Unassociated Document
 

 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F
 
£
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR

T
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
OR

£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR

£
SHELL COMPANY REPORT PURSUANT TO SECTION 23 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report_______________________________ .
For the transition period from   _____________to__________  .                
 
Commission file number 33-65728 / 33-99188 / 333-10068

SOCIEDAD QUIMICA Y MINERA DE CHILE S.A.
(Exact name of registrant as specified in its charter)

CHEMICAL AND MINING COMPANY OF CHILE INC.
(Translation of registrant's name into English)
CHILE
(Jurisdiction of incorporation or organization)

El Trovador 4285, Piso 6, Santiago, Chile +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 basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
£ U.S. GAAP £ International Financial Reporting Standards as issued by the International Accounting Standards Board T Other
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
 
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

 


TABLE OF CONTENTS

 
Page
   
PRESENTATION OF INFORMATION
iii
GLOSSARY
iii
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
vi
     
PART I
 
1
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
1
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
1
ITEM 3.
KEY INFORMATION
1
ITEM 4.
INFORMATION ON THE COMPANY
12
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
45
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
62
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
74
ITEM 8.
FINANCIAL INFORMATION
76
ITEM 9.
THE OFFER AND LISTING
78
ITEM 10.
ADDITIONAL INFORMATION
81
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
92
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
93
     
PART II
 
94
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
94
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
94
ITEM 15.
CONTROLS AND PROCEDURES
94
ITEM 16.
RESERVED
95
ITEM 16.A.
AUDIT COMMITTEE FINANCIAL EXPERT
95
ITEM 16.B.
CODE OF ETHICS
95
ITEM 16.C
PRINCIPAL ACCOUNTANT FEES AND SERVICES
96
ITEM 16.D
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
96
ITEM 16.E
PURCHASES OF EQUITY SECURITIES BY THE ISSUERS AND AFFILIATED PURCHASERS
96
     
PART III
 
97
ITEM 17.
FINANCIAL STATEMENTS
97
ITEM 18.
FINANCIAL STATEMENTS
97
ITEM 19.
EXHIBITS
97
SIGNATURES
 
98
     
CONSOLIDATED FINANCIAL STATEMENTS
99
EXHIBIT 1.1
 
EXHIBIT 8.1
 
EXHIBIT 12.1
 
EXHIBIT 12.2
 
 
EXHIBIT 13.2
 

 
ii

 
PRESENTATION OF INFORMATION
 
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 May 31, 2008, UF 1.00 was equivalent to US$41.82 and Ch$20,061.03.
 
The Republic of Chile is governed by a democratic government, organized in fourteen regions plus the Metropolitan Region (surrounding and including Santiago, the capital of Chile). Our production operations are concentrated in northern Chile, specifically in the Tarapacá Region and in the 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.
 
GLOSSARY*
 
"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.
 
“Controller Group” A person or company or group of persons or companies that have executed a joint performance agreement, that have a direct or indirect share in a company’s ownership and have the power to influence the decisions of the company’s management.
 
"Corfo" Production Development Corporation (Corporación de Fomento de la Producción), formed in 1939, a national organization in charge of promoting Chile's manufacturing productivity and commercial development.
 
"cut-off grade" The minimal assay value or chemical amount of some mineral component above which exploitation is economical.
 
"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.
 
 
iii

 
"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" A process whereby minerals are leached from a heap, or pad, of crushed ore by leaching solutions percolating down through the heap and collected from a sloping, impermeable liner below the pad.
 
"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 on geological data and samples assay 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.
 
“Kriging Method” A technique used to estimate ore reserves, in which the spatial distribution of continuous geophysical variables is estimated using control points where values are known.
 
"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.
 
"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. The calculation of the reserves 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. The calculation of the reserves 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. The calculation 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.
 
 
iv

 
   
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"* That part of a Mineral Resource for which tonnage, grade and mineral content can be estimated with a low level of confidence, by inferring them on the basis of geological evidence and assumed but not verified geological and/or grade continuity. The estimate is based on information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes, and this information 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. The estimate 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.
 
“vat leaching” A process whereby minerals are extracted from crushed ore by placing the ore in large vats containing leaching solutions.
 
"waste" Rock or mineral which is not economical for metallurgical treatment.
 
"Weighted Average Age" 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, 2007 divided by the total gross book value of the Company's fixed assets at such facility as of December 31, 2007.
 
*
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).
**
The definition of a Controller Group that has been provided is the one that applies to the Company. Chilean law provides for a broader definition of a Controller Group.
 
SQM will provide 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), upon written or oral request. 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) or e-mail (ir@sqm.com).
 
 
v

 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
This Form 20-F contains statements that are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear throughout this Form 20-F and include statements regarding the intent, belief or current expectations of the Company and its management, including but not limited to any statements concerning:
 
 
·
the Company's capital investment program and development of new products;
 
 
·
trends affecting the Company's financial condition or results of operations;
 
 
·
level of production, quality of the ore and brines, and production yields;
 
 
·
the future impact of competition;
 
 
·
any statements preceded by, followed by, or that include the words "believe," "expect," "predict," "anticipate," "intend," "estimate," "should," "may," "could" or similar expressions; and
 
 
·
other statements contained in this Form 20-F that are not historical facts.
 
Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements included in this Form 20-F, including, without limitation, the information under Item 4. Information on the Company and Item 5. Operating and Financial Review and Prospects. Factors that could cause actual results to differ materially include, but are not limited to:
 
 
·
SQM's ability to implement its capital expenditures, including its ability to arrange financing when required;
 
 
·
the nature and extent of future competition in SQM's principal markets;
 
 
·
political, economic and demographic developments in the emerging market countries of Latin America and Asia where SQM conducts a large portion of its business; and
 
 
·
the factors discussed below under Item 3. Key Information—Risk Factors.
 
 
vi

 
PART I
 
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
Not Applicable.
 
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not Applicable.
 
ITEM 3. KEY INFORMATION
 
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, 2007 and 2006 and for each of the three years in the period ended December 31, 2007. The consolidated financial statements as of December 31, 2004 and 2003 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, 2007 and 2006 and for each of the three years in the period ended December 31, 2007 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, 2007, 2006 and 2005 and total shareholders' equity as of December 31, 2007 and 2006 to U.S. GAAP.

   
Year ended December 31,
 
   
2007
 
2006
 
2005
 
2004
 
2003
 
Income Statement Data
 
(in millions of US$) (1)
 
       
Chilean GAAP
   
   
   
   
   
 
Total Revenues
   
1,187.5
   
1,042.9
   
896.0
   
788.5
   
691.8
 
Operating Income
   
259.5
   
219.9
   
181.2
   
124.1
   
87.3
 
Non-operating results, net
   
(27.1
)
 
(36.1
)
 
(34.4
)
 
(17.6
)
 
(21.2
)
Net income
   
180.0
   
141.3
   
113.5
   
74.2
   
46.8
 
Net earnings per share (2)
   
0.68
   
0.54
   
0.43
   
0.28
   
0.18
 
Net earnings per ADS (2) (3)
   
0.68
   
0.54
   
0.43
   
0.28
   
0.18
 
Dividend per share (4)(5)
   
0.44
   
0.349
   
0.279
   
0.182
   
0.088
 
Weighted average shares outstanding (000s) (2)
   
263,197
   
263,197
   
263,197
   
263,197
   
263,197
 
                                 
U.S. GAAP
   
   
   
   
   
 
Total Revenues
   
1,187.5
   
1,042.9
   
896.0
   
788.5
   
691.8
 
Operating Income
   
237.0
   
205.5
   
163.9
   
114.6
   
76.7
 
Non-operating results, net (6)
   
1.7
   
(14.1
)
 
(6.1
)
 
(1.6
)
 
(4.3
)
Equity participation in income (loss) of related companies, net
   
3.6
   
2.0
   
2.6
   
1.8
   
2.2
 
Net income
   
192.7
   
154.3
   
125.2
   
86.8
   
57.8
 
Basic and diluted earnings per share
   
0.73
   
0.59
   
0.48
   
0.33
   
0.22
 
Basic and diluted earnings per ADS (3)
   
0.73
   
0.59
   
0.48
   
0.33
   
0.22
 
Weighted average shares outstanding (000s)(2)
   
263,197
   
263,197
   
263,197
   
263,197
   
263,197
 
 
 
   
As of December 31,
 
   
2007
 
2006
 
2005
 
2004
 
2003
 
Balance Sheet Data:
 
(In millions of US$)
 
Chilean GAAP:
                     
Total assets
   
1,986.3
   
1,871.2
   
1,640.6
   
1,361.4
   
1,363.5
 
Long-term debt
   
486.7
   
480.7
   
100.0
   
200.0
   
260.0
 
Total shareholders' equity
   
1,182.4
   
1,085.9
   
1,020.4
   
948.6
   
890.0
 
Capital stock
   
477.4
   
477.4
   
477.4
   
477.4
   
477.4
 
U.S. GAAP:
                     
Total assets
   
1,959.6
   
1,846.0
   
1,609.0
   
1,318.5
   
1,319.4
 
Long-term debt
   
485.0
   
478.7
   
100.0
   
200.0
   
260.0
 
Total shareholders' equity
   
1,084.1
   
994.5
   
923.4
   
856.9
   
794.7
 
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, 2007.
 
(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) The ratio of ordinary shares to Series A ADSs was 10:1 for all periods reflected in the table. The Series A ADSs were delisted from the New York Stock Exchange on March 27, 2008. The ratio of ordinary shares to Series B ADSs changed from 10:1 to 1:1 on March 28, 2008. The calculation of earnings per ADS is based on the ratio of 1:1.
 
(4) Dividends per share are calculated based on 263,196,524 shares for the periods ended December 31, 2003, 2004, 2005, 2006 and 2007.
 
(5) 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.
 
(6) 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 comprises banks and other entities authorized by the Chilean Central Bank. The Informal Exchange Market comprises 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.

On April 10, 2008, the Chilean Central Bank decided to intervene in the Formal Exchange Market by increasing the level of international reserves by US$8 billion. This intervention program is scheduled to take place between April 14, 2008 and December 12, 2008. The Central Bank decided to implement this program in order to strengthen the international liquidity of the Chilean economy, in the face of recent uncertain in the global financial markets. In addition, the Central Bank considered that world economic conditions had caused the exchange rate between the Chilean peso and the U.S. dollar to fall below the level that should prevail under normal economic conditions.

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.

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 2003 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 May 31, 2008, the Observed Exchange Rate was Ch$479.66 = US$1.00.
 
Observed Exchange Rate (1)
Ch$ per US$

Year/Month
 
Low (1)
 
High (1)
 
Average
    (2)(3)
 
Year/Month
End
 
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
   
531.03
   
534.43
 
2007
   
493.14
   
548.67
   
521.95
   
495.82
 
Dec-07
   
495.49
   
506.79
   
499.28
   
495.82
 
Jan-08
   
463.58
   
498.05
   
480.90
   
465.30
 
Feb-08
   
458.02
   
476.44
   
467.22
   
458.02
 
Mar-08
   
431.22
   
454.94
   
442.94
   
439.09
 
Apr-08
   
433.98
   
459.16
   
446.43
   
459.16
 
May-08
   
461.49
   
479.66
   
470.10
   
479.66
 

Source: Central Bank of Chile
 
 
(1)
Observed exchange rates are the actual high and low on a day-to-day basis, for each period.
 
 
(2)
The yearly average rate is calculated as the average of the exchange rates on the last day of each month during the period.
 
 
(3)
The monthly average rate is calculated on a day-to-day basis for each month.
 
3.B. Capitalization and Indebtedness
 
Not applicable.
 
 
3.C. Reasons for the Offer and Use of Proceeds
 
Not applicable.
 
3.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 2007, approximately 43% of our sales were made to emerging market countries: (i) approximately 14% in Central and South America, excluding Chile; (ii) approximately 19% in Chile; and (iii) approximately 10% in Asia, excluding Japan. We expect to expand our sales in these and other emerging markets in the future. The results of 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, during 2007 world prices of potassium-based commodity fertilizers increased steadily, and these price increases have been even more pronounced during the first five months of 2008. These global price increases should result in increases in the prices of our potassium-based specialty plant nutrients and on the prices of the potassium chloride we sell to third parties. We cannot assure you that this trend will continue.
 
During the last two decades, world iodine prices have displayed volatility in response to supply and demand conditions. Iodine prices have followed an upward trend since late 2003, reaching an average price of approximately US$23.60 per kilogram in 2007. We cannot assure you that this trend will continue.
 
We started production of lithium carbonate from the brines of the Salar de Atacama in October 1996 and started selling lithium carbonate commercially in January 1997. Our entry into the market created an oversupply of lithium carbonate, resulting in a drop in prices from over US$3,000 per ton before our entry to less than US$2,000 per ton. At the end of 2007, prices were higher than US$6,000 per ton. We believe the increase in prices was mainly due to the high growth in demand, which had not been fully balanced by the supply of lithium carbonate. However, during 2007, new producers entered the market, helping to balance supply and demand, and therefore we believe prices may decrease.
 
 
We expect that prices for the products we manufacture will continue to be influenced, among other things, by 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.
 
Our exposure to unrecoverable accounts receivable may significantly increase
 
The strong increases observed in world fertilizer prices during the first few months of 2008 have resulted in increases in our accounts receivable. Should this trend continue, our exposure to uncollectible accounts receivable may increase. Although we take steps to minimize the risk of losses from bad debt, such as the use of credit risk insurance and letters of credit for a portion of our accounts receivable, a substantial increase in such losses could have a material adverse effect on our business, financial condition and results of operations.
 
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 on which they will become operational. However, should significant new production volumes enter the market in the near term, we believe there could be a reduction in prices and volumes that could have a significant negative impact on the Company's business, financial condition or 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 our exploitation levels 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. As of December 31, 2007, the Chilean peso had appreciated approximately 7.2% against the U.S. dollar with respect to December 31, 2006, and this trend has continued during the first few months of 2008. As a result, our peso-denominated costs have increased, and this trend may continue in the future.
 
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 and the South African Rand, among others. As a result, fluctuations in the exchange rates of such foreign currencies to the U.S. dollar may affect our business, financial condition and results of operations.
 
 
Sustained high raw materials and energy prices could continue to 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 13.5% in 2007). 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 costs 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 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 business, financial condition or results of operations.
 
Our business is subject to many operating 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 ours. 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.
 
We face significantly higher energy costs as a result of the natural gas shortage in Chile
 
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, in 2004 local authorities began 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 so again in the future.
 
We suffered partial shortages of natural gas during 2004, 2005 and 2006, and during 2007, we received practically no natural gas. We believe this situation will continue and that during 2008 we will likely receive little or no natural gas from Argentina. Most of our industrial equipment that uses natural gas can also operate on fuel oil, and the remaining equipment can operate on diesel. However, the cost of fuel oil and diesel is significantly higher than the cost of natural gas, and therefore we have recently faced significantly higher energy costs. We expect this situation to continue, and therefore we expect the reduction in our natural gas supply to continue to have an adverse effect on our business, financial condition and results of operations.


Decline in the supply of natural gas is negatively affecting the supply of electricity in the Northern Power Grid
 
The natural gas supply crisis discussed above has placed the Northern Power Grid (Sistema Interconectado del Norte Grande or “SING”) under significant stress. The combination of the lack of natural gas received from Argentina during 2007 and additional events, such as damages from an earthquake in November 2007, have made this situation even more critical. Continued stress on the Northern Power Grid 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 the supply of natural gas continues to be uncertain, as discussed above, and oil prices continue to increase, we are faced with the potential early termination, partial amendment or temporary suspension of our long-term electricity supply contracts. We maintain contracts with two main utilities in Chile, Electroandina S.A. and Norgener S.A., and both have sought relief from the terms of their electricity supply agreements, arguing that certain unforeseen events have restricted the supply and increased the price of gas from Argentina. As a result of the requests, we entered into negotiations resulting in new tariffs that have a negative effect on our results of operations. Further increases in the cost of energy could prompt these companies to once again seek to modify, terminate or suspend these contracts. If that were to happen, and these companies were to prevail in any resulting arbitration proceedings, our business, financial condition and results of operations could be materially adversely affected.
 
During 2007, purchases of electricity represented approximately 4.1% 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, 70% 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 business, financial condition or results of operations.
 
In 2006, the Chilean Congress amended the Labor Code, and effective January 15, 2007, certain changes were made, affecting companies that hire subcontractors to provide certain services. This new law, known as the “Law on Subcontracting”, establishes a new requirement that applies in the event of accidents in the workplace. The law states that when a serious accident occurs, the company must halt work at the site where the accident took place until authorities from the National Geology and Mining Service inspect the site and prescribe the measures the company must take to prevent future risks. Work may not be resumed until the company has taken the prescribed measures, and the period of time before work may be resumed may last for a number of hours, days, or longer. The effects of this new law could have a material adverse effect on our business, financial condition or 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 on the Company's business, 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 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 Salar de Atacama 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.
 
In addition, 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 any of these concessions could have a material adverse impact on our business, financial condition and results of operations.
 
We hold water rights that are key to our business development. These rights were 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 operating requirements. However, the Water Code is subject to changes, which could have a material adverse impact on our business, financial condition and results of operations. Law No. 20,017, published on June 16, 2005, modified the Chilean laws relating to water rights. 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. Such rights may be constituted in favor of parties that requested water rights prior to January 1, 2000, when such request had not yet been processed as of June 16, 2005. In constituting these new water rights, the law does not factor in the availability of water, or how the new rights may affect holders of existing rights. Therefore, the amount of water we can effectively extract based on our existing rights could be reduced if these additional rights are exercised. These and other potential future changes to the Water Code could have a material adverse impact on our business, financial condition and results of operations.
 
The Chilean government could levy additional taxes on corporations operating in Chile
 
In 2005, the Chilean Congress approved Law No. 20,026 (also known as the “Royalty Law”) establishing a royalty tax to be applied to mining activities developed in Chile. We cannot assure you that the way in which the Royalty Law is interpreted and applied will not change in the future. In addition, the Chilean Government may decide to levy additional taxes on mining companies or other corporations in Chile. Such changes could have a material adverse impact on our business, financial condition and results of operations.
 
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 government 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 fines and temporary or permanent closure of facilities.
 
 
Chilean environmental regulations have become increasingly stringent in recent years, both with 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 Item 4.B. Business Overview—Safety, Health and Environmental Regulations), we are currently in compliance in all material respects with applicable environmental regulations in Chile of which we are aware. Future developments in the creation or implementation of environmental requirements, or in their interpretation, could result in substantially increased capital, operation or compliance costs or otherwise adversely affect our business, financial condition and results of operations.
 
In connection with our current investments at the Salar de Atacama we have obtained approval for an environmental impact assessment study that allows us to increase brine and water extraction, subject to a rigorous environmental monitoring system. The success of these investments is dependent on the behavior of the ecosystem variables being monitored over time. If the behavior of these variables in future years does not meet environmental requirements, 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 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 such 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 business, 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 laws, will not materially impact our business, 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 shareholders’ 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, 2007, we had approximately 36% 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 the value of our ADSs
 
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 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 constantly look 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 or to new businesses in which we believe we may have sustainable competitive advantages. Depending on our capital structure at the time of such acquisitions, 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 as to 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.
 
If the Company were classified as a Passive Foreign Investment Company there could be adverse consequences for U.S. investors
 
We believe that we were not classified as a passive foreign investment company, or PFIC, for 2007. Characterization as a PFIC could result in adverse U.S. tax consequences to you if you are a U.S. investor in our shares or ADSs. For example, if we (or any of our subsidiaries) are a PFIC, our U.S. investors may become subject to increased tax liabilities under U.S. tax laws and regulations and will become subject to burdensome reporting requirements. The determination of whether or not we (or any of our subsidiaries or portfolio companies) are a PFIC is made on an annual basis and will depend on the composition of our (or their) income and assets from time to time. See Item 10. E Taxation – United States Tax Considerations – Passive Foreign Investment Company Considerations.

 
ITEM 4. INFORMATION ON THE COMPANY
 
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 Notary Public of Santiago, Mr. Sergio Rodríguez Garcés. Its existence was approved by Decree No. 1.164 of June 22, 1968 of the Ministry of Finance, and it was registered on June 29, 1968 in the Registry of Commerce 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 (“Production Development Corporation” or “Corfo”), a Chilean government entity. 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.
 
Since its inception, in addition to producing nitrates, the Company has produced iodine, which is also found in the caliche ore deposits in northern Chile.
 
Between the years 1994 and 1999, we invested approximately US$300 million in the development of the Salar de Atacama project in northern Chile. The project involved the construction of a potassium chloride plant, a lithium carbonate plant, a potassium sulfate plant, and a boric acid plant.
 
To help finance the above projects, we accessed the international capital markets by issuing additional Series B ADRs on the New York Stock Exchange in 1995. In 1999 we issued additional Series A shares, which were also listed on the New York Stock Exchange as ADRs. Effective March 27, 2008, the Company voluntarily delisted its Series A ADR (“SQM-A”) from the New York Stock Exchange.
 
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 businesses 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. In 2007, we completed the construction of a new prilling and granulating plant. We also started construction of our lithium carbonate capacity expansion and began work on the engineering stage of a new potassium nitrate plant.
 


Capital Expenditure Program
 
We are constantly reviewing different opportunities to improve our production methods, increase production capacity of existing products and develop new products and markets. Additionally, significant capital expenditures are required every year in order to sustain our production capacity. We are focused on developing new products in response to identified customer demand, as well as new products that can be derived as part of our existing production or other products that could fit our long-term development strategy. 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 2005-2007 period were the following:
 
 
 
2007
 
2006 (2)
 
2005 (3)
 
   
(in millions of US$)
 
Capital Expenditures (1)
   
185.0
   
290.5
   
198.1
 
 
 
(1)
For purposes of this item, capital expenditures include investments aimed at sustaining, improving or increasing production levels, including acquisitions and investments in related companies. Amounts set forth in this table do not match the consolidated statements of cash flows, as the Company does not consolidate development stage companies.
 
 
(2)
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.
 
 
(3)
Includes acquisition of Kefco in Dubai (US$9.3 million)
 
We have developed a capital expenditure program calling for investments totaling approximately US$320 million for the year 2008 and a total of approximately US$680 million during 2009 and 2010. The main purpose of our capital expenditure program is to increase the production capacities of several of our products, including the completion of the lithium carbonate expansion (by approximately 30%), as well as expansions in natural nitrates (by approximately 25%), potassium-based products from the Salar de Atacama (by approximately 25%) and iodine (by approximately 25%).
 
During 2007, the Company had total capital expenditures of approximately US$185.0 million, primarily relating to:
 
·
the María Elena project including a new crushing facility;
 
·
completion of the new prilling and granulating facility located at Coya Sur;
 
·
expansion of lithium carbonate facility;
 
·
construction of new evaporation ponds at the Salar de Atacama;
 
·
upgrade of our railroad system to handle expanded capacity; and
 
·
various projects designed to maintain capacity, increase yields and lower costs.
 
The Company has budgeted for 2008 total capital expenditures of approximately US$320 million, primarily relating to:
 
·
completion of lithium carbonate facility expansion;
 
·
new potassium nitrate production facility at Coya Sur;
 
·
start-up of investments related to increase production capacity of potassium-based products at the Salar de Atacama;
 
·
upgrade of our railroad system to handle expanded capacity;
 
·
construction of a new mining camp at María Elena; and
 
·
various projects designed to maintain capacity, increase yields and reduce costs.

For 2009 and 2010, we estimate total capital expenditures of approximately US$680 million, primarily for (i) the completion of the potassium nitrate production facility at Coya Sur; (ii) the increase in the production capacity of potassium-based products; (iii) a portion of the investments necessary to increase iodine and nitrates production capacity; (iv) upgrade of our railroad system to handle expanded capacity; (v) various projects designed to maintain capacity, increase yields and lower costs.
 
 
4.B. Business Overview
 
The Company
 
We believe we are the world’s largest integrated producer of potassium nitrate, iodine and lithium carbonate. We also produce other specialty plant nutrients (such as potassium sulfate), potassium chloride, iodine and lithium and their derivatives, and certain industrial chemicals, including industrial nitrates, and we import and commercialize other commodity fertilizers in Chile. Our products are sold in over 100 countries through our worldwide distribution network and we generate approximately 81% of our revenues from countries outside Chile. Our products are mainly derived from mineral deposits found in northern Chile, specifically in the Tarapacá and Antofagasta Regions, 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 Salar de Atacama, 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 Salar de Atacama, we extract brines rich in potassium, lithium, sulfate and boron, in order to produce potassium chloride, potassium sulfate, lithium solutions, boric acid and bischofite (magnesium chloride). We produce lithium carbonate and lithium hydroxide at a plant near the city of Antofagasta, Chile, from the solutions brought from the Salar de Atacama. We market all of these products through an established worldwide distribution network.

Our products are divided into five main categories: specialty plant nutrients, iodine and its derivatives, lithium and its derivatives; industrial chemicals; and potassium chloride and other commodity fertilizers. Specialty plant nutrients 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 display (“LCD”) screens. 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, and more recently, industrial nitrates are being used in solar energy plants as a means for energy storage. Potassium chloride is a commodity fertilizer that is produced and sold by the Company, primarily in the Chilean market. In addition, we complement our portfolio of plant nutrients in Chile by importing other commodity fertilizers.

For the year ended December 31, 2007, we had revenues of US$1,187.5 million, operating income of US$259.5 million and net income of US$180.0 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 they 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™ (aquaculture). 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 nutrition 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, 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. Potassium nitrate is used in the manufacture of specialty glass, and it is also an important raw material for the production of frits for the ceramics and enamel industries. Also, a combination of potassium nitrate and sodium nitrate is used as a thermal storage medium in solar-based electricity generating plants. Boric acid is used in the manufacture of frits for the ceramics and enamel industries, liquid crystal displays (LCD), glass, and fiberglass. Potassium chloride is used as an additive in oil drilling as well as in the production of carragenine.
 
Potassium Chloride and Other Commodity Fertilizers: We produce and market potassium chloride, which in Chile is distributed through our subsidiary Soquimich Comercial S.A. 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 2003-2007 period according to our product lines:
 
   
2007
 
2006
 
2005
 
2004
 
2003
 
Specialty Plant Nutrition
   
49
%
 
48
%
 
54
%
 
54
%
 
52
%
Iodine and Derivatives
   
18
%
 
21
%
 
17
%
 
14
%
 
12
%
Lithium and Derivatives
   
15
%
 
12
%
 
9
%
 
8
%
 
7
%
Industrial Chemicals
   
7
%
 
7
%
 
8
%
 
9
%
 
10
%
Potassium Chloride and Other Commodity Fertilizers
   
11
%
 
12
%
 
12
%
 
15
%
 
19
%
Total
   
100
%
 
100
%
 
100
%
 
100
%
 
100
%
 
Business Strategy
 
Our general business strategy is to:
 
 
(1)
participate in businesses where we are or will be a cost leader supported by strong fundamentals;
 
 
(2)
differentiate ourselves from commodity producers by manufacturing, marketing and distributing specialty products that sell at high value;
 
 
(3)
continually increase the efficiency of our production processes and reduce costs;
 
 
(4)
maintain leadership in our core business areas – specialty plant nutrition, 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 leverage the advantages of our specialty products over commodity-type fertilizers; (ii) increase our sales of higher margin specialty plant nutrients based on potassium and 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) develop new specialty nutrient blends produced in our mixing plants that are strategically located in or near our principal markets, in order to meet specific customer needs; (v) focus primarily on the markets for plant nutrients in soluble and foliar applications 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 such 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 in order 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 in order 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 in order 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 businesses in which we believe we may have sustainable competitive advantages, 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 and iodine.
 
  Salar brines: contain potassium, lithium, sulfate 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.
 
 
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 carried out, including full geological reconnaissance and drilling of 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. After drill holes are made, 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 facilities. In the María Elena mine, trucks haul the ore and dump it directly at a primary crushing installation, after which a 14-kilometer-long overland conveyor belt system delivers the ore to the processing facilities.
 
At the Pedro de Valdivia and María Elena facilities, the ore is crushed and leached to produce concentrated solutions carrying the nitrate, iodine and sodium sulfate. The crushing of the ore produces 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 be processed.
 
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 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 treatment plants. The crystallized sodium nitrate is separated from the remaining solution by centrifuging. The residue resulting from the crushing of the caliche ore is leached at ambient temperature with water, producing a weak solution that is pumped to solar evaporation ponds at our Coya Sur facilities, near 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.
 
Our current crystallized sodium nitrate production capacity at Pedro de Valdivia and María Elena is approximately 770,000 metric tons per year. Crystallized sodium nitrate is processed further at Coya Sur and María Elena to produce prilled sodium nitrate, which is transported to our port facilities in Tocopilla for shipping to customers and distributors worldwide. 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 facilities. 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 solution, which is rich in potassium nitrate, 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 heaps in order to extract solutions that are rich in iodine and nitrate. These solutions are sent to plants where iodine is extracted and subsequently the solutions are sent to solar evaporation ponds where the solutions are evaporated and 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 approximately 650,000 metric tons per year, including 260,000 metric tons per year of technical grade potassium nitrate. We expect to increase that capacity by approximately 300,000 metric tons per year by early 2010. The effective production of the new facility will depend on the availability of nitrate salts to feed the facility.
 
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 for nitrate salts 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 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 facilities have qualified under the ISO-9002 program, providing third-party certification – by TÜV Rheinland – of the quality management system and international quality control standards that we have implemented.
 
 
Our total iodine production in 2007 was approximately 8.1 thousand metric tons: approximately 2.3 thousand metric tons from Pedro de Valdivia, 1.1 thousand metric tons from María Elena, 1.0 thousand metric tons from Pampa Blanca, and 3.7 thousand metric tons from Nueva Victoria. The Nueva Victoria facility is also used for tolling iodine delivered from Pampa Blanca and María Elena. We have the flexibility to adjust our production according to market conditions. Our current iodine production capacity is approximately 11,000 metric tons per year, considering one facility in Nueva Victoria that is not currently in operation.
 
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.
 
Salar de Atacama Brine Deposits
 
The Salar de Atacama, 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 Salar de Atacama 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 provides us with substantial raw material cost savings.
 
In order to produce potassium chloride, brines from the Salar de Atacama are pumped to solar evaporation ponds. Evaporation of the brines results in a complex crystallized mixture of salts of potassium chloride and sodium chloride. One portion of this mixture is harvested and stored, and the other portion is reprocessed and the remaining salts are transferred by truck to a processing facility where the potassium chloride is separated by a grinding, flotation, and filtering process. Potassium chloride is 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 Salar de Atacama 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 2007 actual production was higher than in 2006 and we expect that 2008 production will be higher than in 2007.
 
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 Salar de Atacama; (ii) sodium chloride, which is similar to the surface material of the Salar de Atacama 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 concentrated solution of lithium chloride is transported by truck to a production facility located near Antofagasta, approximately 250 kilometers from the Salar de Atacama. At the production facility, the solution is purified and treated with sodium carbonate to produce lithium carbonate, which is dried and then, if necessary, compacted and finally packaged for shipment. The production capacity of our lithium carbonate facility 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 this project should be completed by the second half of 2008. Future production will depend on the actual volumes and quality of the lithium solutions sent by the Salar de Atacama operations, as well as prevailing market conditions.
 
Lithium Hydroxide
 
Lithium carbonate is sold to customers, and we also use it as a raw material for our lithium hydroxide monohydrate facility, which started operating at the end of 2005. This facility has a capacity of 6,000 metric tons per year and is located in the Salar del Carmen, adjacent to our lithium carbonate operations. In the production process, lithium carbonate 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 shipment to customers.
 
Potassium Sulfate and Boric Acid
 
Approximately 12 kilometers northeast of the potassium chloride facilities at the Salar de Atacama, we use the brines from the Salar de Atacama to produce potassium sulfate and boric acid. The plant is located in an area of the salar where higher sulfate and potassium concentrations are found in the brines. 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. Production capacity for potassium sulfate is approximately 200,000 metric tons per year. Boric acid is produced in crystallized form by acidulation of the final concentrated brines, and then it is dried and packaged for shipment at the same facility. Production capacity for boric acid is approximately 10,000 metric tons per year.
 
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 Salar de Atacama or returned to the evaporation ponds. The principal by-products of the boric acid production process are remaining solutions that are treated with sodium carbonate to neutralize acidity and then are reinjected into the Salar de Atacama.
 
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 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 due 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 fertilizers based on nitrogen and potassium, such as the aforementioned 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 and other problems caused by chlorine;
 
 
·
do not release hydrogen after application, thereby 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 nutrients per unit of product applied.
 
In 2007, our revenues from specialty plant nutrients were approximately US$580.8 million, representing approximately 49% of our total revenues for that year. The main reasons for these results were the increase in sales volumes and the increase in prices during 2007 compared with the previous year.
 
Specialty Plant Nutrition: Market
 
The target market for our specialty plant nutrients is high-value crops such as fruits, vegetables, and crops grown 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 fresh fruits and 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 force 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, crops absorb them faster than they absorb urea- or ammonium-based fertilizers, which provide nitrogen in ammonium form. This is because crops absorb nitrogen in nitric form; thus nitrogen in ammonium form has to be converted into nitric form in the soil first. This process does not occur immediately (it takes time and requires special soil conditions), and it 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, 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, and they are all 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, the United States, Mexico, United Arab Emirates, Belgium, the Netherlands, South Africa, Turkey and Egypt.
 
The following table shows our sales volumes of and revenues from specialty plant nutrients during the 2003-2007 period.

   
2007
 
2006
 
2005
 
2004
 
2003
 
Sales Volume  (in metric tons)
                               
Sodium nitrate
   
45,900
   
43,300
   
63,300
   
58,900
   
62,500
 
Potassium nitrate and sodium potassium nitrate
   
695,300
   
615,000
   
690,200
   
707,600
   
696,500
 
Potassium sulfate
   
172,000
   
172,400
   
178,600
   
157,700
   
143,200
 
Blended and other specialty plant nutrients(1)
   
378,600
   
393,800
   
350,700
   
374,400
   
377,100
 
Revenues (in US$ millions)
   
580.8
   
503.1
   
487.8
   
426.8
   
362.8
 
 
(1)
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 2007, we sold our specialty plant nutrients in close to 90 countries. During the same year, approximately 90% of the Company's specialty plant nutrients sales were exported: approximately 28% were sold to customers in Central and South America, 23% to customers in North America, 19% to customers in Europe and 20% to customers in other regions. Without considering any sales to related parties, no single customer represented more than 5.2% of SQM's specialty plant nutrient sales during 2007, and our 10 largest customers accounted in the aggregate for approximately 24.8% of sales during that period.
 
Sales Breakdown
 
2007
 
2006
 
2005
 
2004
 
2003
 
Central and South America
   
28
%
 
29
%
 
29
%
 
29
%
 
26
%
North America
   
23
%
 
22
%
 
22
%
 
22
%
 
18
%
Europe
   
19
%
 
19
%
 
20
%
 
19
%
 
20
%
Others
   
20
%
 
21
%
 
20
%
 
20
%
 
27
%
Chile
   
10
%
 
9
%
 
9
%
 
10
%
 
9
%
 
The amounts set forth in the table above reflect sales of SQM’s specialty plant nutrition products and do not include sales by SQM of third-party specialty plant nutrition products. We sell our specialty plant nutrition products outside Chile mainly through our own worldwide network of representative offices and through our distribution affiliates.
 
In November 2001, we signed an agreement with Yara International ASA (“Yara”, formerly 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 over the marketing of their own products.
 
We also signed a joint venture agreement with Yara and Israel Chemicals Limited at the end of 2001. Under this joint venture agreement, SQM, Yara, and Israel Chemicals Limited are developing the liquid and soluble plant nutrient blends business through their participation in a Belgian company called NU3 N.V. (“NU3”), to which SQM and Israel Chemicals Limited contributed their blending facility in Belgium, and Yara International ASA contributed its blending facility in the Netherlands. With this joint venture agreement, 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.
 
 
In 2005, SQM and Yara International ASA formed a joint venture, called MISR Specialty Fertilizers (MSF), for the production of tailor-made liquid NPK (nitrogen-phosphate-potassium) fertilizers. The plant is located in Egypt and has a production capacity of 80,000 metric tons per year.
 
In 2005 SQM also acquired 50% of the shares of Kemira Emirates Fertilizers Company (Kefco), which has a urea phosphate plant located in Dubai. Urea phosphate is a specialty plant nutrient that is used primarily in drip irrigation systems. The plant has an annual production capacity of 30,000 tons.
 
In May 2008 we signed a joint venture agreement with Migao Corporation (“Migao”) for the production and distribution of specialty plant nutrients in China. Through the joint venture, we will construct a potassium nitrate plant with a production capacity of 40,000 metric tons per year. We expect this plant to be ready during the first quarter of 2009. In addition, the joint venture will distribute the potassium nitrate produced by Migao in China and imports of SQM’s specialty plant nutrients to China, and it will also handle any exports of potassium nitrate produced by the joint venture or by Migao. This joint venture will enable us to increase our presence in China, which represents one of the most important and fastest-growing markets for the fertilizer industry.
 
We maintain stocks of our specialty plant nutrients in the main markets of the Americas, Asia, Europe, the 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 value-added crops, where the use of our products enables 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 triple super phosphate (TSP) and diammonium phosphate (DAP), among others. 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 sales of fertilizers represented approximately 36% of total fertilizer sales in Chile during 2007. No single customer represented more than 5% of Soquimich Comercial’s total fertilizer sales revenues, and its 10 largest customers in total represented less than 9% of revenues.
 
Revenues generated by Soquimich Comercial represented 17.2% of the Company's 2007 consolidated revenues. Soquimich Comercial's consolidated revenues were approximately US$203 million, US$142 million, and US$144 million in 2007, 2006 and 2005, 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 Haifa Chemicals Ltd., in Israel, which is a subsidiary of Trans Resources International Inc. We estimate that sales of potassium nitrate by Haifa Chemicals accounted for approximately 35% of total world sales during the year 2007 (excluding the Chinese market, where most of the production is consumed domestically).
 
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. Kemapco, a Jordanian producer owned by Arab Potash, produces potassium nitrate in a plant located close to the Port of Aqaba, Jordan. In addition, there are several potassium nitrate producers in China, the largest of which are Wentong and Migao; most of the Chinese production is consumed by the domestic market.
 
In June 2008, Atacama Minerals Corp., a Canadian company with iodine operations in Chile, announced plans to build a plant in order to produce sodium nitrate, potassium nitrate, and sodium potassium nitrate. According to statements made by the company, the plant should have production capacity of 70,000 tons per year and be operational by the second half of 2010.
 
The principal means of competition in the sale of potassium nitrate are product quality, customer service, location, logistics, agronomic expertise, and price.
 
In the potassium sulfate market, we have several competitors of which the most important are K+S KALI 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.
 
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 2007, our revenues from iodine and iodine derivatives amounted to approximately US$215.1 million, representing approximately 18 % of our total revenues in that year. We estimate that our sales accounted for approximately 29% of world iodine sales by volume in 2007.
 
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 and pigments. 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 the mid 1990s, as a joint venture between SQM and Ajay Chemicals, a U.S.-based company. ASG currently has production plants in the United States, Chile and France and is the world's leading inorganic and organic iodine derivatives producer. In 2007, approximately 27% 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.
 
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 2003-2007 period:

   
 
2007
 
2006
 
2005
 
2004
 
2003
 
Sales Volume (thous. metric tons)
                               
Iodine and iodine derivatives
   
9.1
   
9.8
   
8.1
   
7.7
   
6.6
 
Revenues (in US$ millions)
   
215.1
   
217.7
   
149.1
   
110.5
   
84.6
 
 
Iodine: Marketing and Customers
 
In 2007, we sold our iodine products to around 350 customers in more than 70 countries. During the same year, most of our iodine production was exported: approximately 31% was sold to customers in Europe, 38 % to customers in North America, 5% to customers in Central and South America and 26% 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 2007, and our ten largest customers accounted in the aggregate for approximately 40% of sales.
 
Sales Breakdown
 
2007
 
2006
 
2005
 
2004
 
2003
 
Europe
   
31
%
 
34
%
 
30
%
 
27
%
 
34
%
North America
   
38
%
 
40
%
 
37
%
 
38
%
 
40
%
Central and South America
   
5
%
 
5
%
 
13
%
 
13
%
 
6
%
Others
   
26
%
 
21
%
 
20
%
 
22
%
 
20
%
 
We sell iodine through our own worldwide network of representative offices and through our sales, support and distribution affiliates. We maintain inventories 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. Sales agreements generally specify annual minimum and maximum purchase commitments, and prices are adjusted on periodically, according to prevailing market prices.
 
Iodine: Competition
 
SQM and several producers in Chile, Japan and the United States are the world's main iodine producers.
 
Japanese producers extract iodine from underground brines, which are mainly obtained together with the extraction of natural gas. Several Japanese producers also have recycling facilities where they recover iodine and iodine derivatives from iodine waste streams. Iodine recycling, mainly related to LCD consumption, has increased over the past few years and currently represents approximately 13% of world iodine sales. It is estimated that around 70% of the world recycling was done by Japanese iodine producers.


We estimate that eight Japanese iodine producers accounted for approximately 24% of world virgin iodine sales in the year 2007. We estimate that the largest Japanese producer, Ise Chemicals Ltd., accounted for approximately 8% of the world virgin iodine sales.
 
We estimate that iodine producers in the United States (one of which is owned by Ise Chemicals) accounted for approximately 5% of world iodine sales in the year 2007, while four Chilean companies, including SQM iodine business, accounted for approximately 55% of such sales (29% by SQM and 26% by the other Chilean producers).
 
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$24 per kilogram in 2007.
 
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, a few of whom either have or can acquire additional production capacity. SQM has total production capacity of approximately 11,000 tons, which exceeds our current production levels.
 
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 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 2007, our revenues from lithium sales amounted to approximately US$179.8 million, representing approximately 15% of our total revenues. We estimate that our sales accounted for approximately 31% 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 Salar de Atacama. The technologies we use, together with the high concentrations of lithium we obtain from the Salar de Atacama, 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 butyllithium in its own plant located in Pasadena, Texas. This product is sold in North America, Europe and Asia.

The following table sets forth our total sales and revenues from lithium carbonate and derivatives in the 2003-2007 period:
 
   
2007
 
2006
 
2005
 
2004
 
2003
 
Sales Volume (thous. metric tons)
                               
Lithium carbonate and derivatives
   
28.6
   
30.4
   
27.8
   
31.2
   
27.4
 
Revenues (in US$ millions)
   
179.8
   
128.9
   
81.4
   
62.6
   
49.7
 
 
Lithium: Marketing and Customers
 
In 2007, we sold our lithium products to approximately 290 customers in approximately 50 countries. Virtually all of our lithium products were sold overseas: approximately 34% to customers in Europe, 21% to customers in North America, 38% to customers in Asia and Oceania and 7% to customers in other regions. No single customer accounted for more than 12% of the Company's sales in 2007, and our ten largest customers accounted in the aggregate for approximately 43% of sales.
 
Sales Breakdown
   
2007
   
2006
   
2005
   
2004
   
2003
 
Europe
   
34
%
 
32
%
 
33
%
 
32
%
 
31
%
North America
   
21
%
 
24
%
 
25
%
 
26
%
 
29
%
Asia and Oceania
   
38
%
 
36
%
 
31
%
 
37
%
 
37
%
Others
   
7
%
 
8
%
 
11
%
 
5
%
 
3
%
 
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”). In addition, a number of Chinese producers together accounted for approximately 26% of the world market in 2007. We estimate that they together sold approximately 42% of lithium in the lithium chemicals market (excluding lithium minerals) in 2007. 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 93,000 metric tons in 2007.
 
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 2007, our revenues from industrial chemicals were approximately US$81.2 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. In addition, industrial nitrates are being used as a medium for heat storage in solar energy projects. Boric acid is mainly used in 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 2007 accounted for 58%, and 31%, 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 2003-2007 period:
 
   
2007
 
2006
 
2005
 
2004
 
2003
 
Sales Volume (metric tons)
                               
Industrial nitrates
   
175,200
   
162,000
   
176,300
   
192,800
   
193,200
 
Boric Acid
   
9,200
   
9,700
   
6,300
   
6,120
   
10,700
 
Revenues (in US$ millions)
   
81.2
   
71.3
   
70.5
   
68.8
   
66.7
 
 
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 2007. Approximately 40% of our sales of industrial chemicals were made to customers in North America, 34% to customers in Europe, 17% to customers in Central and South America and 9% to customers in Asia, Oceania and other regions. No single customer accounted for more than 6% of the Company's sales of industrial chemicals in 2007, and our ten largest customers accounted in the aggregate for approximately 31% of such sales.
 
Sales Breakdown
   
2007
   
2006
   
2005
   
2004
   
2003
 
North America
   
40
%
 
41
%
 
42
%
 
38
%
 
39
%
Europe
   
34
%
 
29
%
 
28
%
 
23
%
 
25
%
Central and South America
   
17
%
 
17
%
 
17
%
 
24
%
 
12
%
Others
   
9
%
 
13
%
 
13
%
 
15
%
 
24
%
 
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 our production satisfied 58% of world demand for industrial sodium nitrate in 2007 (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 42% of total production and produce sodium nitrate as a by-product of other production processes. In refined grade sodium nitrate, Badische Anilin und Soda Fabrik AG (BASF), a German corporation, and several producers in Japan (the largest of which is Mitsubishi & Co. Ltd.), are highly competitive in the European and Asian markets. Our industrial sodium nitrate products also compete indirectly with substitute chemicals, including sodium carbonate, sodium hydroxide, sodium sulfate, calcium nitrate and ammonium nitrate, which may be used in certain applications instead of sodium nitrate and are available from a large number of producers worldwide.
 
Our main competitor in the technical potassium nitrate market is Haifa Chemicals Ltd., which we estimate has a 30% market share in the industrial sector. We estimate our market share at approximately 31% for 2007.
 
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 Salar de Atacama.
 
Other important raw materials are sodium carbonate (in lithium carbonate production and for the neutralization of iodine solutions), anti-caking and anti-dust agents (in the production of nitrates), kerosene (in iodine production), ammonium nitrate (in the preparation of the anfo that is used as explosives in the mining operations), woven bags for packaging our final products, electricity acquired from electric utilities, and diesel and fuel oil in heat generation. The Company previously used natural gas as the primary raw material in heat generation, but recent natural gas shortages have led us to use alternative fuels. Our raw material costs (excluding caliche ore and salar brines and including energy) represented approximately 13.5% of our cost of sales in 2007.
 
Most of our raw materials have experienced significant price increases during the last year.
 
In 1998 we entered into a long-term (fifteen-year) electricity supply agreement with Norgener, a major Chilean electricity producer. In 1999, we entered into a long-term electricity supply agreement with Electroandina S.A., also a major Chilean electricity producer. The agreement has a ten-year term, extending to 2009, with a six-year renewal option. Since April 2000, the Company has been connected to the Northern Power Grid (Sistema Interconectado del Norte Grande or “SING”), which currently supplies us with electricity and also supplies most cities and industrial facilities in northern Chile with electricity. During 2006 and 2007, both Norgener and Electroandina sought relief from the terms of their electricity supply agreements, arguing that certain unforeseen events had restricted the supply and increased the price of gas from Argentina. As of December 2007, in the case of Norgener, an agreement was reached among the parties, whereas in the case of Electroandina, an arbitrator determined the resolution of the dispute. In both cases the prices of energy to be paid by SQM were adjusted upwards, in line with increases in variable generation costs. 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 was sufficient to satisfy the requirements for the facilities that are connected to a natural gas supply. However, beginning in 2004, the Argentinean government has imposed restrictions on the supply of natural gas, and in 2007 we received practically no gas from Argentina. Consequently, we have had to use other, higher-cost fuels as substitutes for natural gas. For a discussion of risks related to natural gas supply see Item 3. Key Information—Risk Factors.


The natural gas supply crisis discussed above has placed the Northern Power Grid under significant stress. In order to mitigate the risks to our operations from energy shortages, at the beginning of 2008 we purchased five generators that will enable the critical points of our production processes to continue operating in the event of a blackout.
 
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. In addition to the potassium chloride we produce, 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 Salar de Atacama 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
 
Regulations in Chile Generally
 
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 Salar de Atacama 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 operating 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 Salar de Atacama. The agreement sets yearly quotas for the tonnage of lithium authorized to be sold for each year of the Salar de Atacama, as determined by the agreement.


We hold water rights that are key to our business development. These rights were 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 operating requirements. However, the Water Code is subject to changes, which could have a material adverse impact on our business, financial condition and results of operations. Law No. 20,017, published on June 16, 2005, modified the Chilean laws relating to water rights. 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. Such rights may be constituted in favor of parties that requested water rights prior to January 1, 2000, when such request had not yet been processed as of June 16, 2005. In constituting these new water rights, the law does not factor in the availability of water, or how the new rights may affect holders of existing rights. Therefore, the amount of water we can effectively extract based on our existing rights could be reduced if these additional rights are exercised. These and other potential future changes to the Water Code could have a material adverse impact on our business, financial condition and results of operations.
 
In 2005, the Chilean Congress approved Law No. 20,026 (also known as the “Royalty Law”) establishing a royalty tax to be applied to mining activities developed in Chile. The Chilean Government may decide to levy additional taxes on mining companies or other corporations in Chile, and such taxes could have a material adverse impact on our business, financial condition and results of operations.
 
In 2006, the Chilean Congress amended the Labor Code, and effective January 15, 2007, certain changes were made, affecting companies that hire subcontractors to provide certain services. This new law, known as the “Law on Subcontracting”, establishes a new requirement that applies in the event of accidents in the workplace. The law states that when a serious accident occurs, the company must halt work at the site where the accident took place until authorities from the National Geology and Mining Service inspect the site and prescribe the measures the company must take to prevent future risks. Work may not be resumed until the company has taken the prescribed measures, and the period of time before work may be resumed may last for a number of hours, days, or longer. The effects of this new law could have a material adverse effect on our financial condition or results of operations.
 
There are currently no material legal or administrative proceedings pending against the Company with respect to any regulatory matter, except as discussed under “Safety, Health and 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. 
 
Safety, Health and Environmental Regulations in Chile
 
Our operations in Chile are subject to both national and local regulations related to safety, health, and environmental protection.

In Chile, the main regulations on these matters that are applicable to SQM are the Code on Safety in Mining Operations, the Health Code, the Law on Subcontracting, and the Environmental Framework Law.

Health and safety at work are fundamental aspects in the management of mining operations, which is why SQM has made constant efforts to improve the health and safety conditions of the people working at its mining sites.

In addition to the role played by the Company in this important matter, the government has a regulatory role, enacting and enforcing regulations in order to protect and ensure the health and safety of workers. The State, acting through the Ministry of Health and the National Service for Geology and Mining (“Sernageomin”), performs mine safety inspections and oversees mining projects, among other tasks, and it has exclusive powers to enforce standards related to environmental conditions and the health and safety of the people performing activities related to mining.


The Mine Health and Safety Act of 1989 (Ministry of Economy, Reglamento de Seguridad Minera, Supreme Decree DS No. 72, amended by DS No. 132/2002) protects workers and nearby communities against health and safety hazards, and it provides for enforcement of the law where compliance has not been achieved.

The main provisions of this act are related to:
 
 
·
Securing the health, safety and well-being of persons at work;
 
 
·
Protecting nearby communities against risks to health or safety arising out of or in connection with mining operations in the vicinity;
 
 
·
Controlling the use and storage of explosive, highly flammable or otherwise dangerous substances;
 
 
·
Controlling the emission or pollution into the atmosphere of noxious or offensive substances.
 
SQM’s Internal Mining Standards (“Reglamentos internos mineros”) establish our obligation to maintain a workplace that is safe and free of health risks, inasmuch as this is reasonably practicable. We must comply with the general provisions of the Health and Safety Act 1999 (Ministry of Health, Standards on Basic Sanitary and Environmental Conditions in the Workplace, or “Reglamento sobre Condiciones Sanitarias y Ambientales Básicas en los Lugares de Trabajo” DS No. 594, amended by DS No. 57/2003), our own internal standards, and the provisions of the Mine Health and Safety Act of 1989. In the event of non-compliance, the Ministry of Health and particularly the National Service for Geology and Mining are entitled to use their enforcement powers to achieve compliance with the law.
 
The Chilean Environmental Framework Law created the National Corporation of the Environment (“Corporación Nacional del Medio Ambiente” or “CONAMA”), which is the governmental agency responsible for coordinating and supervising environmental issues. Under the 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, together with other public institutions with mandates related to the environment, evaluates environmental impact studies submitted for its approval and also oversees the implementation and operation of projects. The Environmental Framework Law also promotes citizen participation in project evaluation and implementation.
 
Chilean environmental regulations have become increasingly stringent in recent years, both with respect to new project approval and approved projects in their construction and operation phases. In this context, recently implemented environmental regulations in Chile have created uncertainty because rules and enforcement procedures for these regulations have not been fully developed or have been developed without taking into consideration specific aspects of the regulated industries. Given public interest in environmental enforcement matters, these regulations are subject to political considerations that are beyond our control.
 
On August 10, 1993, the Ministry of Health published in the Official Gazette a resolution establishing that atmospheric particulate levels at our production facilities in María Elena and Pedro de Valdivia exceeded air quality standards, 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 No. 164/2000. Although we followed the plan and reduced substantially the atmospheric particulate levels at our principal production facilities, as a result of the investments and processes implemented, we were not able to fully comply with the July 2000 timetable. Resolution No. 384, published in the Official Gazette on May 16, 2000, initiated a revision and reformulation of the plan. The new plan was published by Decree No. 37/2004 on March 2004, and it called for an 80% reduction of the emissions of atmospheric particulate material in two years. We designed a new project to modify the milling and screening systems used in the processing of the caliche ore at María Elena facilities, in order to achieve the necessary reduction of particulate material emissions. An environmental impact study for this project was approved by CONAMA through Resolution No. 270 in October 2005. Upon issuing the approval for the environmental impact study, CONAMA issued the Decree No. 53975, authorizing this project as the one through which we will comply with the emission reductions required by Decree No. 37/2004. Construction of this project was completed in April of 2007, but after it started operating in mid-2007, certain design modifications became necessary. These modifications are currently being made, and the project is estimated to be in full operation by December 2008. 

 
On March 16, 2007, the Ministry of Health published in the Official Gazette a resolution establishing that atmospheric particulate levels exceeded air quality standards in the coast-town of Tocopilla, where we have our port operations. The high particulate matter levels are caused mainly by two thermoelectric power plants that use coal and fuel oil and are located next to our port operations. Our participation in particulate matter emissions is very small (less than 0.50% of the total). However, a decontamination plan is being developed and additional operating and control measures will be required in our port operations under this plan. CONAMA estimates that this plan will begin implementation by the end of 2008.
 
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 impacts. 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 new restrictions on our operations. We are committed to both 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.
 
International Regulations
 
In 2007, a new European Community Regulation on chemicals and their safe use went into effect. This regulation, called REACH (Regulation, Evaluation, Authorisation and Restriction of Chemical Substances), requires all manufacturers and importers of chemicals - including SQM - to identify and manage risks linked to the substances they manufacture and market. Non-compliance with this regulation would preclude the Company from commercializing its products in the European market.


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, 2008. 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 Salar de Atacama 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 the Company’s specialty plant nutrition products domestically 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 subsidiaries 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 (in a part of the country known as “el Norte Grande”), referred to collectively as the "Caliche Ore Mines", are discussed first. The Company's mining interests within the Atacama Desert in the eastern region of el Norte Grande (the "Salar de Atacama Brines") are discussed second.
 
DESCRIPTION OF THE CALICHE ORE MINES
 
As of December 31, 2007, we held exploitation rights to mineral resources representing approximately 1,675,000 hectares, and we have applied for additional exploitation rights for approximately 472,000. In addition, we held exploration rights to mineral resources representing approximately 283,000 hectares, and we have applied for additional exploration rights for approximately 55,000 hectares. As part of these rights, we have four mines covering an area of approximately 597,731 hectares. These four mines are currently being exploited.
 
During 2007, we modified the criteria we use to define a mine. The new criteria require that a property have both reserves and the processing facilities necessary to carry out exploitation. As a result, certain properties we previously defined as mines but that do not have processing facilities are now considered part of other mines, and the number of mines has been reduced from six to four. The Nueva Victoria mine now includes the mining properties Soronal, Mapocho and Iris, which were described separately in previous Company filings. The mining properties in terms of surface area and quantity of reserves have not changed as a result of the new criteria.
 
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 areas currently being mined are located approximately 17 kilometers southeast and approximately 20 kilometers west of the Pedro de Valdivia production facilities. Our mining facilities at Pedro de Valdivia have a Weighted Average Age of approximately 10.88 years. Electricity, diesel, and fuel oil are the primary sources of 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 of power utilized are mainly electricity, diesel, and fuel oil. The Weighted Average Age of the Company's mining facilities at María Elena is approximately 10.99 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. Ore from the Pampa Blanca mine is transported by truck to nearby heap leaching pads where it is used to produce iodine and nitrate salts. The Weighted Average Age of the ore recovery facilities at Pampa Blanca is approximately 13.46 years. The power source utilized is mostly electricity, produced by mobile diesel generators.
 
Nueva Victoria
 
We currently conduct caliche ore operations in Nueva Victoria, which 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 5.38 years. The power source utilized is mostly electricity, obtained from the Northern Power Grid (SING).

 
Description of the Salar de Atacama Brines
 
Salar de Atacama Brines
 
We hold rights to exploit the mineral resources in an area covering approximately 197,000 hectares of land in the Salar de Atacama in northern Chile, and we have applied for additional exploitation rights covering approximately 70,000 hectares. In addition, we hold exploration rights covering approximately 60,000 hectares, and we have applied for additional exploration rights covering approximately 2,000 hectares. Exploration rights are valid for a period of two years, after which the Company can (i) request an exploitation concession for the land, (ii) request an extension of the exploration rights for an additional two years (the extension only applies to a reduced surface area equal to 50% of the initial area), or (iii) cease exploration of the zone covered by the rights. The Weighted Average Age of our mining facilities at the Salar de Atacama is approximately 8.28 years. The main source of power used by the operation is electricity.
 
Additional Mining Operations Leased in the Salar de Atacama 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 Salar de Atacama 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 it 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 Salar de Atacama brines. In the years 2007, 2006, and 2005, royalty payments amounted to approximately US$13.9 million, US$ 9.2 million, and US$ 6.8 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 Salar de Atacama. Under the terms of the Salar de Atacama 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 Salar de Atacama. 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 84% of our total mining concessions are held pursuant to Exploitation Concessions and 16% pursuant to Exploration Concessions, not including areas within the Salar de Atacama 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 78% have been already granted pursuant to applicable Chilean law, and approximately 22% 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$6.4 million in the year 2007.
 
The following table sets forth our exploitation and exploration concessions as of December 31, 2007:
 
   
Exploitation Concessions
 
Exploration Concessions
 
Total
 
Mines (1)
 
Total
number
 
Hectares
 
Total 
number
 
Hectares
 
Total 
number
 
Hectares
 
Pedro de Valdivia
   
585
   
149,128
   
5
   
900
   
590
   
150,028
 
Maria Elena
   
619
   
185,049
   
24
   
8,100
   
643
   
193,149
 
Pampa Blanca
   
463
   
136,888
   
1
   
400
   
464
   
137,288
 
Nueva Victoria (2)
   
344
   
89,466
   
77
   
27,800
   
421
   
117,266
 
Salar de Atacama
   
409
   
266,965
   
209
   
61,800
   
618
   
328,765
 
Subtotal mines
   
2,420
   
827,496
   
316
   
99,000
   
2,736
   
926,496
 
                                       
Other caliche areas
   
7,039
   
1,586,168
   
1,058
   
301,400
   
8,097
   
1,887,568
 
Other salars and other areas
   
581
   
117,756
   
308
   
81,400
   
889
   
199,156
 
Subtotal other areas
   
7,620
   
1,703,924
   
1,366
   
382,800
   
8,986
   
2,086,724
 
                                       
Total
   
10,040
   
2,531,421
   
1,682
   
481,800
   
11,722
   
3,013,221
 
 
 
(1)
We have included in this table both concessions that have been granted and concessions in the process of being granted.
 
 
(2)
Nueva Victoria amounts include the Mapocho and Soronal properties, which were presented separately in our 2006 Annual Report on Form 20-F.
 

Extraction Yields
 
The following table sets forth certain operating data relating to each of our mines:

 (Values in thousands unless otherwise stated)
 
2007
 
2006
 
2005
 
Pedro de Valdivia
                   
 
                   
Metric tons of ore mined
   
10,670
   
11,652
   
12,362
 
Average grade nitrate (% by weight)
   
7.5
   
7.4
   
7.2
 
Iodine (parts per million (ppm))
   
354
   
399
   
402
 
Metric tons of crystallized nitrate produced
   
423
   
454
   
476
 
Metric tons of iodine produced
   
2.3
   
2.5
   
2.6
 
 
                   
María Elena (1)
                   
 
                   
Metric tons of ore mined
   
4,651
   
5,682
   
5,917
 
Average grade nitrate (% by weight)
   
7.4
   
7.5
   
8.0
 
Iodine (ppm)
   
363
   
399
   
428
 
Metric tons of crystallized nitrate produced
   
424
   
504
   
479
 
Metric tons of iodine produced
   
1.0
   
1.3
   
1.4
 
 
                   
Pampa Blanca
                   
 
                   
Metric tons of ore mined
   
3,108
   
4,832
   
5,309
 
Iodine (ppm)
   
527
   
530
   
520
 
Metric tons of iodine produced
   
1.1
   
1.4
   
1.5
 
 
                   
Nueva Victoria (2)
                   
 
                   
Metric tons of ore mined
   
12,285
   
14,635
   
7,140
 
Iodine (ppm)
   
495
   
941
   
504
 
Metric tons of iodine produced
   
3.7
   
4,6
   
2.2
 
 
                   
Salar de Atacama
                   
Metric tons of lithium carbonate produced (3)
   
30
   
29
   
27
 
Metric tons of potassium chloride produced
   
611
   
539
   
632
 
Metric tons of potassium sulfate produced
   
157
   
170
   
162
 
Metric tons of boric acid produced
   
7
   
8
   
9
 
 
 
(1)
Includes production at Coya Sur from treatment of fines from María Elena and Pedro de Valdivia and nitrates from pile treatment at Pampa Blanca.
 
 
(2)
Includes the Iris mining property, which was acquired in 2006 and was presented separately in the 2006 Annual Report on Form 20-F. Nueva Victoria extraction yields were higher in 2006 than they were in 2007 because they reflect extraction yields from the Iris property, which SQM continued to exploit for the first six months of 2006, subsequent to the acquisition. The Iris property has not been exploited since mid-2006, and it represents a future extension of the Nueva Victoria operations.
 
 
(3)
Lithium carbonate is extracted at the Salar de Atacama and processed at our facilities at the Salar del Carmen.
 
 
Reserves
 
Reserves for the Caliche Ore Deposits
 
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. Drill-holes have been made at different space intervals in order to recognize mining resources. Normally, we start with 400 x 400 meters and then we reduce spacing to 200x200 meters, 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 and 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 Method and the application of operating 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 used to determine indicated resources. By adjusting such indicated resources to account for technical, economic and legal factors, it is possible to calculate probable reserves. Probable reserves are calculated by evaluating polygons and have an uncertainty or error margin greater than that of proven reserves; however, the degree of certainty of probable reserves is high enough to assume continuity between points of observation.
 
Proven and probable reserves are determined using extensive drilling, sampling and mine modeling, in order to estimate potential restrictions on production yields, including cut-off grades, ore type, dilution, waste-to-ore ratio and ore depth. Economic feasibility is determined on the basis of this information.
 
The updated estimates of our proven reserves of caliche ore at each of our mines, as of December 31, 2007, are as follows:
 
Mine
 
Proven Reserves (1)
(millions of metric tons)
 
Nitrate Average Grade
(percentage by weight)
 
Iodine Average Grade
(parts per million)
 
Pedro de Valdivia
   
152.3
   
7.1
%
 
370
 
María Elena
   
134.8
   
7.3
%
 
415
 
Pampa Blanca
   
74.9
   
6.3
%
 
549
 
Nueva Victoria (2)
   
283.8
   
5.7
%
 
427
 
 
In addition, the updated estimates of our probable reserves of caliche ore at each of our principal mines as of December 31, 2007, are as follows:
 
Mine
 
Probable Reserves (1) (3)
(millions of metric tons)
 
Nitrate Average Grade
(percentage by weight)
 
Iodine Average Grade
(parts per million)
 
Pedro de Valdivia
   
136.8
   
6.8
%
 
428
 
María Elena
   
97.6
   
7.3
%
 
380
 
Pampa Blanca
   
429.4
   
6.0
%
 
524
 
Nueva Victoria (2)
   
129.9
   
5.5
%
 
407
 
 
Notes on Reserves:
 
(1)
The proven and probable reserves set forth in the tables above are shown before losses related to exploitation and metallurgical treatment. Proven and probable reserves are affected by mining exploitation methods, which result in differences between the estimated reserves that are available for exploitation in the mining plan and the 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%, whereas the average global metallurgical recoveries of processes for nitrate and iodine contained in the recovered material vary between 55% and 65%.
 

(2)
Proven and probable reserves for Nueva Victoria include the Soronal and Mapocho mining properties, which were presented separately in the Company’s 2006 Annual Report on Form 20-F. Nueva Victoria also includes the reserves for the Iris mining property, which was acquired in 2006 and whose reserves had not yet been estimated at the time the 2006 Form 20-F was filed.
 
(3)
Probable reserves amounts can be transformed in order to obtain amounts expressed as proven reserves. On average, the transformation factor to express probable reserves as proven reserves is higher than 60%. This factor depends on geological conditions and caliche ore continuity, which vary from mine to mine. The difference between the probable reserve amounts and the transformed probable reserve amounts is the result of the lower degree of certainty pertaining to probable reserves compared with proven reserves.
 
The proven and probable reserves shown above are the result of exploration and evaluation of approximately 16.0% 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 84.0% 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.
 
Exploration Program. We maintain an ongoing 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 2007, we continued a basic reconnaissance program on new mining properties including a geological mapping of the surface and spaced drill-hole campaign covering approximately 46,516 hectares. Additionally, we conducted general explorations based on a closer grid pattern of drill-holes over a total area of approximately 2,480 hectares and, in addition, carried out in-depth sampling of approximately 2,305 hectares (896 hectares at Pedro de Valdivia, 413 hectares at María Elena, and 996 hectares at Nueva Victoria). The exploration and development program in 2008 calls for a basic reconnaissance program over a total area of 44,710 hectares, general exploration over a total area of about 4,067 hectares and, in addition, in-depth sampling of approximately 2,654 hectares.
 
Reserves for the Salar de Atacama Brines
 
Our in-house staff of hydro-geologists and mining engineers prepares our estimates of potassium, sulfate, lithium and boron reserves at the Salar de Atacama. 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 (1)
(millions of metric tons)
 
Probable Reserves (1)
(millions of metric tons)
 
Potassium (K +) (2)
   
49.9
   
7.3
 
Sulfate (SO4 2-) (3)
   
36.1
   
1.3
 
Lithium (Li +) (4)
   
3.0
   
2.0
 
Boron (B 3+) (5)
   
1.2
   
0.1
 
 
Notes on Reserves:
 
(1)
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 both brine composition, which changes over time, and the process applied to produce the desired commercial products.
 
(2)
Recoveries for potassium vary from 47% to 68%.
 
(3)
Recoveries for sulfate vary from 27% to 44%.
 
(4)
Recoveries for lithium vary from 28% to 32%.
 
(5)
Recoveries for boron are approximately 29%.
 

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 is used to estimate potential restrictions on production yields, and the economic feasibility or producing such commercial products as potassium chloride, potassium sulfate, lithium carbonate and boric acid is determined on the basis of the evaluation.
 
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.
 
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, 2007:
 
Location
 
Type of Facility
 
Approximate Size (1) (Hectares)
 
Pedro de Valdivia
   
Nitrates and iodine production
   
126
 
María Elena
   
Nitrates and iodine production
   
110
 
Coya Sur
   
Nitrates and iodine production
   
232
 
Pampa Blanca
   
Concentrated nitrate salts and iodine production
   
86
 
Nueva Victoria
   
Iodine production
   
11
 
Salar de Atacama (2)
   
Potassium chloride, lithium chloride, potassium sulfate and boric acid
   
2,288
 
Salar del Carmen, Antofagasta
   
Lithium carbonate and lithium hydroxide production
   
32
 
Tocopilla