When China's Tianqi Lithium paid $4 billion in 2018 to become the second-largest shareholder in Chile's SQM, it was gambling for a strategic foothold in one of the world's largest lithium reserves as demand soared for the metal at the heart of the electricity industry. Vehicle revolution.
But Tianqi's investment in strengthening its position in Latin America, home to the “lithium triangle” that includes Argentina, Bolivia and Chile, is in jeopardy as the Chilean government works to exert more control over the vast salt flats in the Atacama Desert, where SQM produces a fifth of the world's lithium.
SQM has entered into a preliminary agreement to form a joint venture with state-owned copper company Codelco, a deal that would fulfill President Gabriel Buric's mandate that strategic lithium projects either begin or transform into public-private partnerships. The joint venture risks diluting Tianqi's existing interests in SQM's lithium business, depriving it of potential access to high-grade lithium resources.
“I suppose Tianqi’s hope when she entered SQM was to one day run the lithium business by buying control,” said Daniel Jimenez, founder of lithium advisory firm iLiMarkets, who previously worked at SQM for 28 years. “With the agreement between SQM and Codelco, this dream disappears.”
Chile's Tianqi problem comes as countries around the world regain control of commodities important for the green transition, including lithium, copper, cobalt and nickel – with prices poised to rebound from low levels as demand picks up.
Indonesia banned the export of nickel ore and required the construction of processing facilities locally, while Zimbabwe and Namibia banned the export of raw lithium. The Democratic Republic of Congo, a major cobalt powerhouse, is reviewing the contracts of all producers to negotiate a fairer share of revenues for the country.
Shares of China's second-largest lithium producer listed in Hong Kong fell 17 percent over the past year under pressure from falling prices for the metal. Tianqi reported a 70 percent year-on-year decline in net profit to RMB7.23 billion ($1 billion) in 2023.
SQM and Codelco reached a preliminary agreement in December under which SQM's lithium business will be split into a joint venture with Codelco, which will own a 50 percent stake plus one share.
The joint venture will start next year and implement SQM contracts with Chilean state mining agency Corvo until 2030, when they are due to expire. The company will then receive new contracts until 2060.
If the deal goes ahead, Tianqi will retain a diluted stake in the lithium joint venture, limiting its influence over the company.
“SQM is effectively signing away future control over it [lithium] “Lithium cash flow and its distributions to SQM will be controlled by a state-owned board, the shareholders of which are the people of Chile, not Tianqi,” Scotiabank said in a note on “distributions” after 2030.
Chilean funds are also concerned about what happens to SQM's dividends after the split of its lithium division – the unit provides the bulk of the chemical company's revenue – as well as the possibility of higher taxes and wage costs under state control, according to analysts.
Tianqi is demanding a vote on the deal, but the Chilean regulator ruled this year that SQM need not give shareholders such a vote.
“The lack of transparency and detail prevents all shareholders from making an informed decision,” Tianqi CEO Frank Ha told Chilean media last month. “We are very interested to know what is hidden behind” the SQM-Codelco agreement, he added. Tianqi declined to comment further.
Tianqi was locked in a battle to retain its influence in the new joint venture between SQM and Codelco, fearing it would essentially be left with shares in a fertilizer company, one of the people familiar with the dispute said. SQM also produces iodine, potassium and nitrates.
“With this deal between SQM and Codelco, Tianqi is in an awkward position,” this person said. “It may come down to whether they can get a seat on the board of the new joint venture. But what you really want is the opportunity to work on the Salar de Atacama by any means.”
One day before the extraordinary meeting at SQM called by Tianqi in March, Xu Tieying, one of Tianqi's three nominated board members, resigned without explanation. His resignation would trigger an election process for the entire SQM board based on Chilean rules, which could slow the deal.
SQM President Gonzalo Guerrero accused Tianqi of bad faith and wanting to use a shareholder vote to block SQM's deal with Codelco in the Salar de Atacama in order to make a takeover bid of its own. “Are these statements in the interest of SQM or Tianqi?” He said.
He added that putting the agreement to a vote would give Tianqi veto power. “It is worth asking whether Tianqi, once the deal is rejected, will not attempt to pursue this business opportunity for itself, misappropriating a business opportunity that belongs to SQM and all of its shareholders,” Guerrero added.
Gustavo Lagos, a professor of mining engineering at the Pontifical Catholic University of Chile, said Tianqi's goal to assume more control was “always optimistic” because it was unlikely to be able to buy more shares in SQM.
Julio Ponce, SQM's largest shareholder and former son-in-law of Chilean dictator Augusto Pinochet, is unlikely to sell his stake in SQM, Lagos said. The company is “one of the best performing companies in Chile” and forms the basis of his personal wealth.
Tianqi's problems are not limited to Chile, said José Hofer, a former SQM employee who now works as commercial director for Livista Energy, which is trying to set up lithium refineries in Europe. The company is also struggling to increase production at its Kwinana plant in Australia.
“It's not a very positive panorama for them,” he said.
