SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
____________________
FORM 20-F
| o |
REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF
1934
|
OR
| x |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the fiscal year ended December 31, 2006
OR
| o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
OR
| o |
SHELL
COMPANY REPORT PURSUANT TO SECTION 23 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
Date
of
event requiring this shell company report_______________________________
.
For
the
transition period from _____________to__________
.
Commission
file number 33-65728
/ 33-99188
/ 333-10068
SOCIEDAD
QUIMICA Y MINERA DE CHILE S.A.
(Exact
name of registrant as specified in its charter)
CHEMICAL
AND MINING COMPANY OF CHILE INC.
(Translation
of registrant's name into English)
CHILE
(Jurisdiction
of incorporation or organization)
El
Trovador 4285, Piso 6, Santiago, Chile +56 2 425-2000
(Address
of principal executive offices)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act.
|
Title
of each class
|
Name
of each exchange on which registered
|
|
Series
A shares, in the form of American Depositary Shares
Series
B shares, in the form of American Depositary Shares
|
New
York Stock Exchange
New
York Stock Exchange
|
Securities
registered or to be registered pursuant to Section 12(g) of the
Act.
NONE
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act.
NONE
Indicate
the number of outstanding shares of each of the issuer's classes of capital
or
common stock as of the close of the period covered by the annual
report.
|
Series
A shares
|
142,819,552
|
|
Series
B shares
|
120,376,972
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
rule 405 of the Securities Act: T
YES £
NO
If
this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d)
of
the Securities Exchange act of 1934: £
YES T
NO
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. T
YES
£
NO
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non accelerated filer. See definition of “accelerated
filer and large accelerated filer” in rule 12b-2 of the Exchange Act.
T
Large
accelerated filer £
Accelerated filer £
Non-
accelerated filer
Indicate
by check mark which financial statement item the registrant has elected to
follow. £
Item
17 T
Item
18
If
this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act):
£YES
T
NO
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| F-1 | ||
In
this
Annual Report on Form 20-F, unless the context requires otherwise, all
references to "we",
"us",
"Company"
or
"SQM"
are to
Sociedad Química y Minera de Chile S.A., an open stock corporation (sociedad
anónima abierta) organized under the laws of the Republic of Chile, and its
consolidated subsidiaries.
All
references to "$,"
"US$,"
"U.S.
dollars"
and
"dollars"
are to
United States dollars, references to "pesos"
or
"Ch$"
are to
Chilean pesos, and references to "UF"
are to
Unidades
de Fomento.
The UF
is an inflation-indexed, peso-denominated unit that is linked to, and adjusted
daily to reflect changes in, the previous month's Chilean consumer price index.
As of June 15, 2007, UF 1.00 was equivalent to US$ 35.10 and Ch$
18,568.55.
The
Republic of Chile is governed by a democratic government, organized in twelve
regions plus the Metropolitan Region (surrounding and including Santiago, the
capital of Chile). Our production operations are concentrated in northern Chile,
specifically in the First Region, also named Tarapacá Region, and in the Second
Region, also named Antofagasta Region.
Our
fiscal year ends on December 31.
We
use
the metric system of weights and measures in calculating our operating and
other
data. The United States equivalent units of the most common metric units used
by
us are as shown below:
1
kilometer equals approximately 0.6214 miles
1
meter
equals approximately 3.2808 feet
1
centimeter equals approximately 0.3937 inches
1
hectare
equals approximately 2.4710 acres
1
metric
ton equals 1,000 kilograms or approximately 2,205 pounds.
We
are
not aware of any independent, authoritative source of information regarding
sizes, growth rates or market shares for most of our markets. Accordingly,
the
market size, market growth rate and market share estimates contained herein
have
been developed by us using internal and external sources and reflect our best
current estimates. These estimates have not been confirmed by independent
sources.
Percentages
and certain amounts contained herein have been rounded for ease of presentation.
Any discrepancies in any figure between totals and the sums of the amounts
presented are due to rounding.
"assay
values"
Chemical result or mineral component amount that contains the
sample.
"average
global metallurgical recoveries"
Percentage that measures the metallurgical treatment effectiveness based on
the
quantitative relationship between the initial product contained in the
mine-extracted material and the final product produced in the
plant.
"average
mining exploitation factor"
Index
or ratio that measures the mineral exploitation effectiveness (defined below),
based on the quantitative relationship between (in-situ mineral minus
exploitation losses) / in-situ mineral.
"Corfo"
Corporation of Promotion of Production (Corporación de Fomento de la
Producción), formed in 1939, a national organization in charge of promoting and
facilitating Chile's manufacturing productivity and commercial
development.
"cut-off
grade"
The
minimal assay value or chemical amount of some mineral component above which
results in economical exploitability.
"dilution"
Loss of
mineral grade because of contamination with barren material (or waste)
incorporated in some exploited ore mineral.
"exploitation
losses"
Amounts
of ore mineral that have not been extracted in accordance with exploitation
designs.
"fertigation"
The
process by which plant nutrients are applied to the ground using an irrigation
system.
"geostatistical
analysis"
Statistical tools applied to mining planning, geology and geochemical data
that
allow estimation of averages, grades and quantities of mineral resources and
reserves.
"heap
leaching pads"
Padding
or filling of rocks from which will be extracted the soluble mineral by
irrigation with water.
"horizontal
layering"
Rock
mass (stratiform seam) with generally uniform thickness that conform to the
sedimentary fields (mineralized and horizontal rock in these
cases).
"hypothetical
resources"
Mineral
resources that have limited geochemical reconnaissance, based mainly in
geological data and samples assays values spaced between 500-1000
meters.
"Indicated
Mineral Resource"
See
"Resources—Indicated Mineral Resource."
"Inferred
Mineral Resource"
See
"Resources—Inferred Mineral Resource."
"industrial
crops"
Refers
to crops that require processing after harvest in order to be ready for
consumption or sale. Tobacco, tea and seed crops are examples of industrial
crops.
"LIBOR"
London
Inter Bank Offered Rate.
"limited
reconnaissance"
Low or
limited level of geological knowledge.
"Measured
Mineral Resource"
See
"Resources—Measured Mineral Resource."
"metallurgical
treatment"
A set
of chemical and physical processes applied to rocks to extract their useful
minerals (or metals).
"old
waste ore deposits"
Ore
deposits that have been previously mined but not entirely depleted because
of
the low-grade quality of the ore the mine yields.
"ore
depth"
Depth
of the mineral that may be economically exploited.
"ore
type"
Main
mineral having economic value contained in the caliche ore (sodium nitrate
or
iodine).
"ore"
A
mineral or rock from which a substance having economic value may be
extracted.
"Probable
Mineral Reserve"
See
"Reserves—Probable Mineral Reserve."
"Proved
Mineral Reserve"
See
"Reserves—Proved Mineral Reserve."
"Reserves—Probable
Mineral Reserve"*
The
economically mineable part of an Indicated Mineral Resource and, in some
circumstances, Measured Mineral Resource. It includes diluting of materials
and
allowances for losses which may occur when the material is mined. Appropriate
assessments, which may include feasibility studies, have been carried out and
include consideration of and modification by realistically assumed mining,
metallurgical, economic, marketing, legal, environmental, social and
governmental factors. These assessments demonstrate at the time of reporting
that extraction is reasonably justified. A Probable Mineral Reserve has a lower
level of confidence than a Proved Mineral Reserve.
"Reserves—Proved
Mineral Reserve"*
The
economically mineable part of a Measured Mineral Resource. It includes diluting
materials and allowances for losses which may occur when the material is mined.
Appropriate assessments, which may include feasibility studies, have been
carried out and include consideration of and modification by realistically
assumed mining, metallurgical, economic, marketing, legal, environmental, social
and governmental factors. These assessments demonstrate at the time of reporting
that extraction is reasonably justified.
"Resources—Indicated
Mineral Resource"*
That
part of a Mineral Resource for which tonnage, densities, shape, physical
characteristics, grade and mineral content can be estimated with a reasonable
level of confidence. It is based on exploration, sampling and testing
information gathered through appropriate techniques from locations such as
outcrops, trenches, pits, workings, and drill holes. The locations are too
widely or inappropriately spaced to confirm geological continuity and/or grade
continuity but are spaced closely enough for continuity to be assumed. An
Indicated Mineral Resource has a lower level of confidence than that applying
to
a Measured Mineral Resource, but has a higher level of confidence than that
applying to an Inferred Mineral Resource.
|
A
deposit may be classified as an Indicated Mineral Resource when the
nature, quality, amount and distribution of data are such as to allow
the
Competent Person determining the Mineral Resource to confidently
interpret
the geological framework and to assume continuity of mineralization.
Confidence in the estimate is sufficient to allow the appropriate
application of technical and economic parameters and to enable an
evaluation of economic viability.
|
"Resources—Inferred
Mineral Resource"*
Is
that part of a Mineral Resource for which tonnage, grade and mineral content
can
be estimated with a low level of confidence. It is inferred from geological
evidence and assumed but not verified geological and/or grade continuity. It
is
based on information gathered through appropriate techniques from locations
such
as outcrops, trenches, pits, workings and drill holes which is of limited or
uncertain quality and/or reliability. An Inferred Mineral Resource has a lower
level of confidence than that applying to an Indicated Mineral
Resource.
"Resources—Measured
Mineral Resource"
The
part of a Mineral Resource for which tonnage, densities, shape, physical
characteristics, grade and mineral content can be estimated with a high level
of
confidence. It is based on detailed and reliable exploration, sampling and
testing information gathered through appropriate techniques from locations
such
as outcrops, trenches, pits, workings, and drill holes. The locations are spaced
closely enough to confirm geological and/or grade continuity.
|
A
deposit may be classified as a Measured Mineral Resource when the
nature,
quality, amount and distribution of data are such as to leave no
reasonable doubt, in the opinion of the Competent Person determining
the
Mineral Resource, that the tonnage and grade of the deposit can be
estimated within close limits and that any variation from the estimate
would not significantly affect potential economic viability. This
category
requires a high level of confidence in, and understanding of, the
geology
and controls of the mineral deposit. Confidence in the estimate is
sufficient to allow the appropriate application of technical and
economic
parameters and to enable an evaluation of economic
viability.
|
"waste"
Rock or
mineral which is not economical for metallurgical treatment.
"waste-to-ore
ratio"
Relation or ratio between waste/ore.
"Weighted
Average Age"
In this
Annual Report means the sum of the product of the age of each fixed asset at
a
given facility and its current gross book value as of December 31, 2006 divided
by the total gross book value of the Company's fixed assets at such facility
as
of December 31, 2006.
*
The
definitions we use for resources and reserves are based on those provided by
the
“Instituto de Ingenieros de Minas de Chile” (Chilean Institute of Mining
Engineers).
SQM
will
provide without charge to each person to whom this Annual Report is delivered,
on the written or oral request of any such person, a copy of any or all of
the
documents incorporated herein by reference (other than exhibits, unless such
exhibits are specifically incorporated by reference in such documents). Written
requests for such copies should be directed to Sociedad Química y Minera de
Chile S.A., El Trovador 4285, Piso 6, Santiago, Chile, Attention: Investor
Relations Department. Requests may also be made by telephone (562-425-2000),
facsimile (562-425-2493) and e-mail (ir@sqm.com).
This
Form
20-F contains statements that are or may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements appear throughout this Form 20-F and include statements
regarding the intent, belief or current expectations of the Company and its
management, including but not limited to any statements concerning:
|
·
|
the
Company's capital investment program and development of new
products;
|
|
·
|
trends
affecting the Company's financial condition or results of
operations;
|
|
·
|
level
of production, quality of the ore and brines, and production
yields;
|
|
·
|
the
future impact of competition;
|
|
·
|
any
statements preceded by, followed by, or that include the words "believe,"
"expect," "predict," "anticipate," "intend," "estimate," "should,"
"may,"
"could" or similar expressions; and
|
|
·
|
other
statements contained in this Form 20-F that are not historical
facts.
|
Such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Actual results may differ materially from those
described in such forward-looking statements included in this Form 20-F,
including, without limitation, the information under Item 4. Information on
the
Company and Item 5. Operating and Financial Review and Prospects. Factors that
could cause actual results to differ materially include, but are not limited
to:
|
·
|
SQM's
ability to implement its capital expenditures, including its ability
to
arrange financing when required;
|
|
·
|
the
nature and extent of future competition in SQM's principal
markets;
|
|
·
|
political,
economic and demographic developments in the emerging market countries
of
Latin America and Asia where SQM conducts a large portion of its
business;
and
|
|
·
|
the
factors discussed below under Item 3. Key Information—Risk
Factors.
|
Not
Applicable.
Not
Applicable.
3.A.
Selected
Financial Data
The
following table presents selected consolidated financial information for SQM
and
one or more of its subsidiaries, as applicable, for each of the periods
indicated. This information should be read in conjunction with, and is qualified
in its entirety by reference to, the Audited Consolidated Financial Statements
of the Company as of December 31, 2006 and 2005 and for each of the three years
in the period ended December 31, 2006. The consolidated financial statements
as
of December 31, 2003 and 2002 and for the years then ended are not included
herein. The Company's Consolidated Financial Statements are prepared in
accordance with Chilean GAAP, which differs in certain material respects from
U.S. GAAP. Note 29 to the Consolidated Financial Statements as of December
31,
2006 and 2005 and for each of the three years in the period ended December
31,
2006 provides a description of the principal differences between Chilean GAAP
and U.S. GAAP and a reconciliation of net income for the years ended December
31, 2006, 2005 and 2004 and total shareholders' equity as of December 31, 2006
and 2005 to U.S. GAAP.
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
Income
Statement Data
|
(in
millions of US$) (1)
|
|||||||||||||||
|
Chilean
GAAP
|
|
|
|
|
|
|||||||||||
|
Total
Revenues
|
1,042.9
|
896.0
|
788.5
|
691.8
|
553.8
|
|||||||||||
|
Operating
Income
|
219.9
|
181.2
|
124.1
|
87.3
|
82.7
|
|||||||||||
|
Non-operating
results, net
|
(36.1
|
)
|
(34.4
|
)
|
(17.6
|
)
|
(21.2
|
)
|
(30.0
|
)
|
||||||
|
Net
income
|
141.3
|
113.5
|
74.2
|
46.8
|
40.2
|
|||||||||||
|
Net
earnings per share (2)
|
0.54
|
0.43
|
0.28
|
0.18
|
0.15
|
|||||||||||
|
Net
earnings per ADS (2)
|
5.37
|
4.31
|
2.82
|
1.78
|
1.53
|
|||||||||||
|
Dividend
per share (3)(4)
|
0.349
|
0.279
|
0.182
|
0.088
|
0.076
|
|||||||||||
|
Weighted
average shares Outstanding (000s) (2)
|
263,197
|
263,197
|
263,197
|
263,197
|
263,197
|
|||||||||||
|
U.S.
GAAP
|
||||||||||||||||
|
Total
Revenues
|
1,042.9
|
896.0
|
788.5
|
691.8
|
553.8
|
|||||||||||
|
Operating
Income
|
205.5
|
163.9
|
114.6
|
76.7
|
87.0
|
|||||||||||
|
Non-operating
results, net (5)
|
(14.1
|
)
|
(6.1
|
)
|
(1.6
|
)
|
(4.3
|
)
|
(26.2
|
)
|
||||||
|
Equity
participation in income (loss) of related companies, net
|
2.0
|
2.6
|
1.8
|
2.2
|
1.1
|
|||||||||||
|
Effect
of change in accounting principles
|
—
|
—
|
—
|
—
|
0.5
|
|||||||||||
|
Net
income
|
154.3
|
125.2
|
86.8
|
57.8
|
46.9
|
|||||||||||
|
Basic
and diluted earnings per share
|
0.59
|
0.48
|
0.33
|
0.22
|
0.18
|
|||||||||||
|
Basic
and diluted earnings per ADS
|
5.86
|
4.76
|
3.30
|
2.19
|
1.78
|
|||||||||||
|
Weighted
average shares Outstanding (000s)(2)
|
263,197
|
263,197
|
263,197
|
263,197
|
263,197
|
|||||||||||
|
Year
ended December 31,
|
||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
Balance
Sheet Data:
|
(In
millions of US$) (1)
|
|||||||||||||||
|
Chilean
GAAP:
|
|
|
|
|
|
|||||||||||
|
Total
assets
|
1,871.2
|
1,640.6
|
1,361.4
|
1,363.5
|
1,322.3
|
|||||||||||
|
Long-term
debt
|
480.7
|
100.0
|
200.0
|
260.0
|
324.0
|
|||||||||||
|
Total
shareholders' equity
|
1,085.9
|
1,020.4
|
948.6
|
890.0
|
849.7
|
|||||||||||
|
Capital
Stock
|
477.4
|
477.4
|
477.4
|
477.4
|
477.4
|
|||||||||||
|
U.S.
GAAP:
|
||||||||||||||||
|
Total
assets
|
1,846.0
|
1,609.0
|
1,318.5
|
1,319.4
|
1,274.6
|
|||||||||||
|
Long-term
debt
|
478.7
|
100.0
|
200.0
|
260.0
|
324.0
|
|||||||||||
|
Total
shareholders' equity
|
994.5
|
923.4
|
856.9
|
794.7
|
747.3
|
|||||||||||
|
Capital
Stock
|
479.3
|
479.3
|
479.3
|
479.3
|
479.3
|
|||||||||||
|
Note:
The Company is not aware of any material differences between Chilean
and
U.S. GAAP that are not addressed in Note 29 to the Consolidated Financial
Statements of December 31, 2006.
|
|
(1)
Except shares outstanding, dividend and net earnings per share and
net
earnings per ADS.
(2)
There are no authoritative pronouncements related to the calculation
of
earnings per share in accordance with Chilean GAAP. For comparative
purposes the calculation has been based on the same number of weighted
average shares outstanding as used for the U.S. GAAP
calculation.
(3)
Dividends per share are calculated based on 263,197 thousand shares
for
the periods ended December 31, 2002, 2003, 2004, 2005 and
2006.
(4)
Dividends may only be paid from net income before amortization of
negative
goodwill as determined in accordance with Chilean GAAP; see Item
8.A.8.
Dividend Policy. For dividends in Ch$ see Item 8.A.8.Dividend Policy
—
Dividends.
(5)
Does not include equity participation in income (loss) of related
companies, net
|
EXCHANGE
RATES
Chile
has
two currency markets, the Mercado Cambiario Formal, or Formal Exchange Market,
and the Mercado Cambiario Informal, or Informal Exchange Market. The Formal
Exchange Market is comprised of banks and other entities authorized by the
Chilean Central Bank. The Informal Exchange Market is comprised of entities
that
are not expressly authorized to operate in the Formal Exchange Market, such
as
certain foreign exchange houses and travel agencies, among others. The Chilean
Central Bank is empowered to determine that certain purchases and sales of
foreign currencies be carried out on the Formal Exchange Market.
Both
the
Formal and Informal Exchange Markets are driven by free market forces. Current
regulations require that the Chilean Central Bank be informed of certain
transactions and that they be effected through the Formal Exchange Market.
For
the purposes of the operation of the Formal Exchange Market, the Chilean Central
Bank sets a dólar acuerdo, or Reference Exchange Rate. The Reference Exchange
Rate is reset daily by the Chilean Central Bank, taking into account internal
and external inflation and variations in parities between the Chilean peso
and
each of the U.S. dollar, the Euro and the Japanese yen at a ratio of 80:15:5,
respectively. In order to keep the average exchange rate within certain limits,
the Chilean Central Bank may intervene by buying or selling foreign currency
on
the Formal Exchange Market.
The
dólar
observado, or Observed Exchange Rate, which is reported by the Chilean Central
Bank and published daily in the Chilean newspapers, is computed by taking the
weighted average of the previous business day’s transactions on the Formal
Exchange Market. On September 2, 1999, the Chilean Central Bank eliminated
the
band within which the Observed Exchange Rate could fluctuate, in order to
provide greater flexibility in the exchange market. Nevertheless, the Chilean
Central Bank has the power to intervene by buying or selling foreign currency
on
the Formal Exchange Market to attempt to maintain the Observed Exchange Rate
within a desired range.
The
Informal Exchange Market reflects transactions carried out at an informal
exchange rate, or the Informal Exchange Rate. There are no limits imposed on
the
extent to which the rate of exchange in the Informal Exchange Market can
fluctuate above or below the Observed Exchange Rate.
Since
1993, the Observed Exchange Rate and the Informal Exchange Rate have typically
been within less than 1% of one another.
The
following table sets forth the annual low, high, average and year-end Observed
Exchange Rate for U.S. dollars for each year starting in 2002 as reported by
the
Chilean Central Bank. The Federal Reserve Bank of New York does not report
a
noon buying rate for Chilean pesos.
On
June
15, 2007, the Observed Exchange Rate was Ch$529.00 = US$1.00.
|
Observed
Exchange Rate (1)
|
|||||||||||
|
Ch$
per US$
|
|||||||||||
|
|
Year/Month
|
Low
(1)
|
|
High
(1)
|
|
Average
(2)(3)
|
|
Year/Month
End
|
|
||
|
|
2002
|
641.75
|
|
756.56
|
|
692.32
|
|
718.61
|
|
||
|
|
2003
|
593.10
|
|
758.21
|
|
687.50
|
|
599.40
|
|
||
|
|
2004
|
559.21
|
|
649.45
|
|
612.13
|
|
559.83
|
|
||
|
|
2005
|
509.70
|
|
592.75
|
|
559.27
|
|
514.21
|
|
||
|
|
2006
|
511.44
|
|
549.63
|
|
530.27
|
|
534.43
|
|
||
|
|
Jan-07
|
532.39
|
|
545.18
|
|
540.51
|
|
545.18
|
|
||
|
|
Feb-07
|
535.29
|
|
548.67
|
|
542.27
|
|
538.42
|
|
||
|
|
Mar-07
|
535.36
|
|
541.95
|
|
538.49
|
|
539.37
|
|
||
|
|
Abr-07
|
527.08
|
|
539.69
|
|
532.30
|
|
527.08
|
|||
|
May-07
|
517.64
|
527.52
|
522.02
|
527.52
|
|||||||
| Source: Central Bank of Chile |
|
| (1) |
Observedexchange
rates are the actual high and low on a day-to-day basis, for each
period.
|
| (2) |
The
yearly average rate is calculated as the average of the exchange
rates on
the last day of each month during the
period.
|
| (3) |
The
monthly average rate is calculated on a day-to-day basis
for each
month.
|
3.B.
Capitalization
And Indebtedness
Not
applicable.
3.C.
Reasons
For The Offer And Use Of Proceeds
Not
applicable.
3.D.
Risk
Factors
Our
operations are subject to certain risk factors that may affect SQM's financial
condition or results of operations. In addition to other information contained
in this Annual Report on Form 20-F, you should consider carefully the risks
described below. These risks are not the only ones we face. Additional risks
not
currently known to us or that are known but we currently believe are not
significant may also affect our business operations. Our business, financial
condition or results of operations could be materially affected by any of these
risks.
Risks
Relating to our Business
Our
sales to emerging markets expose us to risks related to economic conditions
and
trends in those countries
We
sell
our products in more than 100 countries around the world. In 2006, approximately
37% of our sales were made to emerging market countries: (i) approximately
12%
in Central and South America, excluding Chile, specifically in countries such
as
Brazil, Argentina, Colombia and Peru; (ii) approximately 16% in Chile; and
(iii)
approximately 9% 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. Furthermore, the supply of certain
fertilizers or chemical products, including certain products that we provide,
varies principally depending upon the production of the major producers (SQM
included) 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 in 2005 reached approximately
US$19.00 per kilogram, and it has continued to increase to an average of
approximately US$22.80 per kilogram in 2006. 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$5,000 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 SQM)
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.
We
have an ambitious capital expenditure program that is subject to significant
risks and uncertainties
Our
business is capital intensive. Specifically, the exploration and exploitation
of
reserves, mining and processing costs, the maintenance of machinery and
equipment and compliance with applicable laws and regulations require
substantial capital expenditures. We must continue to invest capital to maintain
or to increase the amount of reserves that we exploit and the amount of finished
products we produce. We require environmental permits for our new projects.
Obtaining permits in certain cases may cause significant delays in the execution
and implementation of such new projects and, consequently, may require us to
reassess the related risks and economic incentives. No assurance can be made
that we will be able to maintain our production levels or generate sufficient
cash flow, or that we will have access to sufficient investments, loans or
other
financing alternatives to continue our exploration, exploitation and refining
activities at or above present levels, or that we will be able to implement
our
projects or receive the necessary permits required for them in time. Any or
all
of these factors may have a material adverse impact on our business, financial
condition and results of operations.
Currency
fluctuations may have a negative effect on our financial
results
The
Chilean peso has been subject to large devaluations and revaluations in the
past
and may be subject to significant fluctuations in the future. We transact a
significant portion of our business in U.S. dollars, and the U.S. dollar is
the
currency of the primary economic environment in which we operate and is our
functional currency for financial statement reporting purposes. A significant
portion of our operating costs, however, are related to the Chilean peso.
Therefore, an increase or decrease in the exchange rate between the Chilean
peso
and the U.S. dollar would affect our costs of production. Additionally, as
an
international company operating in Chile and several other countries, we
transact a portion of our business and have assets and liabilities in Chilean
pesos and other non-U.S. dollar currencies, such as the Euro, the South African
Rand and the Mexican Peso, among others. As a result, fluctuation in the
exchange rate of such foreign currencies to the U.S. dollar may affect our
business, financial condition and results of operations.
Sustained
high raw material and energy prices increase our production costs and cost
of
goods sold
We
rely
on certain raw materials and various sources of energy (diesel, electricity,
natural gas, fuel oil and others) to manufacture our products. Purchases of
raw
materials that we do not produce and energy constitute a significant part of
our
cost of sales (approximately 11.7% in 2006). 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
In
several of the markets where we do business, customers may impose quality
standards on our products and/or governments may enact stricter regulations
for
the distribution and/or use of our products. As a result, we may not be able
to
sell our products if we cannot meet such standards. In addition, our cost of
production may increase in order to meet any such newly promulgated standards.
Failure to sell our products in one or more markets or to important customers
could materially affect our financial condition or results of
operations.
Our
business is subject to many operational and other risks for which we may not
be
fully covered in our insurance policies
Our
facilities located in Chile and abroad are insured against losses, damages
or
other risks by insurance policies that are standard for the industry and that
would reasonably be expected to be sufficient by prudent and experienced persons
engaged in a business or businesses similar to those of our business.
Nonetheless, we may be subject to certain events that may not be covered under
the insurance policies, and that could materially affect our financial condition
or results of operations.
The
continuity of our natural gas supply is dependent on the Argentinean
authorities’ policies
As
part
of a cost reduction effort, in 2001 we connected 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 has 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, 2005 and 2006, and the
shortages have increased in the second quarter of 2007. We have experienced,
as
a result of the shortages, an inability to procure a significant portion of
our
normal supply of natural gas. Considering what has happened in the second
quarter of 2007 and the public statements made in Argentina, we believe further
cutbacks in the supply of natural gas are likely in the future. To mitigate
this, we have adopted measures intended to limit the effects of any further
decrease in the natural gas supply. Most of our industrial equipment that uses
natural gas can also operate on fuel oil and the remaining equipment can operate
on diesel. The costs of using fuel oil and diesel are significantly higher
than
natural gas.
The
extent to which we incur increased costs as a result of decreases in the natural
gas supply will depend on the volume of such a decrease and on the duration
of
the period during which natural gas supplies are restricted, and therefore,
we
cannot estimate the exact economic impact of future natural gas supply
reductions. However, further increases in prices of natural gas or a sustained
reduction in our natural gas supply could have an adverse effect on our
business, financial condition and results of operations. During 2006, purchases
of natural gas represented approximately 1.3% of our cost of sales.
Decline
in the supply of natural gas could negatively affect the supply of electricity
in the Northern Power Grid
The
natural gas supply crisis discussed above has placed the Northern Power Grid
(SING) under significant stress. This condition, if maintained, could lead
to a
system failure that would then affect the supply of electricity. Restrictions
on
the Company’s electricity consumption could affect our operations potentially
decreasing our production volumes and increasing our production costs.
Decline
in the supply of natural gas and increasing global oil prices could negatively
affect our electricity contracts
As
natural gas supply continues to be uncertain, as discussed above, and oil prices
continue to increase, we are faced with potential revisions to our long-term
electricity supply agreements. We maintain contracts with two main utilities
in
Chile, Electroandina S.A. and Norgener S.A., and both have requested revision
of
the tariffs involved. As a result of these requests, we entered into arbitration
proceedings between us and Electroandina and Norgener. As of December 31, 2006
we were party to arbitration proceedings with Electroandina and Norgener. As
of
June, 2007 the arbitration proceeding with Norgener has finalized and the
arbitration with Electroandina continues its course. The new tariffs resulting
from the conclusions of negotiation will have a negative affect on our results
of operations.
During
2006, purchases of electricity represented approximately 2.7% of our cost of
sales.
We
are exposed to labor strikes and liabilities that could impact our production
levels and costs
Of
our
permanent employees in Chile, 68.2% are represented by 31 labor unions, which
represent their members in collective bargaining negotiations with the Company.
Accordingly, we are exposed to labor strikes that could impact our production
levels. Should a strike occur and extend for a sustained period of time, we
could be faced with increased costs and even disruption in our product flow
that
could have a material adverse effect on our financial condition or results
of
operations.
The
Chilean Congress has amended the Labor Code. The new wording contemplates that
the work-owner shall be jointly liable for some benefits of the subcontractor’s
employees being hired for the performance of such work and thus increasing
the
owner’s responsibilities and costs.
Our
water supply could be affected by regulatory changes and/or natural
problems
Although
we have not experienced significant difficulties obtaining the necessary water
to conduct our operations, there can be no assurance that we will not have
problems in securing our water supply due to new environmental regulations
or
natural depletion of water resources. This could affect our operations,
negatively affecting our business, financial condition and results of
operations.
Pending
lawsuits could adversely impact us
We
are
party to lawsuits and arbitrations involving commercial matters. Although we
intend to defend our positions vigorously, our defense of these actions may
not
be successful. Judgment in or settlement of these lawsuits may have an adverse
effect on our financial condition or results of operations. See Item 8.A.7.
Legal Proceedings and Note 23 to the Consolidated Financial Statements.
Furthermore, our strategy of being a world leader includes entering into
commercial and production alliances, joint ventures and acquisitions to improve
our global competitive position. As these operations increase in complexity
and
are carried out in different jurisdictions, our Company might be subject to
legal proceedings that, if settled against us, could have a significant impact
in the Company's financial condition or results of operations.
Potencial
new production of Lithium Carbonate in China.
Currently
there are several projects for the expansion of lithium carbonate production
capacity being developed by Chinese competitors. As there is limited information
on the status of these projects we cannot make accurate projections regarding
their capacities and the dates in which they will become operational. However,
should these projects be developed during a short period of time, we believe
there could be negative impacts on prices that could have a significant impact
in the Company's financial condition or results of operations.
Risks
Relating to Chile
As
we are a Chilean-based company, we are exposed to Chilean political
risks
The
prospects and results of operations of the Company could be affected by changes
in policies of the Chilean government, other political developments in or
affecting Chile, and regulatory and legal changes or administrative practices
of
Chilean authorities, over which the Company has no control.
Changes
in mining and water rights laws or in regulations affecting port concessions
could affect our operating costs
We
conduct our mining (including brine extraction) operations under exploitation
and exploration concessions granted pursuant to judicial proceedings in
accordance with provisions of the Chilean Constitution, and the Constitutional
Mining Law and related statutes. Our exploitation concessions essentially grant
a perpetual right to conduct mining operations in the areas covered by the
concessions, provided that we pay annual concession fees (with the exception
of
the Atacama Salar rights, which have been leased to us until 2030). Our
exploration concessions permit us to explore for mineral resources on the land
covered thereby for a specified period of time, and to subsequently request
a
corresponding exploitation concession. We 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 are 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 changes in Chilean law are also likely to affect our
operations:
The
Chilean Congress approved a modification to Chilean laws relating to water
rights (the “Water Code”). The changes to the Water Code include establishing
annual fee payments for owners of water rights that do not use the water
associated with them. This fee does not affect the holder’s right to use
aquifers. The criteria used to determine what rights or what part of such rights
would be subject to this annual fee relate to whether the resource is consumed
or re-injected into the stream after its use (defined as the water right’s
“consumptive condition”), whether the use of the resource is sporadic or
permanent (frequency of use) and the geographical location of the intake points
relative to an area’s overall water supply. The referred changes will not have a
material adverse effect on our business, financial condition and results of
operations. Nevertheless, as the Company maintains water rights that
are key to its business development, further changes to the Water Code could
have a material adverse impact on our business, financial condition and results
of operations.
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 has been applied from 2006 onwards, is levied
on
the “taxable operating income” (as this term is defined in Law No. 20,026) of
the mining company, at a rate that varies from 0.5% up to 5%, depending on
the
consolidated annual sales.
Law
No.20,017, published on June 16, 2005, modified the Water Code. Under
certain conditions, these modifications allow the constitution of permanent
water rights of up to 2 liters per second for each well built prior to June
30, 2004, in the locations where we conduct our mining operations. These changes
to the Water Code could have a material adverse impact on our business,
financial condition and results of operations, as it could affect the amount
of
water as to which, based on our rights, we should effectively
have access to.
If
similar changes are enacted in the future, they may have a material adverse
impact on our business, financial condition and results of
operation.
Environmental
laws and regulations could expose us to higher costs, liabilities, claims and
failure to meet current and future production targets
Our
operations in Chile are subject to a variety of national and local regulations
relating to environmental protection. The main environmental laws in Chile
are
the Health Code and Law No. 19,300, which we refer to as the “Chilean
Environmental Framework Law.” The Chilean Environmental Framework Law created
the Comisión Nacional del Medio Ambiente (National Environmental Commission or
CONAMA), which is the governmental agency in charge of supervising the due
compliance with the Chilean Environmental Framework Law. Under this law, we
are
required to conduct environmental impact studies of any future projects or
activities (or their significant modifications) that may affect the environment.
CONAMA evaluates environmental impact studies submitted for its approval and
oversees the implementation of projects. The Chilean Environmental Framework
Law
also enables private citizens, public agencies or local authorities to challenge
projects that may affect the environment, either before these projects are
executed or once they are already operating. Enforcement remedies available
include temporary or permanent closure of facilities and fines.
Chilean
environmental regulations have become increasingly stringent in recent years,
both in respect to the approval of new projects and in connection with the
implementation and development of projects already approved. This trend is
likely to continue. Furthermore, recently implemented environmental regulations
have created uncertainty because rules and enforcement procedures for these
regulations have not been fully developed. Given public interest in
environmental enforcement matters, these regulations or their application may
also be subject to political considerations that are beyond our
control.
We
continuously monitor the impact of our operations on the environment and have,
from time to time, made modifications to our facilities to minimize any adverse
impact. Except for particulate matter levels exceeding permissible levels in
María Elena facilities (see “Business—Chilean Government Regulations” and
“Business—Environmental Regulations”), we are currently in compliance in all
material respects with applicable environmental regulations in Chile that we
are
aware of. Future developments in the creation or implementation of environmental
requirements, or in their interpretation, could result in substantially
increased capital, operation or compliance costs or otherwise adversely affect
our business, financial condition and results of operations.
In
connection with our current investments at the Atacama Salar we have obtained
approval for an environmental impact assessment study that allows to increase
brine and water extraction, subject to a rigorous environmental monitoring
system. The success of these investments is dependent on the observed values
of
the ecosystem variables being monitored over time. If the ecosystem shows a
detrimental behavior in future years, our operation may be subject to important
restrictions by the authorities on the maximum allowable amounts of brine and
water extraction.
In
connection with our future investments in the nitrate and iodine operations,
we
have submitted and expect to submit several environmental impact assessment
studies. The success of these investments is dependent on the approval of said
submissions by the pertinent governmental authorities.
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. If we fail to obtain
approval, our ability to maintain production at specified levels will be
seriously impaired, thus having a material adverse effect on our financial
condition or results of operations.
Our
worldwide operations are also subject to environmental regulations. Since laws
and regulations in the different jurisdictions in which we operate may change,
we cannot guarantee that future laws, or changes to existing ones, will not
materially impact our financial condition or results of operations.
Our
financial statements are reported, and our dividends are declared, based on
Chilean GAAP, which generally differs from U.S. GAAP
There
are
important differences between Chilean GAAP and U.S. GAAP. As a result, Chilean
financial statements and reported earnings generally differ from those that
are
reported based on U.S. GAAP. In particular, our earnings and the amount of
dividends that we declare under Chilean GAAP may be subject to a higher degree
of fluctuation as compared to U.S. GAAP, due to accounting pronouncements or
other modifications required under Chilean GAAP. Note 29 to the consolidated
Financial Statements includes a description of differences and a reconciliation
of the net income and shareholder’s equity amounts reported under Chilean GAAP
to U.S. GAAP.
Risks
related to our financial activities
Interest
rate fluctuations may have a material impact on our financial
results
We
maintain short and long-term debt priced at Libor, plus a spread. As we do
not
have derivative instruments to hedge the Libor, we are subject to fluctuations
in this rate. As of December 31, 2006, we had approximately 41% of our financial
debt priced at Libor, and therefore significant increases in the rate could
impact our financial condition.
Risks
related to our shares and to our ADSs
The
price of our ADSs and the U.S. dollar value of any dividends will be affected
by
fluctuations in the U.S. dollar/Chilean peso exchange
rate
Chilean
trading in the shares underlying our ADSs is conducted in Chilean pesos. The
depositary will receive cash distributions that we make with respect to the
shares in pesos. The depositary will convert such pesos to U.S. dollars at
the
then prevailing exchange rate to make dividend and other distribution payments
in respect of ADSs. If the value of the peso falls relative to the U.S. dollar,
the value of the ADSs and any distributions to be received from the depositary
will decrease.
Developments
in other emerging markets could materially affect our ADSs
value
The
Chilean financial and securities markets are, to varying degrees, influenced
by
economic and market conditions in other emerging market countries or regions
of
the world. Although economic conditions are different in each country or region,
investor reaction to developments in one country or region can have significant
effects on the securities of issuers in other countries and regions, including
Chile and Latin America. Events in other parts of the world may have an adverse
effect on Chilean financial and securities markets and on the value of our
ADSs.
The
volatility and low liquidity of the Chilean securities markets could affect
the
ability of our shareholders to sell our ADSs
The
Chilean securities markets are substantially smaller, less liquid and more
volatile than the major securities markets in the United States. The volatility
and low liquidity of the Chilean markets could increase the price volatility
of
our ADSs and may impair the ability of a holder to sell our ADSs into the
Chilean market in the amount and at the price and time he or she wishes to
do
so.
Our
share price may react negatively to future acquisitions and
investments
As
world
leaders in our core businesses, part of our strategy is to be constantly looking
for opportunities that will allow us to consolidate and strengthen our
competitive position. Pursuant to this strategy, we may from time to time,
evaluate and eventually carry out acquisitions relating to any of our
businesses. Depending on our then current capital structure, we may need to
raise significant debt and/or equity which will affect our financial condition
and future cash flows. Any change in our financial condition could affect our
results of operations, negatively impacting our share price.
You
may be unable to enforce rights under U.S. Securities
Laws.
Because
we are a Chilean company subject to Chilean law, the rights of our shareholders
may differ from the rights of shareholders in companies incorporated in the
United States, and you may not be able to enforce or may have difficulty
enforcing rights currently in effect under U.S. Federal or State securities
laws.
Our
Company is a "sociedad anónima abierta" (open stock corporation) incorporated
under the laws of the Republic of Chile. Most of SQM's directors and officers
reside outside the United States, principally in Chile. All or a substantial
portion of the assets of these persons are located outside the United States.
As
a result, if any of our shareholders, including holders of our ADSs, were to
bring a lawsuit against our officers or directors in the United States, it
may
be difficult for them to effect service of legal process within the United
States upon these persons. Likewise, it may be difficult for them to enforce
judgments obtained in United States courts based upon the civil liability
provisions of the federal securities laws of the United States against them
in
United States courts.
In
addition, there is no treaty between the United States and Chile providing
for
the reciprocal enforcement of foreign judgments. However, Chilean courts have
enforced judgments rendered in the United States, provided that the Chilean
court finds that the United States court respected basic principles of due
process and public policy. Nevertheless, there is doubt whether an action could
be brought successfully in Chile in the first instance on the basis of liability
based solely upon the civil liability provisions of the United States federal
securities laws.
As
preemptive rights may be unavailable for our ADS holders, they have the risk
of
their holdings being diluted if we issue new stock
Chilean
laws require companies to offer their shareholders preemptive rights whenever
selling new shares of capital stock. Preemptive rights permit holders to
maintain their existing ownership percentage in a company by subscribing for
additional shares. If we increase our capital by issuing new shares, a holder
may subscribe for up to the number of shares that would prevent dilution of
the
holder's ownership interest.
If
we
issue preemptive rights, United States holders of ADSs would not be able to
exercise their rights unless a registration statement under the Securities
Act
were effective with respect to such rights and the shares issuable upon exercise
of such rights or an exemption from registration were available. We cannot
assure holders of ADSs that we will file a registration statement or that an
exemption from registration will be available. We may, in our absolute
discretion, decide not to prepare and file such a registration statement. If
our
holders were unable to exercise their preemptive rights because SQM did not
file
a registration statement, the depositary would attempt to sell their rights
and
distribute the net proceeds from the sale to them, after deducting the
depositary's fees and expenses. If the depositary could not sell the rights,
they would expire and holders of ADSs would not realize any value from them.
In
either case, ADS holders' equity interest in SQM would be diluted in proportion
to the increase in SQM's capital stock.
4.A.
History
And Development Of The Company
Historical
Background
Sociedad
Química y Minera de Chile S.A. "SQM" is an open stock corporation (sociedad
anónima abierta) organized under the laws of the Republic of Chile. The Company
was constituted by public deed issued on June 17, 1968 by the Public Notary
of
Santiago, Mr. Sergio Rodríguez Garcés. Its existence was approved by Decree No.
1.164 of June 22, 1968 of the Ministry of Finance, and it was registered on
June
29, 1968 in the Business Registry of Santiago, on page 4.537 No. 1.992. SQM's
headquarters are located at El Trovador 4285, Piso 6, Las Condes, Santiago,
Chile. The Company's telephone number is +56 2 425-2000.
Commercial
exploitation of the caliche ore deposits in northern Chile began in the 1830s,
when sodium nitrate was extracted from the ore for use in the manufacturing
of
explosives and fertilizers. By the end of the nineteenth century, nitrate
production had become the leading industry in Chile and the country was the
world's leading supplier of nitrates. The accelerated commercial development
of
synthetic nitrates in the 1920s and the global economic depression in the 1930s
caused a serious contraction of the Chilean nitrate business, which did not
recover significantly until shortly before the Second World War. After the
war,
the widespread commercial production of synthetic nitrates resulted in a further
contraction of the natural nitrate industry in Chile, which continued to operate
at depressed levels into the 1960s.
SQM
was
formed in 1968 through a joint venture between Compañía Salitrera Anglo Lautaro
S.A. (“Anglo Lautaro”) and Corporación de Fomento de la Producción (“Corfo”), a
Chilean state-owned development corporation. Three years after our formation,
in
1971, Anglo Lautaro sold all of its shares to Corfo and we were wholly owned
by
the Chilean Government until 1983. In 1983, Corfo began a process of
privatization by selling our shares to the public and subsequently listing
such
shares on the Santiago Stock Exchange. By 1988, all of our shares were publicly
owned. Our Series B ADRs have traded on the NYSE under the ticker symbol “SQM”
since 1993.
Between
the years 1994 to 1999, we participated in the biggest non-metallic mining
project ever carried out in Chile, the development of the Atacama Salar project
in northern Chile. During this period, the project required an investment of
approximately US$300 million, which was used in the construction of a 500,000
ton capacity potassium chloride plant, a 22,000 ton capacity lithium carbonate
plant, a close to 200,000 ton capacity potassium sulfate plant and a close
to
10,000 ton capacity boric acid plant. The potassium chloride, lithium carbonate,
potassium sulfate and boric acid plants are currently in operation.
To
help
finance the above projects, we accessed the international capital markets by
issuing more ADRs on the New York Stock Exchange in 1995 (Series B ADR issuance)
and in 1999 (by issuing our Series A ADRs
on
the NYSE under the ticker symbol “SQM-A”).
During
the period from 2000 through 2004 we principally consolidated the investments
carried out in the preceding five years. We focused on reducing costs and
improving efficiencies throughout the organization.
Since
2005, we have strengthened our leadership in our main business by increasing
our
capital expenditure program and making appropriate acquisitions and
divestitures. During this period we acquired Kefco in Dubai and the iodine
business of DSM. We also sold our stake in the Italian subsidiary Impronta
S.R.L. and the Mexican Subsidiary Fertilizantes Olmeca; these sales allowed
SQM
to concentrate its efforts on its core products.
Capital
Expenditure Program
We
are
constantly reviewing different opportunities for improving our production
methods, increasing production capacity of existing products and developing
new
products and markets. Additionally, significant maintenance of capital
expenditures is required every year in order to sustain our production capacity.
We are focused on developing new products in response to identified customer
demand and products that can be derived as part of our existing production.
Our
capital expenditures in the past five years were mainly related to the
acquisition of new assets, construction of new facilities and renewal of plant
and equipment.
SQM's
capital expenditures in the 2004-2006 period were the following:
|
2006(4)
|
2005(3)
|
2004(2)
|
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|
(in
millions of US$)
|
||||||||||
|
Expenditures
(1)
|
290.5
|
198.1
|
|
91.4
|
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|
(1)
|
In
these item, capital expenditures mean any investment aimed at sustaining,
improving or increasing production levels, including acquisitions
and
investment in related companies. These amounts will not match the
consolidated statements of cash flows, as the Company does not
consolidate
development stage companies.
|
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|
(2)
|
Includes
acquisition of PCS Yumbes (US$35 million). The Yumbes mine is not
currently being mined and some of the purchased facilities have
been
relocated to be used in other SQM facilities.
|
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|
(3)
|
Includes
acquisition of Kefco in Dubai (US$9.3 million)
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|
|
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|
(4)
|
Includes
acquisition of DSM’s Iodine business for a total of US$72 million, plus
all the cash, accounts receivable and final product inventories
minus the
total liabilities of the Chilean and Dutch companies considered
in the
transaction.
|
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We
have
developed a capital expenditure program calling for investments totaling
approximately US$630 million (not including acquisitions) between 2007-2009
of
which approximately US$230 million should be spent in 2007. The main purpose
of
our capital expenditure program is to increase production capacity of natural
nitrates by approximately 25% and lithium carbonate by more than
30%.
During
2006, the company had total capital expenditures of approximately US$177.3
million (not including the DSM iodine business acquisition) primarily relating
to:
·
María
Elena project including a new crushing facility
· a
granular and prilling facility located at Coya Sur
· a
new
drying facility for soluble potassium nitrate at Coya Sur
· completion
of the investment in the iodine facility and solar ponds at Nueva Victoria
;
and
· various
projects designed to maintain capacity, increase yields and lower
costs.
Additionally,
SQM bought the iodine business of DSM for approximately US$72.0 million (plus
working capital) in January 2006.
The
company has budgeted for 2007 total capital expenditures of approximately US$230
million, primarily relating to:
|
§
|
completion
of the María Elena project
|
|
§
|
investment
in a new potassium nitrate production facility at Coya
Sur
|
|
§
|
completion
of the granular and prilling facility located at Coya
Sur
|
|
§
|
revamping
of our railroad and rolling stock
|
|
§
|
investment
in the new solar ponds and wells at the Salar de
Atacama
|
|
§
|
investment
in the expansion of lithium carbonate
production
|
|
§
|
development
of new mining areas at Pedro de Valdivia; and various
projects designed to maintain capacity, increase yields and reduce
costs.
|
For
2008
and 2009, we estimate total capital expenditures of approximately US$400
million, primarily for (i) the increase in lithium carbonate production
capacity; (ii) the completion of the potassium nitrate production facility
at
Coya Sur; (iii) the upgrade of our railroad system to handle expanded capacity;
(iv) additional solar ponds and wells at the Salar de Atacama in order to
increase production; and (v) various projects designed to maintain capacity,
increase yields and lower costs, and to develop new NPK-soluble blending
facilities.
4.B.
Business
Overview
The
Company
We
believe we are the world’s largest integrated producers of potassium nitrate,
iodine and lithium carbonate. We also produce other specialty plant nutrition
products, iodine and lithium derivatives, and certain industrial chemicals,
including industrial nitrates. Our products are sold in over 100 countries
through our worldwide distribution network and we generate approximately 84%
of
our revenues from countries outside Chile. Our products are mainly derived
from
mineral deposits found in the first and second regions of northern Chile, where
we mine and process caliche ore and brine deposits. The caliche ore in northern
Chile contains the largest known nitrate and iodine deposits in the world and
is
the world’s only commercially exploited source of natural nitrates. The brine
deposits of the Atacama Salar, a salt-encrusted depression within the Atacama
Desert in northern Chile, contain high concentrations of lithium and potassium
as well as significant concentrations of sulfate and boron.
From
our
caliche ore deposits, we produce a wide range of nitrate-based products used
for
specialty plant nutrition and industrial applications, as well as iodine and
iodine derivatives. At the Atacama Salar, we extract brines rich in potassium,
lithium and boron, and produce potassium chloride, potassium sulfate, lithium
solutions, boric acid and bischofite. We produce lithium carbonate and lithium
hydroxide at a plant near the city of Antofagasta, Chile, from the solutions
brought from the Atacama Salar. We market all of these products through an
established worldwide distribution network.
Our
products are divided into five main categories: specialty plant nutrition
products, iodine and derivatives, lithium and derivatives; industrial chemicals;
and other products. Specialty plant nutrition is comprised of specialty plant
nutrition products that are fertilizers 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 the x-ray contrast
media and biocides industries and a growing application is in the production
of
polarizing film, which is an important component in liquid crystal displays
(“LCDs”) screens, and lithium and its derivatives are mainly used in batteries,
greases and frits for production of ceramics. Industrial chemicals have a wide
range of applications in certain chemical processes such as the manufacturing
of
glass, explosives and ceramics. Other products include potassium chloride and
other commodity fertilizers that are bought from third parties and sold mostly
in Chile and Mexico.
For
the
year ended December 31, 2006, we had revenues of approximately US$1,042.9
million, operating income of approximately US$219.9 million and net income
of
approximately US$141.3 million.
Specialty
Plant Nutrition:
We
produce five principal types of specialty plant nutrients: potassium nitrate,
sodium nitrate, sodium potassium nitrate, potassium sulfate and specialty
blends. All of these specialty plant nutrients are used in either solid or
liquid form mainly on high value crops such as fruits, vegetables, industrial
crops, cereals and cotton, and are widely used in crops that employ modern
agricultural techniques such as hydroponics, greenhousing, fertigation (where
fertilizer is dissolved in water prior to irrigation) and foliar application.
According to the type of use or application the products are marketed under
the
brands: Ultrasol™ (fertigation), Qrop™ (field application), Speedfol™ (foliar
application), Allganic™ (organic farming) and Nutrilake™ (acquaculture).
Specialty plant nutrition has certain advantages over commodity fertilizers,
such as rapid and effective absorption (without requiring nitrification),
superior water solubility, alkaline pH (which reduces soil acidity) and low
chlorine content. These advantages, plus customized specialty blends that meet
specific needs along with technical service provided by us, allow us to create
plant nutrients solutions that add value to crops through higher yields and
better quality production. Because our products are natural or derived from
natural nitrate compounds or natural potassium brines (in the case of potassium
sulfate), they have certain advantages over synthetically produced fertilizers,
including the presence of certain beneficial trace elements and their organic
nature, which makes them more attractive to customers who prefer products of
natural origin. As a result, our specialty plant nutrients enable our customers
to achieve higher yields and better quality crops. Consequently, specialty
plant
nutrients are sold at a premium price
Iodine:
We are
the world's leading producer of iodine and iodine derivatives, which are used
in
a wide range of medical, pharmaceutical, agricultural and industrial
applications, including x-ray contrast media, antiseptics, biocides and
disinfectants, in the synthesis of pharmaceuticals, herbicides, electronics,
pigments, dye components and heat stabilizers
Lithium:
We are
the world's leading producer of lithium carbonate, which is used in a variety
of
applications, including batteries, frits for the ceramic and enamel industries,
heat resistant glass (ceramic glass), primary aluminum, lithium bromine for
air
conditioner equipment, continuous casting powder for steel extrusion,
pharmaceuticals, and lithium derivatives. We are also a leading supplier of
lithium hydroxide, which is used primarily as a raw material in the lubricating
grease industry
Industrial
Chemicals:
We
produce four industrial chemicals: sodium nitrate, potassium nitrate, boric
acid
and potassium chloride. Sodium nitrate is used primarily in the production
of
glass, explosives, charcoal briquettes and metal treatment. However, other
uses,
such as adhesives and wastewater treatment also account for important sales
volumes and have good prospects for the future. Potassium nitrate, while also
used in the manufacture of specialty glass, is consumed primarily in cathode
ray
tubes for TV’s and computer monitors. In addition, potassium nitrate is an
important raw material for the production of frits for the ceramics and enamel
industries. Boric acid is used in the manufacture of frits for the ceramics
and
enamel industries, glass, and fiberglass. Potassium chloride is used as an
additive in oil drilling as well as in the production of
carragenine.
Other
Products:
We
produce and market granular potassium chloride, which is distributed through
our
subsidiary Soquimich Comercial S.A. in Chile. We have close to 100% of the
market share for this product in Chile. In addition, we import fertilizers
that
are distributed through Soquimich Comercial S.A. in Chile, offering complete
fertilization services to our customers.
The
following table sets forth the percentage breakdown of our revenues in the
2002-2006 period according to our product lines:
|
2006
|
2005
|
2004
|
2003
|
2002
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|
Specialty
Plant Nutrition
|
48%
|
|
54%
|
|
54%
|
|
52%
|
|
51%
|
|
||||||
|
Iodine
and derivatives
|
21%
|
|
17%
|
|
14%
|
|
12%
|
|
15%
|
|
||||||
|
Lithium
and derivatives
|
12%
|
|
9%
|
|
8%
|
|
7%
|
|
7%
|
|
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|
Industrial
Chemicals
|
7%
|
|
8%
|
|
9%
|
|
10%
|
|
11%
|
|
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|
Other
Products
|
12%
|
|
12%
|
|
15%
|
|
19%
|
|
16%
|
|
||||||
|
100%
|
|
100%
|
|
100%
|
|
100%
|
|
100%
|
|
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Business
Strategy
Our
general business strategy is to:
|
(1)
|
participate
in businesses where we are or will be a cost leader supported by
strong
fundamentals;
|
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(2)
|
differentiate
ourselves from commodity producers by manufacturing, marketing and
distributing specialty products that sell at high
value;
|
|
(3)
|
continually
increase the efficiency of our production processes and reduce costs
in
order to increase our productivity;
|
|
(4)
|
maintain
leadership in our principal business areas - specialty plant nutrients,
iodine and lithium - in terms of installed capacity, costs, production,
pricing and development of new products; and
|
|
(5)
|
pursue
vertical integration into value added
markets.
|
We
have
identified market demand in each of our major product lines, both within our
existing customer base and in new markets, for existing products and for
additional products that can be extracted from our natural resources. In order
to take advantage of these opportunities, we have developed a specific strategy
for each of our product lines, as set forth below:
Specialty
Plant Nutrition
Our
strategy in our specialty plant nutrition business is to (i) continue expanding
our sales of natural nitrates by continuing to exploit the advantages of our
products over commodity nitrates and ammonia-based nitrogen and potassium
chloride fertilizers; (ii) increase our sales of higher margin specialty plant
nutrition products based on natural nitrates, particularly soluble potassium
nitrate and NPK-soluble blends; (iii) pursue investment opportunities in
complementary businesses to increase production, reduce costs and add value
to
and improve the marketing of our products; (iv) emphasize development of locally
produced new specialty nutrient blends and customized products intended to
meet
local specific customer needs in all of our principal markets; (v) focus
primarily 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 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) target sales of boric acid to 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 in our current core
businesses or within new business lines, both within and outside Chile, and
we
expect to continue to do so in the future. We may decide to acquire part or
all
of the equity of, or undertake joint ventures or other transactions with, other
companies involved in our businesses or in other businesses.
Production
Process
Our
integrated production process can be classified according to our natural
resources:
• Caliche
ore deposits: contain nitrates, iodine and sodium sulfate.
• 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, with a number
of
possible geological formation theories. The consensus is that a volcanic
formation of deposits was followed by water runoff, leaching and depositing
in
existing sediments.
Caliche
deposits are located in northern Chile, where we currently operate four mines:
Pedro de Valdivia, María Elena, Pampa Blanca and Nueva Victoria (including the
Iris operation, formerly the DSM Iodine business mine)
Caliche
ore is found under a layer of barren overburden in seams with variable thickness
from twenty centimeters to five meters, and with the overburden varying in
thickness from half a meter to one and a half meters.
Before
proper mining begins, a full exploration stage is accomplished, including full
geological reconnaissance and dust recovery drill holes to determine the
features of each deposit and its quality. Drill hole samples properly identified
are tested at our chemical laboratories. With the exploration information on
a
closed grid pattern of drill holes, the ore evaluation stage provides
information for mine planning purpose. Mine planning is done on a long-term
basis (10 years), medium-term basis (3 years) and short-term basis (1 year).
A
mine production plan is a dynamic tool that details daily, weekly and monthly
production plans. Following the production of drill holes, information is
updated to offer the most accurate ore supply schedule to the processing
plants.
Generally,
bulldozers first rip and remove the overburden in the mining area. This process
is followed by production drilling and blasting to break the caliche seams.
Front-end loaders load the ore on off-road trucks. In the Pedro de Valdivia
mine, trucks deliver the ore to stockpiles next to rail loading stations. The
stockpiled ore is later loaded on to railcars that take the mineral to the
processing plant. In the María Elena mine, trucks haul the ore and dump it
directly to a primary crushing installation, after which a 14 kilometer long
overland conveyor belt system delivers the ore to the processing plant.
The
ore
in Pedro de Valdivia and María Elena plants is crushed and leached to produce
concentrated solutions carrying the nitrate, iodine and sodium sulfate. The
crushing of the ore delivers two products, a coarse fraction that is leached
in
a vat system and a fine fraction that is leached by agitation. These are
followed by liquid-solid separation, where solids precipitate as sediment and
liquids containing nitrate and iodine are sent to processing.
In
Pampa
Blanca and Nueva Victoria the run of mine ore is loaded in heaps and leached
to
produce concentrated solutions.
Caliche
Ore-Derived Products
Caliche
ore derived products are: sodium nitrate, potassium nitrate, sodium potassium
nitrate, iodine and iodine derivatives.
Sodium
Nitrate
Sodium
nitrate for both agricultural and industrial applications is produced at the
María Elena and Pedro de Valdivia facilities using the Guggenheim method, which
was originally patented in 1921. This closed circuit method involves adding
a
heated leaching solution to the crushed caliche in the vats to selectively
dissolve the valuable contents. The concentrated solution is then cooled,
causing the sodium nitrate to crystallize. Part of the unloaded solution is
then
recycled to the leaching vats. The other part of the solution is stripped of
its
iodine content at the proper treatment plants. The crystallized sodium nitrate
is separated from the remaining solution by centrifuging. The residue resulting
from the crushing of the caliche ore is leached at ambient temperature with
water, producing a weak solution that is pumped to solar evaporation ponds
at
our Coya Sur facilities, nearby María Elena, for concentration. While the
process of extracting sodium nitrate from caliche ore is well established,
variations in chemical content of the ore, temperature of the leaching solutions
and other operational features require a high degree of know-how to manage
the
process effectively and efficiently.
The
remaining materials from the sodium nitrate crystallization process are vat
leach tailings and a weak solution. The ore tailings are unloaded from the
leaching vats and deposited at sites near the production facilities. The weak
solution is re-cycled for further leaching and for the extraction of
iodine.
Crystallized
sodium nitrate is processed further at Pedro de Valdivia and María Elena to
produce prilled sodium nitrate, which is transported to our port facilities
in
Tocopilla for shipping to customers and distributors worldwide. Our current
crystallized sodium nitrate production capacity at Pedro de Valdivia and María
Elena is approximately 770,000 metric tons per year. A significant part of
the
sodium nitrate produced at María Elena and Pedro de Valdivia is used in the
production of potassium nitrate at Coya Sur, sodium potassium nitrate at María
Elena and a highly refined industrial grade sodium nitrate at Coya
Sur.
Potassium
Nitrate
Potassium
nitrate is produced at our Coya Sur facility using production methods we have
developed. The solutions from the leaching of the fine fraction of the ore,
once
the iodine is extracted,are 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 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 which we extract rich iodine and nitrate solutions that are sent to iodine
plants for iodine extraction. After iodine has been extracted, the solutions
are
sent to solar evaporation ponds where the solutions are evaporated, where rich
nitrate salt is produced. These concentrated nitrate salts are sent to Coya
Sur
or another of our salt processing facilities where they are leached and the
resulting rich nitrate solution is used in the production of potassium
nitrate.
Our
current potassium nitrate production capacity at Coya Sur is more than 650,000
metric tons per year, including 260,000 metric tons per year of technical grade
potassium nitrate. We expect by the end of 2009 to increase that capacity by
approximately 250,000 metric tons per year.
Crystallized
or prilled potassium nitrate produced at Coya Sur and María Elena is transported
to Tocopilla for shipping to customers and distributors worldwide.
Sodium
Potassium Nitrate
Sodium
potassium nitrate is a mixture of approximately two parts sodium nitrate per
one
part potassium nitrate. We produce sodium potassium nitrate at our María Elena
facilities using standard, non-patented production methods we have developed.
Crystallized sodium nitrate is mixed with the crystallized potassium nitrate
to
make sodium potassium nitrate, which is then prilled. The prilled sodium
potassium nitrate is transported to Tocopilla for bulk shipment to
customers.
The
production process for sodium potassium nitrate is basically the same as that
for sodium nitrate and potassium nitrate.
Our
aggregate current production capacity is 1,100,000 metric tons per year. With
certain production restraints and following market conditions we may supply
sodium nitrate, potassium nitrate or sodium potassium nitrate either in prilled
or crystallized form.
Iodine
and Iodine Derivatives
We
produce iodine at our Pedro de Valdivia and Nueva Victoria facilities,
extracting it from the solutions resulting from the leaching of caliche ore
at
the Pedro de Valdivia, María Elena, Nueva Victoria and Pampa Blanca facilities.
As in the case of nitrates, the process of extracting iodine from the caliche
ore is well established, but variations in the iodine and other chemical
contents of the treated ore and other operational parameters require a high
level of know-how to manage the process effectively and
efficiently.
The
solutions from the leaching of caliche will carry iodine in iodate form. Part
of
the iodate 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 - 50 kilogram
drums or 350 - 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 -
TÜV
Rheinland- of the quality management system and international quality control
standards that we have implemented.
Our
total
iodine production in 2006 was approximately 9.7 thousand metric tons:
approximately 2.5 thousand metric tons from Pedro de Valdivia, 1.3 thousand
metric tons from María Elena, 1.4 thousand metric tons from Pampa Blanca, 3.3
thousand metric tons from Nueva Victoria and 1.2 thousand metric tons from
Iris.
The Nueva Victoria facility is also used for tolling iodine delivered from
Pampa
Blanca and María Elena. We have the flexibility to adjust our production
according to market conditions.
As
we had
anticipated, the various projects oriented to significantly increase our iodine
production capacity, together with the recent DSM iodine business acquisition,
have allowed us to have, from the second quarter of 2006 onwards, an aggregate
production capacity approximately 11 thousand metric tons per year, which is
higher than our sales for 2006. This will allow us to have the capability to
respond to sudden changes in demand and the expected future demand growth.
During 2006 we recovered our operational inventories. Since June 2006, Iris
Iodine operations are halted.
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 in the past 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.
Brines
are pumped from depths between 1.5 and 60 meters below surface, through a field
of wells that are located in areas of the Salar that contain relatively high
concentrations of potassium, lithium, sulfate, boron and other
minerals.
We
process these brines to produce potassium chloride, lithium carbonate, lithium
hydroxide, potassium sulfate, boric acid and bischofite (magnesium chloride).
Potassium
Chloride
We
use
potassium chloride in the production of potassium nitrate. Production of our
own
supplies of potassium chloride provide us with substantial raw material cost
savings.
In
order
to produce potassium chloride, brines from the Atacama Salar are pumped to
solar
evaporation ponds. Evaporation of the brines results in a complex crystalized
mixture of salts of potassium chloride and sodium chloride, of which one portion
is harvested and stored and the other portion of which is reprocessed and the
remaining salts are transferred by truck to a processing facility where the
potassium chloride is separated by a grinding, flotation, and filtering process.
Potassium chloride is sent approximately 300 kilometers to our Coya Sur
facilities via a dedicated dual transport system (truck/rail), where it is
used
in the production of potassium nitrate. We sell potassium chloride produced
at
the Atacama Salar and in excess of our needs to third parties. Our production
facilities currently have a production capacity up to 650,000 metric tons per
year. Actual capacity will depend on volumes and quality of the mining resources
pumped from the Salar. During 2006 actual production was lower than in 2005
and
we expect that 2007 producion will be higher than in 2006.
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 amount in excess of our needs
is
reinjected into the Atacama Salar; (ii) sodium chloride, which is similar to
the
surface material of the Atacama Salar and is deposited at sites near the
production facility; and (iii) other salts containing magnesium
chloride.
Lithium
Carbonate
A
portion
of the brines remaining after the production of potassium chloride is sent
to
additional solar concentration ponds adjacent to the potassium chloride
production facility. Following additional evaporation, the remaining lithium
chloride concentrated solution is transported by truck to a production facility
located near Antofagasta, approximately 250 kilometers from the Atacama Salar.
At the production facility, the solution is purified and treated with sodium
carbonate to produce lithium carbonate, which is dried then, if necessary,
compacted and finally packaged for shipment. Our lithium carbonate facility
production capacity is approximately 30,000 metric tons per year. A project
is
currently under way to increase our production capacity to 40,000 metric tons
per year and will be completed by second half 2008. Future production will
depend on the actual volumes and quality of the lithium solutions sent by the
Salar operations.
Lithium
Hydroxide
By
the
end of 2005 we completed the construction of a processing facility for producing
lithium hydroxide monohydrate. This facility, with a capacity of 6,000 metric
tons per year, is located at Salar del Carmen, adjacent to our existing lithium
carbonate operations. Raw material for this operation is lithium carbonate
which
is reacted with a lime solution to produce lithium hydroxide brine and calcium
carbonate salt, which is filtered and piled in reservoirs. The brine is
evaporated in a multiple effect evaporator and crystallized to produce the
lithium hydroxide monohydrate which is dried and packaged for dispatch to
customers.
Potassium
Sulfate and Boric Acid
Approximately
12 kilometers northeast of the potassium chloride facilities at the Atacama
Salar, we produce potassium sulfate and boric acid from the Salar brines. The
plant stands on an area of the Salar where higher sulfate and potassium
concentrations are found in the brine. Brines are pumped to preconcentration
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 flotation, concentration and reaction processes,
after
which it is crystallized, dried and packaged for shipment. Boric acid is
produced in crystallized form by acidulation of the final concentrated brines,
dried and packaged for shipment at the same facility.
The
principal by-products of the production of potassium sulfate are (i)
non-commercial sodium chloride, which is deposited at sites near the production
facility, and (ii) remaining solutions, which are reinjected into the Atacama
Salar or returned to the evaporation ponds. The principal by-products of the
boric acid production process are remaining solutions that after treatment
with
sodium carbonate to neutralize acidity, are reinjected into the Atacama
Salar.
Specialty
Plant Nutrition
We
believe we are the world's largest producers of potassium nitrate. We also
produce the following specialty plant nutrients: sodium nitrate, potassium
nitrate, sodium potassium nitrate, potassium sulfate, urea phosphate (since
2005) and specialty blends (containing various combinations of nitrogen,
phosphate and potassium and generally known as "NPK blends"). These specialty
plant nutrients have specific characteristics that increase productivity and
enhance quality when used on certain crops and soils. Additionally, these plant
nutrients are well suited for high-yield agricultural techniques such as
hydroponics, fertigation, greenhousing and foliar applications. High value
crop
farmers are prompted to invest in specialty plant nutrients by to their
technical advantages over commodity fertilizers (such as urea and potassium
chloride). These advantages translate into products and crops with higher yields
and added quality. Our specialty plant nutrients have significant advantages
for
certain applications over commodity based nitrogen and potassium fertilizers,
such as the before mentioned urea and potassium chloride.
In
particular, our specialty plant nutrients:
|
·
|
are
fully water soluble, allowing their use in hydroponics, fertigation,
foliar applications and other advanced agricultural
techniques;
|
|
·
|
are
absorbed more rapidly by plants because they do not require nitrification,
unlike ammonia based fertilizers;
|
|
·
|
are
free of chlorine content, reducing the risk of scorching
roots;
|
|
·
|
do
not release hydrogen after application, therefore avoiding increased
soil
acidity;
|
|
·
|
possess
trace elements, which promote disease resistance in plants and have
other
beneficial effects;
|
|
·
|
are
more attractive to customers who prefer products of natural origin;
and
|
|
·
|
are
more efficient than commodity fertilizers because they deliver more
plant
nutrients per unit of nutrient
applied.
|
In
2006,
our revenues from specialty plant nutrients were approximately US$502.8 million,
representing approximately 48% of our total revenues for that year.
Specialty
Plant Nutrition: Market
The
target market for our specialty plant nutrients are high value crops such as
fruits, vegetables, and crops raised using modern agricultural techniques.
Since
1990, the international market for specialty plant nutrients has grown at a
faster rate than the international market for commodity-type fertilizers. This
is mostly due to (i) the application of new agricultural technologies such
as
fertigation and hydroponics and increasing use of greenhousing; (ii) the
increase in the cost of land which has forced farmers to improve their yields;
(iii) the scarcity of water; (iv) the increase of consumption of vegetables
per
capita, and (v) the increasing demand for higher quality crops.
Worldwide
scarcity of water and weather changes force farmers to develop new agricultural
techniques such as fertigation that minimize water requirements. These
applications require fully water soluble plant nutrients.
Increasing
land costs near urban centers also forces
farmers
to maximize their yield per surface area. Specialty plant nutrients, when
applied to certain crops, help to increase productivity for various reasons.
In
particular, since our nitrate-based specialty plant nutrients provide nitrogen
in nitric form, as opposed to ammonium form provided by urea, they are absorbed
faster by crops. Crops absorb nitrogen in nitric form; thus nitrogen in ammonium
form has to be converted into nitric form in the soil first. This is not an
immediate process (it takes time and needs special soil conditions) and releases
hydrogen into the soil, increasing soil acidity, which in most cases is harmful
to the soil and the crop. Nitric nitrogen application facilitates a more
efficient application of nutrients to the plant, thereby increasing the crop's
yield and improving its quality.
Our
potassium-based specialty plant nutrients are chlorine free, unlike potassium
chloride, which is the most commonly used potassium-based commodity fertilizer.
In certain crops, chlorine has negative effects that translate into
lower yield and quality.
The
most
important agricultural applications of sodium nitrate, potassium nitrate,
potassium sulfate and sodium potassium nitrate plant nutrients are: industrial
crops, vegetables, fruits, horticulture, sugar beet, cotton and other high
value
crops.
Specialty
Plant Nutrition: Our Products
Potassium
nitrate, sodium potassium nitrate and specialty blends are higher margin
products derived from, or consisting of, sodium nitrate, all of which are
produced in crystallized or prilled form. Specialty blends are produced using
our own specialty plant nutrients and other components at blending plants
operated by the Company or its affiliates and related companies in Chile, USA,
Mexico, United Arab Emirates, Belgium, Holland, South Africa, Turkey and
Egypt.
The
following table shows our sales volume of specialty plant nutrient fertilizer
products and the revenues during the 2002-2006 period.
|
Sales
Volume
(in
metric tons)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Sodium
nitrate
|
55,000
|
63,300
|
58,900
|
62,500
|
59,500
|
|||||||||||
|
Potassium
nitrate and sodium potassium nitrate(1)
|
635,000
|
690,200
|
707,600
|
696,500
|
558,600
|
|||||||||||
|
Potassium
Sulfate
|
172,400
|
178,600
|
157,700
|
143,200
|
161,000
|
|||||||||||
|
Blended
and other specialty plant nutrients(2)
|
361,500
|
350,700
|
374,400
|
377,100
|
276,600
|
|||||||||||
|
Revenues
(in US$ millions)
|
502.8
|
487.8
|
426.8
|
362.8
|
281.4
|
|||||||||||
|
(1)
|
Includes re-sales of potassium nitrate purchased from PCS Yumbes. |
|
(2)
|
Includes
blended and other specialty plant nutrients. It also includes Yara's
products sold pursuant to our commercial
agreement.
|
Specialty
Plant Nutrition: Marketing and Customers
In
2006,
we sold our specialty plant nutrients to more than 100 countries. During the
same year, approximately 91% of the Company's specialty plant nutrients sales
in
2006 were exported: approximately 29% were sold to customers in Central and
South America, 22% to customers in North America, 19% to customers in Europe
and
21% to customers in other regions. Without considering any sales to related
parties, no single customer represented more than 4.3% of SQM's specialty plant
nutrients sales during 2006, and our 10 largest customers accounted in the
aggregate for approximately 24% of sales during that period.
|
Sales
Breakdown
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Central
and South America
|
29%
|
|
29%
|
|
29%
|
|
26%
|
|
30%
|
|
||||||
|
North
America
|
22%
|
|
22%
|
|
22%
|
|
18%
|
|
17%
|
|
||||||
|
Europe
|
19%
|
|
20%
|
|
19%
|
|
20%
|
|
15%
|
|
||||||
|
Others
|
21%
|
|
20%
|
|
20%
|
|
27%
|
|
27%
|
|
||||||
|
Chile
|
9%
|
|
9%
|
|
10%
|
|
9%
|
|
11%
|
|
||||||
We
sell
our specialty plant nutrition products outside Chile mainly through our own
worldwide network of representative offices and through our sales, technical
support and distribution affiliates.
In
November 2001, we signed an agreement with Yara International ASA (“Yara”, ex
Norsk Hydro ASA). This agreement allows us to make use of Yara’s distribution
network in countries where its presence and commercial infrastructure are larger
than ours. Similarly, in those markets where our presence is larger, both our
specialty plant nutrients and Yara International ASA's are marketed through
our
offices. Both parties, however, maintain an active control in the marketing
of
their own products.
We
also
signed a joint venture agreement (JVA) with Yara and Israel Chemicals Limited
at
the end of 2001. Under this JVA, SQM, Yara, and Israel Chemicals Limited are
developing the liquid and soluble plant nutrient blends business through their
participation in a Belgian company called NU3 N.V. (“NU3”), to which SQM and
Israel Chemicals Limited contributed their blending facility in Belgium, and
Yara International ASA contributed its blending facility in Holland. With this
JVA, important synergies have been achieved, particularly in production costs,
administration and the marketing of soluble blends, strengthening the
development of new products and improving customer services.
We
maintain stocks of our specialty plant nutrients in the main markets of the
Americas, Europe, Middle East and Africa, in order to facilitate prompt
deliveries to customers. In addition, we sell specialty plant nutrients directly
to some of our large customers. Sales are made pursuant to spot purchase orders
and short-term contracts.
In
connection with our marketing efforts, we provide technical and agronomical
assistance and support to our customers. By working closely with our customers,
we are able to identify new higher value added products and markets. Our
specialty plant nutrition products are used on a wide variety of crops,
particularly higher value-added crops that allow our customers to increase
yield
and command a premium price.
Our
customers are located in the northern and southern hemispheres. Consequently,
there are no material seasonal or cyclical factors that can materially affect
the sales of our specialty plant nutrient products.
Specialty
Plant Nutrition: Fertilizer Sales in Chile
We
market
specialty plants nutrients in Chile through Soquimich Comercial S.A. which
sells
these products either alone or in blends with other imported products, mainly
urea, triple super phosphate (TSP) and diammonium phosphate (DAP). Soquimich
Comercial sells imported fertilizers to farmers in Chile mainly for application
in the production of sugar beets, cereals, industrial crops, potatoes, grapes
and other fruits. Most of the fertilizers that Soquimich Comercial imports
are
purchased on a spot basis from different countries in the world.
We
believe that all contracts and agreements between Soquimich Comercial and third
party suppliers, with respect to imported fertilizers, contain standard and
customary commercial terms and conditions. During the preceding ten years,
Soquimich Comercial has experienced no material difficulties in obtaining
adequate supplies of such fertilizers at satisfactory prices, and we expect
continuing to do so in the future.
We
estimate that Soquimich Comercial's joint sales of fertilizers represented
approximately 36% of total fertilizer sales in Chile during 2006, of which
no
single customer represented more than 4% of total fertilizer sales revenues,
and
of which the 10 largest customers in total represented less than 12% of
revenues.
Revenues
generated by Soquimich Comercial represented 13.6% of the Company's 2006
consolidated revenues. Soquimich Comercial's consolidated revenues were
approximately US$142 million, US$144 million and US$140 million in 2006, 2005
and 2004, respectively.
Specialty
Plant Nutrition: Competition
We
believe we are the world's largest producer of sodium and potassium 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 our largest competitor is Trans Resources International
Inc., with its subsidiary Haifa Chemicals Ltd. in Israel. We estimate that
sales
of potassium nitrate by Trans Resources International and Haifa Chemicals
accounted for approximately 36% of total world sales during the year
2006.
S.C.M.
Virginia, a Chilean iodine producer, ultimately controlled by Inverraz S.A.,
also produces potassium nitrate from caliche ore and potassium chloride.
ACF,
another Chilean producer, mainly oriented to iodine production, began production
of potassium nitrate from caliche ore and potassium chloride during 2005. We
believe that ACF production will be lower than S.C.M. Virginia.
Arab
Potash, a Jordanian producer, produces potassium nitrate in a plant
located close to the Port of Aqaba, Jordan.
The
principal means of competition in the sale of potassium nitrate are product
quality, customer service, location, logistic and agronomic expertise and
price.
In
the
potassium sulfate market, we have several competitors of which the most
important are Kali und Salz GmbH (Germany), Tessenderlo Chemie (Belgium) and
Great Salt Lake Minerals Corp. (United States). We believe that those three
producers account for a majority of the world production of potassium sulfate.
We estimate that once we reach full production of potassium sulfate, we will
account for approximately 6% of total world sales.
Through
a
partially owned facility, NU3, we also produce soluble and liquid fertilizers
using our potassium nitrate as a raw material. Through this activity, we have
acquired production technology and marketing know-how, which we believe will
be
useful for selling our products to greenhouse growers and for use in certain
high-technology processes such as fertigation and hydroponics.
We
believe we are the largest Chilean producer of bulk specialty blends. In Chile,
our products mainly compete with imported fertilizer blends that use calcium
ammonium nitrate or potassium magnesium sulfate. Our specialty plant nutrients
also compete indirectly with lower-priced synthetic commodity-type fertilizers
such as ammonia and urea, which are produced by many producers in a highly
price-competitive market. Our products compete on the basis of advantages that
make them more suitable for certain applications as described
above.
Iodine
We
believe we are the world's largest producer of iodine. In 2006, our revenues
from iodine and iodine derivatives amounted to approximately US$217.7 million,
representing approximately 21% of our total revenues in that year. We estimate
that our sales accounted for approximately 33% of world iodine sales by volume
in 2006. 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 liquid crystal
displays (LCD), chemicals, herbicides, organic compounds, pigment and ink dyes.
Iodine is added in the form of potassium iodate or potassium iodide to edible
salt to prevent iodine deficiency disorders.
Iodine:
Our Products
We
produce iodine and, through a joint venture with Ajay, organic and inorganic
iodine derivatives. SQM through Ajay or alone, is also actively participating
in
the iodine recycling business using iodinated side-streams from a variety of
chemical processes in Europe, the United States and Asia.
Ajay-SQM
Group (ASG) was formed in mid 1990s, as a joint venture between SQM and Ajay
Chemical, a U.S.-based company. ASG has currently production plants in USA,
Chile and France and is the world's leading inorganic and organic iodine
derivatives producer. In 2006, approximately 33% of SQM's iodine sales were
made
to ASG.
Consistent
with our business strategy, we are constantly working on the development of
new
applications for our iodine-based products, pursuing a continuing expansion
of
our businesses and maintaining our market leadership. In January 2006, SQM
acquired the iodine and iodine derivatives business of DSM Group. The
transaction included DSM’s iodine and iodine derivatives facilities located in
the first region of Chile and the mining reserves located in the first and
second region of Chile. Additionally, SQM acquired DSM’s iodine and iodine
derivatives commercial operation in Europe. The agreement involved a base
payment of US$ 72 million plus all the cash, accounts receivable and final
product inventories minus total liabilities. With a production capacity of
approximately 2.0 thousand metric tons, DSM reached an 8% global market share
in
2005.
We
manufacture our iodine and iodine derivatives in accordance with international
quality standards and have qualified our iodine facilities and production
processes under the ISO-9001:2000 program, providing third party certification
of the quality management system and international quality control standards
that we have implemented.
The
following table sets forth our total sales and revenues from iodine and iodine
derivatives in the 2002-2006 period:
|
Sales
Volume
(in
thousand metric tons)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Iodine
and iodine derivatives
|
9.8
|
8.1
|
7.7
|
6.6
|
6.4
|
|||||||||||
|
Revenues
(in US$ millions)
|
217.7
|
149.1
|
110.5
|
84.6
|
84.1
|
|||||||||||
Iodine:
Marketing and Customers
In
2006,
we sold our iodine products to around 400 customers in more than 70 countries.
During the same year, most of our iodine production was exported: approximately
34% was sold to customers in Europe, 40 % to customers in North America, 5%
to
customers in Central and South America and 21% 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 2006, and our
ten
largest customers accounted in the aggregate for approximately 39% of
sales.
|
Sales
Breakdown
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Europe
|
34%
|
|
30%
|
|
27%
|
|
34%
|
|
36%
|
|
||||||
|
North
America
|
40%
|
|
37%
|
|
38%
|
|
40%
|
|
41%
|
|
||||||
|
Central
and South America
|
5%
|
|
13%
|
|
13%
|
|
6%
|
|
13%
|
|
||||||
|
Others
|
21%
|
|
20%
|
|
22%
|
|
20%
|
|
10%
|
|
||||||
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 USA are the world's main iodine
producers.
Japanese
producers extract iodine from underground brines, which are mainly obtained
together with the extraction of natural gas. Several Japanese producers also
have recycling facilities where they recover iodine and iodine derivatives
from
iodine waste streams.
We
estimate that eight Japanese iodine producers accounted for approximately 24%
of
world iodine sales in the year 2006. We estimate that the largest Japanese
producer, Ise Chemicals Ltd., accounted for approximately 10% of the world
iodine sales.
We
estimate that iodine producers in the United States (one of which is owned
by
Ise Chemicals) accounted for approximately 6% of world iodine sales in the
year
2006, while four Chilean companies, including SQM iodine business, accounted
for
approximately 57% of such sales (33% by SQM and 24% by the other Chilean
producers).
Additionally,
iodine recycling, mainly related to LCD consumption has increased over the
past
few years and currently represents approximately 8% of world iodine
sales.
The
prices of our iodine and iodine derivative products are determined by world
iodine prices, which are subject to market conditions. World iodine prices
vary
depending upon, among other things, the relationship between supply and demand
at any given time. The supply of iodine varies principally depending upon the
production of the few major iodine producers (including us) and their respective
business strategies. As a result of a steady growing demand, iodine prices
have
been increasing since the end of 2003. While prices were around US$13 per
kilogram in 2003, they reached an average of approximately US$22 per kilogram
in
2006.
Demand
for iodine varies depending upon overall levels of economic activity and the
level of demand in the medical, pharmaceutical, industrial and other sectors
that are the main users of iodine and iodine derivative products. Prices for
iodine and iodine derivative products in the future are expected to be
influenced by similar supply and demand factors and the business strategies
of
major producers, some of whom either have or can acquire additional production
capacity.
The
main
factors of competition in the sale of iodine and iodine derivative products
are
reliability, price, quality, customer services and the price and availability
of
substitutes. We believe we have competitive advantages compared to other
producers due to the size of our mining reserves, the installed capacity and
relatively lower production costs (as most part of our iodine is produced as
part of a process for other products -mainly sodium nitrate and potassium
nitrate for agricultural and industrial purposes). We believe our iodine is
competitive with that produced by other manufacturers in certain advanced
industrial processes. We also believe we have benefited competitively from
the
long-term relationships we have established with our larger customers. While
there are substitutes for iodine available for certain applications, such as
coloring processes and for use as antiseptics and disinfectants, there are
no
cost-effective substitutes currently available for the main nutritional,
pharmaceutical, animal feed, and main chemical uses of iodine, which together
account for most iodine sales.
Lithium
We
believe we are the world's largest producer of lithium carbonate and one of
the
world’s largest producers of lithium hydroxide. In 2006, our revenues from
lithium sales amounted to approximately US$128.9 million, representing
approximately 12% of our total revenues. We estimate that our sales accounted
for approximately 36% of world's lithium units used in production of lithium
chemicals. Lithium is also available in the form of lithium minerals. However,
there is virtually no
overlap of the markets demanding lithium minerals and lithium
chemicals.
Lithium:
Market
Lithium
carbonate is used in a variety of applications, including batteries, frits
for
the ceramic and enamel industries, heat resistant glass (ceramic glass), primary
aluminum, air conditioning chemicals, continuous casting powder for steel
extrusion, pharmaceuticals, and lithium derivatives. Lithium hydroxide is
primarily used as a raw material in the lubricating grease industry, as well
as
in the dyes and battery industries. Butyllithium is used as a catalyst in the
synthetic rubber and pharmaceutical industries.
Lithium:
Our Products
We
produce lithium carbonate at the Salar del Carmen facilities, near Antofagasta,
Chile, from solutions with high concentrations of lithium coming from the
potassium chloride production at the Atacama Salar. The technologies we use,
together with the high concentrations of lithium we obtain from the Atacama
Salar, allow us to be one of the lowest cost producers worldwide.
SQM
used
to produce lithium hydroxide through tolling operations in the United States
and
Russia. During the second half of 2005, we began to produce it at our lithium
hydroxide facility, at the Salar del Carmen next to our lithium carbonate
facility in Antofagasta. The lithium hydroxide facility has a production
capacity of 6,000 TM/per year and is one of the largest plants in the
world.
SQM
produces butyl lithium in its own plant located in Pasadena, Texas. This product
is sold principally in the U.S. market. Shipments to overseas markets started
during the second quarter of 2006.
The
following table sets forth our total sales and revenues from lithium carbonate
and derivatives in the 2002-2006 period:
|
Sales
Volume
(in
thousand metric tons)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Lithium
carbonate and derivatives
|
30.4
|
27.8
|
31.2
|
27.4
|
22.3
|
|||||||||||
|
Revenues
(in US$ millions)
|
128.9
|
81.4
|
62.6
|
49.7
|
37.3
|
|||||||||||
Lithium:
Marketing and Customers
In
2006,
we sold our lithium products to approximately 270 customers in approximately
50
countries. Virtually all of our lithium products were sold overseas:
approximately 32% to customers in Europe, 24% to customers in North America,
36%
to customers in Asia and Oceania and 8% to customers in other regions. No single
customer accounted for more than 11% of the Company's sales in 2006, and our
ten
largest customers accounted in the aggregate for approximately 47% of
sales.
|
Sales
Breakdown
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Europe
|
32%
|
|
33%
|
|
32%
|
|
31%
|
|
40%
|
|
||||||
|
North
America
|
24%
|
|
25%
|
|
26%
|
|
29%
|
|
37%
|
|
||||||
|
Asia
and Oceania
|
36%
|
|
31%
|
|
37%
|
|
37%
|
|
21%
|
|
||||||
|
Others
|
8%
|
|
11%
|
|
5%
|
|
3%
|
|
2%
|
|
||||||
Lithium:
Competition
Our
main
competitors in the lithium carbonate and lithium hydroxide businesses are
Chemetall GmbH (“Chemetall”, subsidiary of Rockwood Specialties Group Inc.) and
FMC Corporation (“FMC”). We estimate that they together sold approximately 43%
of lithium in the lithium chemicals market (excluding lithium minerals) in
2006.
Chemetall produces lithium carbonate in its operations located in Chile
(Sociedad Chilena del Litio Limitada) and Nevada, USA. Its production of
downstream lithium products is mostly performed in the United States, Germany
and Taiwan. FMC has production facilities in Argentina (Minera del Altiplano),
where they produce lithium chloride and lithium carbonate. Production of its
downstream lithium products is mostly performed in the United States and the
United Kingdom.
Additionally
lithium carbonate is being produced in China and we believe this production
will
increase in the near future.
We
estimate that worldwide sales of lithium chemicals expressed as lithium
carbonate equivalent (excluding lithium minerals) amounted to approximately
83,000 metric tons in 2006.
Industrial
Chemicals
In
addition to producing sodium nitrate for agricultural applications, we produce
three grades of sodium nitrate for industrial applications: industrial,
technical and refined grades. The three grades differ mainly in purity. Our
industrial grades of potassium nitrate also differ from agricultural grade
potassium nitrate in its degree of purity. We enjoy certain operational
flexibility when producing industrial potassium nitrate because it is produced
from the same process as its equivalent agricultural grade, needing only an
additional step of purification. We may, with certain constraints, shift
production from one grade to the other depending on market conditions. This
flexibility allows us to maximize yields as well as to reduce commercial risk.
In addition to producing industrial nitrates, we produce boric acid. Boric
acid
is a by-product of the production of potassium sulfate. In 2006, our revenues
from industrial chemicals were approximately US$71.3 million, representing
approximately 7% of our total revenues for that year.
Industrial
Chemicals: Market
Industrial
sodium nitrate and potassium nitrate are used in a wide range of industrial
applications, including the production of glass, ceramics, explosives, charcoal
briquettes and various chemical processes and metal treatments. Boric acid
is
mainly used in the glass, ceramics, fiberglass, enamels and as a raw material
in
the fabrication of screens for LCDs.
We
estimate that our sales of industrial sodium nitrate (excluding production
in
China and India, which is consumed internally) and potassium nitrate in 2006
accounted for 54%, and 30%, respectively, of worldwide sales in that
period.
Industrial
Chemicals: Our Products
We
produce technical potassium nitrate and three grades of industrial sodium
nitrate in crystallized and prilled form. We market our refined grade sodium
nitrate under the brand name "Niterox." We produce boric acid in crystalline
form.
The
following table sets forth our sales volumes of industrial chemicals and total
revenues in the 2002-2006 period:
|
Sales
Volume (*)
(in
metric tons)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Industrial
nitrates
|
162,000
|
176,300
|
192,800
|
193,200
|
187,300
|
|||||||||||
|
Boric
Acid
|
9,700
|
6,300
|
6,120
|
10,700
|
11,300
|
|||||||||||
|
Revenues
(in US$ millions)
|
71.3
|
70.5
|
68.8
|
66.7
|
62.3
|
|||||||||||
| (*) |
We
halted our sodium sulfate production at the beginning of 2006 to
prioritize the production of nitrates. We do not expect to produce
sodium
sulfate again in the short term. As a result of this change, we have
ceased to include sodium sulfate in this business line, and we have
reclassified its volumes and revenes to the "Others"
segment.
|
Our
aggregate current sodium nitrate production capacity is approximately 740,000
metric tons per year (agricultural and industrial grades). Within certain
production constraints, we may use our production capacity to produce either
agricultural or industrial sodium nitrate. We have a plant capacity to produce
approximately 260,000 metric tons per year of technical potassium nitrate and
10,000 metric tons per year of boric acid.
Industrial
Chemicals: Marketing and Customers
We
sold
our industrial nitrate products in more than 50 countries in 2006. Approximately
41% of our sales of industrial chemicals were made to customers in North
America, 29% 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 2006, and our ten largest customers accounted in the aggregate
for
approximately 36% of such sales.
|
Sales
Breakdown
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
North
America
|
41%
|
|
42%
|
|
38%
|
|
39%
|
|
31%
|
|
||||||
|
Europe
|
29%
|
|
28%
|
|
23%
|
|
25%
|
|
17%
|
|
||||||
|
Central
and South America
|
17%
|
|
17%
|
|
24%
|
|
12%
|
|
24%
|
|
||||||
|
Others
|
13%
|
|
13%
|
|
15%
|
|
24%
|
|
28%
|
|
||||||
We
sell
our industrial chemical products mainly through our own worldwide network of
representative offices and through our sales and distribution affiliates. We
maintain inventories of our industrial sodium nitrate and technical potassium
nitrate products at our facilities in Europe, North America, South Africa 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 continuously work
with them to develop new products or applications for our products.
Industrial
Chemicals: Competition
We
believe we are the world's largest producer of industrial sodium nitrate. We
estimate that we accounted for approximately 54% of world production of
industrial sodium nitrate in 2006 (excluding China and India internal demand,
for which reliable estimates are not available). Our competitors are mainly
in
Europe and Asia. These producers together represent 46% of total production
and
produce sodium nitrate as a by-product of other production processes. In the
refined grade sodium nitrate market, Badische Anilin und Soda Fabrik AG (BASF),
a German corporation, and several producers in Japan (the largest of which
is
Mitsubishi & Co. Ltd.), are highly competitive in the European and Asian
markets. Our industrial sodium nitrate products also compete indirectly with
substitute chemicals, including sodium carbonate, sodium hydroxide, sodium
sulfate, calcium nitrate and ammonium nitrate,
which
may be used in certain applications instead of sodium nitrate and are available
from a large number of producers worldwide.
Our
main
competitor in the technical potassium nitrate market is Haifa Chemicals Ltd.,
which we estimate has a 28% market share in the industrial sector. We estimate
our market share at approximately 30% for 2006.
Producers
compete in the market for industrial sodium nitrate and technical potassium
nitrate based on reliability, product quality, price and customer service.
We
believe that we are a low cost producer of industrial sodium nitrate and are
able to produce high quality products.
Raw
Materials
The
main
raw material that SQM requires in the production of nitrate and iodine is
caliche ore, which is obtained from our surface mines. The main raw material
in
the production of potassium chloride, lithium carbonate, potassium sulfate
and
boric acid is the brine extracted from our operations at the Atacama
Salar.
Other
important raw materials are sodium carbonate (in lithium carbonate production
and for neutralization of iodine solutions), anti-caking and anti-dust agents
(in the production of nitrates), kerosene (in the iodine production), ammonium
nitrate (in the preparation of the anfo that is used as explosives in the mining
operations), diesel (mainly in mining equipment and as replacement of natural
gas), natural gas (in heat generation and heating processes), fuel oil (as
replacement of natural gas), electricity acquired from electric utilities and
woven bags for packaging our final products. Our raw material costs (excluding
caliche ore and salar brines and including energy) represented approximately
11.7% of our cost of sales in 2006.
Most
of
our raw materials, especially energy-related raw materials, have experienced
significant price increases in the last year.
In
1998
we entered into a long-term (fifteen years) electricity supply agreement with
Norgener, a major Chilean electricity producer. During 1999, we entered into
a
long-term (ten years) electricity supply agreement with Electroandina S.A.,
also
a major Chilean electricity producer. Since April 2000, the Company has been
connected to the Sistema Interconectado del Norte Grande, (SING), which is
our
current electricity supplier and is the supplier for most cities and industrial
facilities in northern Chile. As of December 31, 2006 we were party to
arbitration proceedings with Electroandina and Norgener. As of June, 2007 the
arbitration proceeding with Norgener has finalized and the arbitration with
Electroandina continues its course. For a discussion of risks related to
electricity supply, see Item 3. Key Information—Risk Factors.
In
May
2001, we entered into a 10 year gas supply contract with Distrinor S.A., which
would supply a maximum of 3,850,000 million Btu per year. This gas supply is
sufficient to satisfy the requirements for the facilities that are connected
to
a gas supply. Nonetheless, we are currently facing important shortages in the
supply of natural gas derived from export restrictions imposed by the
Argentinean government. For a discussion of risks related to natural gas supply
see Item 3. Key Information—Risk Factors.
We
obtain
ammonium nitrate, kerosene and soda ash from several large suppliers, mainly
in
Chile and the United States, under long-term contracts or general agreements,
some of which contain provisions for annual revisions of prices, quantities
and
deliveries. We acquire potassium chloride from Sociedad Chilena del Litio
Limitada, a local Chilean supplier. Diesel fuel is obtained under contracts
that
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 main raw materials contain standard and customary
commercial terms and conditions.
Water
Supply
The
main
sources of water for our nitrate and iodine facilities at Pedro de Valdivia,
María Elena and Coya Sur are the Loa and San Salvador rivers, which run near our
production facilities. Water for our Pampa Blanca, Nueva Victoria and Atacama
Salar facilities is obtained from wells near the production facilities. In
the
case of Pampa Blanca we additionally buy water from third parties for our
production processes. 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.
Government
Regulations
We
are
subject to the full range of government regulations and supervision generally
applicable to companies engaged in business in Chile, including labor laws,
social security laws, public health laws, consumer protection laws,
environmental laws, securities laws and anti-trust laws. These include
regulations to ensure sanitary and safe conditions in manufacturing plants.
We
conduct our mining operations pursuant to exploration concessions and
exploitation concessions granted pursuant to applicable Chilean law.
Exploitation concessions essentially grant a perpetual right to conduct mining
operations in the areas covered by the concessions, provided that annual
concession fees are paid (with the exception of the Atacama Salar rights, which
have been leased to us until 2030). Exploration concessions permit us to explore
for mineral resources on the land covered thereby for a specified period of
time, and to subsequently request a corresponding exploitation
concession.
We
also
hold water rights obtained from the Chilean water regulatory authority for
a
supply of water from rivers or wells near our production facilities sufficient
to meet our current and anticipated operational requirements. See Item 3. Key
Information for a discussion under "Risk Factors" of how changes in mining
and
water rights laws could affect our operating costs. We operate port facilities
at Tocopilla for shipment of products and delivery of certain raw materials
pursuant to maritime concessions, under applicable Chilean laws, which are
normally renewable on application, provided that such facilities are used as
authorized and annual concession fees are paid.
Under
Law
No. 16,319, the Company has an agreement with the Chilean Commission of Nuclear
Energy (the “CCHEN”) regarding the exploitation and sale of lithium from the
Atacama Salar. The agreement sets yearly quotas for the tonnage of lithium
authorized to be sold for each year of the Atacama Salar, as determined by
the
agreement.
The
following recent changes in Chilean law are likely to affect our
operations:
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 has been applied from 2006 onwards, is levied
on
the “taxable operating income” (as this term is defined in Law No. 20,026) of
the mining company, at a rate that varies from 0.5% up to 5% depending on the
consolidated annual sales.
There
are
currently no material legal or administrative proceedings pending against the
Company with respect to any regulatory matter, except as discussed under
“Environmental Regulations” below, and we believe that we are in compliance in
all material respects with all applicable statutory and administrative
regulations with respect to our business.
Environmental
Regulations
Our
operations in Chile are subject to both national and local regulations related
to the environment’s protection. The fundamental environmental laws in Chile are
the Health Code and the Chilean Environmental Framework Law.
The
Chilean Environmental Framework Law created CONAMA, which is the governmental
agency in charge of supervising the due compliance with the Chilean
Environmental Framework Law. Under the Chilean Environmental Framework Law,
we
are required to conduct environmental impact studies of any future projects
or
activities (or their significant modifications) that may affect the environment.
CONAMA evaluates environmental impact studies submitted for its approval and
also oversees the implementation of projects. The Chilean Environmental
Framework Law also enables private citizens, public agencies or local
authorities to challenge projects that may affect the environment, either before
these projects are executed or once they are already operating. Enforcement
remedies available include temporary or permanent closure of facilities and
fines.
Chilean
environmental regulations have become increasingly stringent in recent years,
both in respect of the approval of new projects and in connection with the
implementation and development of projects already approved. This trend is
likely to continue and, furthermore, recently implemented environmental
regulations in Chile have created uncertainty because rules and enforcement
procedures for these regulations have not been fully developed. Given public
interest in environmental enforcement matters, these regulations may also be
subject to political considerations that are beyond our control.
On
August
10, 1993, the Ministry of Health published in the Official Gazette a
determination pursuant to applicable air quality standard regulations stating
that atmospheric particulate levels at our production facilities in María Elena
and Pedro de Valdivia exceeded quality standards for breathable air affecting
the nearby towns. The high particulate matter levels are principally from dust
produced during the processing of caliche ore, particularly the crushing of
the
ore before leaching. Residents of the town of Pedro de Valdivia were relocated
to the town of María Elena, practically removing Pedro de Valdivia from the
scope of the determination of the Ministry of Health. In the year 2000, CONAMA
approved a plan to reduce the atmospheric particulate levels below permissible
levels by July of the same year, with certain amendments, by Decree Nº164/2000.
Although we followed the plan and reduced substantially the atmospheric
particulate levels at our principal production facilities, as a result of the
investments and processes implemented, we were not able to fully comply with
the
July 2000 timetable. Resolution Nº384, published in the Official Gazette on May
16, 2000, initiated a revision and reformulation of the plan. The new plan
was
published by Decree N°37/2004 on March 2004, and it demands to reduce 80% of the
emissions for atmospheric particulate material in two years. We designed a
new
project that modifies the milling and screening systems used in the processing
of the caliche ore at María Elena facilities, which should allow for the
necessary reduction of particulate material emissions. An environmental impact
study for the project was presented to the Environment Commission and it was
approved through Resolution Nº270 in October 2005. Upon issuing the approval for
the environmental impact study, the Environmental Commission issued Decree
N°53975, which authorizes this project as the one through which we will comply
with the emission reductions asked for in Decree N° 37/2004. The project
finished construction in April 2007 and is estimated to be in full operation
by
July 2007.
We
continuously monitor the impact of our operations on the environment and have
made, from time to time, modifications to our facilities trying to eliminate
any
adverse impact. Also, over time, new environmental standards and regulations
have been enacted, which have required minor adjustments or modifications of
our
operations for full compliance. We anticipate that additional laws and
regulations will be enacted over time with respect to environmental matters.
While we believe that we will continue to be in compliance with all applicable
environmental regulations of which we are now aware, there can be no assurance
that future legislative or regulatory developments will not impose material
restrictions on our operations. We are both committed to complying with all
applicable environmental regulations and applying an Environmental Management
System (EMS) to continuously improve our environmental performance.
We
have
submitted and will continue to submit several environmental impact assessment
studies related to our projects to the governmental authorities. We require
the
authorization of these submissions in order to maintain and to increase our
production capacity.
4.C.
Organizational
Structure
All
of
our principal operating subsidiaries are essentially wholly-owned, except for
Soquimich Comercial, which is 61% owned by SQM and whose shares are listed
and
traded on the Chilean Stock Exchanges, and Ajay SQM Chile S.A., which is 51%
owned by SQM. The following is a summary of our main subsidiaries as of March
31, 2007. For a list of all our consolidated subsidiaries see Note 2(a) to
the
Consolidated Financial Statements.
|
Main
subsidiaries
|
Activity
|
Country
of Incorporation
|
SQM
Beneficial
Ownership
Interest
(Direct/Indirect)
|
|
SQM
Nitratos S.A.
|
Extracts
and sells Caliche ore to
subsidiaries and affiliates of SQM
|
Chile
|
100%
|
|
SQM
Industrial S.A.
|
Produces
and markets the Company’s products directly and through other
subsidiaries and affiliates of SQM
|
Chile
|
100%
|
|
SQM
Salar
S.A.
|
Exploits
the Atacama Salar to produce and market the Company’s products directly
and through other subsidiaries and affiliates of SQM
|
Chile
|
100%
|
|
Minera
Nueva Victoria S.A.
|
Produces
and markets the Company’s products directly and through other subsidiaries
and affiliates of SQM
|
Chile
|
100%
|
|
Servicios
Integrales de Tránsitos y Transferencias S.A. (SIT)
|
Owns
and operates a rail transport system and also owns and operates
the
Tocopilla port facilities
|
Chile
|
100%
|
|
Soquimich
Comercial S.A.
|
Markets
domestically the Company’s specialty plant nutrition products and imports
fertilizers for resale in Chile
|
Chile
|
61%
|
|
Ajay-SQM
Chile S.A.
|
Produces
and markets the Company’s iodine and iodine derivatives
|
Chile
|
51%
|
|
Sales
and distribution affiliates in the United States, Belgium, Brazil,
Venezuela, Ecuador, Peru, Argentina, Mexico, South Africa and other
locations.
|
Market
the Company’s products throughout the world
|
Various
|
4.D.
Property,
Plants And Equipment
Discussion
of our mining rights is organized below according to the geographic location
of
our mining operations. SQM's mining interests located throughout the valley
of
the Tarapacá and Antofagasta regions of northern Chile (el Norte Grande),
referred to collectively as the "Caliche Ore Mines" are discussed first. Second,
are the company's mining interests within the Atacama Desert in the eastern
region of el Norte Grande (the "Atacama Salar Brines") are then
discussed.
DESCRIPTION
OF THE CALICHE ORE MINES
As
of
December 31 2006, we held exploration rights or exploitation rights to mineral
resources representing approximately 1,799,441 hectares. We have also submitted
applications for exploration and exploitation rights for more than 728,874
additional hectares. As part of these rights, we have six mines covering an
area
of approximately 388,000
hectares. Of these six mines, four are being exploited and two are without
current operations. Additionally, at the beginning of 2006 we incorporated
the
Iris mine as described below.
Pedro
de Valdivia
The
mine
and facilities that we operate in Pedro de Valdivia are located 170 kilometers
northeast of Antofagasta and are accessible by highway. These facilities have
been in operation for approximately 77 years and were previously owned and
operated by Anglo Lautaro. The area currently being mined is located
approximately 25 kilometers west of the Pedro de Valdivia production facilities.
Our mining facilities at Pedro de Valdivia have a Weighted Average Age of
approximately 9.4 years. Electricity, diesel and natural gas, and fuel oil
are
the primary source power for this operation.
María
Elena
The
mine
and facilities that we operate in María Elena are located 220 kilometers
northeast of Antofagasta and are accessible by highway. These facilities have
been in operation for approximately 82 years and were previously owned and
operated by Anglo Lautaro. The area currently being mined is located
approximately 14 kilometers north of the María Elena production facilities. The
power sources utilized are mainly electricity, diesel, natural gas and fuel
oil.
The Weighted Average Age of the Company's mining facilities at María Elena is
approximately 11.7 years.
Pampa
Blanca
We
currently conduct caliche ore operations in Pampa Blanca, which is located
100
kilometers northeast of Antofagasta and is accessible by highway. Beginning
in
1987, the output from Pampa Blanca was derived from old waste ore deposits.
In
1997 we began mining new caliche ore deposits at Pampa Blanca. Ore from this
mine is transported by truck to nearby heap leaching pads where it is used
to
produce iodine and nitrate salts. Various companies conducted mining operations
at the site in the late 1920s. The Weighted Average Age of the ore recovery
facilities at Pampa Blanca is approximately 12.5 years. The power source
utilized is mostly electricity, produced by mobile diesel
generators.
Nueva
Victoria
At
the
end of 2002, we restarted our caliche ore operations in Nueva Victoria. This
site is located 180 kilometers north of María Elena and is accessible by
highway. Ore from Nueva Victoria is transported by truck to heap leaching pads
where it is then used to produce iodine. The Weighted Average Age of the ore
recovery facilities at Nueva Victoria is approximately 4.3 years. The power
source utilized is mostly electricity, obtained from the SING.
Mapocho—Inactive
The
Mapocho mine is located 67 kilometers northeast of Iquique in the First Region
and is accessible by highway. During its years of operation, Mapocho was mined
for caliche ore. Production started in 1996 from old waste deposits and then
shifted to new caliche ore deposits in 1997. The ore in Mapocho was transported
by truck to heap leaching pads and then used to produce iodine. We shut down
the
plant and dismantled it in 1999. This mine represents a future extension of
Nueva Victoria mining operations
Soronal—Stand
By
We
have
proven and probable reserves at Soronal, which is located 35 kilometers to
the
north of Nueva Victoria and is accessible by highway. This area has not been
exploited yet, but represents a future extension of Nueva Victoria mining
operations.
Iris—Stand
By
Formerly
the mine used by DSM, it is not currently in operation. This mine was in
operation during the first half of 2006 and was not exploited during the rest
of
the year. This area has not been further explored by us since its acquisition
at
the beginning of 2006, therefore we have not carried out an estimation of proven
or probable reserves. This mine represents a future extension of Nueva Victoria
mining operations, or a continuity of operations of the Iris iodine
operations.
Description
of the Atacama Salar Brines
Atacama
Salar Brines
We
hold
rights to exploit the mineral resources in an area covering approximately
197,000 hectares of land in the Atacama Salar in northern Chile, and have
applied for additional rights covering approximately 194,700 hectares. The
Weighted Average Age of our mining facilities at Atacama Salar is approximately
7.7 years. The main source of power used by the operation is
electricity.
Additional
Mining Operations Leased in the Atacama Salar Region
SQM
Salar
S.A. holds exclusive rights to exploit the mineral resources in an area covering
approximately 197,000 hectares of land in the Atacama Salar in northern Chile.
These rights include 147,000 hectares that are owned by Corfo and leased
to SQM
Salar S.A. pursuant to a lease agreement between Corfo and SQM Salar S.A.,
(the
Lease Agreement). Corfo may not unilaterally amend the Lease Agreement and
the
rights to exploit the resources cannot be transferred. The Lease Agreement
provides that SQM Salar S.A. is responsible for the maintenance of Corfo´s
exploitation rights and for annual payments to the Chilean government and
expires on December 31, 2030. SQM Salar S.A. is required to make lease-royalty
payments to Corfo according to specified percentages of the value of production
of minerals extracted from the Atacama Salar brines. In the years
2006, 2005 and 2004, royalty payments amounted to approximately US$ 9.2 million,
US$ 6.8 million, and US$4.9 million, respectively.
In
addition to the mining rights leased to SQM Salar S.A. described above, Corfo
has exclusive mining rights covering a total area of approximately 65,200
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 65,200 hectares of the Atacama Salar.
The
Project Agreement expires on December 31, 2030.
Concessions,
Extraction Yields and Reserves for the Caliche Ore Mines and Salar
Brines
Concessions
Generally
Caliche
ore.
We hold
our mineral rights pursuant to one of two types of exclusive concessions granted
pursuant to applicable law in Chile:
(1)
"Exploitation Concessions" These are concessions whereby we are legally entitled
to use the land in order to exploit the mineral resources contained therein
on a
perpetual basis subject to annual payments to the Chilean government;
or
(2)
"Exploration Concessions" These are concessions whereby we are legally entitled
to use the land in order to explore for mineral resources for a period of two
years, at the expiration of which the concession may be extended one time only
for two additional years if the area covered by the concession is reduced by
half.
An
Exploration Concession is generally obtained for purposes of evaluating the
mineral resources in an area. Generally, after the holder of the Exploration
Concession has determined that the area contains exploitable mineral resources,
such holder will apply for an Exploitation Concession for the area. Such
application will give the holder absolute priority with respect to such
Exploitation Concession against third parties. If the holder of the Exploration
Concession determines that the area does not contain commercially exploitable
mineral resources, the concession is usually allowed to lapse, although it
is
our policy to convert substantially all Exploration Concessions to Exploitation
Concessions. An application also can be made for an Exploitation Concession
without first having obtained an Exploration Concession for the area
involved.
Concessions
for the Caliche Ore Mines and Salar Brines
Approximately
79% of our total mining concessions are held pursuant to Exploitation
Concessions and 21% pursuant to Exploration Concessions, not including areas
within the Atacama Salar Mines. Of the Exploitation Concessions, approximately
77% have been already granted pursuant to applicable Chilean law, and
approximately 23% are in the process of being granted. Of the Exploration
Concessions, approximately 60% have been already granted pursuant to applicable
Chilean law, and approximately 40% are in the process of being granted. Chile
owns substantially all the surface land covering our Exploration and
Exploitation Concessions.
We
made
payments to the Chilean government for our Exploration and Exploitation
Concessions of approximately US$5.9 million in the year 2006.
The
following table sets forth our exploitation and exploration concessions as
of
December 31, 2006:
|
Exploitation
Concessions (*)
|
Exploration
Concessions (*)
|
||||||||||||||||||
|
Mines
|
Total
number
|
Hectares
|
Total
number
|
hectares
|
Total
number
|
hectares
|
|||||||||||||
|
Pedro
de Valdivia
|
708
|
|
93,207
|
2
|
100
|
710
|
93,307
|
||||||||||||
|
Maria
Elena
|
658
|
125,879
|
38
|
2,838
|
696
|
128,717
|
|||||||||||||
|
Pampa
Blanca
|
516
|
96,718
|
2
|
30
|
518
|
96,748
|
|||||||||||||
|
Nueva
Victoria
|
71
|
8,366
|
15
|
2,829
|
86
|
11,195
|
|||||||||||||
|
Mapocho
|
61
|
8,240
|
11
|
366
|
72
|
8,606
|
|||||||||||||
|
Soronal
|
311
|
42,580
|
49
|
6,883
|
360
|
49,463
|
|||||||||||||
|
Atacama
Salar
|
132
|
197,483
|
669
|
194,700
|
801
|
392,183
|
|||||||||||||
|
Sub
total mines
|
2,457
|
572,473
|
786
|
207,746
|
3,243
|
780,219
|
|||||||||||||
|
Other
caliche areas
|
6,648
|
1,743,225
|
1,228
|
397,054
|
7,876
|
2,140,279
|
|||||||||||||
|
Salars
and other areas
|
123
|
31,053
|
111
|
30,300
|
234
|
61,353
|
|||||||||||||
|
Sub
total other areas
|
6,771
|
1,774,278
|
1,339
|
427,354
|
8,110
|
2,201,632
|
|||||||||||||
|
Total
|
9,228
|
2,346,751
|
2,125
|
635,100
|
11,353
|
2,981,851
|
|||||||||||||
(*)
We have included in this table both granted concessions and concessions in
the
process of being granted
Extraction
Yields
The
following table sets forth certain operating data relating to each of our mines
(1):
|
(Values
in thousands unless otherwise stated)
|
2004
|
2005
|
2006
|
|
Pedro
de Valdivia
|
|||
|
|
|||
|
Metric
tons of ore mined
|
12,029
|
12,362
|
11,652
|
|
Average
grade Nitrate (% by weight)
|
7.2
|
7.2
|
7.4
|
|
Iodine
(parts per million (ppm))
|
378
|
402
|
399
|
|
Metric
tons of Crystallized Nitrate Produced
|
458
|
476
|
454
|
|
Metric
tons of Iodine Produced
|
2.3
|
2.6
|
2.5
|
|
|
|||
|
María
Elena (1)
|
|||
|
|
|||
|
Metric
tons of ore mined
|
5,835
|
5,917
|
5,682
|
|
Average
grade Nitrate (% by weight)
|
8.6
|
8.0
|
7.5
|
|
Iodine
(ppm)
|
485
|
428
|
399
|
|
Metric
tons of Crystallized Nitrate Produced
|
480
|
479
|
504
|
|
Metric
tons of Iodine Produced
|
1.5
|
1.4
|
1.3
|
|
|
|||
|
Pampa
Blanca
|
|||
|
|
|||
|
Metric
tons of ore recovered
|
4,976
|
5,309
|
4,832
|
|
Iodine
(ppm)
|
560
|
520
|
530
|
|
Metric
tons of Iodine Produced
|
1.4
|
1.5
|
1.4
|
|
|
|||
|
Nueva
Victoria
|
|||
|
|
|||
|
Metric
tons of ore recovered
|
6,776
|
7,140
|
12,024
|
|
Iodine
(ppm)
|
505
|
504
|
501
|
|
Metric
tons of Iodine Produced
|
2.0
|
2.2
|
3.4
|
|
|
|||
|
Iris
|
|||
|
Metric
tons of ore recovered
|
—
|
—
|
2,611
|
|
Iodine
(ppm)
|
—
|
—
|
440
|
|
Metric
tons of Iodine Produced
|
—
|
—
|
1.2
|
|
|
|||
|
SQM
Salar
|
|||
|
|
|||
|
Metric
tons of Lithium Carbonate Produced
|
27
|
27
|
29
|
|
Metric
tons of Potash Produced
|
638
|
632
|
539
|
|
Metric
tons of Potassium Sulfate Produced
|
178
|
162
|
170
|
|
Metric
tons of Boric Acid
|
9
|
9
|
8
|
| · |
(1)
Includes production at Coya Sur from treatment of fines and nitrates
from
pile treatment at Pampa Blanca, María Elena and Pedro de
Valdivia.
|
Reserves
Caliche
ore
Our
in-house staff of geologists and mining engineers prepares our estimates of
caliche ore reserves. The proven and probable reserve figures presented below
are estimates, and no assurance can be given that the indicated levels of
recovery of nitrates and iodine will be realized. See Item 3. D. Risk
factors.
We
estimate ore reserves based on engineering evaluations of assay values derived
from sampling of drill-holes and other openings. Several drill-hole spacing
have
been used for recognizing mining resources. Normally, we start with 400 x 400
meters and then we reduce spacing to 200x200 meters and 100x100 meters and
50x50
meters. The geological occurrence of caliche mineral is unique and different
from other metallic and non-metallic minerals. Caliche ore is found in large
horizontal layers at depths ranging from 1 to 4 meters and has an overburden
between 0 to 2 meters. This horizontal layering is a natural geological
condition and allows the Company to estimate the continuity of the caliche
bed
based on surface geological reconnaissance and analysis of samples and trenches.
Mining resources can be calculated using the information from the drill-hole
sampling.
According
to our experience in caliche ore, the grid pattern drill-holes with spacing
equal to or less than 100 meters produce data on the caliche resources that
is
sufficiently defined to consider them measured resources and then, adjusting
for
technical, economic and legal aspects, as proven reserves. These reserves are
obtained using the Kriging evaluation and the application of operational
parameters to obtain economically profitable reserves. Similarly, the
information obtained from detailed geologic work and samples taken from grid
pattern drill-holes with spacing equal to or less than 200 meters can be
considered indicated resources and then, adjusting for technical, 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. These probable reserves are obtained
by evaluation of polygons and have an uncertainty or error margin greater than
that of proven reserves.
The
updated estimates of our proven reserves of caliche ore at each of our mines,
as
of December 31 2006, are as follows:
|
Mine
|
Proven
Reserves
(millions
of metric tons)
|
Nitrate
Average Grade
(percentage
by weight)
|
Iodine
Average Grade
(parts
per million)
|
|||||||
|
Pedro
de Valdivia
|
158.7
|
7.1%
|
|
371
|
||||||
|
María
Elena
|
136.6
|
7.2%
|
|
416
|
||||||
|
Pampa
Blanca
|
78.1
|
6.2%
|
|
546
|
||||||
|
Nueva
Victoria
|
93.9
|
4.1%
|
|
460
|
||||||
|
Mapocho
|
4.6
|
5.3%
|
|
436
|
||||||
|
Soronal
|
158.9
|
7.1%
|
|
405
|
||||||
In
addition, the updated estimates of our probable reserves of caliche ore at
each
of our principal mines as of December 31 2006, are the following:
|
Mine
|
Probable
Reserves
(millions
of metric tons)
|
Nitrate
Average Grade
(percentage
by weight)
|
Iodine
Average Grade
(parts
per million)
|
|||||||
|
Pedro
de Valdivia
|
133.5
|
6.8%
|
|
435
|
||||||
|
María
Elena
|
97.6
|
7.3%
|
|
380
|
||||||
|
Pampa
Blanca
|
429.4
|
6.0%
|
|
524
|
||||||
|
Nueva
Victoria
|
71.7
|
3.7%
|
|
440
|
||||||
|
Soronal
|
59.1
|
7.6%
|
|
362
|
||||||
The
proven and probable reserves shown above are the result of exploration and
evaluation in approximately 15.2% 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
84.8% of this area has not been explored yet or has limited reconnaissance
as
inferred or hypothetical resources. Reserves shown in these tables consider
and
are calculated over mining properties that are not involved in any legal issues
between SQM and other parties. Additionally, these reserves do not include
the
Iris as we have not carried out an estimation of proven or probable reserves
since its acquisition at the beginning of 2006.
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 basis of proven reserves. The
transforming factors depend on the different geologic conditions and continuity
recognized mine by mine, but on average are higher than 60%.
Additionally,
proven and probable reserves could be affected by mining exploitation methods
which result in differences between reserves estimates that are available for
exploitation in the mining plan and recoverable material that is finally
transferred to the leaching vats or heaps. The average mining exploitation
factor for our different mines ranges between 80% and 90%. Additionally, the
average global metallurgical recoveries of processes for nitrate and iodine
contained in the recovered material varies between 55% to 65%.
Exploration
Program.
We
maintain a permanent program of exploration and resource evaluation on the
land
surrounding the mines at Nueva Victoria, Pedro de Valdivia, María Elena and
Pampa Blanca and at other sites for which we have the appropriate concessions.
In 2006,
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 42,171 hectares. Additionally, we conducted general explorations
based on a closer grid pattern drill-holes in a total area of approximately
1,154 hectares and, in addition, carried out in-depth sampling of approximately
1,936 hectares (761 hectares at Pedro de Valdivia, 341 hectares at María Elena,
710 hectares Nueva Victoria and 119 hectares at Pampa Blanca). The exploration
and development program in 2007 calls for a basic reconnaissance program over
a
total area of 34,221 hectares, general exploration over a total area of about
1,836 hectares and, in addition, in-depth sampling of approximately 1,813
hectares.
Reserves
and Concessions for the Atacama Salar Brines
Reserves
for the Atacama Salar Brines
Our
in-house staff of hydro-geologists and mining engineers prepares our estimates
of potassium, sulfate, lithium and boron reserves at the Atacama Salar. We
have
explored the land up to a depth of 100 meters and estimate that our proven
and
probable reserves, based on economic restrictions, geostatistical analysis
and
brine sampling up to a depth of 30 and 50 meters, are as follows:
|
Proven
Reserves
(millions
of metric tons)
|
Probable
Reserves
(millions
of metric tons)
|
||||||
|
Potassium
(K+)
|
39.9
|
5.1
|
|||||
|
Sulfate
(SO42–)
|
36.1
|
1.3
|
|||||
|
Lithium
(Li+)
|
2.1
|
1.3
|
|||||
|
Boron
(B3+)
|
1.2
|
0.1
|
|||||
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. To evaluate reserves, we conduct a geostatistical study using
the
Kriging method in 2D. We calculate the quality of brine effectively drainable
or
exploitable in each evaluation unit. We consider chemical parameters to
determine the process to be applied to the brines. Based on the chemical
characteristics, the volume of brine and drainable percentage, we determine
the
number of metric tons for each of the chemical ions. Proven reserves are defined
as those geographical blocks that comply with a Kriging method estimation error
of up to 15%. In the case of probable reserves, the selected blocks must comply
with an estimation error between 15% and 35%. Blocks with an error greater
than
35% are not considered in the evaluation of reserves. 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. Metric tons of potassium, sulfate, lithium and boron
considered in the proven and probable reserves are shown before losses from
evaporation processes and metallurgical treatment.
The
recoveries of each ion depend on brine composition, which changes in time,
and
the process applied to produce the desired commercial products. Ponds and
metallurgical recoveries for potassium vary from 47% to 68% while for sulfate
vary from 27% to 44%. The recoveries for lithium vary from 28% to 32% and for
boron is approximately 29%.
PORTS
AND WATER RIGHTS
We
operate port facilities at Tocopilla for shipment of products and delivery
of
certain raw materials pursuant to renewable concessions granted by Chilean
regulatory authorities, provided that such facilities are used as authorized
and
annual concession fees are paid by us. We also hold water rights for a supply
of
water from rivers and wells near our production facilities sufficient to meet
our current and anticipated operational requirements.
The
map
below shows the location of SQM's principal mining operations and land
concessions.
PRODUCTION
FACILITIES
Our
principal production facilities are located near our mines and extraction
facilities in northern Chile. The following table sets forth the principal
production facilities as of December 31, 2006:
|
Location
|
Type
of Facility
|
Approximate
Size (1)
(Hectares)
|
|
Pedro
de Valdivia
|
Nitrate,
sulfate and iodine production
|
126
|
|
María
Elena
|
Nitrate,
sulfate and iodine production
|
110
|
|
Coya
Sur
|
Nitrate,
sulfate and iodine production
|
232
|
|
Pampa
Blanca
|
Concentrated
nitrate salts and iodine production
|
86
|
|
Nueva
Victoria
|
Iodine
production
|
11
|
|
Atacama
Salar(2)
|
Potassium
chloride, lithium chloride, potassium sulfate and boric
acid
|
2,288
|
|
Salar
del Carmen, Antofagasta
|
Lithium
carbonate and lithium hydroxide production
|
32
|
|
Tocopilla
|
Port
facilities
|
24
|
| (1) |
Includes
production facilities, solar evaporation ponds and leaching
heaps, if
any.
|
| (2) |
We
lease the exploitation rights used at the Atacama Salar from
Corfo.
|
We
own,
directly or indirectly through subsidiaries, all of the facilities, free of
any
material liens, pledges or encumbrances, and believe that they are suitable
and
adequate for the business we conduct in them. As of December 31, 2006, the
gross
book value of the property and associated plant and equipment at the Pedro
de
Valdivia, María Elena, Coya Sur, Pampa Blanca, Nueva Victoria, Atacama Salar,
Salar del Carmen and Tocopilla was approximately US$188.93 million, US$322.04
million, US$156.04 million, US$17.05 million, US$166.21 million, US$374.45
million, US$94.29 million and US$61.79 million, respectively.
In
addition to the above-listed facilities, we operate a computer and information
system linking our principal subsidiaries to our operating facilities throughout
Chile via a local area network. The computer and information system is used
mainly for accounting, monitoring of supplies and inventories, billing, quality
control and research activities. The system's mainframe computer equipment
is
located at our offices in Santiago.
The
Weighted Average Age of our production facilities at Pedro de Valdivia, María
Elena, Coya Sur, Nueva Victoria, Atacama Salar and Salar del Carmen is
approximately 10.39 years, 10.20 years, 9.32 years, 4.51 years, 8.30 years
and
7.96 years, respectively. The Weighted Average Age of our iodine facilities
at
Pampa Blanca is approximately 12.53 years. Our railroad line between our
production facilities and Tocopilla was originally constructed in 1890, but
the
rails, locomotives and rolling stock have been replaced and refurbished as
needed. The Tocopilla port facilities were originally constructed in 1961 and
have been refurbished and expanded since that time. The Weighted Average Age
of
the Tocopilla port facilities is approximately 13.29 years. We consider the
condition of our principal plant and equipment to be good.
We
maintain different projects to improve our production methods, to increase
production capacity of current products and to develop new products and markets.
We have in place a capital expenditure program calling for investments totaling
approximately US$630 million. For further discussion see item 4.A History And
Development Of The Company - Capital Expenditure Program.
TRANSPORTATION
AND STORAGE FACILITIES
We
own
and operate railway lines and equipment, as well as port and storage facilities,
for the transport and handling of finished products and consumable
materials.
The
main
center for our production and storage of raw material is the hub composed of
the
facilities in Coya Sur, Pedro de Valdivia and María Elena. Our Salar de Atacama
facilities constitute the second largest concentration of plants and raw
material storage. Other facilities include Nueva Victoria, Pampa Blanca, and
the
finished product plants of Lithium Carbonate and Lithium Hydroxide. The
Tocopilla Port Terminal, which we own, is the main facility for storage and
shipment of our products. In January 2006, the company acquired, a new facility
in Iris, near Nueva Victoria, containing nitrates and iodine ores as well as
iodine and iodine derivatives finished product plants.
Nitrate
raw materials are produced and first stored at our Pampa Blanca, Pedro de
Valdivia and María Elena mines, and then transported by rail (Pedro de
Valdivia), conveyor belt (María Elena) and truck (others) to the plants
described in the next paragraph, for further production processes.
Nitrate
finished products are produced at our facilities in Pedro de Valdivia, María
Elena and Coya Sur and then transported by our rail system to Tocopilla Port
Terminal, where they are stored and shipped, either bagged or in bulk.
Potassium
chloride is produced at our facilities in the Salar de Atacama and transported
either to Tocopilla Port Terminal or Coya Sur by a dedicated dual transport
system (rail/truck) owned by a third party dedicated contractor. Product going
to Coya Sur is used as raw material for the production of potassium nitrate
or
for potassium chloride finished product.
Potassium
sulfate and boric acid are both produced at our facilities in the Salar de
Atacama and then are transported to Tocopilla Port Terminal to follow the rest
of the process. Potassium sulfate is transported by the same dual mode system
as
potassium chloride, and boric acid is transported, already bagged at the Salar
de Atacama, by a contracted trucking company.
Lithium
solutions, produced at our facilities in the Salar de Atacama, are transported
to the lithium carbonate facility in the Salar del Carmen area where finished
lithium carbonate is produced. Part of the lithium carbonate is fed to the
adjacent lithium hydroxide plant, where finished lithium hydroxide is produced.
These two products are bagged and stored in the premises and are subsequently
transported by truck to Tocopilla Port Terminal or to the Antofagasta Terminal
for shipment in charter vessel or container vessels.
Iodine
raw material, obtained in the same mines the nitrates, is processed, bagged
and
stored exclusively in the facilities of Pedro de Valdivia, Iris and Nueva
Victoria, and then shipped by truck to Antofagasta or Iquique for vessel
container transport or by truck to Santiago, where iodine derivatives are
produced.
The
facilities at Tocopilla Port Terminal are located approximately 186 kilometers
north
of
Antofagasta and approximately 124 kilometers west of Pedro de Valdivia, 84
kilometers west of María Elena and Coya Sur and 372 kilometers west of the
Atacama Salar. SIT operates the facilities under maritime concessions granted
pursuant to applicable Chilean laws. The port also complies with ISPS
(International Ship and Port Facility Security Code) regulation. The Tocopilla
Port Terminal facilities include a railcar dumper to transfer bulk product
into
the Conveyor Belt system used to store and ship bulk product.
Storage
facilities consist of a six silo system, with a total capacity of 54,000 metric
tons, and an open storage area for approximately 180,000 metric tons. A bagging
station capable of bagging both small and maxi bags, is also connected to the
conveyor system.
For
shipping bulk product, the conveyor belt system extends over the coast line
to
deliver product directly inside bulk carrier hatches. Using this system, the
loading capacity is 1,200 tons per hour. Bags are loaded to bulk vessels using
barges that are loaded in Tocopilla Port Terminal dock and unloaded by vessel
cranes into the hatches. Both bulk and bagged trucks are loaded in Tocopilla
Port Terminal for transferring product directly to customers or for container
vessels shipping from another port, mainly Antofagasta, Mejillones and Iquique.
Bulk
carrier loading in the Tocopilla Port Terminal is mostly contracted for by
us to
transfer the product to our hubs around the world or for shipping to customers,
which in limited cases use their own contracted vessels for delivery. Trucking
is provided by a mix of spot, contracted and customer owned
equipment.
A
fuel
oil storage facility at Tocopilla, owned by SQM, was closed and dismantled
during February 2006, as a part of a rationalization plan for the terminal.
The
space is destined as bag storage and a new container loading
facility.
Not
applicable
CRITICAL
ACCOUNTING POLICIES
Critical
accounting policies are defined as those that are reflective of significant
judgments and uncertainties, which would potentially result in materially
different results under different assumptions and conditions.
We
believe that our critical accounting policies in the preparation of our Chilean
GAAP financial statements are limited to those described below. It should be
noted that in many cases, Chilean GAAP specifically dictates the accounting
treatment of a particular transaction, with no need for management's judgment
in
their application. Additionally, significant differences can exist between
Chilean GAAP and U.S. GAAP, as explained below in the Notes to the Financial
Statements in Note 29—Differences between Chilean and United States Generally
Accepted Accounting Principles. There are also areas in which management's
judgment in selecting available alternatives would not produce materially
different results. For a summary of significant accounting policies and methods
used in the preparation of the financial statements, see Note 2 to the
Consolidated Financial Statements as of December 31, 2006 and 2005, and for
the
three years in the period ended December 31, 2006.
Allowance
for doubtful accounts
We
maintain allowances for doubtful accounts for estimated losses resulting from
the assessed inability of our customers to make required
payments.If the financial condition of our customers were to deteriorate
unexpectedly, impacting their ability
to make
payments, additional allowances may be required. We routinely review the
financial condition of our customers and make assessments of
collectibility.
Deferred
tax asset valuation allowance
Our
Company and each of its subsidiaries compute and pay tax on a separate basis,
except for the U.S. subsidiaries. We estimate our tax exposure and assess
temporary differences resulting from differing treatment of various items for
tax and accounting purposes. These differences result in deferred tax assets
and
liabilities, which are reflected in our consolidated balance sheet.
We
record
a valuation allowance to reduce deferred tax asset to the amount that we believe
is more likely than not to be realized. The valuation of the deferred tax asset
is dependent on, amongst other things, the ability of the Company to generate
a
sufficient level of future taxable income.
Inventories
Inventories
of finished products and work in process are valued at average production cost.
Raw materials and products acquired from third parties are stated at average
cost and materials-in-transit are valued at cost. We regularly review inventory
for impairment and record an obsolescence provision so that carrying values
do
not exceed net realizable values.
Staff
severance indemnities
We
have
significant staff severance indemnity liabilities, which are recognized on
accrual basis. Inherent in the valuations of these obligations are key
assumptions, including discount rates. We are required to consider current
market conditions, including changes in interest rates, in selecting these
assumptions. Changes in the related benefit plan liabilities may occur in the
future due to changes resulting from fluctuations in our related headcount
or to
changes in the assumptions.
Mining
development costs
Mine
exploration costs and stripping costs to maintain production of mineral
resources extracted from operating mines are considered variable production
costs and are included in the cost of inventory produced during the period.
Mine
development costs at new mines, and major development costs at operating mines
outside existing areas under extraction that are expected to benefit future
production are capitalized under “other long-term assets” and amortized using a
units-of-production method over the associated proven and probable reserves.
The
Company determines its proven and probable reserves based on drilling, brine
sampling and geostatistic reservoir modeling in order to estimate mineral volume
and composition
All
other
mine exploration assets costs, including expenses related to low grade mineral
resources rendering reserves that are not economically exploitable, are charged
to the results of operations in the period in which they are
incurred
Long-lived
assets and their impairment
We
estimate the useful lives of property, plant and equipment in order to determine
the amount of depreciation expense to be recorded during any reporting period.
The estimated useful lives are based on historical experience with similar
assets, taking into account anticipated technological or other changes. If
technological changes are expected to occur more rapidly or in a different
way
than previously anticipated, the useful lives assigned to these assets may
need
to be reduced, resulting in the recognition of increased depreciation expense
in
future periods.
We
evaluate the recoverability of our long-lived assets (other than
intangibles and
deferred tax assets) in accordance with Technical Bulletin No. 33 “Accounting
treatment of Property, Plant and Equipment”, issued by the Chilean Association
of Accountants, and SFAS No. 144 "Accounting for the Impairment or Disposal
of
Long-Lived Assets". Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset
may not be recoverable. The rules require recognition of impairment of
long-lived assets in the event that the net book value of such assets exceeds
the future undiscounted net cash flows attributable to such assets. Impairment,
if any, is recognized in the period of identification to the extent the carrying
amount of an asset exceeds the fair value of such asset. We believe that the
accounting estimate related to asset impairment is critical because it requires
us to make assumptions about future cash flows generated from the use of the
assets over their estimated useful lives.
Impairment
of goodwill
We
have
intangible assets related to goodwill. Under Chilean GAAP, goodwill should
be
reviewed for impairment when events or circumstances, such as recurrent losses
for two or more periods, indicate a possible inability to realize the carrying
amount. Under SFAS No. 142, goodwill must be allocated to reporting units and
tested for impairment at least annually or more frequently if events or
circumstances, such as adverse changes in the business climate, indicate that
there may be justification for conducting an interim test. The first part of
the
test is a comparison, at the reporting unit level, of the fair value of each
reporting unit to its carrying amount, including goodwill. If the fair value
is
less than the carrying value, then the second part of the test is needed to
measure the amount of potential goodwill impairment. The implied fair value
of
the reporting unit’s goodwill is calculated and compared to the carrying amount
of goodwill recorded in the Company’s financial records. If the carrying value
of the reporting units goodwill exceeds the implied fair value of that goodwill,
then we would recognize an impairment loss in the amount of the difference,
which would be recorded as a charge against net income.
The
fair
values of the reporting units are determined using discounted cash flow models
based on each reporting unit’s internal forecasts.
The
impairment analysis requires management to make subjective judgments concerning
estimates of how the assets will perform in the future using a discounted cash
flow analysis. Additionally, estimated cash flows may extend beyond ten years
and, by their nature, are difficult to determine. Events and factors that may
significantly affect the estimates include, among others, competitive forces,
customer behavior and attrition, changes in revenue growth trends, cost
structures and technology, and changes in interest rates and specific industry
or market sector conditions. Impairment is recognized earlier whenever
warranted.
During
the period ended December 31, 2006, there were no changes in the application
of
generally accepted accounting principles in Chile compared to the prior
year.
5.A.
Operating
Results
Introduction
The
following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto included in Item 18.
Certain calculations (including percentages) that appear herein have been
rounded.
Our
Consolidated Financial Statements are prepared in accordance with Chilean GAAP,
which differ in certain material respects from U.S. GAAP. Note 29 to the
Consolidated Financial Statements provides a description of the material
differences between Chilean GAAP and U.S. GAAP and a reconciliation to U.S.
GAAP
of net income for the years ended December 31, 2006, 2005 and 2004 and of total
shareholders' equity as of December 31, 2006, 2005 and 2004. Our Consolidated
Financial Statements are prepared in U.S. dollars. The U.S. dollar is the
primary currency in which we operate.
We
operate as an independent corporation. Nonetheless we are a "controlled
corporation", as that term is defined under Chilean law. See Item 6.E. Share
Ownership.
Certain
segment information by products group and by geographical area is provided
in
Note 29 -Differences between Chilean and United States Generally Accepted
Accounting Principles— II. k) Industry segment and geographic area
information.
Overview
Of Our Results Of Operations
We
divide
our operations into the following four product lines:
|
·
|
Specialty
plant nutrition: production and commercialization of fertilizers
with
unique characteristics.
|
|
·
|
Iodine
and derivatives: production and commercialization of iodine and
derivatives.
|
|
·
|
Lithium
and derivatives: production and commercialization of lithium and
derivatives.
|
|
·
|
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, through Yara
International ASA pursuant to a commercial agreement.
FACTORS
AFFECTING OUR RESULTS OF OPERATIONS
Our
results of operations substantially depend on:
|
·
|
Trends
in demand for our products. See Item 5.D. Trend
Information;
|
|
·
|
Our
efficiency in operating our facilities as they are generally running
at
nameplate capacity;
|
|
·
|
Our
ability to accomplish our capital expenditures program in a timely
manner,
as we are the main supplier in our core
businesses;
|
|
·
|
Trends
in the exchange rate between the US dollar and Chilean peso, as a
significant portion of the cost of sales is related to the Chilean
peso;
|
|
·
|
Logistics,
raw materials and maintenance costs, which have been increasing in
the
last three years; and
|
|
·
|
Energy
costs, which have increased due to the high cost of oil and the
interruption of our natural gas
supply.
|
The
following table sets forth our revenues (in millions of U.S. dollars) and the
percentage accounted for by each of our product lines for each of the periods
indicated:
|
Year
ended December 31,
|
|||||||||||||||||||
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
US$
|
%
|
US$
|
%
|
US$
|
%
|
||||||||||||||
|
Specialty
plant nutrition
|
502.8
|
48
|
487.8
|
54
|
426.8
|
54
|
|||||||||||||
|
Iodine
and derivatives
|
217.7
|
21
|
149.1
|
17
|
110.5
|
14
|
|||||||||||||
|
Lithium
and derivatives
|
128.9
|
12
|
81.4
|
9
|
62.6
|
8
|
|||||||||||||
|
Industrial
chemicals
|
71.3
|
7
|
70.5
|
8
|
68.8
|
9
|
|||||||||||||
|
Other
products(1)
|
122.2
|
12
|
107.2
|
12
|
119.8
|
15
|
|||||||||||||
|
Total
|
1,042.9
|
100
|
896.0
|
100
|
788.5
|
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 under
Chilean GAAP (in millions of U.S. dollars) for each of the periods indicated,
as
a percentage of revenues:
|
Year
ended December 31,
|
|||||||||||||||||||
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
US$
|
%
|
US$
|
%
|
US$
|
%
|
||||||||||||||
|
Total
revenues
|
1,042.9
|
100.0
|
896.0
|
100.0
|
788.5
|
100.0
|
|||||||||||||
|
Cost
of goods sold
|
|||||||||||||||||||