9966.HK 002466.SHE
Shares in the Chinese mining giant have plunged about 40% in the past year, as it grapples with falling lithium prices and uncertainties over a deal in Chile.

Shares in the Chinese mining giant have plunged about 40% in the past year, as it grapples with falling lithium prices and uncertainties over a deal in Chile

Key Takeaways:

  • Tianqi Lithium said it was expecting to post a loss of between 3.6 billion yuan and 4.3 billion yuan in the first quarter, prompting the Shenzhen Stock Exchange to seek a written explanation
  • Market-watchers are worried about Tianqi’s links to a Chilean mining company that is facing a big tax bill and is negotiating a new lithium pact that could sideline the Chinese miner

 

By A. Au

China’s leading lithium mining company dropped an earnings bombshell last week when it warned investors of a huge impending loss for the first quarter.

Investors reeled in shock at the news, released on the evening of April 23, that Tianqi Lithium Corp. (9966.HK; 002466.SZ) was set to land 3.6 billion yuan ($49.8 million) to 4.3 billion yuan in the red, after posting a healthy profit of 4.87 billion yuan in the first quarter of last year.

The company’s shares plunged limit-down in Shenzhen as soon as trading resumed the next day. In Hong Kong, Tianqi’s stockdropped about 19% in a single session after the profit warning, dragging down peers such as Ganfeng Lithium (1772.HK; 002460.SZ) and Chengxin Lithium (00224.SZ).

The company had already gone 801 million yuan into the red in the fourth quarter of last year, but the scale of the losses more than quadrupled in the first quarter, inevitably attracting scrutiny from regulators. In its earnings statement, the firm cited two factors behind the sharp swing into negative territory: a price drop for lithium products and the fallout from a tax probe into a Chilean company that is around one-fifth owned by Tianqi.

The Chinese miner is the second biggest shareholder in chemical mining company Sociedad Química y Minera de Chile S.A. (SQM), which has been mired in a long-running dispute with tax authorities. Responding to a ruling in the case, SQM said in early April that an accounting review was expected to wipe about $1.1 billion off its first-quarter net profit. The sharp downward revision would slash Tianqi’s investment revenue for the quarter.

Tianqi’s initial explanation did not satisfy the Shenzhen Stock Exchange, which fired off a letter of concern seeking more detailed analysis of the escalated losses covering production, sales and prices. Tianqi was also asked to clarify how the SQM tax dispute had been adjudicated and to explain the follow-up developments.

On April 27, Tianqi produced a long response. Despite price pressures, operations proceeded as normal in the first quarter, with sales of lithium salt products rising 20.49% quarter on quarter and 109% year on year to 16,739 tons, the company said. However, lithium ore sales fell 26.8% from the fourth quarter to just 143,488 tons in the first three months of this year. Hit by a fall in international lithium prices, overall revenue dropped almost 64% from the fourth quarter of last year to nearly 2.59 billion yuan.

Lithium price powers down

Tianqi also submitted price charts using data from the Shanghai Metals Market to show that market prices of battery-grade lithium carbonate fell 35% from 169,000 yuan per ton to about 109,800 yuan from the start of the fourth quarter to the end of the first quarter, while the market price of lithium concentrate fell by 57%, from $2,560 to $1,099 per ton.

The company’s average sales price for battery-grade lithium carbonate fell 35% in the first quarter from the preceding three months, while lithium concentrate sank 70% quarter on quarter, more than the drop in the market rate, because of changes in the pricing cycle of Windfield Holdings Pty Ltd in which Tianqi holds an indirect stake.

Elaborating on the SQM tax wrangle, Tianqi explained that its Chilean associate expected to revise down its net profit by about $1.1 billion in the first quarter to cover all disputed mining taxes from the 2012 to 2023 tax years. The accounting adjustments in the first quarter would translate into a fall of 1.7 billion yuan in Tianqi’s investment proceeds as it holds 22.16% of SQM shares.

Why are investors and regulators so concerned about SQM? It is because the Chilean venture ranks as Tianqi’s biggest potential risk.

In 2018, Tianqi paid $4.07 billion for 23.77% of shares in Santiago-based SQM, which holds mining rights in Chile’s Atacama salt flat, a reserve that boasted the world’s biggest lithium output in 2023. Its current stake of about 22.16% makes Tianqi the second-largest shareholder in SQM.

Last year’s earnings statement showed that the Chinese company received about 2.28 billion yuan ($314 million) in SQM dividends, representing a substantial revenue stream. But at the end of last year Tianqi was blindsided by a move that could threaten its future proceeds from Chile’s lucrative lithium deposits.

SQM entered into a provisional deal with Chile’s state-owned copper giant Codelco to operate and develop the Atacama salt flat from 2025 to 2060 through a joint venture. SQM will own 50% minus one share of the joint venture company while Codelco, whose full name is Corporación Nacional Del Cobre de Chile, would own 50% plus 1 share.

The Shenzhen Stock Exchange expressed concern about the implications, asking Tianqi to explain potential countermeasures and to warn investors about related risks. Tianqi said that the parties’ memorandum of understanding and other information about the deal suggest that SQM’s Atacama mining rights would be extended from 2030 to 2060, but after 2031 Codelco would control the core lithium business at the salt flats.

However, Tianqi said it was not able to evaluate the potential impact on its operations or revenues as the Chilean companies’ memorandum of understanding was not legally binding and talks between the two parties are ongoing. The Chinese company has twice requested SQM shareholder meetings to get more information and said it would continue to monitor the situation.

Tianqi’s projected first-quarter results fell short of investment bank forecasts. Daiwa Securities gave the stock an “underperform” rating, saying the adjusted loss in the first quarter was much higher than expected. Morgan Stanley said an outdated pricing mechanism was weighing on gross margin for lithium products and could cause impairment losses, but still gave the stock an “overweight” rating with a target price of HK$52.

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