such
dividend income. A U.S. Holder may be able, subject to certain generally
applicable limitations, to claim a foreign tax credit or a deduction for
Chilean
withholding taxes (net of any credit for the First Category Tax) imposed
on
dividend payments. The rules relating to the determination of the U.S. foreign
tax credit are complex, and the calculation of U.S. foreign tax credits and,
in
the case of a U.S. Holder that elects to deduct foreign taxes, the availability
of deductions, involve the application of rules that depend on a U.S. Holder's
particular circumstances. U.S. Holders should, therefore, consult their own
tax
advisors regarding the application of the U.S. foreign tax credit rules to
dividend income on the shares or ADSs.
Non-U.S.
Holders generally will not be subject to U.S. tax on a distribution with
respect
to shares or ADSs unless such Non-U.S. Holder has certain connections to
the
United States.
Capital
Gains
A
U.S.
Holder will generally recognize gain or loss on the sale, redemption or other
disposition of the shares or ADSs in an amount equal to the difference between
the amount realized on the sale or exchange and the U.S. Holder's adjusted
basis
in such shares or ADSs. Thus, if the U.S. Holder sells the shares for US$40.00
and such U.S. Holder's tax basis in such shares is US$30.00, such U.S. Holder
will generally recognize a gain of US$10.00 for U.S. federal income tax
purposes. Gain or loss upon the sale of the shares or ADSs will be capital
gain
or loss if the shares or ADSs are capital assets in the hands of the U.S.
Holder. Capital gains on the sale of capital assets held for one year or
less
are subject to U.S. federal income tax at ordinary income tax rates. Net
capital
gains derived with respect to capital assets held for more than one year
are
eligible for reduced rates of taxation. Gain or loss realized by a U.S. Holder
on the sale or exchange of shares or ADSs will be U.S.-source income. In
addition, certain limitations exist on the deductibility of capital losses
by
both corporate and individual taxpayers. Any tax imposed by Chile directly
on
the gain from such a sale would generally be eligible for the U.S. foreign
tax
credit; however, because the gain would generally be U.S.-source, a U.S.
Holder
might not be able to use the credit otherwise available. U.S. Holders should
consult their own tax advisors regarding the foreign tax credit implications
of
the sale, redemption or other disposition of a Share or ADS.
A
Non-U.S. Holder of ADSs or shares will not be subject to United States income
or
withholding tax on gain from the sale or other disposition of ADSs or shares
unless, in general (i) such gain is effectively connected with the conduct
of a
trade or business within the United States or (ii) the Non-U.S. Holder is
an
individual who is present in the United States for at least 183 days during
the
taxable year of the disposition
and
certain other conditions are met.
Payments
of dividends on the shares or ADSs and the proceeds of sale or other disposition
of the shares or ADSs within the United States by certain non-corporate holders
may be subject to U.S. information reporting and backup withholding. A U.S.
Holder generally will be subject to U.S. information reporting and backup
withholding at a rate of 30% unless the recipient of such payment supplies
an
accurate taxpayer identification number, as well as certain other information,
or otherwise establishes an exemption, in the manner prescribed by law. U.S.
information reporting and backup withholding of U.S. federal income tax at
a
rate of 30% may also apply to Non-U.S. Holders that are not "exempt recipients"
and that fail to provide certain information as may be required by United States
law and applicable regulations. Any amount withheld under U.S. backup
withholding is not an additional tax and is generally allowable as a credit
against the U.S. Holder's federal income tax liability upon furnishing the
required information to the IRS.
HOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING RULES TO THEIR PARTICULAR
CIRCUMSTANCES
10.F.
Dividends
And Paying Agents
Not
applicable
10.G.
Statement
By Experts
Not
applicable
10.H.
Documents
On Display
Documents
referred to in this form 20-F are available to the public at:
http://www.sec.gov/edgar/searchedgar/companysearch.html,
CIK:
909037.
10.I.
Subsidiary
Information
See
Item
4.C. Organizational Structure.
As
explained elsewhere in this Annual Report, we transact our businesses in more
than 100 countries, thereby rendering our market risk dependent upon the
fluctuations of foreign currencies and local and international interest rates.
These fluctuations may generate losses in the value of financial instruments
taken in the normal course of business.
We,
from
time to time and depending upon then current market conditions, review and
re-establish our financial policies to protect our operations. Management is
authorized by our Board of Directors to engage in certain derivative contracts
such as forwards and swaps to specifically hedge the fluctuations in interest
rates and in currencies other than the U.S. dollar.
Derivative
instruments used by us are transaction-specific so that a specific debt
instrument or contract determines the amount, maturity and other terms of the
hedge. We do not use derivative instruments for speculative purposes.
Interest
Rate Risk.
As of
December 31, 2004, we had a total financial debt of US$ 213.6 million where
approximately 96%
was priced at a fixed rate. During 2005 until March 31st
2006, we
issued US$ 100 million long-term and US$ 61.7 million short-term bank debt
priced at a variable rate plus US$ 102.1 million long-term bond priced at a
fixed rate. During April 2006, we issued US$ 200 million long-term notes under
Rule 144A bonds at a fixed rate. Therefore as of May 31, 2006, 25% of our
financial debt was exposed to fluctuations in Libor.
|
Expected
Maturity Date
|
||||||||||||||||||||||
|
|
||||||||||||||||||||||
|
On
Balance Sheet Financial Instruments
|
2006
|
2007
|
2008
|
2009
|
2010
and thereafter
|
Total
|
Fair
Value
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
(in
thousands of U.S. dollars)
|
||||||||||||||||||||||
|
Fixed
Rate ($US)
|
207,700
|
—
|
—
|
—
|
—
|
207,700
|
208,154
|
|||||||||||||||
|
Average
interest rate: 7.7%
|
|
|
207,700
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
207,700
|
|
|
208,154
|
|
|
Variable
Rate ($US)
|
72,910
|
5,200
|
5,200
|
5,200
|
101,300
|
189,810
|
167,710
|
|||||||||||||||
|
Average
interest rate: 5.2%
|
|
|
5,200
|
|
|
5,200
|
|
|
5,200
|
|
|
5,200
|
|
|
101,300
|
|
|
122,100
|
|
|
101,221
|
|
|
Average
Interest rate: 4.7% (*)
|
|
|
67,710
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
67,710
|
|
|
67,710
|
|
|
|
||||||||||||||||||||||
|
Total
|
280,610
|
5,200
|
5,200
|
5,200
|
101,300
|
397,510
|
375,864
|
|||||||||||||||
(*)
Short-term debt.
We
maintain the majority of our short-term financial debt priced at Libor
plus a
spread for which we do not have any kind of derivative contract.
Exchange
Rate Risk.
Although
the U.S. dollar is the primary currency in which we transact our businesses,
our
operations throughout the world expose us to exchange rate variations for
non-U.S. dollar currencies. Therefore, fluctuations in the exchange rate
of such
local currencies may affect our financial condition and results of operations.
To lessen these effects, we maintain derivatives contracts to protect the
net
difference between our principal assets and liabilities for currencies
other
than the U.S. dollar. These contracts are renewed periodically depending
on the
amount to cover in each currency. Aside from this, we do not hedge potential
future income and expenses in currencies other than the U.S. dollar with
the
exception of the Euro and Chilean Peso. We estimate annual sales in Euro
and
expenses in Chilean Peso and secure the exchange difference with derivatives
contracts.
As
of
December 31, 2005 and 2004 we had the following net monetary assets and
liabilities that are subject to foreign exchange gain or loss
fluctuation:
|
2005
|
2004
|
||||||
|
Th
US$
|
Th
US$
|
||||||
|
|
|
||||||
|
Chilean
pesos
|
53,167
|
66,980
|
|||||
|
Brazilian
real
|
(941
|
)
|
(448
|
)
|
|||
|
Euro
|
19,373
|
20,069
|
|||||
|
Japanese
yen
|
6,333
|
3,693
|
|||||
|
Mexican
pesos
|
8,101
|
(2,770
|
)
|
||||
|
South
African rand
|
7,529
|
7,074
|
|||||
|
Dirhams
|
11,543
|
||||||
|
Other
currencies
|
3,282
|
2,224
|
|||||
As
of
December 31, 2005, we had open forward currency exchange contracts and options
contracts to buy ans sell U.S. dollars in exchange for foreign currencies for
approximately Euros 26 million (US$30.6 million), South African Rands 50 million (US$ 7.9 million)
and Mexican Pesos $ 60 million (US$5.6 million).. These contracts are all short-term
and a
summary of them is shown in Note 17 to the Consolidated Financial
Statements.
90
Not
applicable
PART
II
Not
applicable
In
May of
2005, SQM's by-laws were amended at an extraordinary shareholders meeting in
order to change the method of calculating the total percentage of shares held
by
a single individual for voting purposes. As a result of the amendment,
shares that are held directly and shares held indirectly by related third
parties are included in each shareholders total percentage of ownership.
This calculation is used for determining whether a shareholder's voting
influence exceeds certain limits which are set forth in Article 31 of the
By-laws. For further information see Item 10.B Memorandum and Articles of
Association - Shares
Disclosure
Control and Procedures
Under
the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures, pursuant to Exchange Act Rules 13(a)-15(b), as of the end of the
period covered by this Annual Report. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are effective in providing reasonable
assurance that material information is made known to management and that
financial and non-financial information is properly recorded, processed,
summarized and reported.
The
procedures associated to our internal controls are designed to provide
reasonable assurance that our transactions are properly authorized, assets
are
safeguarded against unauthorized or improper use, and transactions are properly
recorded and reported. However, through the same design and evaluation period
of
the disclosure controls and procedures, the Company's management, including
the
Company's Chief Executive Officer and Chief Financial Officer, recognized that
there are inherent limitations to the effectiveness of any internal control
system regardless of how well designed and operated. In such a way they can
provide only reasonable assurance of achieving the desired control objectives
and no evaluation can provide absolute assurance that all control issues or
instances of fraud, if any, within the Company have been detected.
There
were no significant changes in our internal controls over financial reporting
or
in other factors that could significantly affect these controls subsequent
to
the date of their evaluation. There were no significant deficiencies or material
weaknesses in our internal controls and procedures requiring corrective actions.
91
On
June
21, 2005, the Board of Directors approved the establishment of an audit
committee to comply with the requirements of the NYSE corporate governance
rules. At that meeting, the Board of Directors determined that the Company
does
not have an audit committee financial expert within the meaning of the
regulations adopted under Sarbanes-Oxley Act of 2002.
Pursuant
to Chilean regulations, the Company has a Directors' Committee whose main
duties
are similar to those of an audit committee. Each of the members of the
Directors' Committee is a member of the audit committee. See 6.C. Board
Practices.
Our
Board
believes that the members of the Directors' Committee have the necessary
expertise and experience to perform the functions of the Directors' Committee
pursuant to Chilean regulations.
We
adopted at the beginning of 2003 a Code of Business Conduct that applies
to the
Chief Executive Officer, the Chief Financial Officer and the Internal Auditor,
as well as to all our officers and employees. Our Code adheres to the definition
set forth in Item 16B of Form 20F under the Exchange Act.
No
waivers have been granted therefrom to the officers mentioned
above.
The
full
text of the code is available on our website at http://www.sqm.com in the Investor Relations section under "Corporate Governance Framework."
Amendments
to, or waivers from one or more provisions of the code will be disclosed
on our
website.
The
table
sets forth the amount of fees billed for each of the last two fiscal years
by
our independent auditors, Ernst & Young, in relation to audit services,
audit-related services, tax and other services provided to us (in thousands
of
U.S. dollars).
|
Year
ended December 31,
|
|||||||
|
|
|||||||
|
2005
|
2004
|
||||||
|
|
|
||||||
|
Audit
fees
|
523.0
|
446.9
|
|||||
|
Audit-related
fees
|
11.8
|
||||||
|
Tax
fees
|
94.4
|
16.0
|
|||||
|
Other
fees
|
106.7
|
—
|
|||||
|
|
|
||||||
|
Total
fees
|
724.1
|
474.7
|
|||||
Audit
fees in the above table are the aggregate fees billed by Ernst & Young in
connection with the audit of our annual Consolidated Financial Statements,
as
well as the review of other statutory filings.
Audit-related
fees in the above table are fees billed by Ernst & Young for assurance and
related services that are reasonably related to the performance of the audit
or
review of our financial statements and are not reported under "Audit
Fees."
Tax
fees
in the above table are fees billed by Ernst & Young for tax advice and tax
planning services.
92
Directors'
Committee Pre-Approval Policies and Procedures
Chilean
law states that public companies are subject to "pre-approval" requirements
under which all audit and non-audit services provided by the independent auditor
must be pre-approved by the Directors’ Committee. Our Directors’ Committee
approves all audit, audit-related, tax and other services provided by Ernst
& Young.
Any
services provided by Ernst & Young that are not specifically included within
the scope of the audit must be pre-approved by the Directors’ Committee prior to
any engagement.
Not
applicable
Not
applicable
93
PART
III
Not
applicable
See
Item
19(a) for a list of all financial statements filed as part of this Form 20-F
annual report.
(a)
Index to Financial Statements
|
|
|
|
Supplementary
Schedules*
|
*All
other
schedules have been omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes
thereto.
(b)
Exhibits
|
Exhibit
No.
|
Exhibit
|
|
|
|
|
|
|
1.1
|
By-laws
(Estatutos) of the Company**
|
|
|
8.1
|
Significant
subsidiaries of the Company
|
|
|
12.1
|
Section
302 Chief Executive Officer Certification
|
|
|
12.2
|
Section
302 Chief Financial Officer Certification
|
|
|
13.1
|
Section
906 Chief Executive Officer Certification
|
|
|
13.2
|
Section
906 Chief Financial Officer
Certification
|
**
Incorporated by reference to the Company’s Annual Report on Form 20-F for the
year ended December 31, 2004 filed with the Securities and Exchange Commission
on June 30, 2005.
94
The
registrant hereby certifies that it meets all of the requirements for filing
on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
SOCIEDAD
QUIMICA Y MINERA DE CHILE S.A.
(CHEMICAL
AND MINING COMPANY OF CHILE INC.)
/s/
Ricardo Ramos
Ricardo
Ramos R.
Chief
Financial Officer and
Business
Development Senior Vice President
Date:
June 30, 2006
95
Consolidated
Financial Statements
SOCIEDAD
QUIMICA Y MINERA DE CHILE S.A. AND SUBSIDIARIES
As
of
December 31, 2005 and 2004
and
for
the three years in the period ended December 31, 2005
Contents
|
Consolidated
Financial Statements:
|
|
|
Ch$
|
-
|
Chilean
pesos
|
|
ThCh
$
|
-
|
Thousands
of Chilean pesos
|
|
US$
|
-
|
United
States dollars
|
|
ThUS$
|
-
|
Thousands
of United States dollars
|
|
UF
|
-
|
“Unidad
de Fomento”. The UF is an inflation-indexed, Chilean peso-denominated
monetary unit. The UF rate is set daily in advance, based on the
change in
the Consumer Price Index of the previous
month
|
96
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Sociedad Química y Minera de Chile S.A.:
We have audited the accompanying consolidated balance sheets of Sociedad Química y Minera de Chile S.A. and subsidiaries (“the Company”) as of December 31, 2004 and 2005, and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sociedad Química y Minera de Chile S.A. and subsidiaries at December 31, 2004 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in Chile, which differ in certain respects from accounting principles generally accepted in the United States of America (see Note 29 to the consolidated financial statements).
| ERNST & YOUNG LTDA. |  |
Santiago, Chile
February 17, 2006
(Except for Notes 28 and 29 for which the date is June 20, 2006)
Audited
Consolidated Balance Sheets
(Expressed
in thousands of US dollars, except as stated)
|
As
of December 31,
|
||||||||||
|
|
||||||||||
|
Note
|
2005
|
2004
|
||||||||
|
|
|
ThUS$
|
ThUS$
|
|||||||
|
|
|
|||||||||
|
ASSETS
|
||||||||||
|
Current
assets
|
||||||||||
|
Cash
and cash equivalents
|
2
(e)
|
|
147,956
|
66,753
|
||||||
|
Accounts
receivable, net
|
4
|
155,836
|
169,840
|
|||||||
|
Other
accounts receivable, net
|
4
|
9,737
|
8,343
|
|||||||
|
Accounts
receivable from related companies
|
5
|
56,459
|
26,029
|
|||||||
|
Inventories,
net
|
6
|
327,232
|
274,602
|
|||||||
|
Recoverable
taxes
|
|
31,212
|
19,185
|
|||||||
|
Prepaid
expenses
|
|
3,189
|
2,735
|
|||||||
|
Deferred
income taxes
|
13
|
2,528
|
—
|
|||||||
|
Other
current assets
|
8,634
|
7,963
|
||||||||
|
|
|
|
||||||||
|
Total
current assets
|
|
742,783
|
575,450
|
|||||||
|
|
|
|
||||||||
|
|
||||||||||
|
Property,
plant and equipment, net
|
7
|
794,647
|
694,762
|
|||||||
|
|
|
|
||||||||
|
|
||||||||||
|
Other
Assets
|
|
|||||||||
|
Investments
in related companies
|
8
|
20,676
|
15,987
|
|||||||
|
Goodwill,
net
|
9
|
27,209
|
17,470
|
|||||||
|
Negative
goodwill, net
|
9
|
(68
|
)
|
(271
|
)
|
|||||
|
Intangible
assets, net
|
|
4,783
|
4,544
|
|||||||
|
Long-term
accounts receivable, net
|
4
|
379
|
289
|
|||||||
|
Long-term
accounts receivable from related companies
|
5
|
2,000
|
—
|
|||||||
|
Other
long-term assets
|
10
|
48,159
|
53,141
|
|||||||
|
|
|
|
||||||||
|
Total
other assets
|
|
103,138
|
91,160
|
|||||||
|
|
|
|
||||||||
|
Total
assets Total
assets
|
|
1,640,568
|
1,361,372
|
|||||||
|
|
|
|||||||||
The
accompanying notes form an integral part of these consolidated financial
statements.
Audited
Consolidated Balance Sheets
(Expressed
in thousands of US dollars, except as stated)
|
As
of December 31,
|
||||||||||
|
|
||||||||||
|
Note
|
2005
|
2004
|
||||||||
|
|
|
|||||||||
|
ThUS$
|
ThUS$
|
|||||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||||
|
Current
liabilities
|
||||||||||
|
Short-term
bank debt
|
11
|
85,022
|
7,955
|
|||||||
|
Current
portion of long-term bank debt
|
11
|
204,880
|
4,577
|
|||||||
|
Dividends
payable
|
|
229
|
183
|
|||||||
|
Accounts
payable
|
|
70,292
|
57,859
|
|||||||
|
Other
accounts payable
|
|
1,036
|
2,054
|
|||||||
|
Notes
and accounts payable to related companies
|
5
|
7,662
|
14,025
|
|||||||
|
Accrued
liabilities and provisions
|
12
|
23,750
|
12,267
|
|||||||
|
Withholdings
|
|
13,092
|
11,103
|
|||||||
|
Income
taxes
|
|
20,675
|
11,641
|
|||||||
|
Deferred
income taxes
|
13
|
—
|
7,933
|
|||||||
|
Deferred
income
|
|
1,262
|
441
|
|||||||
|
Other
current liabilities
|
|
368
|
1,206
|
|||||||
|
|
|
|||||||||
|
Total
current liabilities
|
|
428,268
|
131,244
|
|||||||
|
|
|
|||||||||
|
Long-term
liabilities
|
|
|||||||||
|
Long-term
bank debt
|
11
|
100,000
|
200,000
|
|||||||
|
Other
accounts payable
|
1,065
|
1,106
|
||||||||
|
Deferred
income taxes
|
13
|
38,895
|
34,089
|
|||||||
|
Staff
severance indemnities
|
14
|
16,415
|
11,875
|
|||||||
|
|
|
|
||||||||
|
Total
long-term liabilities
|
|
156,375
|
247,070
|
|||||||
|
|
|
|
||||||||
|
Minority
interest
|
15
|
35,509
|
34,430
|
|||||||
|
|
|
|||||||||
|
|
||||||||||
|
Commitments
and contingencies
|
|
22
|
—
|
—
|
||||||
|
Shareholders'
equity
|
16
|
|||||||||
|
Paid-in
capital
|
477,386
|
477,386
|
||||||||
|
Other
reserves
|
157,287
|
150,887
|
||||||||
|
Retained
earnings
|
385,743
|
320,355
|
||||||||
|
|
|
|||||||||
|
Total
shareholders’ equity
|
1,020,416
|
948,628
|
||||||||
|
|
|
|||||||||
|
Total
liabilities and shareholders’ equity
|
1,640,568
|
1361,372
|
||||||||
|
|
|
|||||||||
The
accompanying notes form an integral part of these consolidated financial
statements.
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Audited
Consolidated Statements of Income
(Expressed
in thousands of US dollars, except as stated)
|
For
the years ended December 31,
|
|||||||||||||
|
|
|||||||||||||
|
Note
|
2005
|
2004
|
2003
|
||||||||||
|
|
|
|
|||||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
|||||||||||
|
Operating
income
|
|||||||||||||
|
Sales
|
895,970
|
788,516
|
691,806
|
||||||||||
|
Cost
of sales
|
(652,901
|
)
|
(608,744
|
)
|
(553,964
|
)
|
|||||||
|
|
|
|
|||||||||||
|
Gross
margin
|
243,069
|
179,772
|
137,842
|
||||||||||
|
Selling
and administrative expenses
|
(61,878
|
)
|
(55,705
|
)
|
(50,590
|
)
|
|||||||
|
|
|
|
|||||||||||
|
Operating
income
|
181,191
|
124,067
|
87,252
|
||||||||||
|
|
|
|
|||||||||||
|
Non-operating
income and expense
|
|||||||||||||
|
Non-operating
income
|
18
|
16,433
|
20,829
|
18,654
|
|||||||||
|
Non-operating
expenses
|
18
|
(50,755
|
)
|
(38,420
|
)
|
(39,813
|
)
|
||||||
|
|
|
|
|||||||||||
|
Non-operating
loss
|
(34,322
|
)
|
(17,591
|
)
|
(21,159
|
)
|
|||||||
|
|
|
|
|||||||||||
|
Income
before income taxes, minority interest and amortization of negative
goodwill
|
146,869
|
106,476
|
66,093
|
||||||||||
|
|
|
|
|||||||||||
|
Income
tax expense
|
13
|
(32,527
|
)
|
(27,308
|
)
|
(16,056
|
)
|
||||||
|
|
|
|
|||||||||||
|
Income
before minority interest and amortization of negative
goodwill
|
114,342
|
79,168
|
50,037
|
||||||||||
|
|
|
|
|||||||||||
|
Minority
interest
|
15
|
(1,039
|
)
|
(5,139
|
)
|
(3,654
|
)
|
||||||
|
|
|
|
|||||||||||
|
Income
before amortization of negative goodwill
|
113,303
|
74,029
|
46,383
|
||||||||||
|
|
|
|
|||||||||||
|
Amortization
of negative goodwill
|
9
|
203
|
203
|
370
|
|||||||||
|
|
|
|
|||||||||||
|
Net
income for the year
|
113,506
|
74,232
|
46,753
|
||||||||||
|
|
|
|
|||||||||||
The
accompanying notes form an integral part of these consolidated financial
statements.
F-4
Notes
to the Audited Consolidated Cash Flow
(Expressed
in thousands of US dollars, except as stated)
|
For
the years ended December 31
|
|||||||||||||
|
|
|||||||||||||
|
Note
|
2005
|
2004
|
2003
|
||||||||||
|
|
|
|
|||||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
|||||||||||
|
Cash
flows from operating activities
|
|||||||||||||
|
Net
income
|
113,506
|
74,232
|
46,753
|
||||||||||
|
Charges
(credits) to income not representing cash flows
|
|||||||||||||
|
Depreciation
expense
|
7
|
70,054
|
62,690
|
61,728
|
|||||||||
|
Amortization
of intangible assets
|
498
|
173
|
298
|
||||||||||
|
Write-offs
and accruals
|
17,034
|
23,584
|
25,230
|
||||||||||
|
Equity
participation in net income of unconsolidated investees
|
(3,073
|
)
|
(4,897
|
)
|
(5,529
|
)
|
|||||||
|
Equity
participation in net losses of unconsolidated investees
|
477
|
387
|
1
|
||||||||||
|
Amortization
of goodwill
|
9
|
2,070
|
1,073
|
1,134
|
|||||||||
|
Amortization
of negative goodwill
|
9
|
(203
|
)
|
(203
|
)
|
(370
|
)
|
||||||
|
(Gains)
losses on sales of assets
|
216
|
283
|
(13
|
)
|
|||||||||
|
Gain
on sale of investment
|
—
|
(8,820
|
)
|
—
|
|||||||||
|
Foreign
currency translation, net
|
18
|
3,804
|
475
|
(6,590
|
)
|
||||||||
|
Other
credits to income not representing cash flows
|
(10,109
|
)
|
(1,919
|
)
|
(2,793
|
)
|
|||||||
|
Other
charges to income not representing cash flows
|
87,689
|
59,092
|
29,433
|
||||||||||
|
Net
changes in operating assets and liabilities:
|
|||||||||||||
|
(Increase)
decrease in trade accounts receivable
|
(15,838
|
)
|
(9,447
|
)
|
(18,124
|
)
|
|||||||
|
Increase
in inventories
|
(58,807
|
)
|
(40,665
|
)
|
(12,578
|
)
|
|||||||
|
(Increase)
decrease in other assets
|
(10,783
|
)
|
(770
|
)
|
15,534
|
||||||||
|
Increase
(decrease) in accounts payable
|
(6,520
|
)
|
(6,829
|
)
|
(16,236
|
)
|
|||||||
|
Increase
(decrease) in interest payable
|
349
|
(38
|
)
|
134
|
|||||||||
|
Increase
(decrease) in net income taxes payable
|
(25,620
|
)
|
1,284
|
(2,246
|
)
|
||||||||
|
Increase
(decrease) in other accounts payable
|
(10,517
|
)
|
(2,935
|
)
|
(1,062
|
)
|
|||||||
|
Increase
(decrease) in VAT and taxes payable
|
(3,282
|
)
|
137
|
(2,215
|
)
|
||||||||
|
Minority
interest
|
15
|
1,039
|
5,139
|
3,654
|
|||||||||
|
|
|
|
|||||||||||
|
Net
cash provided from operating activities
|
151,984
|
152,026
|
116,143
|
||||||||||
|
|
|
|
|||||||||||
|
Cash
flows from financing activities
|
|||||||||||||
|
Proceeds
from short term bank financing
|
185,000
|
83,307
|
57,324
|
||||||||||
|
Loans
to related companies
|
—
|
—
|
(5,275
|
)
|
|||||||||
|
Payment
of dividends
|
(51,732
|
)
|
(25,706
|
)
|
(21,361
|
)
|
|||||||
|
Repayment
of bank financing
|
(6,000
|
)
|
(192,696
|
)
|
(82,559
|
)
|
|||||||
|
|
|
|
|||||||||||
|
Net
cash used in financing activities
|
127,268
|
(135,095
|
)
|
(51,871
|
)
|
||||||||
|
|
|
|
|||||||||||
|
Cash
flows from investing activities
|
|||||||||||||
|
Sales
of property, plant and equipment
|
2,546
|
741
|
264
|
||||||||||
|
Sales
of investments in related companies
|
—
|
69,337
|
—
|
||||||||||
|
Sales
of other investments
|
—
|
210
|
542
|
||||||||||
|
Other
investing income
|
1,345
|
877
|
7,699
|
||||||||||
|
Additions
to property, plant and equipment
|
(185,603
|
)
|
(51,758
|
)
|
(55,084
|
)
|
|||||||
|
Capitalized
interest
|
(5,140
|
)
|
(1,708
|
)
|
(2,149
|
)
|
|||||||
|
Purchase
of investments in related companies, net of cash acquired
|
(12,026
|
)
|
(37,079
|
)
|
(11,150
|
)
|
|||||||
|
Purchase
of other investments
|
(2
|
)
|
(13
|
)
|
(210
|
)
|
|||||||
|
Other
disbursements
|
(666
|
)
|
—
|
(56
|
)
|
||||||||
|
|
|
|
|||||||||||
|
Net
cash used in investing activities
|
(199,546
|
)
|
(19,393
|
)
|
(60,144
|
)
|
|||||||
|
|
|
|
|||||||||||
|
Effect
of inflation on cash and cash equivalents
|
1,497
|
(58
|
)
|
(59
|
)
|
||||||||
|
Net
change in cash and cash equivalents
|
81,203
|
(2,520
|
)
|
4,069
|
|||||||||
|
Beginning
balance of cash and cash equivalents
|
66,753
|
69,273
|
65,204
|
||||||||||
|
|
|
|
|||||||||||
|
Ending
balance of cash and cash equivalents
|
2e)
|
|
147,956
|
66,753
|
69,273
|
||||||||
|
|
|
|
|||||||||||
| Supplemental cash flow information: | |||||||||||||
| Interest paid |
20,315
|
18,986
|
22,379
|
||||||||||
|
Income
taxes paid
|
22,330
|
2,466
|
2,347
|
||||||||||
|
apital
lease obligations incurred during the year
|
—
|
—
|
98
|
||||||||||
F-5
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
1 – Company
Background
Sociedad
Química y Minera de Chile S.A. (the “Company”) was registered with the Chilean
Superintendency of Securities and Insurance (Superintendencia
de Valores y Seguros
- “SVS”)
on March 18, 1983. The Company is regulated by the SVS as well as by the
United
States Securities and Exchange Commission (“SEC”) since issuing American
Depositary Receipts (“ADRs”) in December 1995.
References
herein to “Parent Company” are to Sociedad Química y Minera de Chile S.A. and
references herein to the “Company” or “SQM” are to Sociedad Química y Minera de
Chile S.A. together with its consolidated subsidiaries and the companies
in
which Sociedad Química y Minera de Chile S.A. holds significant equity
interests.
The
Company is an integrated producer and distributor of specialty fertilizers,
iodine, lithium and other industrial chemicals. The Company extracts natural
resources and develops them into products, which it then distributes to more
than 100 countries.
Note
2 - Summary of Significant Accounting Policies
a)
Basis
for the preparation of the consolidated financial
statements
The
accompanying consolidated financial statements have been prepared in US dollars
in accordance with accounting principles generally accepted in Chile (“Chilean
GAAP”) and the regulations of the SVS. Certain accounting practices applied by
the Company that conform with accounting Chilean GAAP do not conform with
accounting principles generally accepted in the United States (“US GAAP”) or
International Financial Reporting Standards (“IFRS”).
The
consolidated financial statements include the accounts of Sociedad Química y
Minera de Chile S.A. and subsidiaries (companies in which the Parent Company
holds a controlling participation, generally equal to direct or indirect
ownership of more than 50%). All
significant inter-company transactions and balances have been eliminated
in the
consolidation.
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
F-6
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
2 - Summary of Significant Accounting Policies (continued)
a)
Basis
for the preparation of the consolidated financial statements
(continued)
The
majority-owned subsidiaries of the SQM S.A. as of December 31, 2005,
2004 and 2003 are as follows:
|
Direct
or indirect ownership
|
||||||||||
|
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
Foreign
subsidiaries:
|
|
%
|
|
%
|
|
%
|
||||
|
Nitrate
Corp. of Chile Limited (United Kingdom)
|
100.00
|
100.00
|
100.00
|
|||||||
|
Soquimich
SRL (Argentina)
|
100.00
|
100.00
|
100.00
|
|||||||
|
Nitratos
Naturais do Chile Ltda. (Brazil)
|
100.00
|
100.00
|
100.00
|
|||||||
|
SQM
Europe NV (Belgium)
|
100.00
|
100.00
|
100.00
|
|||||||
|
SQM
North America Corp. (USA)
|
100.00
|
100.00
|
100.00
|
|||||||
|
North
American Trading Company (USA)
|
100.00
|
100.00
|
100.00
|
|||||||
|
SQM
Peru S.A.
|
100.00
|
100.00
|
100.00
|
|||||||
|
SQM
Corporation NV (Dutch Antilles)
|
100.00
|
100.00
|
100.00
|
|||||||
|
S.Q.I.
Corporation NV (Dutch Antilles)
|
100.00
|
100.00
|
100.00
|
|||||||
|
Soquimich
European Holding BV (Holland)
|
100.00
|
100.00
|
100.00
|
|||||||
|
PTM
- SQM Ibérica S.A. (Spain)
|
100.00
|
100.00
|
100.00
|
|||||||
|
SQMC
Holding Corporation LLP (USA)
|
100.00
|
100.00
|
100.00
|
|||||||
|
SQM
Ecuador S.A.
|
100.00
|
100.00
|
100.00
|
|||||||
|
Cape
Fear Bulk LLC (USA)
|
51.00
|
51.00
|
51.00
|
|||||||
|
SQM
Investment Corporation NV (Dutch Antilles)
|
100.00
|
100.00
|
100.00
|
|||||||
|
SQM
Brasil Ltda.
|
100.00
|
100.00
|
100.00
|
|||||||
|
Royal
Seed Trading Corporation AVV (Aruba)
|
100.00
|
100.00
|
100.00
|
|||||||
|
SQM
Japan K.K.
|
100.00
|
100.00
|
100.00
|
|||||||
|
SQM
Oceanía PTY Limited (Australia)
|
100.00
|
100.00
|
100.00
|
|||||||
|
SQM
France S.A.
|
100.00
|
100.00
|
100.00
|
|||||||
|
RS
Agro-Chemical Trading AVV (Aruba)
|
100.00
|
100.00
|
100.00
|
|||||||
|
SQM
Comercial de México S.A. de C.V.
|
100.00
|
100.00
|
100.00
|
|||||||
|
SQM
Indonesia
|
80.00
|
80.00
|
80.00
|
|||||||
|
SQM
Virginia LLC (USA)
|
100.00
|
100.00
|
100.00
|
|||||||
|
Agricolima
S.A. de C.V. (Mexico)
|
100.00
|
100.00
|
100.00
|
|||||||
|
SQM
Venezuela S.A.
|
100.00
|
100.00
|
100.00
|
|||||||
|
SQM
Italia SRL (Italy)
|
95.00
|
95.00
|
95.00
|
|||||||
|
Comercial
Caiman Internacional S.A. (Cayman Islands)
|
100.00
|
100.00
|
100.00
|
|||||||
|
Mineag
SQM Africa Limited (South Africa)
|
100.00
|
100.00
|
100.00
|
|||||||
|
Fertilizantes
Olmeca y SQM S.A. de C.V. (Mexico)
|
100.00
|
100.00
|
100.00
|
|||||||
|
Administración
y Servicios Santiago S.A. de C.V. (Mexico)
|
100.00
|
100.00
|
100.00
|
|||||||
|
SQM
Lithium Specialties LLC (USA)
|
100.00
|
100.00
|
100.00
|
|||||||
|
SQM
Nitratos México S.A. de C.V. (Mexico)
|
51.00
|
51.00
|
51.00
|
|||||||
|
SQM
Dubai - Fzco (United Arab Emirates).
|
100.00
|
—
|
—
|
|||||||
|
Fertilizantes
Naturales S.A. (Spain) (1)
|
—
|
50.00
|
50.00
|
|||||||
| (1) |
Up
to December 31, 2004 the Company exerted control over Fertilizantes
Naturales S.A. and that entity was included in the consolidation
for the
years ended December 31, 2004 and 2003. Beginning January
1, 2005, the
Company no longer controls this entity and therefore it
has been excluded
from consolidation for the year ended December 31, 2005.
|
F-7
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
2 - Summary of Significant Accounting Policies (continued)
a)
Basis
for the preparation of the consolidated financial statements
(continued)
|
Direct
or indirect ownership
|
|||||||
|
|
|||||||
|
2005
|
2004
|
||||||
|
|
|
||||||
|
|
|
%
|
|
%
|
|||
|
Domestic
subsidiaries:
|
|||||||
|
Servicios
Integrales de Tránsitos y Transferencias S.A.
|
100.00
|
100.00
|
|||||
|
Soquimich
Comercial S.A.
|
60.64
|
60.64
|
|||||
|
Isapre
Norte Grande Ltda.
|
100.00
|
100.00
|
|||||
|
Almacenes
y Depósitos Ltda.
|
100.00
|
100.00
|
|||||
|
Ajay
SQM Chile S.A.
|
51.00
|
51.00
|
|||||
|
SQM
Nitratos S.A.
|
99.99
|
99.99
|
|||||
|
Proinsa
Ltda.
|
60.58
|
60.58
|
|||||
|
SQM
Potasio S.A.
|
100.00
|
100.00
|
|||||
|
SQMC
International Limitada
|
60.64
|
60.64
|
|||||
|
SQM
Salar S.A.
|
100.00
|
100.00
|
|||||
|
SQM
Industrial S.A.(ex-PCS Yumbes)
|
100.00
|
100.00
|
|||||
|
Comercial
Hydro S.A.
|
60.64
|
60.64
|
|||||
All
significant inter-company balances, transactions and unrealized gains
and losses
arising from transactions between these companies have been eliminated
in
consolidation.
b)
Periods
presented
These
consolidated financial statements are presented as of December 31, 2005
and 2004
and for each of the three years in the period ended December 31, 2005.
c)
Reporting
currency and price-level restatement
The
financial statements of the Company are prepared in US dollars. As a
significant
portion of the Company’s operations are transacted in US dollars, the US dollar
is considered the currency of the primary economic environment in which
the
Company operates.
Under
Chilean GAAP, the Parent Company and those subsidiaries which maintain
their
accounting records in US dollars are not required, or permitted, to restate
the
historical dollar amounts for the effects of inflation in Chile.
In
accordance with Chilean GAAP the financial statements of domestic subsidiaries
that maintain their accounting records in Chilean pesos have been restated
to
reflect the effects of variations in the purchasing power of Chilean
pesos
during the year. For this purpose, and in accordance with Chilean regulations,
non-monetary assets and liabilities, equity and income statement accounts
have
been restated in terms of year-end constant pesos based on the change
in the
consumer price index during the year (3.6% and 2.5% in 2005 and 2004,
respectively). The resulting net charge or credit to income arises as
a result
of the gain or loss in purchasing power from the holding of non-US dollar
denominated monetary assets and liabilities exposed to the effects of
inflation.
F-8
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
2 - Summary of Significant Accounting Policies (continued)
c)
Reporting
currency and price-level restatement (continued)
Index-linked
assets and liabilities
Assets
and liabilities that are denominated in index-linked units of account
are stated
at the year-end values of the respective units of account. The principal
index-linked unit used in Chile is the Unidad
de Fomento
(“UF”),
which is adjusted daily to reflect the changes in Chile’s
CPI. Values for the UF are as follows (historical Chilean pesos
per UF):
|
US$
|
||||
|
|
||||
|
December
31, 2003
|
28.28
|
|||
|
December
31, 2004
|
31.07
|
|||
|
December
31, 2005
|
35.07
|
|||
d)
Foreign
currency translations
| (i) |
Foreign
currency transactions
|
Monetary
assets and liabilities denominated in Chilean pesos and other currencies
have
been translated to US dollars at the observed exchange rates determined
by the
Central Bank of Chile as of each year-end. The observed exchange
rates of
Chilean pesos were Ch$ 512.50 per US$ 1 at December 31, 2005 and
Ch$ 557.40 per
US$ 1 at December 31, 2004.
|
(ii)
|
Translation
of non-US dollar financial
statements
|
In
accordance with Chilean GAAP, the financial statements of foreign
and domestic
subsidiaries that do not maintain their accounting records in US
dollars are
translated from the respective local currencies to US dollars in
accordance with
Technical Bulletin No. 64 and No. 72 issued by the Chilean Association
of
Accountants (“BT 64 and BT 72”) as follows:
| a) |
Domestic
subsidiaries
|
For
those
subsidiaries and affiliates located in Chile that keep their accounting
records
in price-level adjusted Chilean pesos:
| - |
Balance
sheet accounts are translated to US dollars at the year-end
exchange rate
without eliminating the effects of price-level restatement.
The assets and
liabilities were translated into US dollars at the exchange
rates as of
the respective balance sheet dates of Ch$ 512.50 and
Ch$ 557.40 per US$ 1
as of December 31, 2005 and 2004,
respectively.
|
| - |
Income
statement accounts are translated to US dollars at the
average exchange
rate each month. The monetary correction account on the
income statement,
which is generated by the inclusion of price-level restatement
on the
non-monetary assets and liabilities and shareholders’ equity, is
translated to US dollars at the average exchange rate
for each
month.
|
| - |
Translation
gains and losses, as well as price-level restatement,
are included as an
adjustment in shareholders’ equity, in conformity with Circular No. 1697
of the SVS.
|
F-9
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
2 - Summary of Significant Accounting Policies (continued)
d)
Foreign
currency (continued)
|
(ii)
|
Translation
of non-US dollar financial statements
(continued)
|
| b) |
Foreign
subsidiaries
|
The
financial statements of those foreign subsidiaries that keep
their accounting
records in currencies other than the US dollar have been translated
as
follows:
| - |
Monetary
assets and liabilities are translated at year-end
exchange rates between
the US dollar and the local
currency.
|
| - |
All
non-monetary assets and liabilities and shareholders’ equity are
translated at historical exchange rates between
the US dollar and the
local currency.
|
| - |
Income
and expense accounts, except
for such accounts that are calculated using historical
rates (e.g.
depreciation and amortization)
are translated at average exchange rates between
the US dollar and the
local currency.
|
| - |
Any
foreign currency translation differences are included
in the results of
operations for the period.
|
Foreign
exchange gains (losses) for the years ended December 31, 2005,
2004 and 2003
amounted to ThUS$ (3,804), ThUS$ (475) and ThUS$ 6,590, respectively
and have
been charged to the consolidated statements of income in each
respective
period.
The
monetary assets and liabilities of foreign subsidiaries were
translated into US
dollars at the exchange rates per US dollar prevailing as of
December 31, as
follows:
|
As
of December 31,
|
||||||||||
|
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
Brazilian
Real
|
2.34
|
2.65
|
2.89
|
|||||||
|
New
Peruvian Sol
|
3.34
|
3.47
|
3.46
|
|||||||
|
Argentine
Peso
|
3.03
|
2.98
|
2.96
|
|||||||
|
Japanese
Yen
|
118.07
|
104.21
|
107.13
|
|||||||
|
Euro
|
0.85
|
0.73
|
0.79
|
|||||||
|
Mexican
Peso
|
10.71
|
11.22
|
11.20
|
|||||||
|
Indonesian
Rupee
|
9,290.00
|
9,289.97
|
8,465.00
|
|||||||
|
Australian
Dollar
|
1.36
|
1.28
|
1.33
|
|||||||
|
Pound
Sterling
|
0.52
|
0.52
|
0.58
|
|||||||
|
South
African Rand
|
6.33
|
5.80
|
6.59
|
|||||||
The
Company uses the “observed exchange rate”, which is the rate determined daily by
the Chilean Central Bank based on the average exchange rates
at which bankers
conduct authorized transactions.
F-10
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
2 - Summary of Significant Accounting Policies (continued)
e)
Cash
and cash equivalents
The
Company considers all highly liquid investments with
a remaining maturity of
less than 90 days as of the closing date of the financial
statements to be cash
equivalents. As of December 31, cash and cash equivalent
are as
follows:
|
As
of December 31,
|
||||||||||
|
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||
|
Cash
|
13,273
|
18,559
|
15,251
|
|||||||
|
Time
deposits
|
1,483
|
15,854
|
13,203
|
|||||||
|
Mutual
funds
|
132,303
|
30,797
|
38,629
|
|||||||
|
Repurchase
agreements
|
897
|
1,543
|
2,190
|
|||||||
|
|
|
|
||||||||
|
Total
|
147,956
|
66,753
|
69,273
|
|||||||
|
|
|
|
||||||||
f)
Time
deposits
Time
deposits are recorded at cost plus accrued interest
and UF indexation
adjustments, as applicable.
g)
Marketable
securities
Marketable
securities are recorded at the lower of cost plus accrued
interest or market
value.
h)
Allowance
for doubtful accounts
The
Company records an allowance for doubtful accounts
based on estimated
probability of unrecoverability of accounts receivable.
This
allowance is presented as a deduction from Trade accounts
receivable, Notes
receivable and Other accounts receivables.
i)
Inventories
Inventories
of finished products and work in process are valued
at average production cost.
Raw materials and goods for resale acquired from third
parties are stated at
average acquisition cost and materials-in-transit are
valued at cost. These
values do not exceed net realizable values.
Inventories
of non-critical spare parts and supplies are classified
as other current assets,
except for those items for which the Company estimates
a turnover period in
excess of one year, which are classified as other long-term
assets.
j)
Income
taxes and deferred income taxes
Current
income tax provisions are recognized by the group companies
on the basis of
respective tax regulations in each jurisdiction where
the Company operates.
Prior
to
2000, income taxes were charged to results in the same
period in which the
income and expenses were recorded and were calculated
in accordance with the
enacted tax laws in Chile and the other jurisdictions
in which the Company
operated.
F-11
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
2 - Summary of Significant Accounting Policies
(continued)
j)
Income
taxes and deferred income taxes (continued)
Beginning
January 1, 2000, the Company records deferred income
taxes in accordance with
Technical Bulletin No. 60 (“BT 60”) and complementary technical bulletins
thereto issued by the Chilean Association of Accountants,
and with SVS Circulars
No. 1466 and No. 1560, recognizing, using the liability
method, the deferred tax
effects of temporary differences between the financial
and tax values of assets
and liabilities. As a transitional provision at the
date of adoption of BT 60, a
contra asset or liability has been recorded offsetting
the effects of the
deferred tax assets and liabilities not recorded prior
to January 1, 2000. Such
contra asset or liability must be amortized to income
over the estimated average
reversal periods corresponding to the underlying temporary
differences to which
the deferred tax asset or liability relates calculated
using the tax rates that
will be in effect at the time of reversal.
Deferred
tax assets are further reduced by a valuation allowance,
if based on the weight
of available evidence it is more-likely-than-not that
some portion of the
deferred tax assets will not be realized.
k)
Property,
plant and equipment
Property,
plant, equipment and property rights are recorded at
acquisition cost,
considering in general an average residual value of
5%, except for certain
assets that were restated in accordance with a technical
appraisal in 1988.
Depreciation expense has been calculated using the
straight-line method based on
the estimated useful lives of the assets and is charged
directly to
expenses.
|
Estimated
years
of
useful
life
|
||||
|
|
||||
|
Mining
Concessions
|
7
–
13
|
|||
|
Building
and infrastructure
|
3
– 80
|
|||
|
Machinery
and equipment
|
3
– 35
|
|
||
|
Other
|
2
– 30
|
|||
Property,
plant and equipment acquired through financial lease
agreements are accounted
for at the present value of the minimum lease payments
plus the purchase option
based on the interest rate included in each contract.
The Company does not
legally own these assets and therefore cannot freely
dispose of
them.
In
conformity with Technical Bulletin No. 31 and 33 of
the Chilean Association of
Accountants, the Company capitalizes interest cost
associated with the financing
of new assets during the construction period of such
assets.
Maintenance
costs of plant and equipment are charged to expenses
as incurred.
The
Company obtains property rights and mining concessions
from the Chilean state.
The property rights are usually obtained without initial
cost (other than minor
filing fees) and once obtained, are retained by the
Company as long as the
annual fees are paid. Such fees, which are paid annually
in March, are recorded
as prepaid assets and are amortized on a straight-line
basis over the following
twelve months. Values attributable to mining concessions
are recorded in
property, plant and equipment.
Note
2 - Summary of Significant Accounting Policies (continued)
l)
Investments
in related companies
Investments
in related companies over which the Company has significant
influence, are
included in other assets and are recorded using the
equity method of accounting,
in accordance with SVS Circulars No. 368 and 1697 and
Technical Bulletins No. 64
and 72 issued by the Chilean Association of Accountants.
Accordingly, the
Company’s proportional equity share in the net income or net
loss of each
investee is recognized in non-operating income and
expenses in the consolidated
statements of income on an accrual basis, after eliminating
any unrealized
profits from transactions with the related companies.
The
translation adjustment resulting from conversions
of investments in domestic
subsidiaries that maintain their accounting records
and are controlled in
Chilean pesos to US dollars is recognized in other
reserves within shareholders’
equity (cumulative translation adjustment). Direct
and indirect investments in
foreign subsidiaries or affiliates are controlled
in US dollars.
Investments
in which the Company has less than 20% participation,
but it has the capacity
to exert significant influence over the investment,
because SQM’s nominee form
part of its Board of Directors, have been valued
using the equity
method.
m)
Goodwill
and negative goodwill
Until
December 31, 2003, goodwill was calculated as the excess
of the purchase price
of companies acquired over book value of their net
assets, whereas negative
goodwill arose when the net assets acquired exceeded
the purchase price.
Beginning January 1, 2004, the Company adopted Technical
Bulletin No. 72 of the
Chilean Association of Accountants that changes the
basis for accounting for
goodwill and negative goodwill, introducing the fair
value of the acquired net
assets as the basis to be compared with purchase price
in a business combination
in order to determine goodwill or negative goodwill.
Goodwill
and negative goodwill resulting from acquisitions of
equity method investments
are controlled in the same currency in which the investment
to which it relates
is measured.
Both
goodwill and negative goodwill are amortized based
on the estimated period of
investment return, which is generally 20 and 10 years
for goodwill and negative
goodwill, respectively.
n)
Intangible
assets
Intangible
assets are stated at cost plus acquisition expenses
and are amortized over a
maximum period of 40 years, in accordance with Technical
Bulletin No. 55 of the
Chilean Association of Accountants.
o)
Mining
development cost
Expenses
associated with mineral reserves under exploitation
are capitalized as part of
production cost to inventories. Expenses associated
with future reserves are
presented within Other long-term assets and are amortized
according to estimated
reserves of minerals.
p)
Staff
severance indemnities
The
Company calculates the liability for staff severance
indemnities based on the
present value of the accrued benefits for the actual
years of service worked
based on average employee tenure of 24 years and a
real annual discount rate of
8% (9% in 2004 and 2003).
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
2 - Summary of Significant Accounting Policies
(continued)
q)
Vacations
The
cost
of employee vacations is recognized in the financial
statements on an accrual
basis.
r)
Reverse
repurchase agreements
These
operations are registered in Other Current Assets
at the amount of the purchase.
Since the purchase date, the respective interest
is recognized on accrual basis
in accordance with SVS Circular No. 768.
s)
Dividends
Dividends
are generally declared in US dollars but are
paid in Chilean pesos.
t)
Derivative
contracts
The
Company maintains derivative contracts to hedge
against movements in foreign
currencies, which are recorded in conformity
with Technical Bulletin No. 57 of
the Chilean Association of Accountants. Such
contracts are generally recorded at
fair value with net gain or losses recognized
in results.
u)
Revenue
recognition
Revenue
is recognized on the date goods are physically
delivered or when they are
considered delivered according to the terms of
the contract.
v)
Computer
software
Computational
systems developed internally using the Company’s personnel and materials are
charged to income during the year in which the
expenses are incurred. In
accordance with Circular No. 981 issued by the
SVS, computer systems acquired by
the Company are recorded at cost.
w)
Research
and development expenses
Research
and development cost are charged to the income
statement in the period in which
they are incurred. Property, plant and equipment
that are acquired for use in
research and development activities and determined
to provide additional
benefits to the Company are recorded in property,
plant and equipment.
x)
Reclassifications
Certain
amounts in the prior years' financial statements
have been reclassified to
conform to the current year's presentation.
Note
3 - Accounting Changes
During
the year ended December 31, 2005, the Company
changed the discount rate used for
the determination of staff severance indemnities
provision from 9% applied in
the years ended December 31, 2003 and 2004 to
8%. This change gave rise to a
higher charge to income for the year ended December
31, 2005 of ThUS$
678.
During
the year ended December 31, 2005, the subsidiary
SQM Industrial S.A. (formerly
PCS Yumbes SCM acquired in December 2004) changed
the method of depreciation of
certain assets from the unit of production to
the straight-line method based on
the estimated remaining technical useful lives
of the different classes of
assets.
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
4 - Current and Long-term Accounts Receivable
|
a)
|
Current
and long-term accounts receivable and other accounts receivable as
of
December 31, are detailed as
follows:
|
|
|
Up
to 90 days
|
Between
90 days
and
1 year
|
Total
Short-term
(net)
|
||||||||||||||||
|
|
|
|
|||||||||||||||||
|
|
2005
|
2004
|
2005
|
2004
|
2005
|
2004
|
|||||||||||||
|
|
|
|
|
|
|
||||||||||||||
|
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
|||||||||||||
|
Short-term
|
|||||||||||||||||||
|
Trade
accounts receivable
|
105,618
|
124,724
|
12,570
|
7,137
|
118,188
|
131,861
|
|||||||||||||
|
Allowance
for doubtful accounts
|
(7,737
|
)
|
(6,970
|
)
|
|||||||||||||||
|
Notes
receivable
|
34,950
|
38,439
|
14,772
|
10,517
|
48,844
|
48,192
|
|||||||||||||
|
Allowance
for doubtful accounts
|
(3,459
|
)
|
(3,243
|
)
|
|||||||||||||||
|
|
|
||||||||||||||||||
|
Accounts
receivable, net
|
155,836
|
169,840
|
|||||||||||||||||
|
|
|
||||||||||||||||||
|
|
|||||||||||||||||||
|
Other
accounts receivable
|
9,454
|
8,908
|
999
|
113
|
10,453
|
9,021
|
|||||||||||||
|
Allowance
for doubtful accounts
|
(716
|
)
|
(678
|
)
|
|||||||||||||||
|
|
|
||||||||||||||||||
|
Other
accounts receivable, net
|
9,737
|
8,343
|
|||||||||||||||||
|
|
|
||||||||||||||||||
|
|
|
||||||||||||||||||
|
Long-term
receivables
|
379
|
289
|
|||||||||||||||||
|
|
|
||||||||||||||||||
|
b)
|
Changes
in the allowance for doubtful accounts for the years ended December
31 are
as follows:
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|||
|
|
|
|
||||||||
|
|
|
ThUS$
|
|
ThUS$
|
|
ThUS$
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
At
January 1,
|
|
|
10,891
|
|
|
9,985
|
|
|
8,568
|
|
|
Charged
to expenses
|
|
|
1,741
|
|
|
3,537
|
|
|
2,216
|
|
|
Deductions
(release)
|
|
|
(1,097
|
)
|
|
(2,937
|
)
|
|
(1,372
|
)
|
|
Exchange
rate differences
|
|
|
377
|
|
|
306
|
|
|
332
|
|
|
Companies
not previously consolidated
|
|
|
—
|
|
|
—
|
|
|
241
|
|
|
|
|
|
||||||||
|
At
December 31,
|
|
|
11,912
|
|
|
10,891
|
|
|
9,985
|
|
|
|
|
|
||||||||
F-15
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
4 - Current and Long-term Accounts Receivable (continued)
|
(c)
|
Consolidated
Current and Long-term Receivables –
by
Geographic Location as of December 31, are detailed as
follows:
|
|
|
|
Chile
|
|
Europe,
Africa and
the
Middle East
|
|
Asia
and
Oceania
|
|
USA,
Mexico
and
Canada
|
|
Latin
America
and
the Caribbean
|
|
Total
|
|
||||||||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||
|
|
|
ThUS$
|
|
ThUS$
|
|
ThUS$
|
|
ThUS$
|
|
ThUS$
|
|
ThUS$
|
|
ThUS$
|
|
ThUS$
|
|
ThUS$
|
|
ThUS$
|
|
ThUS$
|
|
ThUS$
|
|
||||||||||||
|
Net
current trade
accounts
receivable
Balance
|
|
|
35,860
|
|
|
31,490
|
|
|
26,345
|
|
|
40,914
|
|
|
7,069
|
|
|
3,489
|
|
|
27,433
|
|
|
36,273
|
|
|
13,744
|
|
|
12,725
|
|
|
110,451
|
|
|
124,891
|
|
|
%
of total
|
|
|
32.47
|
%
|
|
25.21
|
%
|
|
23.85
|
%
|
|
32.76
|
%
|
|
6.40
|
%
|
|
2.79
|
%
|
|
24.84
|
%
|
|
29.05
|
%
|
|
12.44
|
%
|
|
10.19
|
%
|
|
100.00
|
%
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
current notes
receivable
balance
|
|
|
38,016
|
|
|
39,065
|
|
|
2,826
|
|
|
2,524
|
|
|
563
|
|
|
515
|
|
|
357
|
|
|
120
|
|
|
3,623
|
|
|
2,725
|
|
|
45,385
|
|
|
44,949
|
|
|
%
of total
|
|
|
83.76
|
%
|
|
86.91
|
%
|
|
6.23
|
%
|
|
5.62
|
%
|
|
1.24
|
%
|
|
1.15
|
%
|
|
0.79
|
%
|
|
0.26
|
%
|
|
7.98
|
%
|
|
6.06
|
%
|
|
100.00
|
%
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
current other
accounts
receivable
Balance
|
|
|
4,631
|
|
|
3,558
|
|
|
1,504
|
|
|
1,943
|
|
|
11
|
|
|
2
|
|
|
3,064
|
|
|
2,591
|
|
|
527
|
|
|
249
|
|
|
9,737
|
|
|
8,343
|
|
|
%
of total
|
|
|
47.56
|
%
|
|
42.65
|
%
|
|
15.45
|
%
|
|
23.29
|
%
|
|
0.11
|
%
|
|
0.02
|
%
|
|
31.47
|
%
|
|
31.06
|
%
|
|
5.41
|
%
|
|
2.98
|
%
|
|
100.00
|
%
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net current
accounts
receivable
Balance
|
|
|
78,507
|
|
|
74,113
|
|
|
30,675
|
|
|
45,381
|
|
|
7,643
|
|
|
4,006
|
|
|
30,854
|
|
|
38,984
|
|
|
17,894
|
|
|
15,699
|
|
|
165,573
|
|
|
178,183
|
|
|
%
of total
|
|
|
47.42
|
%
|
|
41.59
|
%
|
|
18.53
|
%
|
|
25.47
|
%
|
|
4.62
|
%
|
|
2.25
|
%
|
|
18.62
|
%
|
|
21.88
|
%
|
|
10.81
|
%
|
|
8.81
|
%
|
|
100.00
|
%
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
accounts
receivable,
net
Balance
|
|
|
322
|
|
|
199
|
|
|
—
|
|
|
75
|
|
|
42
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
15
|
|
|
379
|
|
|
289
|
|
|
%
of total
|
|
|
84.96
|
%
|
|
68.86
|
%
|
|
—
|
|
|
25.95
|
%
|
|
11.08
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.96
|
%
|
|
5.19
|
%
|
|
100.00
|
%
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current and
long-term
accounts
receivable,
net
Balance
|
|
|
78,829
|
|
|
74,312
|
|
|
30,675
|
|
|
45,456
|
|
|
7,685
|
|
|
4,006
|
|
|
30,854
|
|
|
38,984
|
|
|
17,909
|
|
|
15,714
|
|
|
165,952
|
|
|
178,472
|
|
|
%
of total
|
|
|
47.50
|
%
|
|
41.64
|
%
|
|
18.48
|
%
|
|
25.47
|
%
|
|
4.63
|
%
|
|
2.24
|
%
|
|
18.60
|
%
|
|
21.84
|
%
|
|
10.79
|
%
|
|
8.81
|
%
|
|
100.00
|
%
|
|
100.00
|
%
|
F-16
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
5 - Balances and Transactions with Related Parties
Accounts
receivable from and payable to related companies are stated in US dollars and
accrue no interest.
Transactions
are made under terms and conditions that are similar to those offered to
unrelated third parties.
|
a)
|
Amounts
included in balances with related parties as of December 31, 2005
and 2004
are as follows:
|
|
|
|
Short-term
|
|
Long-term
|
|
||||||||
|
|
|
||||||||||||
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
||||
|
|
|
|
|
||||||||||
|
Accounts
receivable
|
|
ThUS$
|
|
ThUS$
|
|
ThUS$
|
|
ThUS$
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Ajay
Europe S.A.R.L.
|
|
|
1,948
|
|
|
3,583
|
|
|
—
|
|
|
—
|
|
|
Nutrisi
Holding N.V.
|
|
|
1,432
|
|
|
1,653
|
|
|
—
|
|
|
—
|
|
|
Generale
de Nutrition Vegetale S.A.
|
|
|
132
|
|
|
132
|
|
|
—
|
|
|
—
|
|
|
Abu
Dhabi Fertilizer Ind. WLL
|
|
|
3,354
|
|
|
5,284
|
|
|
2,000
|
|
|
—
|
|
|
NU3
B.V.
|
|
|
467
|
|
|
607
|
|
|
—
|
|
|
—
|
|
|
Doktor
Tarsa - SQM Turkey
|
|
|
12,688
|
|
|
4,813
|
|
|
—
|
|
|
—
|
|
|
Fertilizantes
Naturales S.A.
|
|
|
5,887
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Sales
de Magnesio S.A.
|
|
|
72
|
|
|
52
|
|
|
—
|
|
|
—
|
|
|
Soc.Inv.
Pampa Calichera S.A.
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Sac
S.A.
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Ajay
North America LLC
|
|
|
2,420
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
PCS
Sales Inc.
|
|
|
—
|
|
|
31
|
|
|
—
|
|
|
—
|
|
|
Impronta
SRL
|
|
|
5,042
|
|
|
2,568
|
|
|
—
|
|
|
—
|
|
|
Adubo
Trevo S.A.
|
|
|
16
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
Yara
International Asia Trade
|
|
|
1,359
|
|
|
1,682
|
|
|
—
|
|
|
—
|
|
|
Yara
East Africa Limited
|
|
|
681
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Yara
Poland Sp. z o.o.
|
|
|
103
|
|
|
45
|
|
|
—
|
|
|
—
|
|
|
Yara
Benelux B.V.
|
|
|
222
|
|
|
237
|
|
|
—
|
|
|
—
|
|
|
Yara
Hellas S.A.
|
|
|
116
|
|
|
80
|
|
|
—
|
|
|
—
|
|
|
Yara
International Australia PTY.
|
|
|
670
|
|
|
829
|
|
|
—
|
|
|
—
|
|
|
Yara
UK Ltd.
|
|
|
132
|
|
|
144
|
|
|
—
|
|
|
—
|
|
|
Yara
GMBH & CO KG
|
|
|
148
|
|
|
96
|
|
|
—
|
|
|
—
|
|
|
Yara
Colombia Ltda.
|
|
|
1,480
|
|
|
355
|
|
|
—
|
|
|
—
|
|
|
Yara
Fertilizers (Philippines)
|
|
|
60
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Yara
Fertilizers (New Zealand)
|
|
|
171
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Yara
Iberian S.A.
|
|
|
1,958
|
|
|
1,565
|
|
|
—
|
|
|
—
|
|
|
Yara
North America LLC
|
|
|
7,727
|
|
|
218
|
|
|
—
|
|
|
—
|
|
|
Yara
France BU Africa
|
|
|
1,025
|
|
|
743
|
|
|
—
|
|
|
—
|
|
|
Yara
France BU Latin America
|
|
|
—
|
|
|
1,296
|
|
|
—
|
|
|
—
|
|
|
Yara
Argentina S.A.
|
|
|
43
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Yara
Internacional ASA
|
|
|
7,098
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
||||||||||
|
Total
|
|
|
56,459
|
|
|
26,029
|
|
|
2,000
|
|
|
—
|
|
|
|
|
|
|
||||||||||
F-17
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
5 - Balances and Transactions with Related Parties
(continued)
|
a)
|
Amounts
included in balances with related parties as of December 31, 2005
and
2004, continued:
|
|
|
|
Short-term
|
|
||||
|
|
|||||||
|
|
|
2005
|
|
2004
|
|
||
|
|
|
||||||
|
Accounts
payable
|
|
|
ThUS$
|
|
|
ThUS$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SQM
Industrial S.A.
|
|
|
—
|
|
|
6,645
|
|
|
Charlee
SQM Thailand CO.
|
|
|
88
|
|
|
—
|
|
|
NU3
N.V.
|
|
|
813
|
|
|
1,319
|
|
|
Rotem
Amfert Negev Limited
|
|
|
—
|
|
|
1,424
|
|
|
Yara
Int. Wholesale Sudafrica (South Africa)
|
|
|
362
|
|
|
—
|
|
|
Yara
Argentina S.A.
|
|
|
—
|
|
|
4
|
|
|
Yara
AB
|
|
|
1
|
|
|
14
|
|
|
Yara
Business Suport
|
|
|
4,130
|
|
|
2,761
|
|
|
Yara
Internacional ASA
|
|
|
—
|
|
|
446
|
|
|
Yara
Fertilizantes Ltda.
|
|
|
575
|
|
|
—
|
|
|
Yara
France S.A.
|
|
|
191
|
|
|
1,412
|
|
|
Yara
France BU Latin America
|
|
|
1,502
|
|
|
—
|
|
|
|
|
||||||
|
Total
|
|
|
7,662
|
|
|
14,025
|
|
|
|
|
||||||
There
were no outstanding long-term accounts payable with related parties as of
December 31, 2005 and 2004.
F-18
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
5 - Balances and Transactions with Related Parties
(continued)
|
a)
|
During
2005, 2004 and 2003, principal transactions with related parties
were as
follows:
|
|
Company
|
|
Relationship
|
|
Type
of Transaction
|
|
Amount
of
Transaction
|
|
Impact
in income
(charge)
credit
|
|
||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2005
|
|
2004
|
|
2003
|
|
||||||||
|
|
|
|
|
|
|
||||||||||||||||||||
|
|
|
|
|
|
|
ThUS$
|
|
ThUS$
|
|
ThUS$
|
|
ThUS$
|
|
ThUS$
|
|
ThUS$
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
NU3
N.V.
|
|
|
Indirect
|
|
|
Sales
of products
|
|
|
5,018
|
|
|
5,036
|
|
|
4,054
|
|
|
1,892
|
|
|
1,521
|
|
|
1,023
|
|
|
Doktor
Tarsa
|
|
|
Indirect
|
|
|
Sales
of products
|
|
|
14,977
|
|
|
6,718
|
|
|
5,086
|
|
|
3,872
|
|
|
1,416
|
|
|
1,299
|
|
|
Abu
Dhabi Fertilizer WLL
|
|
|
Indirect
|
|
|
Sales
of products
|
|
|
3,834
|
|
|
3,932
|
|
|
3,463
|
|
|
1,222
|
|
|
1,126
|
|
|
619
|
|
|
Impronta
SRL
|
|
|
Indirect
|
|
|
Sales
of products
|
|
|
4,471
|
|
|
4,282
|
|
|
—
|
|
|
1,613
|
|
|
970
|
|
|
—
|
|
|
Ajay
Europe S.A.R.L
|
|
|
Indirect
|
|
|
Sales
of products
|
|
|
8,017
|
|
|
5,964
|
|
|
6,836
|
|
|
4,743
|
|
|
2,937
|
|
|
2,485
|
|
|
NU3
B.V.
|
|
|
Indirect
|
|
|
Sales
of products
|
|
|
6,035
|
|
|
5,904
|
|
|
4,735
|
|
|
2,846
|
|
|
2,276
|
|
|
1,944
|
|
|
Fertilizantes
Naturales S.A.
|
|
|
Indirect
|
|
|
Sales
of products
|
|
|
19,916
|
|
|
—
|
|
|
—
|
|
|
6,663
|
|
|
—
|
|
|
—
|
|
|
Ajay
North America LLC.
|
|
|
Indirect
|
|
|
Sales
of products
|
|
|
12,401
|
|
|
8,519
|
|
|
6,909
|
|
|
7,031
|
|
|
4,009
|
|
|
1,921
|
|
|
Sales
de Magnesio Ltda.
|
|
|
Indirect
|
|
|
Sales
of products
|
|
|
—
|
|
|
333
|
|
|
—
|
|
|
—
|
|
|
152
|
|
|
—
|
|
|
Yara
UK Ltd.
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
1,276
|
|
|
1,060
|
|
|
|
|
|
485
|
|
|
315
|
|
|
—
|
|
|
Yara
International Asia Trade Pte Ltd.
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
6,782
|
|
|
6,035
|
|
|
5,370
|
|
|
1,984
|
|
|
1,284
|
|
|
1,029
|
|
|
Yara
France BU Africa
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
8,748
|
|
|
917
|
|
|
|
|
|
2,640
|
|
|
253
|
|
|
—
|
|
|
Yara
Benelux B.V.
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
6,698
|
|
|
5,593
|
|
|
5,384
|
|
|
2,385
|
|
|
1,345
|
|
|
1,002
|
|
|
Yara
AB Sweden
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
808
|
|
|
705
|
|
|
561
|
|
|
284
|
|
|
184
|
|
|
165
|
|
|
Yara
International Australia Pty Ltd.
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
2,853
|
|
|
2,530
|
|
|
1,722
|
|
|
999
|
|
|
682
|
|
|
456
|
|
|
Yara
Iberian S.A.
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
8,900
|
|
|
6,665
|
|
|
4,739
|
|
|
3,060
|
|
|
1,638
|
|
|
801
|
|
|
Yara
Colombia Ltda.
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
5,004
|
|
|
3,537
|
|
|
2,760
|
|
|
1,543
|
|
|
777
|
|
|
715
|
|
|
Yara
Poland Sp. z o.o.
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
1,623
|
|
|
1,525
|
|
|
|
|
|
703
|
|
|
512
|
|
|
—
|
|
|
Yara
GMBH & Co Kg
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
1,603
|
|
|
1,381
|
|
|
1,082
|
|
|
635
|
|
|
417
|
|
|
305
|
|
|
Yara
France
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
7,622
|
|
|
7,755
|
|
|
|
|
|
2,458
|
|
|
1,908
|
|
|
—
|
|
|
Yara
France S.A.
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
209
|
|
|
1,729
|
|
|
6,054
|
|
|
73
|
|
|
478
|
|
|
1,222
|
|
|
Yara
Hellas S.A.
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
1,448
|
|
|
1,022
|
|
|
1,138
|
|
|
473
|
|
|
252
|
|
|
225
|
|
|
Yara
France BU Latin America
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
1,192
|
|
|
2,296
|
|
|
—
|
|
|
288
|
|
|
680
|
|
|
—
|
|
|
Yara
Argentina S.A.
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
9,441
|
|
|
7,724
|
|
|
6,425
|
|
|
2,658
|
|
|
1,629
|
|
|
1,271
|
|
|
Adubo
Trevo S.A.
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
3,991
|
|
|
5,564
|
|
|
5,148
|
|
|
1,746
|
|
|
1,512
|
|
|
1,816
|
|
|
PCS
Yumbes SCM (currently SQM
Industrial
S.A.) (1)
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
—
|
|
|
7,221
|
|
|
13,617
|
|
|
—
|
|
|
3,414
|
|
|
8,463
|
|
|
PCS
Yumbes SCM (currently SQM
Industrial
S.A.) (1)
|
|
|
Shareholder
|
|
|
Purchases
of products
|
|
|
—
|
|
|
29,466
|
|
|
25,558
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Yara
Internacional ASA.
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
8,250
|
|
|
340
|
|
|
2,991
|
|
|
2,120
|
|
|
120
|
|
|
195
|
|
|
Yara
North America
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
43,386
|
|
|
40,491
|
|
|
|
|
|
13,137
|
|
|
8,317
|
|
|
—
|
|
|
Yara
International Wholesale
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
20,013
|
|
|
—
|
|
|
|
|
|
5,733
|
|
|
—
|
|
|
—
|
|
|
Yara
Business Support
|
|
|
Shareholder
|
|
|
Services
|
|
|
4,129
|
|
|
2,761
|
|
|
2,093
|
|
|
(4,129
|
)
|
|
(2,761
|
)
|
|
(2,093
|
)
|
|
Yara
Planta Nutrition, Cis Reg.
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
—
|
|
|
—
|
|
|
1,070
|
|
|
—
|
|
|
—
|
|
|
449
|
|
|
Yara
East Africa
|
|
|
Shareholder
|
|
|
Sales
of products
|
|
|
1,311
|
|
|
—
|
|
|
|
|
|
474
|
|
|
—
|
|
|
—
|
|
|
(1)
|
On
December 23, 2004, SQM acquired 100% participation in PCS Yumbes
SCM
(currently SQM Industrial S.A.) (see Note 8) and consequently that
entity
ceased to be related party and instead is included in consolidated
financial statements of SQM.
|
F-19
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
6 - Inventories
Inventories
are summarized as follows:
|
As
of December 31,
|
|||||||
|
|
|||||||
|
2005
|
2004
|
||||||
|
|
|
||||||
|
ThUS$
|
ThUS$
|
||||||
|
Finished
products
|
207,195
|
165,436
|
|||||
|
Work
in process
|
102,187
|
96,616
|
|||||
|
Supplies
|
17,850
|
12,550
|
|||||
|
|
|
||||||
|
Total
|
327,232
|
274,602
|
|||||
|
|
|
||||||
Note
7 - Property, Plant and Equipment
Property,
plant and equipment as of December 31, are summarized as follows:
|
2005
|
2004
|
||||||
|
|
|
||||||
|
ThUS$
|
ThUS$
|
||||||
|
Land
|
|||||||
|
Land
|
20,003
|
20,003
|
|||||
|
Mining
Concessions
|
44,784
|
44,223
|
|||||
|
|
|
||||||
|
64,787
|
64,226
|
||||||
|
|
|
||||||
|
Buildings
and infrastructure
|
|||||||
|
Buildings
|
174,843
|
163,075
|
|||||
|
Installations
|
173,326
|
343,168
|
|||||
|
Construction-in-progress
|
136,225
|
47,727
|
|||||
|
Other
|
177,141
|
587
|
|||||
|
|
|
||||||
|
661,535
|
554,557
|
||||||
|
|
|
||||||
|
Machinery
and Equipment
|
|||||||
|
Machinery
|
445,683
|
415,801
|
|||||
|
Equipment
|
121,086
|
99,417
|
|||||
|
Project-in-progress
|
9,832
|
16,278
|
|||||
|
Other
|
17,809
|
18,671
|
|||||
|
|
|
||||||
|
594,410
|
550,167
|
||||||
|
|
|
||||||
|
Other
property, plant and equipment
|
|||||||
|
Tools
|
8,804
|
8,019
|
|||||
|
Furniture
and office equipment
|
12,315
|
12,339
|
|||||
|
Projects
in progress
|
14,180
|
10,876
|
|||||
|
Other
|
7,653
|
12,836
|
|||||
|
|
|
||||||
|
42,952
|
44,070
|
||||||
|
|
|
||||||
|
Amounts
relating to technical revaluation of property, plant and
equipment
|
|||||||
|
Land
|
7,839
|
7,839
|
|||||
|
Buildings
and infrastructure
|
41,439
|
41,439
|
|||||
|
Machinery
and equipment
|
12,091
|
12,091
|
|||||
|
Other
assets
|
53
|
53
|
|||||
|
|
|
||||||
|
61,422
|
61,422
|
||||||
|
|
|
||||||
|
Total
property, plant and equipment
|
1,425,106
|
1,274,442
|
|||||
|
|
|
||||||
F-20
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
7 - Property, Plant and Equipment (continued)
|
Less:
Accumulated depreciation
|
|||||||
|
Buildings
and infrastructure
|
(257,063
|
)
|
(230,740
|
)
|
|||
|
Machinery
and equipment
|
(319,388
|
)
|
(295,584
|
)
|
|||
|
Other
property, plant and equipment
|
(18,466
|
)
|
(19,012
|
)
|
|||
|
Technical
appraisal
|
(35,542
|
)
|
(34,344
|
)
|
|||
|
|
|
||||||
|
Total
accumulated depreciation
|
(630,459
|
)
|
(579,680
|
)
|
|||
|
|
|
||||||
|
Net
property, plant and equipment
|
794,647
|
694,762
|
|||||
|
|
|
||||||
Depreciation
expense for the years ended December 31, 2005, 2004 and 2003 was as
follows:
|
For
the year ended December 31,
|
||||||||||
|
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||
|
Buildings
and infrastructure
|
(30,286
|
)
|
(26,547
|
)
|
(26,492
|
)
|
||||
|
Machinery
and equipment
|
(37,108
|
)
|
(33,552
|
)
|
(32,022
|
)
|
||||
|
Other
property, plant and equipment
|
(1,462
|
)
|
(1,300
|
)
|
(1,471
|
)
|
||||
|
Technical
revaluation
|
(1,198
|
)
|
(1,291
|
)
|
(1,743
|
)
|
||||
|
|
|
|
||||||||
|
Total
depreciation
|
(70,054
|
)
|
(62,690
|
)
|
(61,728
|
)
|
||||
|
|
|
|
||||||||
The
Company has capitalized assets obtained through leasing, which are included
in
other property,
plant and equipment
and are
as follows:
|
As
of December 31,
|
|||||||
|
|
|||||||
|
2005
|
2004
|
||||||
|
|
|
||||||
|
ThUS$
|
ThUS$
|
||||||
|
Administrative
office buildings
|
1,988
|
1,988
|
|||||
|
Leased
vehicles
|
98
|
98
|
|||||
|
Accumulated
depreciation
|
(525
|
)
|
(468
|
)
|
|||
|
|
|
||||||
|
Total
assets in leasing
|
1,561
|
1,618
|
|||||
|
|
|
||||||
The
administrative office buildings were acquired for 230 installments of UF 663.75
each and an annual, contractually established interest rate of 8.5%.
The
vehicles were acquired for 36 installments totaling to ThUS$ 98.
Note
8 - Investments in Related Companies
| a) |
Information
on foreign investments
|
There
are
no plans for the foreign investments to pay dividends, as it is the Company’s
policy to reinvest those earnings.
The
Company has not designated any instruments as net investment hedges of its
foreign investments.
F-21
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
8 - Investments in Related Companies (continued)
| b) |
Significant
events and transactions involving related companies in the years
2003-2005
|
| · |
Up
to December 31, 2004, the financial statements of Fertilizantes
Naturales S.A. (“Fenasa”) in which SQM has 50%
participation were included in consolidation given that the
Company maintained the control over
that
entity (managed its financial and operating policies) based on
ability to
appoint General Manager. Beginning January 2005, the Company
lost its
ability to control Fenasa and consequently it has been excluded
from consolidation. The Company accounted for its investment
in that entity
for
the year ended December 31, 2005 using equity method.
|
| · |
In
March 2005, the subsidiary Soquimich European Holding B.V. made
a capital
increase of ThUS$ 411 in its related company Misr Specialty Fertilizers.
In accordance with Technical Bulletin No. 72 issued by the Chilean
Association
of Accountants and the regulations in Circular No. 1697 issued by the
Chilean Superintendency of Securities and Insurance, the valuation
was
performed in consideration of the book value of the equity of Misr
Specialty Fertilizers as of December 31, 2004, which does not significantly
differ
from its fair value determined at that date. This operation gave rise
to no goodwill or negative goodwill.
|
| · |
In
April 2005, the subsidiary SQM Corporation N.V. acquired additional
13% participation in of the affiliate Abu Dhabi Fertilizers for a sum
of ThUS$484. In accordance with Technical Bulletin No. 72 issued
by
the Chilean Association of Accountants and Circular No. 1697 issued
by the Chilean Superintendency of Securities and Insurance the Company
valued this investment in consideration of the book value of equity
of Abu Dhabi Fertilizers as of December 31, 2004, which does not
significantly
differ from its fair value at that date. This operation gave rise to
no goodwill or negative goodwill.
|
| · |
On
August 9, 2005, SQM Nitratos S.A. and SQM S.A. acquired 99 and 1 shares,
respectively of Kemira Emirates Fertilizer Company - Fzco for ThUS$
9,282 paid in cash at the date of the acquisition. Acquired shares represent
in total 100% of the capital of that entity. In accordance with the
provisions of Technical Bulletin No. 72 issued by the Chilean Association
of Accountants and Circular No. 1697 issued by the SVS, the preliminary
valuation of identifiable assets and liabilities of Kemira Emirates
Fertilizer Company - Fzco as of July 31, 2005 was performed. Such valuation
indicated that those fair values do not significantly differ from assets’
and liabilities’ carrying amounts at that date. Goodwill determined
on the acquisition amounted to ThUS$ 2,058 and will be amortized over
a period of 20 years.
|
The
Company will continue to review valuation of assets acquired and liabilities
assumed and may make adjustments to the purchase accounting within 1 year from
the date of the acquisition in accordance with paragraph 66 of Technical
Bulletin No. 72 issued by the Chilean Association of Accountants.
Subsequent
to the acquisition Kemira Emirates Fertilizer Company - Fzco changed its name
to
SQM Dubai - Fzco.
| · |
In
September 2005, the subsidiary Soquimich European Holding B.V. and Charlee
Industries Co, Ltd. incorporated Charlee SQM (Thailand) Co. Ltd. Soquimich
European Holding B.V. contributed ThUS$ 800 for 40% participation in
Charlee SQM (Thailand) Co. Ltd. This operation did not generate any
negative goodwill or goodwill.
|
F-22
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
8 - Investments in Related Companies (continued)
| b) |
Significant
events and transactions involving related companies in the years
2003-2005
|
| · |
At
the Fifth General Extraordinary Shareholders’ Meeting of SQM Nitratos
S.A. held on October 31, 2005, the shareholders unanimously agreed the
following:
|
| - |
Change
the line of business of SQM Nitratos S.A. with the purpose of limiting
it
to mining exploitation operations.
|
| - |
Spin-off
SQM Nitratos S.A. in two companies, SQM Nitratos S.A., which maintains
its name and a newly incorporated company SQM Procesos S.A.
|
| - |
This
spin-off will be effective on January 1, 2006.
|
| · |
On
December 23, 2004, SQM S.A. and SQM Nitratos S.A. acquired 43,733,165
and 2,000 shares, respectively (equivalent to 99.9954% and 0.0046% participation,
respectively), of PCS Yumbes SCM for ThUS$ 39,707. Subsequent to the
acquisition (in December 2005) PCS Yumbes SCM changed its name to SQM
Industrial S.A.
|
In
accordance with BT 72 the Company began preliminary assignation of acquisition
costs to assets acquired and liabilities assumed based on their fair values.
For
the purposes of preparation of financial statements as of December 31, 2004
the
Company estimated fair values of net assets acquired at ThUS$ 27,070 as
presented in the table below and recorded goodwill on acquisition amounting
to
ThUS$ 12,637. Therefore, the assets, liabilities and equity incorporated in
the
consolidation at their respective fair values as of December 31, 2004 were
as
follows:
|
Book
value
|
Adjustments
|
Fair
value
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||
|
Current
assets
|
10,958
|
—
|
10,958
|
|||||||
|
Property,
plant and equipment
|
25,708
|
(7,954
|
)
|
17,754
|
||||||
|
Other
assets
|
293
|
—
|
293
|
|||||||
|
Current
liabilities
|
1,935
|
—
|
1,935
|
|||||||
|
Equity
|
35,024
|
(7,954
|
)
|
27,070
|
||||||
The
Company continued to review the valuation during 2005 in accordance with the
term allowed to adjust effects of purchase accounting established in paragraph
66 of Technical Bulletin No. 72. Accounts that presented major differences
comparing to preliminary valuation were property, plant and equipment. This
resulted from the determination that certain assets were in poorer operating
conditions that was previously thought. In addition, in accordance with
paragraph 22 of Technical Bulletin No. 33 issued by the Chilean Association
of
Accountants, the Company has determined that certain property, plant and
equipment acquired will be disposed of. For these assets, depreciation was
suspended and they were adjusted to net estimated realizable value where
applicable. The new valuation considered background information obtained in
a
valuation survey conducted by external experts and qualified personnel from
the
Company, who conducted a full review of the status of the assets and determined
fair and the net realizable values.
Adjustments
made to assets’ values resulted in increase of goodwill to US$ 22,255. Goodwill
determined will be amortized over a term of 20 years. The amortization expense
for the year ended December 31, 2005 amounted to ThUS$ 1,072.
F-23
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
8 - Investments in Related Companies (continued)
| b) |
Significant
events and transactions involving related companies in the years
2003-2005
|
Assets,
liabilities and equity of SQM Industrial S.A. included in consolidation at
their
respective fair values as of December 31, 2005 are detailed as
follows:
|
Book
value
|
||||
|
|
||||
|
ThUS$
|
||||
|
Current
assets
|
28,495
|
|||
|
Property,
plant and equipment
|
9,710
|
|||
|
Other
assets
|
672
|
|||
|
Current
liabilities
|
26,795
|
|||
|
Long-term
liabilities
|
23
|
|||
|
Equity
|
12,059
|
|||
| · |
In
January, April and October 2004, the subsidiary Soquimich European
Holding
B.V. made a capital contributions totaling to ThUS$ 1,425 to
its affiliate
Misr Specialty Fertilizers. In accordance with BT 72 of the Chilean
Association of Accountants and SVS Circular No. 1697, the investment
in Misr
Specialty Fertilizers was valued using the book value of net
assets as of
the dates of contributions, which did not differ significantly
from its
fair value determined as of that dates.
|
| · |
At
the shareholders’ meeting of Empresas Melón S.A. held on February 25,
2004, the shareholders agreed its spin-off in 2 companies, Empresas
Melón
S.A. and Inmobiliaria San Patricio S.A. As a result, SQM S.A. maintained
its ownership of 14.05% in Empresas Melón S.A. and received the same
ownership percentage in the new
company.
|
On
August
13, 2004, SQM S.A. transferred all 653,748,837 shares held in Inmobiliaria
San
Patricio S.A. to Blue Circle South American Holding S.A. This transfer was
performed in accordance with the contract for acquiring shares of Empresas
Melón
in 1998.
On
August
18, 2004, 653,748,837 shares of Empresas Melón S.A. representing all the shares
held at the time by the Company (14.05% participation) were sold in a public
auction on the Santiago Stock Exchange for ThUS$ 69,337. The proceeds were
received in cash and a gain on sale of ThUS$ 8,179 was recorded in income
(includes also effect of the transfer of shares in Inmobiliaria San Patricio
S.A. to Blue Circle South American Holding S.A.).
| · |
On
November 18, 2004, the subsidiary Soquimich European Holding B.V.
contributed ThUS$ 268 to a joint venture with SQM Eastmed
Turkey.
|
| · |
On
January 27, 2003, SQM Comercial de México S.A. de C.V. and SQM Nitratos
S.A. acquired 8,750 shares of the related company Fertilizantes Olmeca
y
SQM S.A. de C.V. which represented 50% of its share capital. Consequently,
Fertilizantes Olmeca y SQM S.A. de C.V. became a 100% subsidiary
of SQM.
This transaction generated goodwill of ThUS$ 279. Subsequently, SQM
Nitratos S.A. acquired from SQM Comercial de México S.A. de C.V. 8,749
shares in Fertilizantes Olmeca y SQM S.A. de C.V. This transaction
did not
produce goodwill.
|
| · |
On
March 30, 2003, Soquimich European Holding acquired 50% ownership
of
Mineag SQM Africa Ltd. from Ravlin Investment Limited for ThUS$ 990.
Consequently, Mineag SQM Africa Ltd. became a subsidiary of SQM.
This
transaction did not produce goodwill.
|
F-24
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
8 - Investments in Related Companies (continued)
| b) |
Significant
events and transactions involving related companies in the years
2003-2005
|
| · |
On
April 28, 2003, SQM Comercial S.A. (“SQMC”) acquired from Norsk Hydro ASA,
819,999 shares in Norsk Hydro Chile S.A. Simultaneously SQM Comercial
Internacional Ltda., a subsidiary of SQMC, acquired the one remaining
share in Norsk Hydro Chile S.A. and SQMC became the sole owner of
100%
ownership of Norsk Hydro Chile S.A. This transaction generated goodwill
of
ThUS$ 1,282. Subsequently Norsk Hydro Chile changed its name to Comercial
Hydro S.A.
|
| · |
On
June 30, 2003, SQM Nitratos S.A. acquired the shares owned by SQM
S.A. in
Sociedad Energía y Servicios S.A. The shares amounted to ThUS$ 2,422. This
transaction resulted in the consolidation of all the shares of Energía y
Servicios S.A. by one shareolder, SQM Nitratos S.A. Consequently
under
Chilean law, Energía y Servicios S.A. was dissolved and SQM Nitratos S.A.
assumed all its assets and liabilities.
|
| · |
On
November 10, 2003, SQM Nitratos S.A. and SQM S.A. liquidated the
subsidiary SQM Colombia Limitada.
|
| · |
On
November 18, 2003, the subsidiary Soquimich European Holding BV,
provided
capital of ThUS$ 676 to initiate a joint venture with the company
Misr
Specialty Fertilizer in Egypt.
|
| c) |
Investments
with less than 20% participation
|
Investments
in which the Company has less than 20% participation but the capacity to exert
significant influence, because SQM forms part of Board of Directors, have been
accounted for using the equity method.
F-25
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
8 - Investments in Related Companies (continued)
d)
Detail
of
investments in related companies
|
Company
|
|
Ownership
interest
as
of December 31,
|
Equity
of
investment
as
of
December 31,
|
Net
income (loss)
for
the year ended
|
Carrying
value as
of
December 31,
|
Equity
participation
in
net income (loss) for
the
year December 31,
|
||||||||||||||||||||||||||||||||||||||||
|
|
Currency
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||||||||
|
of
origin
|
2005
|
2004
|
2003
|
2005
|
2004
|
2005
|
2004
|
2003
|
2005
|
2004
|
2005
|
2004
|
2003
|
|||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
|
%
|
%
|
%
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||||||||||||||||||||||||||||
|
Ajay
North America LLC
|
USA
|
|
US$
|
49.00
|
49.00
|
49.00
|
13,372
|
11,726
|
2,810
|
940
|
378
|
6,271
|
5,746
|
1,377
|
461
|
185
|
||||||||||||||||||||||||||||||
|
SQM
Lithium Specialties LLC (1)
|
USA
|
|
US$
|
—
|
—
|
100.00
|
—
|
—
|
—
|
—
|
(2,858
|
)
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||||||||
|
Nutrisi
Holding N.V.
|
Belgium
|
|
US$
|
50.00
|
50.00
|
50.00
|
6,658
|
5,559
|
1,609
|
1,480
|
1,104
|
3,329
|
2,649
|
805
|
724
|
520
|
||||||||||||||||||||||||||||||
|
Misr
Specialty Fertilizers
|
Egypt
|
|
US$
|
|
47.49
|
47.49
|
25.00
|
4,504
|
3,803
|
(708
|
)
|
(789
|
)
|
—
|
2,139
|
1,806
|
(336
|
)
|
(375
|
)
|
—
|
|||||||||||||||||||||||||
|
Ajay
Europe S.A.R.L.
|
France
|
|
US$
|
50.00
|
50.00
|
50.00
|
5,086
|
4,646
|
1,063
|
140
|
—
|
2,258
|
2,323
|
532
|
70
|
—
|
||||||||||||||||||||||||||||||
|
Doktor
Tarsa
|
Turkey
|
Euros$
|
50.00
|
50.00
|
50.00
|
4,876
|
2,170
|
429
|
590
|
738
|
2,438
|
1,085
|
214
|
295
|
369
|
|||||||||||||||||||||||||||||||
|
Abu
Dhabi Fertilizer Industries WLL Industries WLL
|
UAE
|
|
US$
|
50.00
|
37.00
|
37.00
|
3,520
|
3,227
|
13
|
84
|
174
|
1,760
|
1,194
|
6
|
31
|
64
|
||||||||||||||||||||||||||||||
|
Charlee
SQM Thailand Co. Ltd.
|
Thailand
|
|
US$
|
40.00
|
—
|
2,000
|
—
|
—
|
—
|
—
|
800
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||||||||||
|
Impronta
SRL
|
Italia
|
Euros$
|
50.00
|
50.00
|
50.00
|
1,778
|
1,016
|
(281
|
)
|
342
|
755
|
889
|
508
|
(141
|
)
|
171
|
377
|
|||||||||||||||||||||||||||||
|
Sales
de Magnesio Ltda.
|
Chile
|
|
Ch$
|
50.00
|
50.00
|
50.00
|
844
|
518
|
259
|
480
|
155
|
422
|
259
|
130
|
240
|
78
|
||||||||||||||||||||||||||||||
|
SQM
Eastmed Turkey
|
Turkey
|
Euros$
|
50.00
|
50.00
|
—
|
464
|
536
|
—
|
—
|
—
|
232
|
268
|
—
|
—
|
—
|
|||||||||||||||||||||||||||||||
|
Rui
Xin Packaging Materials Sanhe Co.Ltd.
|
China
|
|
US$
|
25.00
|
25.00
|
25.00
|
—
|
482
|
—
|
—
|
—
|
—
|
121
|
—
|
—
|
—
|
||||||||||||||||||||||||||||||
|
Fertilizantes
Naturales S.A.
|
Spain
|
Euros$
|
25.00
|
—
|
430
|
—
|
37
|
—
|
—
|
108
|
—
|
9
|
—
|
—
|
||||||||||||||||||||||||||||||||
|
Empresas
Melón S.A.
|
Chile
|
—
|
—
|
—
|
14.05
|
—
|
—
|
—
|
—
|
28,005
|
—
|
—
|
—
|
2,905
|
3,935
|
|||||||||||||||||||||||||||||||
|
Inmobiliaria
San Patricio S.A.
|
Chile
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(12
|
)
|
—
|
||||||||||||||||||||||||||||||
|
Asociación
Garantizadora dePensiones
|
Chile
|
|
Ch$
|
3.31
|
3.31
|
3.31
|
908
|
835
|
—
|
—
|
—
|
30
|
28
|
—
|
—
|
—
|
||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||
|
20,676
|
15,987
|
2,596
|
4,510
|
5,528
|
||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||||||||||
| (1) |
SQM
Lithium Specialties LLC was company in development stage up to June
2004
and its net loss for the year 2003 was included directly in Other
reserves
in equity.
|
F-26
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
9 - Goodwill and Negative Goodwill
Goodwill,
negative goodwill and the related amortization is summarized as
follows:
| a) |
Goodwill
|
|
Amortization
for the year ended December 31,
|
Net
Balance as of December 31,
|
|||||||||||||||
|
|
|
|||||||||||||||
|
Company
|
2005
|
2004
|
2003
|
2005
|
2004
|
|||||||||||
|
|
|
|
|
|
|
|||||||||||
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
||||||||||||
|
Doktor
Tarsa
|
18
|
76
|
69
|
—
|
23
|
|||||||||||
|
Soquimich
Comercial S.A.
|
122
|
150
|
150
|
—
|
122
|
|||||||||||
|
Empresas
Melón S.A.
|
—
|
324
|
503
|
—
|
—
|
|||||||||||
|
SQM
Salar S.A.
|
40
|
43
|
43
|
—
|
40
|
|||||||||||
|
SQM
México S.A. de C.V.
|
56
|
56
|
56
|
891
|
947
|
|||||||||||
|
SQM
Potassium S.A.
|
144
|
144
|
144
|
1,591
|
1,735
|
|||||||||||
|
Comercial
Caiman Internacional S.A.
|
23
|
23
|
23
|
154
|
177
|
|||||||||||
|
Fertilizantes
Olmeca S.A. de C.V.
|
56
|
56
|
56
|
111
|
167
|
|||||||||||
|
Comercial
Hydro S.A.
|
176
|
140
|
90
|
1,294
|
1,305
|
|||||||||||
|
Saftnits
Pty Ltd.
|
290
|
61
|
—
|
—
|
317
|
|||||||||||
|
SQM
Dubai –
FZCO
|
73
|
—
|
—
|
1,985
|
—
|
|||||||||||
|
SQM
Industrial S.A. (1)
|
1,072
|
—
|
—
|
21,183
|
12,637
|
|||||||||||
|
|
|
|
|
|
||||||||||||
|
Total
|
2,070
|
1,073
|
1,134
|
27,209
|
17,470
|
|||||||||||
|
|
|
|
|
|
||||||||||||
|
(1)
|
As
described in note 8 b), review of preliminary estimation of fair
values of
assets acquired and liabilities assumed in transaction of purchase
of PCS
Yumbes SCM (currently SQM Industrial S.A.) performed during 2005
resulted
in adjustments to amounts previously determined and in consequence
increase in value of goodwill.
|
|
b)
|
Negative
Goodwill
|
|
Amortization
for the year ended December 31,
|
Net
Balance as of December 31,
|
|||||||||||||||
|
|
|
|||||||||||||||
|
Company
|
2005
|
2004
|
2003
|
2005
|
2004
|
|||||||||||
|
|
|
|
|
|
|
|||||||||||
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
||||||||||||
|
SQM
Salar S.A.
|
—
|
—
|
167
|
—
|
—
|
|||||||||||
|
Minera
Mapocho S.A.
|
203
|
203
|
203
|
68
|
271
|
|||||||||||
|
|
|
|
|
|
||||||||||||
|
Total
|
203
|
203
|
370
|
68
|
271
|
|||||||||||
|
|
|
|
|
|
||||||||||||
Note
10 - Other Long-term Assets
Other
long-term assets are summarized as follows as of December 31, 2005 and
2004:
|
2005
|
2004
|
||||||
|
|
|
||||||
|
ThUS$
|
ThUS$
|
||||||
|
Engine
and equipment spare-parts, net
|
19,289
|
24,734
|
|||||
|
Mine
development costs
|
24,282
|
23,208
|
|||||
|
Pension
plan
|
1,133
|
1,165
|
|||||
|
Construction
of Salar-Baquedano road (1)
|
1,410
|
1,650
|
|||||
|
Deferred
loan issuance costs
|
323
|
866
|
|||||
|
Other
|
1,722
|
1,518
|
|||||
|
|
|
||||||
|
Total
|
48,159
|
53,141
|
|||||
|
|
|
||||||
| (1) |
Amortized
on a straight line basis over a period of 30-
years.
|
F-27
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
11 - Bank Debt
a)
Short-term
bank debt as of December 31, is detailed as follows:
|
2005
|
2004
|
||||||
|
|
|
||||||
|
Bank
or financial institution
|
ThUS$
|
ThUS$
|
|||||
|
Banco
de Crédito e Inversiones
|
65,017
|
—
|
|||||
|
Banco
Santander Santiago
|
20,005
|
—
|
|||||
|
Banco
de Chile
|
—
|
6,019
|
|||||
|
CAM
Caja Ahorros Mediterráneo
|
—
|
698
|
|||||
|
Fortis
Bank
|
—
|
836
|
|||||
|
BBVA
banco Bilbao Vizcaya Argentaria
|
—
|
240
|
|||||
|
Banco
Atlántico
|
—
|
162
|
|||||
|
|
|
||||||
|
Total
|
85,022
|
7,955
|
|||||
|
|
|
||||||
|
Annual
average interest rate
|
4.65
|
%
|
2.48
|
%
|
|||
b)
Long-term
bank debt as of December 31, is detailed as follows:
|
2005
|
2004
|
||||||
|
|
|
||||||
|
Bank
or financial institution
|
ThUS$
|
ThUS$
|
|||||
|
Union
Bank of Switzerland (1)
|
204,577
|
204,577
|
|||||
|
BBVA
Banco Bilbao Vizcaya Argentaria (2)
|
100,303
|
—
|
|||||
|
|
|
||||||
|
Total
|
304,880
|
204,577
|
|||||
|
|
|
||||||
|
Less:
current portion
|
(204,880
|
)
|
(4,577
|
)
|
|||
|
|
|
||||||
|
Long-term
portion
|
100,000
|
200,000
|
|||||
|
|
|
||||||
|
(1)
|
US
dollar-denominated loan, interest rate of 7.7%
per
annum, paid semi-annually. The principal is due on September
15, 2006.
|
|
(2)
|
US
dollar-denominated loan without guarantee, interest rate of Libor
+ 0.325%
per annum, paid quarterly. The principal is due on March 3,
2010.
|
c)
The
maturity of long-term debt as of December 31, is as follows:
|
2005
|
2004
|
||||||
|
|
|
||||||
|
Years
to maturity
|
ThUS$
|
ThUS$
|
|||||
|
Current
portion (due within 1 year)
|
204,880
|
4,577
|
|||||
|
1
to 2 years
|
—
|
200,000
|
|||||
|
2
to 3 years
|
—
|
—
|
|||||
|
3
to 5 years
|
100,000
|
—
|
|||||
|
|
|
||||||
|
Total
|
304,880
|
204,577
|
|||||
|
|
|
||||||
F-28
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
12 - Accrued Liabilities and Provisions
As
of
December 31, 2005 and 2004, accrued liabilities are summarized as
follows:
|
2005
|
2004
|
||||||
|
|
|
||||||
|
ThUS$
|
ThUS$
|
||||||
|
Provision
for royalties
|
1,855
|
1,360
|
|||||
|
Provision
for employee compensation and legal costs
|
7,145
|
1,570
|
|||||
|
Taxes
and monthly income tax installment payments
|
2,909
|
861
|
|||||
|
Vacation
accrual
|
8,126
|
6,932
|
|||||
|
Accrued
employee benefits
|
186
|
216
|
|||||
|
Marketing
expenses
|
246
|
246
|
|||||
|
Other
accruals
|
3,283
|
1,082
|
|||||
|
|
|
||||||
|
Total
current liabilities
|
23,750
|
12,267
|
|||||
|
|
|
||||||
Note
13 - Current and Deferred Income Taxes
| a) |
As
of December 31, 2005 and 2004, the Company has the following consolidated
balances for distributable retained taxed earnings, income not
subject to
taxes, tax loss carry-forwards and credits for
shareholders:
|
|
2005
|
2004
|
||||||
|
|
|
||||||
|
ThUS$
|
ThUS$
|
||||||
|
Accumulated
tax basis retained earnings with tax credit
|
206,777
|
86,518
|
|||||
|
Accumulated
tax basis retained earnings without tax credit
|
93,732
|
—
|
|||||
|
Tax
loss carry-forwards (1)
|
232,644
|
225,638
|
|||||
|
Credit
for shareholders
|
42,046
|
17,355
|
|||||
| (1) |
Income
tax losses in Chile can be carried forward
indefinitely.
|
The
Company has recognized deferred income taxes for tax losses and the related
valuation allowance, where applicable, in accordance with Technical Bulletin
No.
60 issued by the Chilean Association of Accountants.
The
corporate income tax rate in Chile was 17% in 2005 and 2004 and 16.5% in
2003.
F-29
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
13 - Current and Deferred Income Taxes (continued)
b)
Deferred
taxes
The
deferred taxes as of December 31, 2005 and 2004 represented a net liability
of
ThUS$ 36,367 and ThUS$ 42,022, respectively, and consisted of:
|
As
of December 31, 2005
|
Deferred
tax asset
|
Deferred
tax liability
|
|||||||||||
|
|
|
|
|||||||||||
|
Short-term
|
Long-term
|
Short-term
|
Long-term
|
||||||||||
|
|
|
|
|
||||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||||
|
Temporary
differences
|
|||||||||||||
|
Allowance
for doubtful accounts
|
1,345
|
—
|
—
|
—
|
|||||||||
|
Other
long-term provisions
|
—
|
620
|
—
|
—
|
|||||||||
|
Vacation
accrual
|
1,322
|
—
|
—
|
—
|
|||||||||
|
Unrealized
gain on sale of products
|
15,053
|
—
|
—
|
—
|
|||||||||
|
Provision
for obsolescence of long-term assets
|
—
|
2,075
|
—
|
—
|
|||||||||
|
Production
expenses
|
—
|
—
|
18,123
|
—
|
|||||||||
|
Accelerated
depreciation
|
—
|
—
|
—
|
58,031
|
|||||||||
|
Exploration
expenses
|
—
|
—
|
—
|
5,375
|
|||||||||
|
Capitalized
interest
|
—
|
—
|
—
|
6,040
|
|||||||||
|
Staff
severance indemnities
|
—
|
—
|
—
|
2,448
|
|||||||||
|
Accrued
expenses
|
—
|
—
|
—
|
147
|
|||||||||
|
Tax
losses carry-forwards
|
—
|
40,624
|
—
|
—
|
|||||||||
|
Accrued
interest
|
149
|
—
|
—
|
—
|
|||||||||
|
Fair
value acquisition adjustments
|
—
|
2,535
|
—
|
—
|
|||||||||
|
Other
|
1,462
|
3,834
|
—
|
182
|
|||||||||
|
|
|
|
|
||||||||||
|
Total
gross deferred taxes
|
19,331
|
49,688
|
18,123
|
72,223
|
|||||||||
|
Complementary
accounts
|
—
|
(4,692
|
)
|
(1,508
|
)
|
(23,850
|
)
|
||||||
|
Valuation
allowance
|
(188
|
)
|
(35,518
|
)
|
—
|
—
|
|||||||
|
|
|
|
|
||||||||||
|
Deferred
taxes
|
19,143
|
9,478
|
16,615
|
48,373
|
|||||||||
|
|
|
|
|
||||||||||
|
Total
deferred taxes, net
|
2,528
|
—
|
—
|
38,895
|
|||||||||
|
|
|
|
|
||||||||||
F-30
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
13 – Current
and Deferred Income Taxes (continued)
b)
Deferred
taxes (continued)
|
As
of December 31, 2004
|
Deferred
tax asset
|
Deferred
tax liability
|
|||||||||||
|
|
|
|
|||||||||||
|
Short-term
|
Long-term
|
Short-term
|
Long-term
|
||||||||||
|
|
|
|
|
||||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||||
|
Temporary
differences
|
|||||||||||||
|
Allowance
for doubtful accounts
|
1,324
|
—
|
—
|
—
|
|||||||||
|
Other
long-term provisions
|
—
|
386
|
—
|
—
|
|||||||||
|
Vacation
accrual
|
1,165
|
—
|
—
|
—
|
|||||||||
|
Unrealized
gain on sale of products
|
8,748
|
—
|
—
|
—
|
|||||||||
|
Provision
for obsolescence of long-term assets
|
—
|
1,835
|
—
|
—
|
|||||||||
|
Production
expenses
|
7,872
|
—
|
23,044
|
—
|
|||||||||
|
Accelerated
depreciation
|
—
|
—
|
—
|
53,890
|
|||||||||
|
Exploration
expenses
|
—
|
—
|
—
|
5,336
|
|||||||||
|
Capitalized
interest
|
—
|
—
|
—
|
5,849
|
|||||||||
|
Staff
severance indemnities
|
—
|
467
|
—
|
2,028
|
|||||||||
|
Capitalized
expenses
|
—
|
—
|
—
|
344
|
|||||||||
|
Tax
losses carry-forwards
|
—
|
36,472
|
—
|
—
|
|||||||||
|
Losses
on derivative transactions
|
85
|
—
|
—
|
—
|
|||||||||
|
Accrued
interest
|
130
|
—
|
—
|
—
|
|||||||||
|
Other
|
1,466
|
1,856
|
217
|
179
|
|||||||||
|
|
|
|
|
||||||||||
|
Total
gross deferred taxes
|
20,790
|
41,016
|
23,261
|
67,626
|
|||||||||
|
Complementary
accounts
|
—
|
(5,815
|
)
|
(2,584
|
)
|
(25,955
|
)
|
||||||
|
Valuation
allowance
|
(8,046
|
)
|
(27,619
|
)
|
—
|
—
|
|||||||
|
|
|
|
|
||||||||||
|
Deferred
taxes
|
12,744
|
7,582
|
20,677
|
41,671
|
|||||||||
|
|
|
|
|
||||||||||
|
Total
deferred taxes, net
|
—
|
—
|
7,933
|
34,089
|
|||||||||
|
|
|
|
|
||||||||||
c)
Income
tax expense for the years ended December 31, 2003, 2004 and 2005 is summarized
as follows:
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||
|
Provision
for current income tax
|
(37,428
|
)
|
(14,435
|
)
|
(2,829
|
)
|
||||
|
Effect
of deferred tax assets and liabilities
|
10,844
|
(6,613
|
)
|
(7,731
|
)
|
|||||
|
Adjustment
for tax expense (previous year)
|
(945
|
)
|
(144
|
)
|
56
|
|||||
|
Effect
of amortization of complementary accounts
|
(3,084
|
)
|
(6,022
|
)
|
(5,917
|
)
|
||||
|
|
|
|
||||||||
|
Effect
on deferred tax assets and liabilities due to changes in valuation
allowance
|
(1,350
|
)
|
—
|
236
|
||||||
|
Other
tax charges and credits
|
(564
|
)
|
(94
|
)
|
129
|
|||||
|
|
|
|
||||||||
|
Total
income tax expense
|
(32,527
|
)
|
(27,308
|
)
|
(16,056
|
)
|
||||
|
|
|
|
||||||||
F-31
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
14 – Staff
Severance Indemnities
Staff
severance indemnities as of December 31, are summarized as follows:
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||
|
Opening
balance
|
11,875
|
10,127
|
9,143
|
|||||||
|
Increases
in obligation
|
5,193
|
3,301
|
2,283
|
|||||||
|
Benefits
paid
|
(3,379
|
)
|
(2,245
|
)
|
(2,802
|
)
|
||||
|
Foreign
currency translation
|
1,000
|
692
|
1,503
|
|||||||
|
Other
changes
|
1,726
|
—
|
—
|
|||||||
|
|
|
|
||||||||
|
Balance
as of December 31
|
16,415
|
11,875
|
10,127
|
|||||||
|
|
|
|
||||||||
Note
15 – Minority Interest
Minority
shareholders’ participation in the shareholders’ equity and results of the
Company’s subsidiaries as of each year-end is as follows:
|
Participation
in equity as of
December 31, |
Participation
in income (loss) for the years ended
December 31, |
|||||||||||||||
|
|
|
|||||||||||||||
|
2005
|
2004
|
2005
|
2004
|
2003
|
||||||||||||
|
|
|
|
|
|
||||||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||||||
|
Soquimich
Comercial S.A.
|
32,234
|
30,741
|
(84
|
)
|
(4,442
|
)
|
(3,107
|
)
|
||||||||
|
Ajay
SQM Chile S.A.
|
3,200
|
3,313
|
(827
|
)
|
(488
|
)
|
(250
|
)
|
||||||||
|
Cape
Fear Bulk LLC
|
93
|
146
|
(118
|
)
|
(144
|
)
|
(94
|
)
|
||||||||
|
SQM
Italia S.R.L
|
23
|
20
|
(3
|
)
|
2
|
—
|
||||||||||
|
SQM
Nitratos México S.A. de C.V.
|
(39
|
)
|
(46
|
)
|
(7
|
)
|
(37
|
)
|
86
|
|||||||
|
Fertilizantes
Naturales S.A.
|
—
|
258
|
—
|
(32
|
)
|
(63
|
)
|
|||||||||
|
SQM
Indonesia S.A.
|
(2
|
)
|
(2
|
)
|
—
|
2
|
(1
|
)
|
||||||||
|
Mineag
SQM Africa Ltda.
|
—
|
—
|
—
|
—
|
(225
|
)
|
||||||||||
|
|
|
|
|
|
||||||||||||
|
Total
|
35,509
|
34,430
|
(1,039
|
)
|
(5,139
|
)
|
(3,654
|
)
|
||||||||
|
|
|
|
|
|
||||||||||||
F-32
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
16 – Shareholders’ Equity
| a) |
Changes
to shareholders’ equity consisted
of:
|
|
Number
of
shares
|
Paid-in
capital
ThUS$
|
Other
reserves
ThUS$
|
Accumulated
deficit of
subsidiaries
in
development
stage
ThUS$
|
Retained
earnings
ThUS$
|
Net
income
ThUS$
|
Total
ThUS$
|
||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||
|
Balance
as of January 1, 2003
|
263,196,524
|
477,386
|
125,111
|
(3,661
|
)
|
210,624
|
40,202
|
849,662
|
||||||||||||||
|
Transfer
2001 net income to retained earnings
|
—
|
—
|
—
|
—
|
40,202
|
(40,202
|
)
|
—
|
||||||||||||||
|
Declared
dividends 2003
|
—
|
—
|
—
|
—
|
(19,894
|
)
|
—
|
(19,894
|
)
|
|||||||||||||
|
Accumulated
deficit from subsidiaries in development stage (1)
|
—
|
—
|
—
|
(2,858
|
)
|
—
|
—
|
(2,858
|
)
|
|||||||||||||
|
Other
comprehensive income (2)
|
—
|
—
|
16,309
|
—
|
—
|
—
|
16,309
|
|||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
46,753
|
46,753
|
|||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||
|
Balance
as of December 31, 2003
|
263,196,524
|
477,386
|
141,420
|
(6,519
|
)
|
230,932
|
46,753
|
889,972
|
||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||
|
Balance
as of January 1, 2004
|
263,196,524
|
477,386
|
141,420
|
(6,519
|
)
|
230,932
|
46,753
|
889,972
|
||||||||||||||
|
Transfer
2003 net income to retained earnings
|
—
|
—
|
—
|
—
|
46,753
|
(46,753
|
)
|
—
|
||||||||||||||
|
Declared
dividends 2004
|
—
|
—
|
—
|
—
|
(23,192
|
)
|
—
|
(23,192
|
)
|
|||||||||||||
|
Accumulated
deficit from subsidiaries in development stage (1)
|
—
|
—
|
—
|
(1,851
|
)
|
—
|
—
|
(1,851
|
)
|
|||||||||||||
|
Other
comprehensive income (2)
|
—
|
—
|
9,467
|
—
|
—
|
—
|
9,467
|
|||||||||||||||
|
Net
income for the year
|
—
|
—
|
—
|
—
|
—
|
74,232
|
74,232
|
|||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||
|
Balance
as of December 31, 2004
|
263,196,524
|
477,386
|
150,887
|
(8,370
|
)
|
254,493
|
74,232
|
948,628
|
||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||
|
Balance
January 1, 2005
|
263,196,524
|
477,386
|
150,887
|
(8,370
|
)
|
254,493
|
74,232
|
948,628
|
||||||||||||||
|
Transfer
2004 net income to retained earnings
|
—
|
—
|
—
|
—
|
74,232
|
(74,232
|
)
|
—
|
||||||||||||||
|
Declared
dividends 2005
|
—
|
—
|
—
|
—
|
(48,118
|
)
|
—
|
(48,118
|
)
|
|||||||||||||
|
Other
comprehensive income (2)
|
—
|
—
|
6,400
|
—
|
—
|
—
|
6,400
|
|||||||||||||||
|
Net
income for the year
|
—
|
—
|
—
|
—
|
—
|
113,506
|
113,506
|
|||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||
|
Balance
as of December 31, 2005
|
263,196,524
|
477,386
|
157,287
|
(8,370
|
)
|
280,607
|
113,506
|
1,020,416
|
||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||
| (1) |
The
only subsidiary that was in a development stage during 2003 and 2004
was
SQM Lithium Specialties LLC and therefore was not included in the
consolidation. The equity value of this investment was recorded under
caption Investments in related companies and the proportional share
of the
accumulated deficit during the development stage was included in
Other
reserves within shareholders’ equity. Since July, 2004 results of this
entity are included in the consolidated financial
statements.
|
| (2) |
Movements
of Other comprehensive income during the years ended December 31,
2003,
2004 and 2005 include cumulative translation adjustment related to
Chilean
investments measured in Chilean pesos, foreign investments and the
effect
of changes in the valuation of the Company’s pension plan. Details are
presented in point b) below.
|
F-33
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
16 – Shareholders’ Equity (continued)
| b) |
Other
comprehensive income in the years ended December 31, 2003, 2004 and 2005 and other
reserves balance as of December 31, 2004 and 2005 are as follows:
|
|
For
the year ended December
31,
|
As
of December 31,
|
|||||||||||||||
|
|
|
|||||||||||||||
|
|
2005
|
2004
|
2003
|
2005
|
2004
|
|||||||||||
|
|
|
|
|
|
||||||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||||||
|
Technical
appraisal
|
—
|
—
|
—
|
151,345
|
151,345
|
|||||||||||
|
Changes
in other comprehensive income related to investments:
|
||||||||||||||||
|
Soquimich
Comercial S.A. (1)
|
5,522
|
3,242
|
6,421
|
6,268
|
746
|
|||||||||||
|
Isapre
Norte Grande Ltda. (1)
|
—
|
14
|
—
|
(83
|
)
|
(83
|
)
|
|||||||||
|
Inversiones
Augusta S.A. (1)
|
—
|
—
|
—
|
(761
|
)
|
(761
|
)
|
|||||||||
|
SQM
Ecuador S.A.1
|
—
|
—
|
—
|
(271
|
)
|
(271
|
)
|
|||||||||
|
Almacenes
y Depósitos Ltda.(1)
|
78
|
34
|
1
|
22
|
(56
|
)
|
||||||||||
|
Asociación
Garantizadora de Pensiones (1)
|
2
|
2
|
2
|
(11
|
)
|
(13
|
)
|
|||||||||
|
Empresas
Melón S.A. (1)
|
—
|
6,190
|
9,446
|
—
|
—
|
|||||||||||
|
Sales
de Magnesio Ltda. (1)
|
7
|
—
|
69
|
59
|
52
|
|||||||||||
|
SQM
North America Corp. (2)
|
792
|
(15
|
)
|
370
|
—
|
(792
|
)
|
|||||||||
|
Other
Companies (1)
|
(1
|
)
|
—
|
—
|
719
|
720
|
||||||||||
|
|
|
|
|
|
||||||||||||
|
Total
other comprehensive income
|
6,400
|
9,467
|
16,309
|
157,287
|
150,887
|
|||||||||||
|
|
|
|
|
|
||||||||||||
| (1) |
Corresponds
to translation adjustments and price-level
restatement
|
|
(2)
|
Corresponds
to a change in the valuation of the Company’s pension plan.
|
| c) |
Paid-in
capital consists of 263,196,524 fully authorized, subscribed and
paid
shares with no par value, divided into 142,819,552 Series A shares
and
120,376,972 Series B shares.
|
The
preferential voting rights of each series are as follows:
|
Series
A:
|
If
the election of the president of the Company results in a tied vote,
the
Company's directors may vote once again, without the vote of the
director
elected by the Series B shareholders.
|
||
|
Series
B:
|
(1)
|
A
general or extraordinary shareholders' meeting may be called at the
request of shareholders representing 5% of the Company's Series B
shares.
|
|
|
(2)
|
An
extraordinary meeting of the Board of Directors may be called with
or
without the agreement of the Company's president, at the request
of a
director elected by Series B
shareholders.
|
F-34
Sociedad
Química y Minera De Chile S.A. and
Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
17 – Derivatives Instruments
Derivative
instruments are recorded at their fair value as of year-end. Changes in fair
value are recognized in income with the asset or liability recorded in Other
current assets or liabilities. Losses from options relate to fees paid by the
Company to enter into such contracts. As of December 31, 2005 and 2004, the
Company’s derivative instruments are as follows:
2005
|
Type
of
derivative
|
Notional
or
covered
amount
ThUS$
|
Expiration
|
Risk
type
|
Position
Purchase/Sale
(P/S)
|
(Liability)Asset
amount
ThUS$
|
Income
(loss)
effect
ThUS$
|
|||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
|
Currency
Option
|
31,279
|
1st
quarter of 2006
|
Exchange
rate
|
P
|
62
|
62
|
|||||||||||||
|
Currency
Option Option
|
5,747
|
1st
quarter of 2006
|
Exchange
rate
|
P
|
(49
|
)
|
(49
|
)
|
|||||||||||
|
US
dollar Forward
|
7,726
|
1st
quarter of 2006
|
Exchange
rate
|
P
|
(176
|
)
|
(176
|
)
|
|||||||||||
|
|
|
|
|||||||||||||||||
|
44,752
|
(163
|
)
|
(163
|
)
|
|||||||||||||||
|
|
|
|
|||||||||||||||||
2004
|
Type
of
derivative
|
Notional
or
covered
amount
ThUS$
|
Expiration
|
Risk
type
|
Position
Purchase/Sale
(P/S)
|
(Liability)Asset
amount
ThUS$
|
Income
(loss)
effect
ThUS$
|
|||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
|
US
dollar Forward
|
1,013
|
1st
quarter of 2005
|
Exchange
rate
|
P
|
(108
|
)
|
(108
|
)
|
|||||||||||
|
US
dollar Forward
|
4,629
|
1st
quarter of 2005
|
Exchange
rate
|
S
|
110
|
110
|
|||||||||||||
|
US
dollar Forward
|
399
|
2nd
quarter of 2005
|
Exchange
rate
|
S
|
42
|
42
|
|||||||||||||
|
US
dollar Forward
|
10,004
|
1st
quarter of 2005
|
Arbitration
|
P
|
(539
|
)
|
(539
|
)
|
|||||||||||
|
US
dollar Forward
|
5,187
|
1st
quarter of 2005
|
Exchange
rate
|
S
|
(207
|
)
|
(207
|
)
|
|||||||||||
|
Currency
Option
|
38,721
|
1st
quarter of 2005
|
Exchange
rate
|
P
|
(893
|
)
|
(893
|
)
|
|||||||||||
|
Currency
Option
|
43,884
|
2nd
quarter of 2005
|
Exchange
rate
|
P
|
(1,012
|
)
|
(1,012
|
)
|
|||||||||||
|
Currency
Option
|
25,814
|
3nd
quarter of 2005
|
Exchange
rate
|
P
|
(595
|
)
|
(595
|
)
|
|||||||||||
|
Currency
Option
|
20,651
|
4st
quarter of 2005
|
Exchange
rate
|
P
|
(476
|
)
|
(476
|
)
|
|||||||||||
|
|
|
|
|||||||||||||||||
|
150,302
|
(3,678
|
)
|
(3,678
|
)
|
|||||||||||||||
|
|
|
|
|||||||||||||||||
F-35
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
18 – Non-Operating Income and Expenses
| a) |
Details
of non-operating income for the years ended December 31, 2003,
2004 and
2005 are as follows:
|
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||
|
Interest
income
|
5,530
|
3,650
|
2,957
|
|||||||
|
Equity
participation in net income of unconsolidated investees
|
3,073
|
4,897
|
5,529
|
|||||||
|
Insurance
recoveries
|
213
|
546
|
154
|
|||||||
|
Write-off
of liabilities
|
2,204
|
388
|
422
|
|||||||
|
Net
foreign exchange gain and price-level restatement
|
—
|
—
|
6,590
|
|||||||
|
Sale
of mining concessions
|
298
|
635
|
135
|
|||||||
|
Sale
of materials and services
|
438
|
190
|
628
|
|||||||
|
Gain
on sale of investments in related companies
|
—
|
8,179
|
—
|
|||||||
|
Rental
of property, plant and equipment
|
1,015
|
774
|
736
|
|||||||
|
Compensation
obtained from third parties
|
737
|
—
|
—
|
|||||||
|
Payment
discounts obtained from suppliers
|
1,026
|
452
|
606
|
|||||||
|
Other
income
|
1,899
|
1,118
|
897
|
|||||||
|
|
|
|
||||||||
|
Total
|
16,433
|
20,829
|
18,654
|
|||||||
|
|
|
|
||||||||
| b) |
Details
of non-operating expenses for the years ended December 31, 2003,
2004 and
2005 are as follows:
|
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||
|
Interest
expense
|
16,663
|
18,782
|
21,777
|
|||||||
|
Net
foreign currency exchange loss and price-level restatement
|
3,804
|
475
|
—
|
|||||||
|
Non-capitalizable
exploration project expenses and provisions for damages and liquidation
of
assets
|
13,489
|
9,262
|
8,965
|
|||||||
|
Equity
participation in net losses of unconsolidated investees
|
477
|
387
|
1
|
|||||||
|
Amortization
of goodwill
|
2,070
|
1,073
|
1,134
|
|||||||
|
Work
disruption expenses
|
584
|
568
|
1,640
|
|||||||
|
Increase
in provision for employee compensation and legal costs
|
7,986
|
533
|
1,442
|
|||||||
|
Change
of discount rate for staff severance indemnities provision
|
678
|
—
|
—
|
|||||||
|
Allowances
for materials, spare parts and supplies
|
1,188
|
1,628
|
881
|
|||||||
|
Allowance
for doubtful accounts
|
151
|
2,500
|
687
|
|||||||
|
Non-recoverable
taxes
|
647
|
531
|
690
|
|||||||
|
Consulting
services
|
314
|
175
|
282
|
|||||||
|
Donations
|
896
|
533
|
235
|
|||||||
|
Penalties
|
238
|
161
|
415
|
|||||||
|
Other
expenses
|
1,570
|
1,812
|
1,664
|
|||||||
|
Total
|
50,755
|
38,420
|
39,813
|
|||||||
|
|
|
|
||||||||
F-36
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
19 –
Price-level Restatement
Amounts
charged or credited to income relating to price-level restatement are summarized
as follows:
|
(Charge)
credit to income from operations for the year ended December
31,
|
||||||||||
|
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||
|
Property,
plant and equipment
|
239
|
173
|
60
|
|||||||
|
Other
assets and liabilities
|
(248
|
)
|
(286
|
)
|
193
|
|||||
|
Shareholders’
equity
|
(2,846
|
)
|
(1,577
|
)
|
(459
|
)
|
||||
|
|
|
|
||||||||
|
Subtotal
price-level restatement
|
(2,855
|
)
|
(1,690
|
)
|
(206
|
)
|
||||
|
|
|
|
||||||||
|
Net
adjustment of assets and liabilities denominated in UF
|
—
|
(23
|
)
|
188
|
||||||
|
|
|
|
||||||||
|
Net
price-level restatement
|
(2,855
|
)
|
(1,713
|
)
|
(18
|
)
|
||||
|
|
|
|
||||||||
Note
20 – Assets and Liabilities Denominated in Foreign Currencies and Indexation
Units
As
of
December 31, 2004 and 2005, assets and liabilities denominated in foreign
currency and indexation units are as follows:
|
As
of December 31,
|
|||||||
|
|
|||||||
|
2005
|
2004
|
||||||
|
|
|
||||||
|
ThUS$
|
ThUS$
|
||||||
|
Assets
|
|||||||
|
Chilean
pesos
|
|
|
81,583
|
|
|
81,886
|
|
|
US
dollars
|
|
|
1,433,629
|
|
|
1,175,983
|
|
|
Euros
|
|
|
24,742
|
|
|
30,996
|
|
|
Japanese
Yen
|
|
|
6,466
|
|
|
3,889
|
|
|
Brazilian
Real
|
|
|
304
|
|
|
348
|
|
|
Mexican
pesos
|
|
|
11,331
|
|
|
6,926
|
|
|
UF
|
|
|
57,906
|
|
|
49,785
|
|
|
South
African Rand
|
|
|
9,321
|
|
|
9,214
|
|
|
Dirhams
|
|
|
11,954
|
|
|
—
|
|
|
Other
currencies
|
3,332
|
2,345
|
|||||
|
Current
liabilities
|
|||||||
|
Chilean
pesos
|
|
|
65,355
|
|
|
51,877
|
|
|
US
dollars
|
|
|
347,141
|
|
|
54,437
|
|
|
Euros
|
|
|
5,369
|
|
|
10,927
|
|
|
Japanese
Yen
|
|
|
133
|
|
|
75
|
|
|
Brazilian
Real
|
|
|
1,245
|
|
|
796
|
|
|
Mexican
pesos
|
|
|
3,230
|
|
|
9,696
|
|
|
UF
|
|
|
3,544
|
|
|
1,177
|
|
|
South
African Rand
|
|
|
1,792
|
|
|
2,140
|
|
|
Dirhams
|
|
|
411
|
|
|
—
|
|
|
Other
currencies
|
48
|
119
|
|||||
|
Long-term
liabilities
|
|||||||
|
Chilean
pesos
|
|
|
16,358
|
|
|
10,531
|
|
|
US
dollars
|
|
|
138,950
|
|
|
235,310
|
|
|
Japanese
Yen
|
|
|
—
|
|
|
121
|
|
|
UF
|
|
|
1,065
|
|
|
1,106
|
|
|
Other
currencies
|
2
|
2
|
|||||
F-37
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
21 – Additional cash flow statement information
Amounts
included in other investing income in Statements of cash flows are summarized
as
follows:
|
For
the years ended December 31,
|
||||||||||
|
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||
|
Loans
to employees (made) received, net
|
(75
|
)
|
219
|
3,221
|
||||||
|
Cash
of acquired and newly consolidated entities (1)
|
911
|
23
|
4,343
|
|||||||
|
Sale
of mining concessions
|
509
|
635
|
135
|
|||||||
|
|
|
|
||||||||
|
Total
|
1,345
|
877
|
7,699
|
|||||||
|
|
|
|
||||||||
|
(1)
|
In
2003 corresponds to the consolidation of newly acquired subsidiaries
Mineag SQM Africa Limited, Fertilizantes Olmeca SQM S.A. de C.V.
and
Comercial Hydro S.A. In 2004 corresponds to consolidation of subsidiary
previously being in development stage (SQM Lithium Specialities
LLP) and
acquisition of PCS Yumbes SCM (currently SQM Industrial S.A.).
In 2005
corresponds to acquisition of SQM Dubai -
Fzco.
|
Note
22 – Commitments and Contingencies
I.
Contingencies:
a)
Lawsuits
and other legal actions
The
Company and its subsidiaries are involved in litigations in the ordinary
course
of business. Based on the advice of legal counsel, management believes that
the
results of these litigations will not have a material effect on the consolidated
financial statements. Details of the most important litigations of which
the
Company is party to are provided below:
|
1.
|
Plaintiff:
|
Miguel
Negrete Ubeda
|
||
|
Defendants:
|
Marco
Antonio Ortiz Castillo y SQM Nitratos S.A. and its
insurers
|
|||
|
Date
of lawsuit:
|
May
2004
|
|||
|
Court:
|
First
Civil Court of Antofagasta
|
|||
|
Cause:
|
Work
accident
|
|||
|
Instance:
|
Evidence
provided
|
|||
|
Nominal
amount:
|
ThUS$
150
|
|||
|
2.
|
Plaintiff:
|
Mario
Miles Andrade
|
||
|
|
Defendants:
|
Constructora
Fe Grande S.A. and subsidiary and jointly and severally SQM S.A.
and its
insurers
|
||
|
Date
of lawsuit:
|
June
2005
|
|||
|
Court:
|
Labor
Court of Antofagasta
|
|||
|
Cause:
|
Work
accident
|
|||
|
Instance:
|
The
demand has been contested
|
|||
|
Nominal
amount:
|
ThUS$
270
|
|||
|
3.
|
Plaintiff:
|
Gabriela
Véliz Huanchicay
|
||
|
Defendants:
|
Gilberto
Mercado Barreda and subsidiary and jointly and
severally
|
|||
|
SQM
Nitratos S.A. and its insurers
|
||||
|
Date
of lawsuit:
|
August
2005
|
|||
|
Court:
|
4th
Civil Court of Santiago
|
|||
|
Cause:
|
Work
accident
|
|||
|
Instance:
|
The
demand has been contested
|
|||
|
Nominal
amount:
|
ThUS$
1,350
|
F-38
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
22 – Commitments and Contingencies (continued)
I.
Contingencies
(continued)
a)
Lawsuits
and other legal actions (continued):
|
4.
|
Plaintiff:
|
Marina
Arnéz Valencia
|
||
|
Defendants:
|
Intro
Ingeniería Limitada and subsidiary and joint and
severally
|
|||
|
SQM
S.A. and its insurers
|
||||
|
Date
of lawsuit:
|
September
2005
|
|||
|
Court:
|
Labor
Court of Antofagasta
|
|||
|
Cause:
|
Work
accident
|
|||
|
Instance:
|
Evidence
provided
|
|||
|
Nominal
amount:
|
ThUS$
475
|
|||
|
5.
|
Plaintiff:
|
Electroandina
S.A.
|
||
|
Defendants:
|
Sociedad
Química y Minera de Chile S.A.
|
|||
|
Date
of lawsuit:
|
September
2005
|
|||
|
Court:
|
Court
of arbitration
|
|||
|
Cause:
|
Early
termination or partial modification or temporary suspension
|
|||
|
of
the Electrical Supply Agreement entered on February 12, 1999 by
virtue
|
||||
|
of
supposedly unforeseen events that would result in an increase in
the
cost
|
||||
|
of
or restricted the supply of natural gas from Argentina.
|
||||
|
Instance:
|
Evidentiary
stage
|
|||
|
Nominal
amount:
|
The
amount has not been determined yet
|
|||
|
6.
|
Plaintiff:
|
Juana
Muraña Quispe
|
||
|
Defendants:
|
Intro
Ingenieria Limitada and subsidiary and jointly and
severally
|
|||
|
SQM
S.A. and its insurers
|
||||
|
Date
of lawsuit:
|
October
2005
|
|||
|
Court:
|
25th
Civil Court of Santiago
|
|||
|
Cause:
|
Work
accident
|
|||
|
Instance:
|
Rejoinder
|
|||
|
Nominal
amount:
|
ThUS$
1,500
|
b)
Models
for the Production of the María Elena Site
The
Company is currently implementing different projects related to the María Elena
Site Decontamination Plan (Note 26).
Projects
that are being implemented in the María Elena site, a priori, do not generate
any significant changes in the current mining reserves or forecasted production
volumes.
The
final
execution of these projects is subject to the approval of environmental impact
studies presented in December 2005 to the respective authorities.
F-39
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
22 – Commitments and Contingencies (continued)
II.
Commitments:
| 1. |
The
subsidiary SQM Salar S.A. maintains an agreement with a government
agency,
whereby the Company must make annual payments until 2030 based on
the
Company’s annual sales. This fee that is being paid since the beginning of
the agreement in 1996 amounted to ThUS$ 6,752 in 2005 (ThUS$ 4,910
in 2004
and ThUS$ 4,024 in 2003).
|
| 2. |
The
Company has certain indirect guarantees, which relate to agreements
with
no remaining payments pending. These guarantees are still in effect
and
have been approved by the Company’s Board of Directors; however, they have
not been used by the subsidiaries.
|
| 3. |
Bank
debt of SQM S.A. and its subsidiaries has no restrictions or terms
other
than those that might usually be found in similar debt instruments
issued
on the financial markets, such as maximum indebtedness and minimum
equity
among others.
|
Note
23 – Third Party Guarantees
As
of
December 31, 2005 and 2004 the Company has the following indirect guarantees
outstanding:
|
Debtor
|
Balances
outstanding
|
||||||||||||
|
|
|
||||||||||||
|
Beneficiary
|
Name
|
Relationship
|
2005
|
2004
|
|||||||||
|
|
|
|
|
|
|||||||||
|
ThUS$
|
ThUS$
|
||||||||||||
|
Phelps
Dodge Corporation
|
SQM
Potasio S.A.
|
Subsidiary
|
—
|
957
|
|||||||||
|
BBVA
Banco Bilbao Vizcaya Argentaria
|
Royal
Seed Trading Corp. A.V.V.
|
Subsidiary
|
100,303
|
—
|
|||||||||
Note
24 – Guarantees obtained from third parties
Tattersall
Comercial S.A. has made several guarantees of up to ThUS$ 1,000 to assure
compliance of its obligations related to commercial mandate agreement for the
distribution and sale of fertilizers with Soquimich Comercial S.A.
Note
25 – Sanctions
During
2005, 2004 and 2003, the SVS did not apply sanctions to the Company, its
directors or managers.
F-40
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
26 – Environmental Projects
Disbursements
incurred by the Company during the years ended December 31, 2005, 2004 and
2003
relating to investments in production processes and compliance with
environmental regulations related to industrial processes and facilities are
as
follows:
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||
|
Project
|
||||||||||
|
Environmental
department
|
596
|
544
|
383
|
|||||||
|
Risk
and security management
|
424
|
—
|
—
|
|||||||
|
Dust
emission control
|
962
|
—
|
—
|
|||||||
|
Light
normalization
|
378
|
—
|
—
|
|||||||
|
Improvement
of mining operations
|
220
|
—
|
—
|
|||||||
|
Boratos
sewage treatment plant
|
—
|
281
|
555
|
|||||||
|
Tocopilla
project
|
—
|
615
|
792
|
|||||||
|
Engineering
and building of María Elena piles
|
—
|
2,667
|
2,014
|
|||||||
|
Treatment
plant MOP
|
—
|
208
|
208
|
|||||||
|
Other
|
811
|
1,242
|
408
|
|||||||
|
|
|
|
||||||||
|
Total
|
3,391
|
5,557
|
4,360
|
|||||||
|
|
|
|
||||||||
SQM
is
currently implementing an Environmental Management System, which is based on
the
ISO 14000 standard, with which the Company will improve its environmental
performance. The implementation program stipulates that all the operations
maintained by the Company in Regions I and II of Chile, will have a fully
implemented Environmental Management System by late 2005.
Processes
where sodium nitrate is used as a raw material are carried out in geographical
areas such as the desert with favorable weather conditions for drying solid
materials and evaporating liquids used in solar energy. The extraction of
minerals in open pit mines, given their low waste-to-mineral ratio, gives rise
to waste deposits that have little impact on the environment. The extraction
process and ore crushing produce particles that are consistent with the industry
of operation.
On
August
10, 1993, the Ministry of Health published a resolution under the Sanitary
Code
that established that the levels of breathable particles present at María Elena
Plant exceeded the level allowed for air quality and, consequently, affected
the
nearby city of María Elena. Particles mainly come from dust that results from
processing the sodium nitrate, particularly at the crushing process prior to
leaching. The Company has implemented a series of measures that have shown
notable improvement in air quality at María Elena. A new decontamination plan
was published in Decree No. 37/2004 in March 2004, and it demands to reduce
80%
of the emissions for atmospheric particulate material in two years. We design
a
new project that modifies the milling and screening systems used in the
processing of the caliche ore at María Elena facilities, which should allow for
the necessary reduction of particulate material emissions. An environmental
impact study for the project was presented to the Environment Commission and
it
was approved through Resolution No. 270 in October 2005, with a construction
program of nine months. Upon issuing the approval for the environmental impact
study, the Environmental Commission issued Decree N°53975, which authorizes this
project as the one through which we will comply with the emission reductions
asked for in Decree No. 37/2004. The project is under construction and its
start
up is scheduled for August 2006.
Company’s
ore treatment operations, as they are controlled processes, produce solid
residual materials that are the non-soluble by product and a certain degree
of
moisture.
F-41
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
26 – Environmental Projects (continued)
SQM
entered into a contract with the National Forestry Corporation (CONAF) aimed
at
researching the activities of flamingo groups that live in the Atacama Salt
Mine
lagoons. Such research includes a population count of the birds and wildlife,
breeding research, additional behavior research and the climate phenomena of
the
area.
Consistent
with the Company’s ongoing commitment with the environmental authorities, the
Company actively participates in the Joint Monitoring Research project for
the
Atacama Salt Mine watershed along with other mining companies that make use
of
the water resources that supply the Atacama Salt Mine. To perform this study,
SQM has involved diverse scientists from prestigious research institutions
such
as Dictuc of Pontificia Universidad Católica, the University of Nevada, Cornell
University and the University of Binghamton in New York.
Note
27 – Significant Events
| · |
On
January 19, 2005, the Company’s Board of Directors informed the SVS that,
in an Ordinary Session of the Board on January 18, 2005, they accepted
the
voluntary and irrevocable resignation of Mr. Avi Milstein as Director
and
appointed Mr. Daniel Yarur E. in his
place.
|
| · |
On
February 25, 2005, Royal Seed Trading Corp A.V.V., a subsidiary of
Sociedad Química y Minera de Chile S.A., entered into a syndicated loan
for ThUS$ 100,000, guaranteed by its Parent Company, with the following
banks: BBVA Securities Inc., BNP Paribas and Rabobank Curacao N.V.
The
loan matures in 5 years, with quarterly interest payments at an initial
annual interest rate of Libor + 0.325%, which could vary depending
on any
possible future modifications in the subsidiary’s external debt
classification. There are no real guarantees associated with this
loan.
|
| · |
Inversiones
El Boldo Limitada, owner of more than 10% of voting right shares
issued of
SQM S.A. and subsidiary of Potash Corporation of Saskatchewan Inc.,
on
April 25, 2005 requested from the Board of directors of SQM S.A.
that it
requests an Extraordinary Shareholders' Meeting of the Company to
vote as
to the convenience of either eliminating or not Series A and B shares
-
and preferences related to these series - in which the Company's
capital
is currently divided through the amendment of the pertinent articles
of
the Company's by-laws required to reflect this possible elimination
and;
alternately, and provided that the shareholders do not approve this
elimination, to modify article 31 of these by-laws with the purpose
of
incorporating in this article the concept of “related persons” already
included in Article 31 Bis of the aforementioned by-laws. The Company's
Board of Directors unanimously agreed on its meeting held on April
26,
2005 to summon such a meeting for May 25, 2005.
|
| · |
At
the General Ordinary Shareholders’ Meeting of April 29, 2005, the
shareholders, among others, agreed the
following:
|
| (i) |
Approved
the distribution and payment of a final dividend from 2004 net income
for
a total of Ch$ 106.56029 per share in one single payment from May
12,
2005.
|
| (ii) |
Approved
the payment of UF 50 to each member of the Board of Directors’ Committee
regardless of the number of meetings that this Committee may or not
have
during the respective month and establish an annual budget for expenses
for this Committee and its advisors of UF
1,800.
|
| (iii) |
Appoint
Wayne R. Brownlee, Hernán Büchi B., José María Eyzaguirre B., Julio Ponce
L., José Antonio Silva B., Wolf von Appen, Kendrick T. Wallace and Daniel
Yarur E. as new directors of SQM S.A. and approved remuneration payable
to
these members of the Board during the next twelve months, which are
the
same as those approved at the Company’s previous General Ordinary
Shareholders’ Meeting.
|
F-42
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
27 – Significant Events (continued)
| · |
During
July 2005, the French Arbitrage Association (“AFA”) pronounced its
sentence in the process that Compagnie du Guano de Poisson Angibaud
S.A.
and Generale de Nutrition Vegetales SAS, which are member companies
of the
Angibaud Group (“Angibaud”), filed in Paris, France during 2002 a lawsuit
against Soquimich European Holdings B.V., NU3 and SQM France S.A.,
all of
which are subsidiaries of SQM for damages that Angibaud would have
experienced due to the termination of business relationships between
both
groups of companies.
|
Angibaud
filed a lawsuit for the amount of ThEuro 30,295 and the AFA in a sentence
that partially accepted this claim ordered that
SQM pays the amount of approximately ThUS$ 6,000, including expenses and
interest to Compagnie
du Guano de Poisson Angibaud S.A. and Generale de Nutrition Vegetales
SAS.
With
no
prejudice of the foregoing, SQM has made an accrual of ThUS$ 6,000 to pay
the amounts indicated in the aforementioned sentence.
F-43
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
28 – Subsequent Events
| · |
At
the First General Extraordinary Shareholders’ Meeting of SQM Industrial
S.A. held on January 9, 2006, the shareholders approved the merger
of SQM
Procesos S.A. into SQM Industrial S.A. through the dissolution of
SQM
Procesos S.A. and its incorporation into SQM Industrial S.A., which
in
effect acquires all assets and liabilities of SQM Procesos S.A.
|
| · |
On
January 19, 2006, the Company informed the SVS that Sociedad Química y
Minera de Chile S.A. and some of its subsidiaries have acquired,
on the
same date from the DSM Group based in the Netherlands, the total
amount of
shares of certain companies that participate in the markets of the
production and commercialization of iodine and iodine derivatives
in Chile
and abroad. Accordingly, SQM has acquired the mining rights and water
rights, industrial plants, regulatory permits and other pertinent
assets
of these companies which will allow it to have proper installed capacity
to produce 2,200 additional tons of iodine per year in
Chile.
|
The
purchase price was ThUS$ 72,000 and it was paid in cash. This, with no prejudice
of certain minor adjustments that will have to be made in respect to this price
in the short-term and with no prejudice of the purchase of accounts receivable
and finished products and the charge to the values of these accounts and
products of certain liabilities that were part of the accounting records of
these three new subsidiaries of SQM S.A. - DSM Minera S.A., DSM Minera B.V.
and
Exploraciones Mineras S.A.
| · |
On
January 24, 2006, Sociedad Química y Minera de Chile S.A has placed in the
Chilean market an unguaranteed bond for the nominal amount of UF
3 million
with a term of 21 years and an annual interest rate of 4.18% to refinance
liabilities and fund investments projects for the year
2006.
|
| · |
On
January 24, 2006, Soquimich European Holding B.V. and Nutrisi Holding
N.V.
acquired 334 and 666 shares, respectively of Fertilizantes Naturales
S.A.
in ThEuro 75,100 thereby increasing their ownership to 33.35% and
66.65%,
respectively.
|
| · |
On
April 15, 2006, SQM placed in the US market a bond, of US$ 200
million with an annual interest rate of 6.125%. The interest
will be paid semi-annually and the capital will be paid in
a single
amortization in April 2016. The
Funds obtained will be used to refinance existing indebtedness
maturing in
September 2006.
|
Management
is not aware of any other significant subsequent events that have occurred
after
December 31, 2005 and that may affect the Company’s financial position or the
interpretation of these financial statements.
F-44
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles
Accounting
principles generally accepted in Chile vary in certain important respects from
accounting principles generally accepted in the United States. Such differences
involve certain methods for measuring the amounts shown in the financial
statements, as well as additional disclosures required by US GAAP.
The
principal differences Between Chilean GAAP and US GAAP are described below
together with explanations, where appropriate, of the method used in the
determination of the adjustments that affect net income and total shareholders’
equity. References below to “SFAS” are to Statements of Financial Accounting
Standards issued by the Financial Accounting Standards Board of the United
States of America.
The
preparation of financial statements in conformity with Chilean GAAP, along
with
the reconciliation to US GAAP, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
I.
Differences
in measurement methods
The
principal methods applied in the preparation of the accompanying financial
statements, which have resulted in amounts that differ from those that would
have otherwise been determined under US GAAP, are as follows:
a)
Revaluation
of property, plant and equipment
As
described in Note 2 k), certain property, plant and equipment are reported
in
the financial statements at amounts determined in accordance with a technical
appraisal performed in 1988. US GAAP does not allow the revaluation of property,
plant and equipment. The effects of the reversal of this revaluation, as well
as
of the related accumulated depreciation and depreciation charge for each year
are set-forth under paragraph I o) below.
b)
Deferred
income taxes
On
January 1, 2000 the Company began applying Technical Bulletin No. 60 (“BT 60”),
and related amendments, of the Chilean Association of Accountants concerning
deferred income taxes. These regulations require the recognition of deferred
income taxes for all temporary differences arising after January 1, 2000, using
the liability method. Prior to implementation of BT 60 and related amendments,
no deferred income taxes were recorded under Chilean GAAP if the related timing
differences were expected to be offset in the year that they were projected
to
reverse by new timing differences of a similar nature. In order to mitigate
the
effects of not recording deferred income taxes under the prior deferred income
tax accounting standard, BT 60 provided for a period of transition whereby
a
transitional provision, a contra asset or liability (referred to as
“complementary”) was recorded, offsetting the effects of the deferred tax assets
and liabilities not recorded prior to January 1, 2000. Such contra assets or
liabilities must be amortized to income over the estimated average reversal
periods corresponding to the underlying temporary differences to which the
deferred tax asset or liability relates.
For
US
GAAP purposes, the Company applies SFAS 109 Accounting for Income Taxes, whereby
income taxes are also recognized using the same asset and liability approach
with deferred income tax assets and liabilities established for temporary
differences between the financial reporting basis and tax basis of the Company’s
assets and liabilities based on enacted tax rates.
The
primary differences between Chilean GAAP and US GAAP relates to the reversal
of
complementary accounts and their amortization recorded in accordance with the
transition provisions of BT 60 as well as to the recognition of the deferred
income tax effect of US GAAP adjustments, the effect of which is set-forth
under
paragraph I o) below. Additional disclosures required under SFAS 109 are set
forth under paragraph II b) below.
F-45
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
|
c)
|
Translation
of foreign currency financial statements and price-level
restatement
|
In
accordance with Chilean GAAP, the financial statements of subsidiaries which
do
not maintain their accounting records in US dollars, are translated from local
currency to US dollars as described in Note 2 d).
For
the
purposes of reconciling to US GAAP, the Company applies SFAS 52 Foreign Currency
Translation (“SFAS 52”), which requires a functional currency translation
approach. Under SFAS 52 the Company has determined that the US dollar is the
functional currency of all domestic and foreign subsidiaries. Accordingly,
financial statements of subsidiaries, which do not maintain their accounting
records in US dollars, are remeasured into US dollars, after the elimination
of
price-level adjustments, if any, as follows:
(i)
Balance
sheet accounts:
| · |
Monetary
assets and liabilities are translated at the year-end exchange rate;
and
|
| · |
Non-monetary
assets and liabilities and shareholders' equity are translated at
historical exchange rates.
|
(ii)
Income
statement accounts:
| · |
Depreciation
and amortization expense and other accounts derived from non-monetary
assets and liabilities are translated at historical rates;
and
|
| · |
All
other accounts are translated at monthly-average exchange rates,
which
approximate the actual rates of exchange at the date the transactions
occurred.
|
Remeasurement
gains and losses are included in the determination of net income for the
period.
As
described in the Note 2 c) under Chilean GAAP financial statements of domestic
subsidiaries that maintain their records in Chilean pesos include effects of
the
inflation (price-level-restatement) in Chile. Under US GAAP Chile does not
meet
definition of highly inflationary economy and consequently effects of inflation
accounting needs to be reversed.
The
effect of eliminating price-level restatement and the effects of translation
of
financial statements of subsidiaries that maintain their records in currencies
other than US dollar are included in paragraph I o) below.
d)
Investment
in Empresas Melón S.A.
During
1998, the Company purchased a 14.05% participation in Empresas Melón S.A.,
(“Melón”) cement manufacturing company. Pursuant to a shareholders agreement,
until August of 2004 the Company exerted significant influence over Melón and
thus it accounted for this investment for both Chilean GAAP and US GAAP under
the equity method. As mentioned in Note 8 this investment was sold during 2004.
Significant adjustments between Chilean GAAP and US GAAP relating to the
investment in Melón are described below.
d-1) Purchase
accounting adjustments
At
the
time of acquisition of participation in Melón, under Chilean GAAP, the Company
recorded goodwill on the transaction, calculated as the difference between
the
purchase price and the proportionate share in the net assets acquired at their
book values. Such goodwill was being amortized over a period of 20 years.
F-46
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
d)
Investment
in Empresas Melón S.A. (continued)
Under
US
GAAP, the Company calculated goodwill as the difference between the purchase
price and the proportionate participation in the fair values of the assets
acquired and liabilities assumed. As a result proportionate share in the Melón’s
net assets measured at fair values exceeded acquisition cost. In accordance
with
US GAAP such difference was allocated to property, plant and equipment acquired,
reducing the accounting base, and consequently the depreciation of those assets.
The
effects of reversing goodwill and its related amortization recorded under
Chilean GAAP and the recognition of the new basis of assets and liabilities
and
subsequent depreciation are set forth in paragraph I o) below.
|
d-2)
|
Accounting for participation in Melón on US GAAP
basis
|
Within
the period in which SQM exerted significant influence over Melón it recognized
its participation of income (loss) and net assets of that entity using equity
method. For the purposes of the Company’s US GAAP reconciliation US GAAP
information of Melón was prepared. The principle differences between Chilean
GAAP and US GAAP in Melón related to deferred taxes and the elimination of
price-level restatement.
In
addition under US GAAP the financial statements of Melón were converted into
dollars in accordance with SFAS 52 as described in paragraph c) above. The
effect of recognizing income and net assets under the equity method under US
GAAP and effects of conversion to US dollars in accordance with SFAS 52 are set forth
in paragraph I o) below.
|
d-3)
|
Sale of investment in Melón on US GAAP
basis
|
As
discussed above in 2004 the Company sold its participation in Melón. As a result
of differences in purchase accounting and subsequent measuring of income from
the investment as discussed in points d-1) and d-2) above value of investment
sold was different for Chilean GAAP and for US GAAP. Consequently adjustment
to
the result of the sale of participation in Melón is included in the
reconciliation to US GAAP in paragraph I o) below.
e)
Consolidation
of subsidiaries in the development stage
Under
Chilean GAAP subsidiaries in the development stage are not consolidated and
their results from operations are not included in the consolidated income
statement. For purposes of US GAAP, these subsidiaries must be consolidated
and
their results should be recorded in the income statement. Until June 30, 2004,
SQM Lithium Specialties LLP was the development stage company. The effects
of
recognizing its net loss for the years ended December 31, 2003 and 2004 is
set
forth in paragraph I o) below.
|
f)
|
Minimum
Dividend
|
As
required by the Chilean Companies Act, unless otherwise decided by the unanimous
vote of the holders of issued and subscribed shares, an open stock corporation
must distribute a cash dividend in an amount equal to at least 30% of the
company’s net income before amortization of negative goodwill for each year as
determined in accordance with Chilean GAAP, unless and except to the extent
the
Company has unabsorbed prior year losses. Since the payment of the 30% dividend
out of each year’s income is a legal requirement in Chile, a provision has been
made in the accompanying US GAAP reconciliation in paragraph I o) below to
recognize the corresponding decrease in net equity at December 31 for each
year
for the difference between 30% of net income and interim dividends paid during
the year.
Net
income related to the amortization of negative goodwill can only be distributed
as an additional dividend by the approval of the shareholders, and accordingly,
is not included in the calculation of the minimum dividend to be
distributed.
F-47
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 –
Differences
between Chilean and United States Generally Accepted
Accounting Principles (continued)
|
g)
|
Loans
to Employees
|
During
1989, 1995 and 2000, the Company loaned, in the aggregate, ThUS$ 1,452, ThUS$
8,224 and ThUS$ 6,435, respectively, at market interest rates, to certain
employees for the purpose of acquiring shares of the Company in the open market.
In accordance with US GAAP, the remaining unpaid balance of such loans,
amounting to ThUS$ 288, ThUS$ 764 and ThUS$ 1,102 at December 31, 2005, 2004
and
2003, respectively, has been treated as a reduction of shareholders' equity
under paragraph I o) below.
|
h)
|
Staff
Severance Indemnities
|
The
Company has negotiated certain collective bargaining agreements with employees
for staff severance indemnities. Under Chilean GAAP the liability has been
recorded at the present value of the accrued benefits which are calculated
by
applying a real discount rate to the benefit accrued over the estimated average
remaining service period.
|
h)
|
Staff
Severance Indemnities
(continued)
|
Under
US
GAAP, termination indemnity employee benefits should be accounted for in
accordance with SFAS 87 consistent with that of a defined benefit pension
plan, measuring
the liability by projecting the future expected severance payments using
an assumed salary progression rate, net of inflation adjustments, mortality
and
turnover assumptions, and discounting the resulting amounts to their present
value using real interest rates. The effect of accounting for the indemnities
in
accordance with SFAS 87 is set forth under paragraph I o) below. Additional
disclosure requirements are presented in paragraph II m) below.
|
i)
|
Marketable
securities
|
The
Company’s marketable securities may be sold in the short term if appropriate
based on market conditions. Under Chilean GAAP, these securities are valued
at
the lower of cost or market value. Under US GAAP such securities are classified
as available-for-sale and are shown at market value in the balance sheet with
any unrealized gains or losses recognized in other comprehensive income. The
unrealized gains and losses related to these securities are not material for
the
periods presented.
|
j)
|
Derivatives
|
In
June
1998, the Financial Accounting Standards Board issued SFAS 133 Accounting
for Derivative Instruments and Hedging Activities
(“SFAS
133”). SFAS 133 requires that all of a company’s derivative instruments be
recorded in the balance sheet at fair value and that changes in a derivative
instrument's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative instrument's gains and losses to offset related results
on
the hedged item in the income statement, to the extent effective, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting
| j-1) |
Sale
of swaps
|
During
2000, the Company sold three interest rate swap contracts with original
expiration dates in 2001 and 2003, which generated a gain of ThUS$3,213. Under
Chilean GAAP, the gain was recognized in income at the time of sale. Under
US
GAAP, the gain is deferred and amortized over the effective life of the
instruments that it hedged. The effect of deferring the gain is set forth under
paragraph I p) below.
F-48
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
|
j)
|
Derivatives
(continued)
|
| j-2) |
Fair
value accounting of
derivatives
|
The
Company enters into forward exchange and currency option contracts principally
to mitigate the risk associated with maintaining certain accounts receivable
in
foreign currencies. The purpose of the Company's foreign currency-hedging
activities is to protect the Company from the risk that cash flows will be
adversely affected by changes in exchange rates resulting from the collection
of
receivables from international customers. The effects of accounting for
derivatives under Chilean GAAP are recorded in income.
The
Company periodically uses interest rate swap agreements to manage interest
rate
risk on its floating rate debt portfolio. Interest rate swap agreements are
generally entered into at the time floating rate debt is issued, in order to
convert the floating rate debt to a fixed rate. As of December 31, 2005 the
Company had no interest rate swap contracts in place.
The
Company does not have the documentation and hedge effectiveness to qualify
for
hedge accounting, as required under SFAS 133. Therefore all derivatives have
been accounted at fair value with changes in fair value recorded in
income.
The
effect of measuring the derivative instruments at their fair value and the
corresponding effect in income is set forth under paragraph I o)
below.
|
k)
|
Business
combinations and Goodwill
|
Under
Chilean GAAP, goodwill is amortized over the estimated period of return of
the
investment made. Impairment tests are only performed if there is evidence of
impairment. No impairment has been recognized for any of the periods presented
under either Chilean GAAP or US GAAP.
For
US
GAAP purposes, the Company adopted SFAS 142 Goodwill and Other Intangible Assets
(“SFAS 142”), as of January 1, 2002, and did not amortize goodwill related to
acquisitions made after June 30, 2001.
The
Company has performed the required annual impairment test, which did not result
in any impairment.
The
effect of reversing the amortization of goodwill under Chilean GAAP is set
forth
under paragraph I o) below.
|
l)
|
Negative
goodwill
|
Under
Chilean GAAP until December 31, 2003, negative goodwill was calculated as the
excess of the net assets acquired in a business combination transaction over
the
purchase price. Beginning January 1, 2004, the Company adopted Technical
Bulletin No. 72 of the Chilean Association of Accountants that changes the
basis
for accounting for negative goodwill, introducing the fair value of the acquired
net assets as the basis to be compared with purchase price in order to determine
goodwill or negative goodwill.
Negative
goodwill recognized under Chilean GAAP was generated on the acquisition of
the
investments in SQM Salar S.A. and Minera Mapocho S.A. Under Chilean GAAP, such
negative goodwill was capitalized as a credit to the balance sheet and is being
amortized over a period of 10 years.
F-49
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
|
l)
|
Negative
goodwill (continued)
|
Under
US
GAAP, prior to the adoption of SFAS 142, negative goodwill was considered as
a
reduction of the long-term assets of the acquired company, and if a credit
remained after reducing those assets to zero, negative goodwill was recorded
and
amortized over the period of expected benefit. However, in the period of
adoption, SFAS 141, Business Combinations requires that unamortized negative
goodwill be written off and the resulting gain be recognized as an effect of
a
change in accounting principle. The effects of reversing goodwill recorded
and
its related amortization, the recognition of the new basis of assets and
liabilities and subsequent depreciation and writing off the remaining balance
of
negative goodwill are set-forth in paragraph I o) below as follows:
| l-1: |
The
reversal of negative goodwill amortization recorded under Chilean
GAAP.
|
| l-2: |
The
effects of reducing depreciation expense, due to the allocation of
the
excess purchase price to property, plant and
equipment;
|
|
m)
|
Capitalized
interest
|
In
accordance with Chilean GAAP, only those legal entities that have financial
expenses may capitalize interests on debt related to property, plant, equipment
under construction and other projects.
Under
US
GAAP, the capitalization of interest on qualifying assets under construction
is
required, regardless of whether interest is associated with debt directly
related to a project. The accounting differences between Chilean and US GAAP
for
financing costs and the related depreciation expense are included in the
reconciliation to US GAAP under paragraph I o) below.
|
n)
|
Minority
interest
|
The
effects on the minority interest of the US GAAP adjustments in subsidiaries
that
are not wholly-owned by the Company have been reflected in Minority interest
and
are included in paragraph I o) below.
F-50
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| o) |
Effects
of conforming to US GAAP
|
The
adjustments to reported net income required to conform to US GAAP are as
follows:
|
For
the years ended December 31,
|
||||||||||
|
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||
|
Net
income in accordance with Chilean GAAP
|
113,506
|
74,232
|
46,753
|
|||||||
|
Revaluation
of property, plant and equipment (paragraph a)
|
2,132
|
4,367
|
4,580
|
|||||||
|
Deferred
income taxes (paragraph b)
|
2,236
|
6,022
|
5,917
|
|||||||
|
Translation
of foreign currency financial statements (paragraph c)
|
8,994
|
5,318
|
7,455
|
|||||||
|
Purchase
accounting adjustments - Empresas Melón S.A. (paragraph
d-1)
|
—
|
(34
|
)
|
(264
|
)
|
|||||
|
Accounting
for participation in Melón on US GAAP basis (paragraph
d-2)
|
—
|
(467
|
)
|
250
|
||||||
|
Cost
of sale of Empresas Melón S.A. on US
GAAP basis (paragraph d)
|
—
|
2,336
|
—
|
|||||||
|
Consolidation
of subsidiaries in the development stage (paragraph e)
|
—
|
(1,851
|
)
|
(2,858
|
)
|
|||||
|
Staff
severance indemnities (paragraph h)
|
(836
|
)
|
(618
|
)
|
(1,902
|
)
|
||||
|
Derivatives
- sale of swaps (paragraph j-1)
|
—
|
—
|
175
|
|||||||
|
Derivatives
- fair value accounting of derivatives (paragraph j-2)
|
1,483
|
(1,483
|
)
|
309
|
||||||
|
Goodwill
(paragraph k)
|
1,718
|
749
|
631
|
|||||||
|
Negative
goodwill (paragraph l)
|
||||||||||
|
l-1:
Reversal of negative goodwill amortization
|
(203
|
)
|
(213
|
)
|
(370
|
)
|
||||
|
l-2:
Depreciation of property, plant and equipment
|
113
|
123
|
104
|
|||||||
|
Capitalized
interest (paragraph m)
|
(91
|
)
|
(91
|
)
|
—
|
|||||
|
Minority
interest (paragraph n)
|
(3,576
|
)
|
(2,115
|
)
|
(3,041
|
)
|
||||
|
Deferred
income tax effect of the above US GAAP adjustments
|
(272
|
)
|
551
|
35
|
||||||
|
|
|
|
||||||||
|
Net income
under US GAAP
|
125,204
|
86,826
|
57,774
|
|||||||
|
|
|
|
||||||||
|
Other
comprehensive income (loss), net of tax:
|
||||||||||
|
Minimum
pension liability adjustment
|
792
|
(15
|
)
|
370
|
||||||
|
Translation
adjustment
|
—
|
6,460
|
8,802
|
|||||||
|
Deferred
gain from sale of swaps (paragraph j-1)
|
—
|
—
|
(146
|
)
|
||||||
|
|
|
|
||||||||
|
Total
comprehensive income under US GAAP
|
125,996
|
93,271
|
66,800
|
|||||||
|
|
|
|
||||||||
F-51
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| o) |
Effects
of conforming to US GAAP
(continued)
|
The
adjustments required to conform shareholders' equity amounts under Chilean
GAAP
to US GAAP are as follows:
|
As
of December 31,
|
|||||||
|
|
|||||||
|
2005
|
2004
|
||||||
|
|
|
||||||
|
ThUS$
|
ThUS$
|
||||||
|
Shareholders’
equity in accordance with Chilean GAAP
|
1,020,416
|
948,628
|
|||||
|
Revaluation
of property, plant and equipment: (paragraph a)
|
|||||||
|
a-1:
Property, plant and equipment
|
(133,768
|
)
|
(133,768
|
)
|
|||
|
a-2:
Accumulated depreciation
|
99,729
|
97,597
|
|||||
|
Deferred
income taxes (paragraph b)
|
(26,648
|
)
|
(28,884
|
)
|
|||
|
Translation
of foreign currency financial statements (paragraph c)
|
|||||||
|
c-1:
Property, plant and equipment, net
|
(2,377
|
)
|
(1,637
|
)
|
|||
|
c-2:
Accumulated depreciation
|
921
|
722
|
|||||
|
c-3:
Inventory
|
(728
|
)
|
(1,198
|
)
|
|||
|
c-4:
Goodwill, net
|
(408
|
)
|
(297
|
)
|
|||
|
Minimum
dividend (paragraph f)
|
(34,053
|
)
|
(22,270
|
)
|
|||
|
Employer
loans used to purchase shares (paragraph g)
|
(288
|
)
|
(764
|
)
|
|||
|
Staff
severance indemnities (paragraph h)
|
(4,926
|
)
|
(4,090
|
)
|
|||
|
Fair
value of derivatives (paragraph j-2)
|
—
|
(1,483
|
)
|
||||
|
Goodwill
(paragraph k)
|
3,813
|
2,094
|
|||||
|
Negative
goodwill: (paragraph l)
|
|||||||
|
l-1:
Property, plant and equipment
|
(3,156
|
)
|
(3,156
|
)
|
|||
|
l-1:
Accumulated depreciation of property, plant and equipment
|
1,796
|
1,683
|
|||||
|
l-2:
Negative goodwill
|
3,156
|
3,156
|
|||||
|
l-2:
Accumulated amortization of negative goodwill
|
(3,088
|
)
|
(2,885
|
)
|
|||
|
Capitalized
interest (paragraph m)
|
|||||||
|
m-1:
Property, plant and equipment
|
1,643
|
1,643
|
|||||
|
m-2:
Accumulated depreciation
|
(182
|
)
|
(91
|
)
|
|||
|
Effect
of minority interest on US GAAP adjustments (paragraph n)
|
1,001
|
1,009
|
|||||
|
Deferred
income tax effect of the above US GAAP adjustments
|
589
|
862
|
|||||
|
|
|
||||||
|
Shareholders'
equity in accordance with US GAAP
|
923,442
|
856,871
|
|||||
|
|
|
||||||
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| o) |
Effects
of conforming to US GAAP,
continued
|
The
changes in the Shareholders’ equity accounts determined under US GAAP are
summarized as follows:
|
ThUS$
|
||||
|
|
||||
|
Balance
at January 1, 2003
|
747,332
|
|||
|
Reversal
of accrued minimum divided at December 31, 2002
|
11,685
|
|||
|
Distribution
of final 2002 dividend
|
(19,894
|
)
|
||
|
Accrued
minimum dividend at December 31, 2003
|
(14,026
|
)
|
||
|
Employer
loans used to purchase shares
|
2,801
|
|||
|
Other
comprehensive income
|
9,026
|
|||
|
Net
income for the year
|
57,774
|
|||
|
|
||||
|
Balance
at December 31, 2003
|
794,698
|
|||
|
|
||||
|
Reversal
of accrued minimum divided at December 31, 2003
|
14,026
|
|||
|
Distribution
of final 2003 dividend
|
(23,192
|
)
|
||
|
Accrued
minimum dividend at December 31, 2004
|
(22,270
|
)
|
||
|
Employer
loans used to purchase shares
|
338
|
|||
|
Other
comprehensive income
|
6,445
|
|||
|
Net
income for the year
|
86,826
|
|||
|
|
||||
|
Balance
at December 31, 2004
|
856,871
|
|||
|
|
||||
|
Reversal
of accrued minimum divided at December 31, 2004
|
22,270
|
|||
|
Distribution
of final 2004 dividend
|
(48,118
|
)
|
||
|
Accrued
minimum dividend at December 31, 2005
|
(34,053
|
)
|
||
|
Employer
loans used to purchase shares
|
476
|
|||
|
Other
comprehensive income
|
792
|
|||
|
Net
income for the year
|
125,204
|
|||
|
|
||||
|
Balance
at December 31, 2005
|
923,442
|
|||
|
|
||||
F-53
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| II. |
Additional
Disclosure Requirements
|
The
following disclosures are not generally required or recommended for presentation
in the financial statements under Chilean GAAP, but are required under US
GAAP:
| a) |
Earnings
per share
|
The
following disclosure of earnings per share information is not generally required
for presentation in financial statements under Chilean accounting principles
but
is required under US GAAP:
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
(Expressed
in single US dollars)
|
||||||||||
|
Basic
and diluted earnings per share under Chilean GAAP
|
0.43
|
0.28
|
0.18
|
|||||||
|
Basic
and diluted earnings per share under US GAAP
|
0.48
|
0.33
|
0.22
|
|||||||
|
|
|
|
||||||||
|
Dividends
declared per share (1)
|
0.28
|
0.18
|
0.09
|
|||||||
|
Weighted
average number of common shares outstanding (thousands)
|
263,197
|
263,197
|
263,197
|
|||||||
| (1) |
Represents
dividends declared and paid in accordance with Chilean
GAAP.
|
The
earnings per share data shown above is determined by dividing net income for
both Chilean GAAP and US GAAP purposes by the weighted average number of shares
of common stock outstanding during each year. For the years presented the
Company did not have convertible securities outstanding.
| b) |
Income
taxes
|
The
provision for income taxes differs from the amount of income tax determined
by
applying the applicable Chilean statutory income tax rate to pretax accounting
income on a US GAAP basis as a result of the following differences:
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||
|
Consolidated
pretax income under US GAAP
|
160,382
|
114,815
|
74,573
|
|||||||
|
Statutory
tax rate
|
17
|
%
|
17
|
%
|
16.5
|
%
|
||||
|
|
|
|
||||||||
|
Theoretical
tax at statutory rate
|
27,265
|
19,519
|
12,305
|
|||||||
|
Non-deductible
items
|
892
|
91
|
(2,325
|
)
|
||||||
|
Difference
in tax rates in foreign jurisdictions
|
1,056
|
553
|
360
|
|||||||
|
Valuation
allowance
|
1,350
|
572
|
(236
|
)
|
||||||
|
Other
|
—
|
—
|
||||||||
|
|
|
|
||||||||
|
Total
income tax under US GAAP
|
30,563
|
20,735
|
10,104
|
|||||||
|
|
|
|
||||||||
F-54
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| b) |
Income
taxes (continued)
|
Deferred
tax assets (liabilities) are summarized as follows at December 31 under US
GAAP.:
|
2005
|
2004
|
||||||
|
|
|
||||||
|
ThUS$
|
ThUS$
|
||||||
|
Deferred
Tax Assets
|
|||||||
|
Allowance
for doubtful debts
|
1,965
|
1,710
|
|||||
|
Vacation
accrual
|
1,322
|
1,165
|
|||||
|
Unrealized
gains on sales of products
|
15,053
|
8,749
|
|||||
|
Provision
for obsolescence
|
2,075
|
1,836
|
|||||
|
Losses
from derivative transactions
|
—
|
336
|
|||||
|
Tax
loss carryforwards (1)
|
40,624
|
36,472
|
|||||
|
Fair
value acquisition adjustments
|
2,535
|
—
|
|||||
|
Other
accruals
|
5,445
|
3,451
|
|||||
|
|
|
||||||
|
Gross
deferred tax assets
|
69,019
|
53,719
|
|||||
|
Valuation
allowance
|
(35,706
|
)
|
(35,665
|
)
|
|||
|
|
|
||||||
|
Total
deferred tax assets
|
33,313
|
18,054
|
|||||
|
|
|
||||||
|
Deferred
Tax Liabilities
|
|||||||
|
Production
expenses
|
(18,123
|
)
|
(15,172
|
)
|
|||
|
Accelerated
depreciation
|
(58,031
|
)
|
(53,890
|
)
|
|||
|
Staff
severance indemnities
|
(1,611
|
)
|
(866
|
)
|
|||
|
Exploration
expenses
|
(5,375
|
)
|
(5,336
|
)
|
|||
|
Capitalized
interest
|
(6,288
|
)
|
(6,113
|
)
|
|||
|
Other
|
(329
|
)
|
(740
|
)
|
|||
|
|
|
||||||
|
Total
deferred tax liabilities
|
(89,757
|
)
|
(82,117
|
)
|
|||
|
|
|
||||||
| (1) |
The
Company’s tax loss carry forwards were primarily generated from losses
incurred in Chile and Mexico. In accordance with current laws,
in Chile
tax losses may be carried forward indefinitely and in Mexico they
expire
after 10 years. For the years ended December 31, 2005, 2004 and
2003 the
Company realized benefits from the use of tax loss carry forwards
amounting to ThUS$ 3,541, ThUS$ 9,324 and ThUS$ 6,567, respectively.
|
Tax
loss
carry forwards relate to the following countries as of December 31:
|
2005
|
2004
|
||||||
|
|
|
||||||
|
ThUS$
|
ThUS$
|
||||||
|
Chile
|
38,385
|
31,081
|
|||||
|
Mexico
|
—
|
3,833
|
|||||
|
Other
|
2,239
|
1,558
|
|||||
|
|
|
||||||
|
Total
|
40,624
|
36,472
|
|||||
|
|
|
||||||
F-55
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as
stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| b) |
Income
taxes (continued)
|
The
classification of the net deferred tax assets and liabilities detailed above
is
as follows:
|
2005
|
2004
|
||||||
|
|
|
||||||
|
ThUS$
|
ThUS$
|
||||||
|
Short-term
|
1,020
|
(10,264
|
)
|
||||
|
Long-term
|
(57,464
|
) |
(53,799
|
)
|
|||
|
|
|
||||||
|
Net
deferred tax liabilities
|
(56,444
|
)
|
(64,063
|
)
|
|||
|
|
|
||||||
The
provision for income taxes in accordance with US GAAP is as
follows:
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||
|
Income
tax expense under Chilean GAAP (Note 13)
|
32,527
|
27,308
|
16,056
|
|||||||
|
Additional
deferred tax under US GAAP
|
272
|
(551
|
)
|
(35
|
)
|
|||||
|
Reversal
of amortization of complementary accounts
|
(2,236
|
)
|
(6,022
|
)
|
(5,917
|
)
|
||||
|
|
|
|
||||||||
|
Total
tax provision US GAAP
|
30,563
|
20,735
|
10,104
|
|||||||
|
|
|
|
||||||||
In
accordance with Chilean Law No, 19,753, which was issued on September 28, 2001,
the corporate income tax rate was 16.5% for the year 2003, and 17% for the
year
2004 and thereafter.
US
GAAP
before tax income related to Chile and foreign operations for the years ended
December 31 is as follows:
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||
|
Chile
|
134,411
|
113,683
|
59,625
|
|||||||
|
Foreign
|
25,972
|
1,132
|
14,948
|
|||||||
|
|
|
|
||||||||
|
Total
|
160,382
|
114,815
|
74,573
|
|||||||
|
|
|
|
||||||||
The
portion of current and deferred income taxes charged to income statements that related to Chile and foreign
operations for the years ended December 31 in accordance with US GAAP is as
follows:
|
2005
|
2004
|
2003
|
||||||||||||||||||||||||||
|
|
|
|
||||||||||||||||||||||||||
|
Deferred
|
Current
|
Total
|
Deferred
|
Current
|
Total
|
Deferred
|
Current
|
Total
|
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||||||||||||||
|
Chile
|
(5,777
|
)
|
33,537
|
27,760
|
5,045
|
14,001
|
19,046
|
7,193
|
1,301
|
8,494
|
||||||||||||||||||
|
Foreign
|
(1,088
|
)
|
3,891
|
2,803
|
1,255
|
434
|
1,689
|
711
|
899
|
1,610
|
||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Total
|
(6,865
|
)
|
37,428
|
30,563
|
6,300
|
14,435
|
20,735
|
7,904
|
2,200
|
10,104
|
||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
F-56
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| c) |
Other
Comprehensive Income
|
In
accordance with SFAS No. 130 Reporting
Comprehensive Income,
the
Company reports a measure of all changes in shareholders’ equity that result
from transactions and other economic events of the period other than
transactions with owners (“comprehensive income”). Comprehensive income is the
total net income and other non-owner equity transactions that result in changes
in net equity,
The
following represents accumulated other comprehensive income balances, net of
tax, as of December 31, 2003, 2004 and 2005:
|
Year
ended December 31, 2003
|
||||||||||
|
|
||||||||||
|
Before-tax
amount
|
Tax
(expense)
or
benefit
|
Net-of-tax
amount
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||
|
Beginning
balance
|
(16,934
|
)
|
671
|
(16,263
|
)
|
|||||
|
Translation
adjustment
|
8,802
|
—
|
8,802
|
|||||||
|
Deferred
gain on sale of swaps
|
(175
|
)
|
29
|
(146
|
)
|
|||||
|
Minimum
pension liability adjustment
|
597
|
(227
|
)
|
370
|
||||||
|
|
|
|
||||||||
|
Net
change
|
9,224
|
(198
|
)
|
9,026
|
||||||
|
|
|
|
||||||||
|
Ending
balance
|
(7,710
|
)
|
473
|
(7,237
|
)
|
|||||
|
|
|
|
||||||||
|
Year
ended December 31, 2004
|
||||||||||
|
|
||||||||||
|
Before-tax
amount
|
Tax
(expense)
or
benefit
|
Net-of-tax
amount
|
||||||||
|
|
|
|
||||||||
|
|
ThUS$
|
ThUS$
|
ThUS$
|
|||||||
|
Beginning
balance
|
(7,710
|
)
|
473
|
(7,237
|
)
|
|||||
|
Translation
adjustment
|
6,460
|
—
|
6,460
|
|||||||
|
Minimum
pension liability adjustment
|
(24
|
)
|
9
|
(15
|
)
|
|||||
|
Net
change
|
6,436
|
9
|
6,445
|
|||||||
|
|
|
|
||||||||
|
Ending
balance
|
(1,274
|
)
|
482
|
(792
|
)
|
|||||
|
|
|
|
||||||||
|
Year
ended December 31, 2005
|
||||||||||
|
|
||||||||||
|
Before-tax
amount
|
Tax
(expense)
or
benefit
|
Net-of-tax
amount
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||
|
Beginning
balance
|
(1,274
|
)
|
482
|
(792
|
)
|
|||||
|
Translation
adjustment
|
—
|
—
|
—
|
|||||||
|
Minimum
pension liability adjustment
|
1,274
|
(482
|
)
|
792
|
||||||
|
|
|
|
||||||||
|
Net
change
|
1,274
|
(482
|
)
|
792
|
||||||
|
|
|
|
||||||||
|
Ending
balance
|
—
|
—
|
—
|
|||||||
|
|
|
|
||||||||
F-57
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| d) |
Credit
Agreements
|
The
Company has renewable lines of credit arrangements for short-term US dollar
borrowings with various Chilean and foreign banks totaling, in the aggregate
to
ThUS$ 554,000 and ThUS$ 449,000 at December 31, 2005 and 2004, respectively.
There was US$ 469 million and US$ 435 million available as of December 31,
2005
and 2004, respectively. The Company pays no commitment fees on such credit
lines
and the average rate was LIBOR plus 0,40%.
| e) |
Lease
commitments
|
The
Company leases office facilities by way of a capital lease payable in
installments through 2011, with a bargain purchase option at the end of the
lease.
Minimum
lease payments under capital leases are recorded in Other accounts payable
and
are as follows:
|
Minimum
lease
payments
|
||||
|
|
||||
|
Year
ended December 31,
|
ThUS$
|
|||
|
2006
|
279
|
|||
|
2007
|
455
|
|||
|
2008
|
455
|
|||
|
2009
|
175
|
|||
|
2010
|
175
|
|||
|
Thereafter
|
21
|
|||
|
|
||||
|
Total
future minimum lease payments
|
1,560
|
|||
|
|
||||
|
Interest
|
(311
|
)
|
||
|
|
||||
|
Present
value of net minimum lease payments
|
1,249
|
|||
|
|
||||
F-58
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 –
Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| e) |
Lease
commitments (continued)
|
SQM
Salar
S.A., a consolidated subsidiary of the Company, entered into a contract with
a
government agency for the rental of land for the purpose of exploration and
exploitation of certain minerals. Rental payments are stated in US dollars
and
are determined based on actual mineral sales through 2030 in accordance with
specified rates in the agreement. Based on the agreement the Company paid ThUS$
6,752, ThUS$ 4,910 and ThUS$ 4,024 in 2005, 2004 and 2003 respectively,
including the minimum annual rental, which was ThUS$ 4,172, ThUS$ 3,477 and
ThUS$ 2,995 for 2005, 2004 and 2003, respectively. Future minimum annual rentals
are as follows:
|
Minimum
annual
rentals
|
||||
|
|
||||
|
Year
ended December 31,
|
ThUS$
|
|||
|
2006
|
3,945
|
|||
|
2007
|
3,945
|
|||
|
2008
|
3,945
|
|||
|
2009
|
3,945
|
|||
|
2010
|
3,945
|
|||
|
Thereafter
|
78,905
|
|||
|
|
||||
|
Total
|
98,630
|
|||
|
|
||||
| f) |
Foreign
exchange gain and
losses
|
For
US
GAAP presentation purposes, the net foreign exchange gains and losses on
transactions in foreign currencies and UF amounted to ThUS$ 5,391, ThUS$ 3,000
and ThUS$ 14,036 in 2005, 2004 and 2003, respectively.
| g) |
Concentration
of credit risk
|
Financial
instruments, which potentially subject the Company to significant concentrations
of credit risk, consist principally of cash, investments and trade accounts
receivable.
The
Company maintains cash and cash equivalents, marketable securities, and certain
other financial instruments with various financial institutions, These financial
institutions are located in Chile and other parts of the world, and the
Company’s policy is designed to limit exposure to any one institution, The
Company performs periodic evaluations of the relative credit standing of these
financial institutions as part of the Company's investment
strategy.
Concentrations
of credit risk with respect to trade accounts receivable are limited because
of
the large number of entities comprising the Company's customer base and their
dispersion around the world. The Company’s policy is to require collateral (such
as letters of credit, guarantee clause or others) and/or maintain credit
insurances for certain accounts as deemed necessary by
management.
F-59
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| h) |
Advertising
and Research and development
costs
|
Advertising
costs are expensed as incurred and amounted to ThUS$ 1,389 , ThUS$ 1,719 and
ThUS$ 1,346 for the years ended December 31, 2005, 2004 and 2003,
respectively.
Research
and development costs are expensed as incurred and amounted to ThUS$ 2,480
,
ThUS$ 1,803 and ThUS$ 1,444 for the years ended December 31, 2005, 2004 and
2003.
| i) |
Business
combinations and goodwill
|
As
described in paragraph I k) above the Company adopted SFAS 142 as of January
1,
2002, SFAS 142 applies to all goodwill and identified intangible assets acquired
in a business combination.
Goodwill
under US GAAP as of December 31 is summarized as follows:
|
2005
|
2004
|
||||||
|
|
|
||||||
|
ThUS$
|
ThUS$
|
||||||
|
Goodwill
|
30,528
|
19,181
|
|||||
|
Accumulated
amortization and impairment
|
(1,425
|
)
|
(1,425
|
)
|
|||
|
|
|
||||||
|
Goodwill,
net
|
29,103
|
17,756
|
|||||
|
|
|
||||||
F-60
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| j) |
Reclassification
differences between Chilean GAAP and US
GAAP
|
| (i) |
Non-operating
income and expense under US GAAP calculated in accordance with Chilean
GAAP
|
The
following reclassifications are required to conform the presentation of Chilean
GAAP income statement information to that required under US GAAP. The
reclassification amounts are determined in accordance with Chilean
GAAP.
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||
|
Non-operating
income under Chilean GAAP
|
16,433
|
20,829
|
18,654
|
|||||||
|
Less:
|
||||||||||
|
Sale
of mining concessions
|
298
|
635
|
135
|
|||||||
|
Sale
of material and services
|
438
|
190
|
628
|
|||||||
|
Insurance
recoveries
|
213
|
546
|
154
|
|||||||
|
Write-off
of liabilities
|
2,204
|
388
|
422
|
|||||||
|
Payment
discount obtained from suppliers
|
1,026
|
452
|
606
|
|||||||
|
Rental
of property, plant and equipment
|
1,015
|
774
|
736
|
|||||||
|
Compensation
obtained from third parties
|
737
|
—
|
—
|
|||||||
|
Other
income
|
1,899
|
1,118
|
897
|
|||||||
|
|
|
|
||||||||
|
Non-operating
income as classified under US GAAP, but calculated in accordance
with
Chilean GAAP
|
8,603
|
16,726
|
15,076
|
|||||||
|
|
|
|
||||||||
|
Non-operating
expenses under Chilean GAAP
|
50,755
|
38,420
|
39,813
|
|||||||
|
Less:
|
||||||||||
|
Amortization
of goodwill
|
2,070
|
1,073
|
1,134
|
|||||||
|
Work
disruption expenses
|
584
|
568
|
1,640
|
|||||||
|
Increase
in allowance for doubtful accounts
|
151
|
2,500
|
687
|
|||||||
|
Non-capitalizable
exploration project expenses and provisions for damages and liquidation
of assets
|
13,489
|
9,262
|
8,965
|
|||||||
|
Unrecoverable
taxes
|
647
|
531
|
690
|
|||||||
|
Provision
for compensation and legal costs
|
7,986
|
533
|
1,442
|
|||||||
|
Change
of discount rate for staff severance indemnities provision
|
678
|
—
|
—
|
|||||||
|
Allowances
for materials, spare parts and supplies
|
1,188
|
1,628
|
881
|
|||||||
|
Consulting
services
|
314
|
175
|
282
|
|||||||
|
Donations
|
896
|
533
|
235
|
|||||||
|
Penalties
|
238
|
161
|
415
|
|||||||
|
Other
expenses
|
1,570
|
1,812
|
1,664
|
|||||||
|
|
|
|
||||||||
|
Non-operating
expense as classified under US GAAP, but calculated in accordance
with
Chilean GAAP
|
20,944
|
19,644
|
21,778
|
|||||||
|
|
|
|
||||||||
F-61
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| j) |
Reclassification
differences between Chilean GAAP and US GAAP
(continued)
|
(ii)
Condensed financial statements under US GAAP
The
following are summarized balance sheets of the Company using a US GAAP
presentation and amounts determined in accordance with US GAAP:
|
As
of December 31,
|
|||||||
|
|
|||||||
|
2005
|
2004
|
||||||
|
|
|
||||||
|
Assets
|
ThUS$
|
ThUS$
|
|||||
|
Current
assets
|
743,692
|
573,524
|
|||||
|
Property,
plant and equipment
|
1,287,448
|
1,137,524
|
|||||
|
Accumulated
depreciation
|
(528,195
|
)
|
(479,769
|
)
|
|||
|
|
|
||||||
|
Property
plant and equipment, net
|
759,253
|
657,755
|
|||||
|
Goodwill
|
29,103
|
17,756
|
|||||
|
Other
assets
|
76,947
|
69,368
|
|||||
|
|
|
||||||
|
Total
assets
|
1,608,995
|
1,318,403
|
|||||
|
|
|
||||||
|
Liabilities
and shareholders’ equity
|
|||||||
|
Current
liabilities
|
464,852
|
157,328
|
|||||
|
Long-term
liabilities
|
186,193
|
270,783
|
|||||
|
Minority
interest
|
34,508
|
33,421
|
|||||
|
Shareholders’
equity
|
923,442
|
856,871
|
|||||
|
|
|
||||||
|
Total
liabilities and shareholders’ equity
|
1,608,995
|
1,318,403
|
|||||
|
|
|
||||||
F-62
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| j) |
Reclassification
differences between Chilean GAAP and US GAAP
(continued)
|
The
condensed consolidated statements of income for the years ended December 31
under US GAAP and classified in accordance with US GAAP are presented as
follows:
|
For
the years ended December 31,
|
||||||||||
|
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
Operating
income
|
ThUS$
|
ThUS$
|
ThUS$
|
|||||||
|
Sales
|
895,970
|
788,516
|
691,806
|
|||||||
|
Cost
of sales
|
(670,213
|
)
|
(618,213
|
)
|
(564,495
|
)
|
||||
|
|
|
|
||||||||
|
Gross
margin
|
225,757
|
170,303
|
127,311
|
|||||||
|
Selling
and administrative expense
|
(61,878
|
)
|
(55,705
|
)
|
(50,590
|
)
|
||||
|
|
|
|
||||||||
|
Operating
income
|
163,879
|
114,598
|
76,721
|
|||||||
|
Non-operating
income and expense, net
|
(6,093
|
)
|
(1,618
|
)
|
(4,301
|
)
|
||||
|
Income
taxes
|
(30,563
|
)
|
(20,735
|
)
|
(10,104
|
)
|
||||
|
Minority
interest
|
(4,615
|
)
|
(7,254
|
)
|
(6,695
|
)
|
||||
|
Equity
participation in income (loss) of related companies, net
|
2,596
|
1,835
|
2,153
|
|||||||
|
|
|
|
||||||||
|
Net
income
|
125,204
|
86,826
|
57,774
|
|||||||
|
|
|
|
||||||||
|
Other
comprehensive income (loss), net of tax:
|
||||||||||
|
Minimum
pension liability adjustment
|
792
|
(15
|
)
|
370
|
||||||
|
Translation
adjustment
|
—
|
6,460
|
8,802
|
|||||||
|
Deferred
gain from sale of swap
|
—
|
—
|
(146
|
)
|
||||||
|
|
|
|
||||||||
|
Total
comprehensive income under US GAAP
|
125,996
|
93,271
|
66,800
|
|||||||
|
|
|
|
||||||||
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| k) |
Industry
segment and geographic area
information
|
The
Company provides disclosures in accordance with SFAS 131, Disclosures
About Segments of an Enterprise and Related Information
(“SFAS
131”), which establishes standards for reporting information about operating
segments in annual financial statements as well as related disclosures about
products and services and geographic areas. Operating segments are defined
as
components of an enterprise about which separate financial statement information
available is evaluated regularly by the chief operating decision maker in making
decisions about allocating resources and assessing performance, In accordance
with SFAS 131, the Company has five segments, which are split into geographical
areas: Chile, Latin American and Caribbean except Chile, Europe, USA and Asia
and other.
The
accounting policies of each segment are the same as those described in the
“Summary of Significant Accounting Policies” (Note 2).
The
following segment information is presented in accordance with US GAAP reporting
requirements, however, the amounts have been determined in accordance with
Chilean GAAP.
|
Chile
|
Latin
America
and
Caribbean
except
Chile
|
Europe
|
North
America
|
Asia
and
other
|
Elimination
|
Consolidated
|
||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||
|
For
the year ended December 31, 2005
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
|||||||||||||||
|
Sales
to unaffiliated customers
|
156,086
|
128,187
|
258,296
|
270,006
|
83,395
|
—
|
895,970
|
|||||||||||||||
|
Transfers
between geographic areas
|
278,325
|
15,604
|
287,129
|
224,714
|
38,389
|
(844,161
|
)
|
—
|
||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||
|
Total
revenues
|
434,411
|
143,791
|
545,425
|
494,720
|
121,784
|
(844,161
|
)
|
895,970
|
||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||
|
Exports
by region
|
—
|
116,427
|
243,964
|
172,060
|
51,908
|
—
|
584,359
|
|||||||||||||||
|
Net
assets
|
1,731,058
|
33,188
|
39,107
|
91,241
|
338
|
(874,516
|
)
|
1,020,416
|
||||||||||||||
|
Goodwill
|
27,055
|
154
|
—
|
—
|
—
|
—
|
27,209
|
|||||||||||||||
|
Long-lived
assets
|
2,342,510
|
71,670
|
30,870
|
85,219
|
237
|
(1,632,720
|
)
|
897,786
|
||||||||||||||
|
Expenditures
on long-lived assets
|
199,242
|
102
|
2,159
|
1,268
|
—
|
—
|
202,771
|
|||||||||||||||
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| k) |
Industry
segment and geographic area information
(continued)
|
|
Chile
|
Latin
America
and
Caribbean
except
Chile
|
Europe
|
North
America
|
Asia
and
other
|
Elimination
|
Consolidated
|
||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||
|
For
the year ended December 31, 2004
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
|||||||||||||||
|
Sales
to unaffiliated customers
|
158,846
|
111,066
|
228,287
|
233,506
|
56,811
|
—
|
788,516
|
|||||||||||||||
|
Transfers
between geographic areas
|
202,293
|
11,231
|
245,585
|
175,859
|
36,689
|
(671,657
|
)
|
—
|
||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||
|
Total
revenues
|
361,139
|
122,297
|
473,872
|
409,365
|
93,500
|
(671,657
|
)
|
788,516
|
||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||
|
Exports
by region
|
—
|
102,266
|
171,861
|
142,970
|
43,124
|
—
|
460,221
|
|||||||||||||||
|
Net
assets
|
1,862,554
|
16,005
|
12,519
|
92,582
|
332
|
(1,035,364
|
)
|
948,628
|
||||||||||||||
|
Goodwill
|
16,952
|
177
|
341
|
—
|
—
|
—
|
17,470
|
|||||||||||||||
|
Long-lived
assets
|
2,478,562
|
15,255
|
11,615
|
91,597
|
228
|
(1,811,335
|
)
|
785,922
|
||||||||||||||
|
Expenditures
on long-lived assets
|
87,309
|
132
|
2,488
|
616
|
13
|
—
|
90,558
|
|||||||||||||||
|
Chile
|
Latin
America
and
Caribbean
except
Chile
|
Europe
|
North
America
|
Asia
and
other
|
Elimination
|
Consolidated
|
||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||
|
For
the year ended December 31, 2003
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
ThUS$
|
|||||||||||||||
|
Sales
to unaffiliated customers
|
216,820
|
36,433
|
219,239
|
185,224
|
34,090
|
—
|
691,806
|
|||||||||||||||
|
Transfers
between geographic areas
|
167,098
|
11,671
|
236,119
|
129,760
|
22,614
|
(567,262
|
)
|
—
|
||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||
|
Total
revenues
|
383,918
|
48,104
|
455,358
|
314,984
|
56,704
|
(567,262
|
)
|
691,806
|
||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||
|
Exports
by region
|
—
|
79,400
|
164,072
|
110,834
|
31,169
|
—
|
385,475
|
|||||||||||||||
|
Net
assets
|
1,682,653
|
69,481
|
14,931
|
66,084
|
(100
|
)
|
(943,077
|
)
|
889,972
|
|||||||||||||
|
Goodwill
|
13,289
|
200
|
98
|
—
|
—
|
—
|
13,587
|
|||||||||||||||
|
Long-lived
assets
|
2,448,591
|
17,686
|
12,853
|
65,991
|
134
|
(1,716,249
|
)
|
829,006
|
||||||||||||||
|
Expenditures
on long-lived assets
|
58,765
|
1,614
|
2,856
|
5,358
|
—
|
—
|
68,593
|
|||||||||||||||
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| k) |
Industry
segment and geographic area information
(continued)
|
Sales
by
product type to unaffiliated customers for the years ended December 31 are
as
follows:
|
2005
|
|
2004
|
|
2003
|
||||||
|
|
|
|
||||||||
|
ThUS$
|
|
ThUS$
|
|
ThUS$
|
||||||
|
Specialty
plant nutrition
|
487,802
|
426,836
|
362,791
|
|||||||
|
Iodine
and derivatives
|
149,103
|
110,495
|
84,557
|
|||||||
|
Lithium
and derivatives
|
81,360
|
62,623
|
49,695
|
|||||||
|
Industrial
chemicals
|
73,983
|
73,050
|
73,748
|
|||||||
|
Others
|
103,722
|
115,512
|
121,015
|
|||||||
|
|
|
|
||||||||
|
Sales
to unaffiliated customers
|
895,970
|
788,516
|
691,806
|
|||||||
|
|
|
|
||||||||
| l) |
Estimated
Fair Value of Financial Instruments and Derivative Financial
Instruments
|
The
accompanying tables provide disclosure of the estimated fair value of financial
instruments owned by the Company. Various limitations are inherent in the
presentation, including the following:
| - |
The
data excludes non-financial assets and liabilities, such as property,
plant and equipment, and goodwill.
|
|
-
|
While
the data represents management’s best estimates, the data is subjective
and involves significant estimates regarding current economic and
market
conditions and risk
characteristics,
|
The
methodologies and assumptions used depend on the terms and risk characteristics
of the various instruments and include the following:
| - |
Cash
and time deposits approximate fair value because of the short-term
maturity of these instruments.
|
| - |
Marketable
securities with a readily determinable market value are recorded
at fair
value,
|
|
-
|
Current
liabilities that are contracted at variable interest rates, are considered
to have a fair value equal to book
value.
|
|
-
|
For
interest-bearing liabilities with an original contractual maturity
of
greater than one year, the fair values are calculated by discounting
contractual cash flows at current market origination rates with similar
terms.
|
|
-
|
For
forward contracts and swap agreements, fair value is determined using
quoted market prices of financial instruments with similar
characteristics.
|
F-66
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| l) |
Estimated
Fair Value of Financial Instruments and Derivative Financial Instruments
(continued)
|
The
following is a detail of the Company’s financial instruments’ US
GAAP carrying amount and estimated fair value:
|
As
of December 31,
|
|||||||||||||
|
|
|||||||||||||
|
2005
|
2004
|
||||||||||||
|
|
|
||||||||||||
|
US
GAAP Carrying Amount
|
Estimated
Fair Value
|
US
GAAP Carrying Amount
|
Estimated
Fair Value
|
||||||||||
|
|
|
|
|
||||||||||
|
ThUS$
|
|
ThUS$
|
ThUS$
|
ThUS$
|
|||||||||
|
Assets:
|
|||||||||||||
|
Cash
and cash equivalents
|
147,956
|
147,956
|
66,753
|
66,753
|
|||||||||
|
Short-term
accounts receivable
|
222,032
|
222,032
|
204,213
|
204,213
|
|||||||||
|
Long-term
accounts receivable
|
2,379
|
2,379
|
289
|
289
|
|||||||||
|
Liabilities:
|
|||||||||||||
|
Short-term
bank debt
|
85,022
|
85,022
|
(7,955
|
)
|
(7,955
|
)
|
|||||||
|
Short-term
notes and accounts payable
|
78,990
|
78,990
|
(73,938
|
)
|
(73,938
|
)
|
|||||||
|
Derivative
instruments
|
163
|
163
|
(702
|
)
|
(2,185
|
)
|
|||||||
|
Current
and long-term portions of long-term bank debt
|
304,881
|
306,102
|
(204,577
|
)
|
(216,965
|
)
|
|||||||
|
Long-term
other accounts payable
|
1,065
|
1,065
|
(1,106
|
)
|
(1,106
|
)
|
|||||||
| m) |
Post-retirement
obligations and staff severance
indemnities
|
The
Company’s subsidiary SQM North America Corporation has a defined benefit,
noncontributory pension plan covering substantially all employees who qualify
as
to age and length of service. Plan benefits are based on years of service and
the employee’s highest five-year average compensation during the last ten years
of employment. The plan’s assets consist primarily of equity mutual funds and
group annuity contracts.
In
September 2002, the Board of Directors of SQM North America Corporation voted
to
suspend the plan and as a result after December 31, 2002, participants do not
earn additional benefits for future services. Such action resulted in a
curtailment loss (equal to the amount of unrecognized prior service cost) of
approximately US$1.3 million for the year ended December 31, 2002.
Assumptions
used in determining the actuarial present value of the projected benefit
obligation as of December 31 are as follows:
|
2005
|
2004
|
||||||
|
|
|
||||||
|
Weighted-average
discount rate
|
7.5
|
%
|
7.5
|
%
|
|||
|
Rate
of increase in compensation levels
|
0.0
|
%
|
0.0
|
%
|
|||
|
Long-term
rate of return on plan assets
|
8.5
|
%
|
8.5
|
%
|
|||
F-67
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| m) |
Post-retirement
obligations and staff severance indemnities
(continued)
|
The
long-term rate of return on assets was determined based upon past investment
experience and the expectation for future experience.
The
following table sets forth the plan’s funded status and amounts recognized in
the consolidated balance sheet as of December 31:
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
|
ThUS$
|
ThUS$
|
|||||||
|
Change
in benefit obligation:
|
||||||||||
|
Benefit
obligation at beginning of year
|
5,080
|
4,831
|
4,903
|
|||||||
|
Service
cost
|
16
|
15
|
13
|
|||||||
|
Interest
cost
|
369
|
362
|
345
|
|||||||
|
Actuarial
loss
|
(37
|
)
|
115
|
(186
|
)
|
|||||
|
Benefits
paid
|
(244
|
)
|
(243
|
)
|
(244
|
)
|
||||
|
|
|
|
||||||||
|
Benefit
obligation at end of the year
|
5,184
|
5,080
|
4,831
|
|||||||
|
|
|
|
||||||||
|
Change
in plan assets:
|
||||||||||
|
Fair
value of plan assets at beginning of year
|
4,966
|
4,713
|
4,049
|
|||||||
|
Employer
contributions
|
—
|
82
|
—
|
|||||||
|
Actual
return (loss) on plan assets
|
501
|
414
|
908
|
|||||||
|
Benefits
paid
|
(244
|
)
|
(243
|
)
|
(244
|
)
|
||||
|
|
|
|
||||||||
|
Fair
value of plan assets at end of year
|
5,223
|
4,966
|
4,713
|
|||||||
|
|
|
|
||||||||
|
Funded
status
|
39
|
(114
|
)
|
(118
|
)
|
|||||
|
|
|
|
||||||||
|
Unrecognized
transitional asset
|
—
|
—
|
||||||||
|
Unrecognized
net actuarial loss
|
1,133
|
1,165
|
1,137
|
|||||||
|
Adjustment
to recognize minimum pension liability
|
(1,094
|
)
|
(1,279
|
)
|
(1,255
|
)
|
||||
|
|
|
|
||||||||
|
Accrued
pension (liability)/ prepaid pension cost
|
39
|
(114
|
)
|
(118
|
)
|
|||||
|
|
|
|
||||||||
Net
periodic pension expense was comprised of the following components for the
years
ended December 31, 2003, 2004 and 2005:
|
2005
|
2004
|
2003
|
||||||||
|
|
|
|
||||||||
|
ThUS$
|
ThUS$
|
ThUS$
|
||||||||
|
Service
cost or benefits earned during the period
|
16
|
15
|
13
|
|||||||
|
Interest
cost on benefit obligation
|
369
|
362
|
345
|
|||||||
|
Actual
return on plan assets
|
(501
|
)
|
(414
|
)
|
(908
|
)
|
||||
|
Amortization
of unrecognized transitional asset
|
—
|
—
|
(45
|
)
|
||||||
|
Other
|
148
|
91
|
682
|
|||||||
|
|
|
|
||||||||
|
Net
periodic pension expense
|
32
|
54
|
87
|
|||||||
|
|
|
|
||||||||
F-68
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| m) |
Post-retirement
obligations and staff severance indemnities
(continued)
|
The
plan’s asset allocations by asset category as of December 31 are as follows:
|
2004
|
2005
|
||||||
|
|
|
||||||
|
Growth
securities
|
69
|
%
|
68
|
%
|
|||
|
|
|||||||
|
Treasury
securities
|
2
|
%
|
1
|
%
|
|||
|
International
securities
|
14
|
%
|
15
|
%
|
|||
|
Growth
& income securities
|
14
|
%
|
15
|
%
|
|||
|
Money
market funds
|
1
|
%
|
1
|
%
|
|||
|
|
|
||||||
|
Total
|
100
|
%
|
100
|
%
|
|||
The
transition liability (asset) re-established on January 1, 1992 is being
amortized in level amounts over 11.66 years. As of January 1, 2003, the
transition asset has been fully amortized.
The
excess of the unrecognized (gain) or loss (if any) over the larger of 10%
of the
projected benefit obligation or 10% of the market related value of assets
is
amortized in level amounts over 12-48 years.
All
unrecognized prior service costs have been considered fully amortized as
a
result of the December 31, 2002 curtailment brought about as the result of
the
December 31, 2002 cessation of benefit accruals.
The
Company expects the plan to be fully funded for 2005. As a result no
contribution is anticipated during this period.
As
of
December 31, 2005 the pension plan benefits expected to be paid in the future
are as follows:
|
US$
|
||||
|
|
||||
|
2006
|
260,500
|
|||
|
2007
|
269,500
|
|||
|
2008
|
288,200
|
|||
|
2009
|
354,600
|
|||
|
2010
|
371,400
|
|||
|
Years
2011-2015
|
2,384,900
|
|||
| n) |
Cash
and cash equivalents
|
Under
Chilean GAAP cash and cash equivalents are considered to be all highly liquid
investments with a remaining maturity of less than 90 days as of the closing
date of the financial statements, whereas, US GAAP considers cash and cash
equivalents to be all highly liquid investments with an original maturity
date
of less than 90 days. The difference between the balance under US GAAP and
Chilean GAAP of cash and cash equivalents is not material for the periods
presented.
Under
US
GAAP, the cash movements of subsidiaries in the development stage would be
included in the consolidated statement of cash flows, as described in paragraph
I e). The effect on the consolidated statement of cash flows is not material
for
the periods presented.
F-69
Sociedad
Química y Minera De Chile S.A. and Subsidiaries
Notes
to the Audited Consolidated Financial Statements
(Expressed
in thousands of US dollars, except as stated)
Note
29 – Differences between Chilean and United States Generally Accepted Accounting
Principles (continued)
| o) |
Recently
issued accounting
pronouncements
|
Inventory
costs
In
November 2004, the FASB issued Statement of Financial Accounting Standards
No.
151, Inventory
Costs - an amendment of ARB No. 43, Chapter 4 (“SFAS
151”), which clarifies that abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage) should be recognized as a
current
period expense. In addition, SFAS 151 requires that allocation of fixed
production overhead to the costs of conversion be based on the normal capacity
of the production facilities. SFAS 151 is effective for fiscal years beginning
after 15 June 2005. The Company is in process of analyzing the impact of
this
Statement on its results of operations and financial position.
Stripping
costs
In
March
2005, the FASB Emerging Issues Task Force ("EITF") issued EITF No. 04-06
Accounting
for Stripping Costs in the Mining Industry
and
concluded that stripping costs incurred during the production phase of a
mine
are variable production costs that should be included in the costs of the
inventory produced during the period that the stripping costs are incurred.
EITF
No. 04-06 does not address the accounting for stripping costs incurred during
the pre-production phase of a mine. EITF 04-06 is effective for the first
reporting period in fiscal years beginning after December 15, 2005, with
early
adoption permitted. The effect of initially applying this consensus should
be
accounted for in a manner similar to a cumulative-effect adjustment. Since
the
Company have historically adhered to the accounting principles similar to
EITF
04-06, the Company does not believe that adoption of EITF 04-06 will have
a
material impact on the Company’s consolidated financial statements.
F-70