Lithium Play: SQM's Consolidation Offers Opportunity

Aibek Burabayev - INO.com Contributor - Metals - lithium investing


In this post, I will share with you an upcoming lithium investing opportunity in the lithium industry through the stock of the well-known company traded on the NYSE with a hard to spell name. It’s Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM).

Among other useful things it produces lithium carbonates for various applications, such as electrochemical materials for batteries; lithium derivatives; supplies lithium hydroxide for the lubricating greases industry, as well as for cathodes for batteries; and sells lithium chloride solutions. Its lithium products are marketed under the QLithiumCarbonate, QLithiumHydroxide, and QLubelith brands.

Recently, Moody's Investors Service affirmed on January 24th Sociedad Quimica y Minera de Chile S.A.'s (SQM) Baa1 senior unsecured ratings and changed its rating’s outlook to stable from negative as the company reached an agreement to settle the long-term dispute with the Chilean Production Development Corporation on 17 January 2018. The resolution will positively impact production growth prospects for SQM's Salar de Atacama operations (half of the revenues) during the remainder of the contract, which expires in 2030.

Let’s start our analysis from financial highlights.

Chart 1. Income

lithium investing
Chart courtesy of finance.google.com

Both total revenue and net income rose in the 3Q 2017 to $558m and beat the readings of the previous year by $50m. Net profit margin is also higher at the 20% in 2017 compared to the 15% in 2016.

Chart 2. Balance Sheet

lithium investing
Chart courtesy of finance.google.com

Total assets grew slightly quarter on quarter and remain stable between $4.1 and $4.2 bn. Total long-term debt shows positive dynamics decreasing by $40m in the 3Q 2017 to $1.02bn. The LT debt-to-equity ratio stands at 0.47.

The management effectiveness shows the following results:

Return-on-Assets = 9.5%
Return-on-Equity = 18%
Return-on-Investment = 9.1%

These profitability indicators are very good, especially ROE as you buy a share in the company’s equity.

The financial strength shows the following readings:

Quick ratio (company's ability to meet its short-term obligations with its most liquid assets) = 2.30
Current ratio (company's ability to pay short-term obligations) = 3.80

Both numbers indicate the good short-term financial strength, although current ratio also indicates excessive capacity.

And now I put the icing on the cake and show you the technical setup for the SQM stock.

Chart 3. SQM Daily: Consolidation Offers Opportunity

lithium investing
Chart courtesy of tradingview.com

Before I start writing about SQM I would like to ask you to visit a page with a historical sample of consolidation play that we luckily had before in my earlier post published last November titled “The Modern Gold Rush: These Three Stocks Could Benefit”. The trading setup there was dedicated to Advanced Micro Devices (NASDAQ:AMD), which also was consolidating that time. The idea already booked more than 25% gains, although the price is yet to break out of the consolidation range.

Now let’s get back to Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM) I think I couldn’t spell it right, but I guess it sounds like the name of delicious exotic food.

The consolidation itself is highlighted with an orange box in the chart above. It has $15.06 height, the downside is located at the low established last December at the $49.14, and the upside is set at the peak tagged in the middle of this January at the $64.20. I also highlighted another crucial point stitched last September at the $52.50 to show you where the first leg of downside move has finished as the current drop within the second leg of consolidation stopped last Friday just shy away at the $53.01.

The idea is simple; we should wait for another dip down into the area highlighted with the blue triangle between $53.30 and $49.14 to enter the long position as RSI is already approaching the oversold area and this could be the first signal that the consolidation is going to complete soon as this is the daily chart. Limit your risk to avoid excessive losses. I hope this week there will be another drop for you to catch the opportunity.

For those who prefer safer trades, there is one hint: you could wait until the RSI breaks above 50 which would confirm the end of consolidation but there surely less profit remains.

I added AB/CD segments to the chart to show you visually how we can calculate the target. The $80 area implies the equality of segments and could be the conservative target.

Do you think “buy SQM on the dip” is a good bet these days?

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Intelligent trades!

Aibek Burabayev
INO.com Contributor, Metals

Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

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