UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16
OF THE SECURITIES AND EXCHANGE ACT OF 1934
SOCIEDAD QUIMICA Y MINERA DE CHILE S.A.
---------------------------------------
(Exact name of registrant as specified in its charter)
CHEMICAL AND MINING COMPANY OF CHILE INC.
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(Translation of registrant's name into English)
El Trovador 4285, Santiago, Chile (562) 425-2000
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(Address and phone number of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F |X| Form 40-F |_|
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes |_| No |X|.
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule
12g3-2(b): 82___________
This report on Form 6-K provides updated risk factors and financial and
business information of SQM for the year ended December 31, 2005 (except where
certain information below is stated to be as of December 31 2004).
All references to "SQM," "the Company," "we," "our," "ours," and "us"
refer to Sociedad Quimica y Minera de Chile S.A. and its consolidated
subsidiaries, except as otherwise provided.
All references to "$," "US$," "U.S. dollars" and "dollars" are to
United States dollars, all references to "pesos" or "Ch$" are to Chilean pesos,
and all 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
March 1, 2006, UF1.00 was equivalent to US$34.65 and Ch$17,923.27.
Our consolidated financial information as of December 31, 2003, 2004
and 2005 and for each of the three years in the periods ended December 31, 2003,
2004 and 2005 has been derived from our financial statements prepared in
accordance with accounting standards generally accepted in Chile ("Chilean
GAAP") and audited by Ernst & Young Ltda. ("E&Y").
All financial information presented below is on a consolidated basis.
FORWARD-LOOKING INFORMATION
The information below 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 the
information below and include statements regarding the intent, belief or current
expectations of the Company and its management, including but not limited to any
statements concerning:
o the Company's capital investment program and development of new
products;
o trends affecting the Company's financial condition or results of
operations;
o level of reserves, quality of the ore and brines and production
levels and yields;
o the future impact of competition;
o regulatory changes;
o any statements preceded by, followed by, or that include the
words "believe," "expect," "predict," "anticipate," "intend,"
"estimate," "should," "may," "could" or similar expressions; and
o other statements contained in the information below 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
the information below. Factors that could cause actual results to differ
materially include, but are not limited to:
o our ability to implement our capital expenditures program,
including our ability to arrange financing when required;
o the nature and extent of future competition in our principal
markets;
o political, economic and demographic developments in the emerging
market countries of Latin America and Asia where we conduct a
large portion of our business; and
o the factors discussed below under "Risk Factors."
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RISK FACTORS
The risks described below are not the only ones facing us or
investments in Chile in general. Our business, financial condition or results of
operations could be materially adversely affected by any of these risks.
Additional risks not presently known to us or that we currently deem immaterial
may also impair our business operations.
The information below also contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including the risks faced by us described below. See "Forward-Looking
Information."
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.
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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, smelting and refining 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.
Interest rate fluctuations may have a material impact on our financial results
We maintain short and long-term debt at the rate of Libor plus a
spread. We do not hedge our interest rates through derivative instruments, and
therefore we are subject to fluctuations in Libor. Even though this risk is
limited, as of December 31, 2005, we had 100% of our long-term financial debt
priced at Libor plus a spread, and therefore significant increases in the rate
could impact our financial condition.
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 13.3% 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.
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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, 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. We
have adopted measures intended to mitigate 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.
Therefore, we cannot estimate the economic impact that additional natural gas
supply reductions might have. However, sustained periods of increased natural
gas costs 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., or Electroandina, and AES Norgener S.A.,
or Norgener, and both have requested revision of the tariffs involved. As a
result of such request we have commenced arbitration between us and
Electroandina and we expect to commence arbitration with Norgener shortly.
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 that could impact our production levels
Of our permanent employees in Chile, 73% are represented by 30 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.
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
4
environmental regulations or natural depletion of water resources that could
affect our operations, negatively affecting our business, financial condition
and 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.
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% of
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 Law." The Chilean Environmental Law created the Comision Nacional
del Medio Ambiente (National Environmental Commission or CONAMA) and the
Comisiones Regionales del Medio
5
Ambiente (Regional Environmental Commission or COREMA), which are the
governmental agencies in charge of supervising the due compliance with the
Chilean Environmental Law. Under the Chilean Environmental 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 and
COREMA evaluate environmental impact studies submitted for their approval and
oversee the implementation of projects. The Chilean Environmental 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 Maria 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.
Additionally, in connection with our future investments in the nitrate
and iodine operations, we have submitted 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. Additionally,
in our annual report on Form 20-F, which we file with the SEC, our financial
statements include a reconciliation of net income and shareholder's equity
amounts reported under Chilean GAAP to
6
U.S. GAAP. The financial statements for the year ended December 31, 2005, which
will be included in our 2005 Form 20-F to be filed later this year, will include
such reconciliation to U.S. GAAP.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview of our Operations
We divide our operations into the following four product lines:
o specialty plant nutrition: production and commercialization of
fertilizers with unique characteristics;
o iodine and derivatives: production and commercialization of iodine and
derivatives;
o lithium and derivates: production and commercialization of lithium and
derivatives; and
o industrial chemicals: production and commercialization of industrial
nitrates 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,
a significant portion is sold through Yara International ASA ("Yara") pursuant
to a commercial agreement.
Factors Affecting Our Results of Operations
Our results of operations substantially depend on:
o trends in demand for our products, volumes and prices;
o our efficiency in operating our facilities, as they are generally
running at nameplate capacity;
o our ability to accomplish our capital expenditures program in a timely
manner;
o trends in the exchange rate between the U.S. dollar and the Chilean
peso, as a significant portion of the cost of sales is related to the
Chilean peso;
o logistics, raw materials and maintenance costs, which have been
increasing in the last two years; and
o energy costs, which have increased due to the high cost of oil and the
potential interruption of our natural gas supply.
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 in the past years to
continue. Demand is mostly driven by lithium batteries, x-ray contrast media and
biocides producers. 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 slightly higher sales volume and higher average prices during
2006.
8
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 are 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.
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 54 416.4 54 351.9 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 71.2 9 73.7 11
Other products(1) 103.7 12 114.7 15 121.0 18
------ ---- ------ ---- ------ ----
Total 896.0 100 775.5 100 680.9 100
------ ---- ------ ---- ------ ----
-------------------
(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 896.0 100.0 775.5 100.0 680.9 100.0
Cost of goods sold (652.9) (72.9) (597.2) (77.0) 544.4) (80.0)
------- ------- -------- ------- ------- -------
Gross margin 243.1 27.1 178.3 23.0 136.5 20.0
Selling and administrative expenses (61.9) (6.9) (54.5) (7.0) (49.5) (7.3)
------- ------- -------- ------- ------- -------
Operating income 181.2 20.2 123.8 16.0 87.0 12.7
Non-operating income 16.4 1.8 20.8 2.7 18.7 2.7
Non-operating expenses (50.8) (5.7) (38.3) (4.9) (39.7) (5.8)
------- ------- -------- ------- ------- -------
Income before income taxes 146.8 16.3 106.3 13.7 66.0 9.6
Income tax (32.5) (3.6) (27.2) (3.5) (16.0) (2.3)
Minority interest (1.0) (0.1) (5.1) (0.7) (3.6) (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 6.9
------- ------- -------- ------- ------- -------
Results of Operations - 2005 compared to 2004
During 2005, we generated total revenues of approximately US$896.0
million, which is approximately 16% higher than the US$775.5 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:
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Specialty Plant Nutrition
Revenues from sales of specialty plant nutrition products increased 17.1%
to US$487.8 million in 2005 from US$416.4 million in 2004. Set forth below are
sales volume data in the specified year by product category.
=============================================================================================
2005 2004 % Change
---------------------------------------------------------------------------------------------
Sodium nitrate Th. Ton 58.2 56.0 -4%
Potassium nitrate and sodium potassium nitrate Th. Ton 695.7 710.0 -2%
Blended and other specialty plant nutrients Th. Ton 366.2 374.0 -2%
Potassium sulfate Th. Ton 178.6 158.0 13%
==============================================================================================
The 17.1% increase in specialty plant nutrition product revenues was
mainly driven by improved pricing conditions. Prices of specialty plant
nutrition products increased between 15% and 25%, as compared with the previous
year. 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. However, we increased sales volume of
soluble potassium nitrate, 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.
==============================================================================================
2005 2004 % Change
----------------------------------------------------------------------------------------------
Iodine and iodine derivates 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.
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
approximately 2.2 th. metric tons per year.
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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.
==============================================================================================
2005 2004 % Change
----------------------------------------------------------------------------------------------
Lithium carbonate and derivates Th. Ton 27.8 30.6 -9%
===============================================================================================
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 3.9% to US$74.0 million in
2005 from US$71.2 million in 2004. Set forth below are sales volume data in the
specified year by product category.
==============================================================================================
2005 2004 % Change
----------------------------------------------------------------------------------------------
Industrial nitrates Th. Ton 176.3 190.0 -7
Boric acid Th. Ton 6.3 5.9 7%
===============================================================================================
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 4% decrease in volume, the increased price for industrial nitrates
led to higher revenues in this product line.
11
Other Products
Potassium chloride
Revenues from sales of potassium chloride decreased 11.6% to US$32.4
million in 2005 from US$36.7 million in 2004. Set forth below are sales volume
data in the specified year by product category.
=============================================================================
2005 2004 % Change
-----------------------------------------------------------------------------
Potassium chloride Th. Ton 128.7 210.4 -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$78.0 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:
o higher energy and raw materials costs;
o less favorable exchange rates; and
o maintenance and depreciation cost increase.
Gross Profit
As a result of the factors described above, gross profit increased 36.3%
to US$243.1 million in 2005 from US$178.3 million in 2004.
Selling and Administrative Expenses
Selling and administrative expenses reached US$61.9 million (6.9% of
revenues) during 2005 compared to US$54.5 million (7% of revenues) recorded
during 2004.
Operating Income
As a result of the factors described above, operating income increased
46.3% to US$181.2 million in 2005 from US$123.8 million in 2004.
12
Non-Operating Income and Expenses
For 2005, net non-operating expenses amounted to US$34.4 million,
compared to US$17.5 million during 2004. The main changes in non-operating
income and expenses were due to the following:
o During 2004, SQM sold its 14.05% stake in Empresas Melon S.A., or
Empresas Melon, 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.
o 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 Melon).
o Net financial expenses, including capitalized interest, reached
US$16.3 million during 2005, lower than the US$16.8 million reached
during 2004.
o 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.
o Other losses were approximately US$4.0 million greater in 2005 than
those of 2004, including write-off 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$27.2 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 19.5% 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 14 to the Consolidated Financial Statements.
13
Results of Operations - 2004 compared to 2003
During 2004, we generated total revenues of US$775.5 million, which is
approximately 14% higher than the US$680.9 million generated in 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 products increased 18%
to US$416.4 million in 2004 from US$351.9 million in 2003. Set forth below are
sales volume data in the specified year by product category for each year.
=================================================================================================
2004 2003 % Change
-------------------------------------------------------------------------------------------------
Sodium nitrate Th. Ton 56.0 62.5 10%
Potassium nitrate and sodium potassium nitrate Th. Ton 710.0 696.5 2%
Blended and other specialty plant nutrients((1)) Th. Ton 374.0 377.1 -1%
Potassium sulfate Th. Ton 158.0 143.2 10%
=================================================================================================
-----------------
(1) Includes resales of purchased products.
The increase in specialty plant nutrition product revenues was mainly
driven by a different product mix, our strategy to focus in markets that offer
higher returns, and generally improved pricing conditions in the market.
The increase in prices is the result of mainly two factors: strong
demand, which for the last five years has led to our annual growth of
approximately 7%, and tight supply conditions.
Changes in sales volume of our specialty plant nutrition products were
due to the following:
o 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 was the result of our
decision, facing a tight supply, to focus on markets with higher
returns.
o The increase in sales of blended and other specialty plant nutrition
products reflects an overall increase in market demand.
o The increase in potassium sulfate shipments was due to our ability to
produce greater quantities and thereby keep pace with growing market
demand.
Iodine and derivatives
Revenues from sales of iodine and derivatives increased 30.7% to US$110.5
million in 2004 from US$84.6 million in 2003. Set forth below are sales volume
data for each specified year.
==============================================================================================================
2004 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:
o Sales of iodine to the x-ray contrast media, biocides and
pharmaceutical markets on average experienced growth of approximately
7%.
o We increased sales to the Chinese markets, mainly to the
pharmaceutical and disinfectant industries.
14
o We increased our sales of iodine for use in LCD screens, a relatively
new development in iodine applications. Iodine usage in this market
increased by approximately 50% in 2004.
During 2004, we slightly increased our market share of iodine and
derivatives and expanded our iodine production capacity.
Full year average prices for iodine, excluding iodine salts that react
somewhat more slowly to iodine pricing, increased by approximately US$1.90 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 for each specified year.
===============================================================================================================
2004 2003 % Change
---------------------------------------------------------------------------------------------------------------
Lithium carbonate and derivatives Th. Ton 30.6 27.4 12%
===============================================================================================================
The increase both in revenues and sales volume was mainly due to the
following:
o 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 in this market
accounted for approximately 20% of volume sales.
o 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 faster than the world
economy as a whole.
o 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.
o Prices 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.
Industrial Chemicals
Revenues from sales of industrial chemicals decreased by 3.4% to US$71.2
million in 2004 from US$73.7 million in 2003. Set forth below are sales volume
data by product category.
===============================================================================================================
2004 2003 % Change
---------------------------------------------------------------------------------------------------------------
Industrial nitrates Th. Ton 190.0 193.2 -2%
Boric acid Th. Ton 5.9 10.7 -45%
===============================================================================================================
The decrease in revenues from sales of industrial chemicals in 2004 was
mainly due to the following:
o Industrial nitrates saw a reduction in sales volumes, mainly in Asia,
due to high logistical costs and low prices. Despite a 2% decrease in
volumes of industrial nitrates, an increase by approximately 10% in
industrial nitrates prices allowed us to obtain higher revenues for
this product.
o The significant decrease in boric acid sales was due to lower
production. Prices for this product line have increased on average by
approximately 7% due to increased demand for raw materials in the pulp
and paper and detergent industries.
15
o World demand for industrial chemicals grew at a moderate pace of 2%,
mainly driven by increased mining activity and infrastructure
development.
Other Products
Revenues from other products were US$114.7 million, including US$37.2
million from potassium chloride and US$77.5 million from commodity fertilizers.
In 2004, total revenues from other products decreased 5.2% 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. Set forth below are sales volume data for
each specified year.
===============================================================================================================
2004 2003 % Change
---------------------------------------------------------------------------------------------------------------
Potassium Chloride Th. Ton 210.4 284.1 -26%
===============================================================================================================
The decrease in potassium chloride sales volume was mainly due to the
following:
o As sales of potassium chloride are directly related to its consumption
as raw material in the production of potassium nitrate, the 26%
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 2004,
reaching US$77.5 million compared to the US$81.0 million in 2003.
Cost of Sales
Cost of sales during 2004 was approximately US$597.2 million, an increase
of 9.7% compared to the US$544.4 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 was 77.0% in the year 2004 compared to 80.0% in 2003.
The higher cost of sales in 2004 reflects the increased trading of
commodity and specialty plant nutrients as well as the trading of lithium
hydroxide.
The main factors affecting our cost of sales were the following:
o logistics costs increased by approximately 15% due to a worldwide low
shipping capacity in the world and higher oil prices;
o 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; and
o 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 30.6%
to US$178.3 million in 2004 from US$136.5 million in 2003.
Selling and Administrative Expenses
Selling and administrative expenses, or SG&A, were US$54.5 million (7.0%
of revenues) in 2004 compared to US$49.5 million (7.3% of revenues) in 2003. The
decrease of SG&A as a percentage of sales
16
corresponds to our efforts to optimize the use of our sales affiliates,
especially those acquired during 2003, SQM Comercial de Mexico S.A. de C.V. and
Mineag SQM Africa (PTY) Ltd.
Operating Income
As a result of the factors described above, operating income increased
42.3% to US$123.8 million in 2004 from US$87.0 million in 2003.
Non-Operating Income and Expenses
During 2004, we had net non-operating expenses of US$17.5 million,
compared to US$21.0 million during 2003. The main reasons for this reduction in
non-operating expenses were:
o On August 18, 2004, we sold our 14.05% stake in Empresas Melon at a
public auction carried out on the Santiago Stock Exchange. We recorded
a before-tax 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 Melon. The sale of our investment in Empresas Melon is
consistent with our strategy to focus on our core businesses.
o 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$106.4 million, partly with the proceeds from the sale
of our stake in Empresas Melon.
o 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$27.2 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 24.2% 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$225.6 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 rate in Chile was 17% and 16.5% for 2004 and
2003, respectively.
The 71% 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 14 to the Consolidated Financial Statements.
Foreign Exchange Rates
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.
17
Liquidity and Capital Resources
We operate a capital-intensive business that requires significant
investments in revenue-producing 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, issuance of
debt securities and increases in capital.
The current ratio (current assets divided by current liabilities)
decreased from 4.5 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$389.9
million, as compared to total debt of US$210.6 million as of December 31, 2004.
Of the total debt of US$389.9 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%. We plan to use the proceeds
from the sale of the Notes to make this payment.
In February 2005, our Aruban wholly-owned 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 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.
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.
As of December 31, 2005, we had US$147.1 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 0.38:1 in December 31, 2004 to 0.55:1 in
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$190 million (not including the Dubai acquisition
described in "Business-Capital Expenditure Program").
18
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.
We intend to finance our capital expenditure plans and our dividend
primarily from our internally-generated cash flows, which we define as net
income plus depreciation, and from the Chilean bond issuance of January 2006.
For 2005, our internally-generated cash flows, defined as net income for the
year plus depreciation expenses, were US$183.6 million.
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.
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 applied 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. 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.
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.
Income and deferred taxes
SQM and each of its subsidiaries computes and pays tax on a separate
basis, except for the U.S. subsidiaries that prepare consolidated income tax
returns. We estimate our tax exposure and assess temporary differences resulting
from differing treatment of items, such as depreciation, for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are reflected in our consolidated balance sheet.
We then assess the likelihood that our deferred tax assets will be
recovered from future taxable income. To the extent we believe that recovery is
unlikely, we establish a valuation allowance. Revisions to the estimated
realizable value of deferred tax assets or estimated average reversal periods of
contra assets or liabilities could cause the provision for income taxes to vary
significantly from period to period.
19
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 potential obsolescence and record relevant
allowance for obsolescence so that carrying values do not exceed net realizable
values.
Staff severance indemnities
We have significant benefit plan liabilities that are recorded based on
actuarial valuations. Inherent in these valuations are key assumptions,
including discount rates and expected returns on plan assets. We consider
current market conditions, including changes in interest rates, in making 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.
Units of production method of amortization of mine development costs
We amortize mine development costs using units-of-production method based
on the total proven and probable reserves. Determining the amount of proven and
probable reserves requires us to make significant estimates based on geological
studies. If our estimates of proven and probable reserves were to change, this
would directly impact the amount of amortization of the mine development costs.
Impairment of 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. The first part of
the test is a comparison, at the cash-generating unit level, of the fair value
of each cash-generating 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 cash-generating 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 cash-generating 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.
Accounting Changes
Up to December 31, 2004, the financial statements of our subsidiary
Fertilizantes Naturales S.A. were consolidated, given that we effectively
controlled this subsidiary (due to our right to manage this subsidiary's
financial and operating policies). Beginning on January 1, 2005, we no longer
control this subsidiary and therefore the aforementioned subsidiary has been
excluded from consolidation in accordance with letters a) to d) of No.6 in
Attachment 1 to Technical Bulletin No. 72 issued by the Chilean Association of
Accountants.
During 2005, we changed the discount rate for the determination of staff
severance indemnities from 9% to 8% using the accrued cost of benefit method.
This change gave rise to a higher charge to income of US$678,000.
20
During the year ended December 31, 2005, our subsidiary SQM Industrial
S.A. 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.
Until June 30, 2004 the financial statements of the subsidiary SQM
Lithium Specialties LLP were not consolidated because this subsidiary was in
development stage. Starting July 1, 2004, SQM Lithium Specialties LLP began
operating; therefore, we have consolidated this subsidiary in the financial
statements as of December 31, 2004 and 2005.
21
BUSINESS
Business Overview
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 82% of our revenues from exports to 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, 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 LCD
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.
During 2005, specialty plant nutrition products accounted for
approximately 54% of our revenues, iodine and iodine derivatives accounted for
approximately 17%, lithium carbonate and lithium derivatives accounted for
approximately 9%, industrial chemicals (industrial grade nitrates and boric
acid) accounted for approximately 8%, and other products (mainly imported
fertilizers distributed in Chile and Mexico, and potassium chloride sold to
third parties) accounted for approximately 12%.
The following table sets forth the percentage breakdown of our revenues
in the 2003-2005 period according to our product lines:
2005 2004 2003
------- ------ ------
Specialty Plant Nutrition 54% 54% 52%
Iodine and derivatives 17% 14% 12%
Lithium and derivatives 9% 8% 7%
Industrial Chemicals 8% 9% 11%
Other Products 12% 15% 18%
-------------------------------------
100% 100% 100%
22
Business Strategy
Our general business strategy is to:
(1) participate in businesses where we are or we believe 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
nutrition, iodine and lithium - in terms of installed capacity,
production costs, pricing and development of new products; and
(5) vertically integrate towards more value added products.
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
23
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.
Capital Expenditure Program
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 Maria 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 described
below) primarily for (i) the completion of the Maria 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, soluble blending facilities. Additionally, we bought the
iodine business of DSM for approximately US$72.0 million in January 2006.
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
Maria 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.
Company History
We were formed in 1968 through a joint venture between Compania Salitrera
Anglo Lautaro S.A. ("Anglo Lautaro") and Corporacion de Fomento de la Produccion
("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
24
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 and our Series A ADRs haved traded on the NYSE under the
ticker symbol "SQM-A" since 1999.
Our market capitalization as of December 31, 2005 was US$2.87 billion.
Our Products
Specialty Plant Nutrition
We believe we are the world's largest producers of potassium nitrate. We
also produce the following specialty plant nutrition: sodium nitrate, potassium
nitrate, sodium potassium nitrate, potassium sulfate and specialty blends
(containing various combinations of nitrogen, phosphate and potassium and
generally known as "NPK blends"). These specialty plant nutrition products have
particular 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 prompted to
invest in specialty plant nutrition products 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 nutrition products provide significant advantages for certain
applications over commodity-based nitrogen and potassium fertilizers, such as
urea and potassium chloride.
In particular, our products:
o are fully water soluble, allowing their use in hydroponics,
fertigation, foliar applications and other advanced agricultural
techniques;
o are absorbed more rapidly by plants because they do not require
nitrification like ammonia-based fertilizers;
o are free of chlorine content, reducing the risk of scorching roots;
o do not release hydrogen after application, avoiding increased soil
acidity;
o possess trace elements, which promote disease resistance in plants and
have other beneficial effects;
o are more attractive to customers who prefer products of natural
origin; and
o are more efficient than commodity fertilizers because they deliver
more plant nutrients per unit of nutrient applied.
In 2005, our revenues from specialty plant nutrition products were
approximately US$487.8 million, representing approximately 54% of our total
revenues for that year.
Specialty Plant Nutrition: the Market
-------------------------------------
The target market for our specialty plant nutrition products are high
value crops such as fruits, vegetables and crops raised using modern
agricultural techniques. Since 1990, the international market for specialty
plant nutrition has grown at a substantially 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 the
increased 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 in consumption of vegetables per capita; and (v) the increasing demand
for higher quality crops.
25
Worldwide scarcity of water forces farmers to develop new agricultural
techniques such as fertigation that minimize the water requirements. These
applications require fully water soluble plant nutrients.
Increasing land costs near urban centers also force farmers to maximize
their yields per surface area. Specialty plant nutrition products, when applied
to certain crops, help to increase productivity for various reasons. In
particular, since our nitrate-based specialty plant nutrition products provide
nitrogen in nitric form, as opposed to in ammonium form as urea provides, they
are absorbed faster by the crops. Crops absorb nitrogen in nitric form; thus
nitrogen in ammonium form has to be first converted to nitric form in the soil.
This process is not immediate and releases hydrogen into the soil, increasing
soil acidity, which in most cases is harmful to the soil and the crops. Nitric
nitrogen application facilitates a more efficient application of nutrients to
the plant, thereby increasing the crops yield and improving its quality.
Our potassium-based specialty plant nutrition products are chlorine free,
unlike potassium chloride, which is the most commonly used potassium-based
commodity fertilizer. In certain crops, chlorine has negative effects, which
translate into lower yields and quality.
The principal 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 nutrition and other components at
blending plants operated by the Company or its affiliates and related companies
in Chile, the United States, Mexico, the United Arab Emirates, Belgium, Holland,
South Africa, Turkey and Egypt.
The following table sets forth our sales volumes for each specified year
and the revenues of specialty plant nutrition fertilizer products during the
2001-2005 period.
Sales Volume
(in metric tons) 2005 2004 2003 2002 2001
------- -------- -------- -------- --------
Sodium nitrate 58,200 56,000 62,500 59,500 63,100
Potassium nitrate and sodium potassium nitrate(1) 695,700 710,000 696,500 558,600 544,800
Potassium sulfate 178,600 158,000 143,200 161,000 156,600
Blended and other specialty plant nutrition (2) 366,200 374,000 377,100 276,600 241,800
Revenues (in US$ millions) 487.8 416.4 351.9 281.4 259.1
--------------
(1) Includes re-sales of potassium nitrate purchased from PCS Yumbes.
(2) Includes blended and other specialty plant nutrition products. It also
includes Yara's products sold pursuant to our commercial agreement.
Specialty Plant Nutrition: Marketing and Customers
--------------------------------------------------
In 2005, we sold our specialty plant nutrition products to more than 100
countries. During the same year, approximately 92% of Company's specialty plant
nutrition production 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. Not considering sales to
related parties, no single customer accounted for more than 3% of our specialty
plant nutrition product sales in 2005, and our 10 largest customers accounted in
the aggregate, during the same year, for less than 24% of such sales.
26
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%
We sell our specialty plant nutrition products outside Chile principally
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. This agreement allows
us to make use of Yara's distribution network in countries in which its presence
and commercial infrastructure are larger than ours. Similarly, in those markets
where our presence is larger, both our specialty plant nutrition products and
Yara'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 with Yara and Israel Chemicals
Limited at the end of 2001. Under the joint venture agreement, 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., or NU3, to which SQM and Israel Chemicals Limited contributed their
blending facility in Belgium and Yara contributed its blending facility in
Holland. With the joint venture agreement, important synergies have been
achieved, particularly with respect to production costs, administration and the
marketing of soluble blends, strengthening the development of new products and
improving costumer service.
We maintain stocks of our specialty plant nutrition products in the
principal markets of the Americas, Europe, the Middle East and Africa to
facilitate prompt deliveries to customers. In addition, we sell specialty plant
nutrition products directly to certain 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
agronomic 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
yields and command a premium price.
Our customers are located in both the northern and southern hemispheres.
Accordingly, there are no seasonal or cyclical factors that can substantially
affect the sales of our specialty fertilizer products.
Specialty Plant Nutrition: Competition
--------------------------------------
We believe we are the world's largest producers of sodium and potassium
nitrate for agricultural use. S.C.M. Virginia, a Chilean nitrate and iodine
company, produces sodium nitrate as a 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 Inc. and Haifa Chemicals Ltd. accounted for approximately 38% 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
27
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 northern Chile,
which is an essential raw material in the production of potassium nitrate.
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 the
Canadian company Potash Corp. in Chile (Yumbes).
In the potassium sulfate market, we have several competitors of which the
most important are Kali und Salz GmbH, Tessenderlo Chimie and Great Salt Lake
Minerals Corp., from Germany, Holland and the United States, respectively. We
believe that those three producers account for the majority of the world's
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.
Iodine
We believe we are the world's largest producers 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 raw materials or
catalysts in the formulation of products such as x-ray contrast media, biocides,
antiseptics and disinfectants, pharmaceutical intermediates, polarizing films
for LCD, chemicals, herbicides, organic compounds, pigments 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 the mid-1990s, as a 50-50 joint
venture between SQM and Ajay Chemical, a U.S.-based company. ASG has production
plants in the United States, Chile and France and is the world's leading
producer of inorganic and organic iodine derivatives. In 2005, approximately 29%
of our iodine sales were made to ASG.
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.
28
The following table sets forth our total sales volumes for each specified
year 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 less
than 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.
Iodine: Competition
--------------------
SQM and several producers in Chile, Japan and the United States 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. We estimate that
eight Japanese iodine producers accounted for approximately 31% of world iodine
sales in 2005. We estimate that the largest Japanese producer, Ise Chemicals
Ltd., accounted for approximately 8% of the world's iodine sales.
We also estimate that iodine producers in the United States (one of which
is owned by Ise Chemicals Ltd.) accounted for approximately 6% of world iodine
sales in 2005, while five Chilean companies, including SQM, accounted for
approximately 59% of such sales (30% by SQM and 29% by the other Chilean
producers, including DSM).
The prices of our iodine and iodine derivatives 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 steady growing demand, iodine
prices have been increasing since the end of 2003. While prices were around
US$13 per kg in 2003, they reached an average of approximately US$19 per kg in
2005.
Demand for iodine varies depending upon, among other things, 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.
29
The main factors of competition in the sale of iodine and iodine
derivative products are reliability, price, quality, customer service and the
price and availability of substitutes. We believe that we have competitive
advantages compared to other producers due to the size of our mining reserves,
our installed capacity and our relatively lower production costs (as most of our
iodine is produced as part of the production 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
largest 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 are believe we are the world's largest producers of lithium carbonate
and one of the world's largest suppliers 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 the world's lithium units used in the
production of lithium chemicals. Lithium is also used in the production 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 dye and battery industries. Butyl lithium 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 technology 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.
Currently, this product is sold in the U.S. market only. Shipments to Europe and
Asia are scheduled to begin by the end of 2006.
The following table sets forth our total sales volumes for each specified
year 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 30,600 27,400 22,300 21,700
Revenues (in US$ millions) 81.3 62.6 49.7 37.3 37.0
30
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 34% 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"), a subsidiary of Rockwood
Specialties Group Inc., and FMC Corporation ("FMC"). We estimate that together
they sold approximately 48% of lithium in volume in the lithium chemicals market
(excluding lithium minerals) in 2005. Chemetall produces lithium carbonate in
its facilities located in Chile (Sociedad Chilena del Litio) and Nevada. 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 it produces lithium chloride and lithium carbonate.
Production of its downstream lithium products is mostly performed in the U.S.
and the U.K. Most of the new competition is expected to come from China in the
coming years.
We estimate that worldwide sales of lithium chemicals expressed as
lithium carbonate equivalent (excluding lithium minerals) amounted to
approximately 76,500 metric tons in 2005. Our sales of lithium chemicals reached
over 27,800 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, which grades differ mainly in purity. Our
industrial grades of potassium nitrate also differ from agricultural grade
potassium nitrate in their 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, requiring 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$73.9 million, representing
approximately 8% of our total revenues for that year.
Industrial Chemicals: Market
----------------------------
Industrial sodium nitrate and potassium nitrate are used in a wide range
of industrial applications, including the production of glass, ceramics,
explosives and charcoal briquettes and various chemical processes and metal
treatments. Boric acid is mainly used in the glass, ceramics, fiberglass,
enamels and as a raw material in the fabrication of LCDs.
We estimate that our sales of industrial sodium nitrate (excluding
production in China and India, which is consumed internally) and potassium
nitrate in 2005 accounted for 62% and 30%, respectively, of worldwide sales for
that period.
31
Industrial Chemicals: Our Products
----------------------------------
We produce technical potassium nitrate and three grades of industrial
sodium nitrate in crystallized and prilled form. We market our refined grade
sodium nitrate under the brand name "Niterox." We also produce boric acid in
crystalline form.
The following table sets forth our sales volumes for each specified year
and total revenues of industrial chemicals in the 2001-2005 period:
Sales Volume
(in metric tons) 2005 2004 2003 2002 2001
--------- --------- --------- ---------- --------
Industrial nitrates 176,300 190,000 193,200 187,300 186,999
Boric acid 6,300 5,900 10,700 11,300 12,822
Revenues (in US$ millions) 74.0 71.2 73.7 70.8 69.6
Our aggregate current sodium nitrate 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 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
the year 2005. Approximately 42% of our sales of industrial chemicals were 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 less than 37% of such sales.
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%
In 2005, we sold approximately 62% of our boric acid production to the
North American market.
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 producers 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, Bayerische Anilinen 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
32
chemicals, including sodium carbonate, sodium hydroxide, 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.
Production Process
Our integrated production process can be classified according to our
natural resources:
o caliche ore deposits: contain nitrates and iodine.
o 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 theory 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 five production facilities: Pedro de Valdivia, Maria Elena, Pampa
Blanca, Nueva Victoria and Iris (formerly the DSM iodine production facility).
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.
The ore in Pedro de Valdivia and Maria Elena plants is crushed and
leached to produce concentrated solutions carrying nitrate and iodine. The
crushing of the ore delivers two products, a coarse fraction, which is leached
in a vat system, and a fine fraction, which 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, Nueva Victoria and Iris, the run of mine ore is loaded
in heaps and leached to produce concentrated solutions.
33
Caliche Ore-Derived Products
----------------------------
Caliche ore-derived products are: sodium nitrate, potassium nitrate,
sodium potassium nitrate and iodine and iodine derivatives.
Sodium Nitrate
--------------
Sodium nitrate for both agricultural and industrial applications is
produced at the Maria 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 near Maria 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 material out of 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 recycled for further leaching and for the extraction of iodine.
Crystallized sodium nitrate is processed further at Pedro de Valdivia and
Maria Elena to produce prilled sodium nitrate, which is transported to our port
facilities in Tocopilla for shipping to customers and distributors worldwide in
bulk or bagged. Our current crystallized sodium nitrate production capacity at
Pedro de Valdivia and Maria Elena is approximately 770,000 metric tons per year.
A portion of the sodium nitrate produced at Maria Elena and Pedro de Valdivia is
used in the production of a highly refined industrial grade sodium nitrate or in
the production of potassium nitrate at Coya Sur and sodium potassium nitrate at
Maria Elena.
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.
Concentrated nitrate salts are produced at Pampa Blanca by leaching
caliche ore in leach pads from we extract rich iodine and the 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 the solutions
are evaporated and rich nitrate salts are produced. These concentrated nitrate
salts are sent to Coya Sur or our other salt processing facilities where they
are leached and the resulting rich nitrate solution is used in the production of
potassium nitrate.
We are in the process of developing the project to produce concentrated
nitrate salts at the Nueva Victoria facility. These salts will be used as a raw
material to produce potassium nitrate (see description in "Business--Capital
Expenditure Program").
Our current potassium nitrate production capacity 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.
34
Crystallized or prilled potassium nitrate produced at Coya Sur and Maria
Elena is transported to Tocopilla for shipping to customers and distributors in
bulk or bagged.
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 Maria 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 installed prilling capacity is approximately 1,100,000 metric tons
per year. With certain production restraints and according to market conditions
we may supply sodium nitrate, potassium nitrate or sodium potassium nitrate in
prilled form.
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, Maria 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 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
the 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 or in 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 7,800 metric tons
(not including production at the Iris facility, which we acquired in January
2006).
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 have primarily marketed our iodine derivative products in South America,
Africa and Asia, while Ajay and its affiliates have 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.
35
Brines are pumped from depths between 1.5 and 40 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,
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 provides 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 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 trucked approximately 300 kilometers to
our Coya Sur facilities, where it is used in the production of potassium
nitrate. We sell potassium chloride produced at the Atacama Salar in excess of
our needs to third parties. Our production facilities currently have a
production capacity up to 650,000 metric tons per year.
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 and
then, if necessary, compacted and finally packaged for shipment. Our lithium
carbonate facility production capacity is approximately 28,500 metric tons per
year. Future production will depend on the actual volumes and quality of the
lithium solutions sent by the Salar operations.
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 process, 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.
36
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 for general purposes),
potassium chloride (in the manufacture of potassium nitrate), 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, Maria Elena, Iris, Coya Sur, Pampa Blanca, Nueva
Victoria, the Atacama Salar and the lithium carbonate plant at Salar del
Carmen). Our raw material costs (including energy and excluding caliche ore and
salar brines) represented approximately 13.3% 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 and iodine facilities at Pedro
de Valdivia, Maria Elena and Coya Sur are the Loa and San Salvador Rivers, which
run near our production facilities. Water for our Pampa Blanca, Nueva Victoria,
Iris 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.
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 another
major Chilean electricity producer, Electroandina. 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.
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
installations that are connected to a gas supply. Nonetheless, we currently have
a restriction that limits our supply to approximately 3,200,000 million Btu per
year. This restriction is not affecting us currently, but if we were to use 100%
of the equipment connected to the gas supply we would have to replace part of
the natural gas consumption with higher cost diesel or fuel oil. See
"Business--Legal Proceedings."
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.
Chilean Government Regulations
We are subject to a wide range of Chilean regulations and governmental
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.
37
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 Authority for a supply of
water from rivers and wells near our production facilities sufficient to meet
our current and anticipated operational requirements. We operate port facilities
at Tocopilla for the shipment of products and the delivery of certain raw
materials, pursuant to maritime concessions under applicable Chilean law, 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:
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% of
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
Law. The Chilean Environmental Law created CONAMA and COREMA, which are the
governmental agencies in charge of supervising the due compliance with the
Chilean Environmental Law. Under the Chilean Environmental 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 and
COREMA evaluate environmental impact studies submitted for their approval and
also oversee the implementation of projects. The Chilean Environmental 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
38
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 the Health Code stating that atmospheric
particulate levels at our production facilities in Maria 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 Maria 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 No. 164/2000. 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 No. 384, 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(degree)37/2004 in March 2004. The new timetable requires a reduction by 80% of
the emissions for atmospheric particulate material by April 1, 2006. We are
working on the construction for a project that modifies the milling and
screening systems used in the processing of the caliche ore at Maria Elena
facilities that should allow for the necessary reduction of particulate material
emissions. We expect to begin operations in 2006.
There can be no assurance that we will not be subject in the interim to
warnings, fines and possible temporary closures of our referred production
facilities in Maria Elena.
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.
We continuously monitor the impact of our operations on the environment
and have, from time to time, made modifications to our facilities trying to
eliminate any adverse impact. While we believe that we will continue to be in
compliance with all applicable environmental regulations of which we are now
aware, 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. We are committed to
complying with all applicable environmental regulations and applying an
Environmental Management System (EMS) to continuously improve our environmental
performance.
Organizational Structure
All of our principal operating subsidiaries are wholly-owned, except for
Soquimich Comercial S.A., which is 61% owned by SQM and whose shares are listed
and traded on the Santiago Stock Exchange, and Ajay SQM Chile S.A., which is 51%
owned by SQM. The following is a summary of our main subsidiaries. For a list of
all our subsidiaries, see Note 2(a) to our Consolidated Financial Statements.
------------------------------- ------------------------------------------- -------------------- ---------------------
SQM Beneficial
Main subsidiaries Country of Ownership Interest
Activity Incorporation (Direct/Indirect)
------------------------------- ------------------------------------------- -------------------- ---------------------
SQM Nitratos S.A. Exploits Caliche ore to produce and sell Chile 100%
processed minerals to subsidiaries and
affiliates of SQM
------------------------------- ------------------------------------------- -------------------- ---------------------
SQM Industrial S.A. Produces and markets the Company's Chile 100%
products directly and through other
subsidiaries and affiliates of SQM
------------------------------- ------------------------------------------- -------------------- ---------------------
39
------------------------------- ------------------------------------------- -------------------- ---------------------
SQM Salar S.A. Exploits the Atacama Salar to produce and Chile 100%
market the Company's products directly
and through other subsidiaries and
affiliates of SQM
------------------------------- ------------------------------------------- -------------------- ---------------------
Minera Nueva Victoria S.A.(1) Produces and markets the Company's Chile 100%
products directly and through other
subsidiaries and affiliates of SQM
------------------------------- ------------------------------------------- -------------------- ---------------------
Servicios Integrales de Owns and operates a rail transport system Chile 100%
Transitos y Transferencias and also owns and operates the Tocopilla
S.A. (SIT) port facilities
------------------------------- ------------------------------------------- -------------------- ---------------------
Soquimich Comercial S.A. Markets domestically the Company's Chile 61%
specialty plant nutrition products and
imports fertilizers for re-sale in Chile
------------------------------- ------------------------------------------- -------------------- ---------------------
Ajay-SQM Chile S.A. Produces and markets the Company's iodine Chile 51%
and iodine derivatives
------------------------------- ------------------------------------------- -------------------- ---------------------
Sales and distribution Market the Company's products throughout Various
affiliates in the United the world
States, Belgium, Brazil,
Venezuela, Ecuador, Peru,
Argentina, Mexico, South
Africa and other locations.
------------------------------- ------------------------------------------- -------------------- ---------------------
------------------
(1) Formerly DSM Minera S.A., acquired in 2006.
Concessions, Extraction Yields and Reserves for the Caliche Ore Mines and Salar
Brines
Concessions for the Caliche Ore Mines and Salar Brines
Approximately 68% of our total mining concessions are held pursuant to
Exploitation Concessions and 32% pursuant to Exploration Concessions, not
including areas within the Atacama Salar mines. The Chilean government owns
substantially all of the surface land covering our Exploration and Exploitation
Concessions.
Additional Mining Operations Leased in the Atacama Salar Region
---------------------------------------------------------------
Our subsidiary 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. Also, Corfo may not unilaterally terminate the Lease
Agreement, except in the events of conversion of SQM Salar S.A. into another
type of company, insolvency of SQM Salar S.A., or the non-payment of amounts due
under the Lease Agreement. 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 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.
As of December 31, 2004, our exploitation and exploration concessions,
not including concessions related to the acquisition of the iodine business of
DSM Group in January 2006, were:
40
Exploitation Exploration
Concessions Concessions
------------------------- -------------------------
Total Total Total
Mines Number hectares number hectares number hectares
--------------------------------------- ------------ ------------ ------------ ------------- ------------ ------------
Pedro de Valdivia 687 94,879 19 1,310 706 96,189
Maria Elena 636 125,446 41 3,111 677 128,557
Pampa Blanca 500 96,368 10 861 510 97,229
Nueva Victoria 18 7,930 7 1,369 25 9,299
Mapocho 56 8,042 10 348 66 8,390
Soronal 296 42,602 20 1,926 316 44,528
Atacama Salar 228 221,823 504 145,100 732 366,923
Sub total mines 2,421 597,090 611 154,025 3,032 751,115
Other caliche areas 4,913 1,322,712 2,885 747,135 7,798 2,069,847
Salars and other areas 260 66,048 56 45,040 316 111,088
Sub total other areas 5,173 1,388,760 2,941 792,175 8,114 2,180,935
--------------------------------------- ------------ ------------ ------------ ------------- ------------ ------------
Total 7,594 1,985,850 3,552 946,200 11,146 2,932,050
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
----------------------------------------------------------------------------------------------------------------------
Maria 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(3) 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
----------------------------------------------------------------------------------------------------------------------
41
2005 2004 2003
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
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 potassium chloride produced 632 638 651
Metric tons of potassium sulfate produced 162 178 157
Metric tons of boric acid produced 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.
(2) Includes production at Coya Sur from treatment of fines and nitrates from
pile treatment at Pampa Blanca, Maria Elena and Pedro de Valdivia.
(3) Does not include product losses.
Reserves (All the following information is as of December 31, 2004. We will
report information as of December 31, 2005 in our Form 20-F to be filed in June
2006. Such information may be materially different from the following.)
Caliche ore
-----------
Our in-house staff of geologists and mining engineers prepares our
estimates of caliche ore reserves according to practices or methods generally
applied within the industry. 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.
We estimate ore reserves based on engineering evaluations of assay values
derived from the sampling of drill holes and other openings. Several drill hole
spacings have been used for recognizing mining resources. Normally, we start
with 400x400 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 one to four meters and
has an overburden between zero to two meters. This horizontal layering is a
natural geological condition and allows us 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.
Based on our experience with caliche ore, the grid pattern drill holes
with spacing equal to or less than 100 meters produce data on the caliche
resources that are 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 400 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 estimates of our proven reserves of caliche ore at each of our mines,
as of December 31, 2004, are the following:
42
------------------------------- ---------------------------- ---------------------------- ----------------------------
Proven Reserves Nitrate Average Grade Iodine Average Grade
Mine (millions of metric tons) (percentage by weight) (parts per million)
------------------------------- ---------------------------- ---------------------------- ----------------------------
Pedro de Valdivia 142.4 7.2% 386
------------------------------- ---------------------------- ---------------------------- ----------------------------
Maria Elena 154.0 7.3% 421
------------------------------- ---------------------------- ---------------------------- ----------------------------
Pampa Blanca 65.3 6.6% 539
------------------------------- ---------------------------- ---------------------------- ----------------------------
Nueva Victoria 37.4 3.5% 475
------------------------------- ---------------------------- ---------------------------- ----------------------------
Mapocho 4.6 5.3% 436
------------------------------- ---------------------------- ---------------------------- ----------------------------
Soronal 158.9 7.1% 405
------------------------------- ---------------------------- ---------------------------- ----------------------------
In addition, the estimates of our probable reserves of caliche ore at
each of our principal mines, as of December 31, 2004, are the following:
------------------------------- ---------------------------- ---------------------------- ----------------------------
Probable Reserves Nitrate Average Grade Iodine Average Grade
Mine (millions of metric tons) (percentage by weight) (parts per million)
------------------------------- ---------------------------- ---------------------------- ----------------------------
Pedro de Valdivia 160.5 6.9% 440
------------------------------- ---------------------------- ---------------------------- ----------------------------
Maria Elena 187.4 7.1% 345
------------------------------- ---------------------------- ---------------------------- ----------------------------
Pampa Blanca 482.2 8.0% 540
------------------------------- ---------------------------- ---------------------------- ----------------------------
Nueva Victoria 112.2 4.2% 451
------------------------------- ---------------------------- ---------------------------- ----------------------------
Mapocho 234.3 6.9% 524
------------------------------- ---------------------------- ---------------------------- ----------------------------
Soronal 59.1 7.6% 362
------------------------------- ---------------------------- ---------------------------- ----------------------------
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.
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 bases 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% and
65%.
Exploration Program. We maintain a permanent program of exploration and
resource evaluation on the land surrounding the mines at Pedro de Valdivia and
Maria Elena and at other sites for which we have the appropriate concessions. In
2004, 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 75,000 hectares. Additionally, we conducted general
explorations based on a closer grid pattern drill holes in a total area of
approximately 2,603 hectares and, in addition, carried out in-depth sampling of
approximately 1,843 hectares (281 hectares at Pedro de Valdivia, 593 hectares at
Maria Elena, 28 hectares at Pampa Blanca and 941 hectares at Nueva Victoria).
43
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
according to practices generally applied within the industry. 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, as of December 31, 2004, were
as follows:
--------------- ------------------------------- -------------------------------
Proven Reserves Probable Reserves
(millions of metric tons) (millions of metric tons)
--------------- ------------------------------- -------------------------------
Potassium 40.3 6.2
--------------- ------------------------------- -------------------------------
Sulfate 36.6 1.2
--------------- ------------------------------- -------------------------------
Lithium 1.9 1.5
--------------- ------------------------------- -------------------------------
Boron 0.7 0.7
--------------- ------------------------------- -------------------------------
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. The
overall recovery for potassium varies from 72% to 40%, while for sulfate varies
from 50% to 19%. The recoveries for lithium and boron are estimated to vary
between 26% and 30%.
Ports and Water Rights
We operate port facilities at Tocopilla for the shipment of products and
the 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.
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 materials is the
hub composed by the facilities in Coya Sur, Pedro de Valdivia and Maria Elena.
Our Atacama Salar facilities constitute the second largest concentration of
plants and raw material storage. Other facilities include Nueva Victoria, Pampa
Blanca, the Yumbes nitrate plant and the finished products plants of boron and
lithium carbonate at the Salar del Carmen, near Antofagasta. The Tocopilla Port
Terminal, which we own, is the main facility for the storage and shipment of our
products.
Nitrates raw materials are produced and first stored at our Pampa Blanca
and Yumbes mines. They are transported by rail (Pedro de Valdivia), conveyor
(Maria Elena) and truck (others) to the plants described in the next paragraph,
to continue the production process.
Nitrates finished products are produced at our facilities in Pedro de
Valdivia, Maria Elena and Coya Sur and then transported by our rail system to
the Tocopilla Port Terminal, where they are stored and shipped, either bagged or
in bulk.
44
Potassium chloride is produced at our facilities at the Atacama Salar and
transported either to the Tocopilla Port Terminal or Coya Sur by a dedicated
dual transport system (rail/truck) owned by a third party dedicated contractor.
Products going to Coya Sur are used as raw materials for the production of
potassium nitrate or for potassium chloride finished products.
Potassium sulfate and boric acid are both produced at our facilities in
the Atacama Salar and then are transported to the 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 Atacama Salar, by contracted truck company.
Lithium solutions, produced at our facilities in the Atacama Salar, are
transported to the lithium facility in the Salar del Carmen area near
Antofagasta, where finished lithium carbonate is produced, bagged and stored.
These products are then transported by truck to the Tocopilla Port Terminal or
to the Antofagasta Terminal for shipment in charter vessel and container vessel,
respectively.
Iodine raw material, obtained in the same mines as nitrates, is
processed, bagged and stored exclusively in the facilities of Pedro de Valdivia
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 the Tocopilla Port Terminal are located approximately
186 kilometers north of Antofagasta and approximately 124 kilometers west of
Pedro de Valdivia, 84 kilometers west of Maria 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 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 the Tocopilla Port Terminal dock and
unloaded by vessel cranes into the hatches. Both bulk and bagged trucks are
loaded in the 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 the Tocopilla Port Terminal is 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.
Employees
As of December 31, 2005, we had 3,735 permanent employees, of whom 315
were employed outside of Chile. The average tenure of our full time employees is
approximately 9 years.
2005 2004 2003 2002
---- ---- ---- ----
Permanent employees 3,735 3,418 3,455 3,050
Employees in Chile 3,420 3,138 3,154 2,869
Employees outside of Chile 315 280 301 181
Of our permanent employees in Chile, 73.7% are represented by 30 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 other benefits,
45
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 Institucion 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 law 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 Maria 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 have experienced no strikes or significant work stoppages in the last
ten years and consider the relationship with our employees to be good.
Recent legislation to reform Chilean labor law has amended several
articles of Employment Law N(degree) 19,759. One of the most relevant amendments
for the Company was Article 22, which reduced the hours in a work week from 48
to 45, effective as of January 1, 2005. During 2004, we changed all our work
shifts that had more than 45 working hours in order to comply with the new
requirement. These changes did not result in significant higher costs or
operational problems.
Legal Proceedings
In September 2005, Electroandina S.A., or 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.
Because a similar claim has been announced by AES Norgener S.A., or
Norgener, our other main electricity supplier, we expect an arbitration
proceeding to commence shortly with Norgener.
The Company is party to various other lawsuits arising in the ordinary
course of business. Management considers it unlikely that any losses associated
with such lawsuits will significantly affect the Company's results of
operations, financial position, and cash flows.
Research and Development, Patents and Licenses
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
depends on the GIDMA (Research, Development and Environmental Department),
provides technical advice to production, quality and commercial areas.
Our research and development activities are conducted principally at the
Antofagasta Research and Development Center. As of February 2006, the center had
a total staff of 39 people, including four Ph.D.s, three MSc.s, and 23
professionals in the fields of engineering and chemistry conducting research on
various projects. Our
46
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, and (iv) improvement of
technical customer service.
Our research and development activities have been instrumental in
improving our production processes and developing new products. As a result of
our 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 in other countries when necessary.
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOCIEDAD QUIMICA Y MINERA DE CHILE S.A.
Conf: /s/ Ricardo Ramos
Ricardo Ramos
Chief Financial Officer &
Business Development SVP
Date: March 29, 2006