December 14, 2017 / 1:01 PM / a year ago

Chile politics put Potash in tight spot on SQM stake sale

SANTIAGO, Dec 14 (Reuters) - The chance to own a stake in Chile’s SQM, one of the world’s top lithium producers, has attracted several potential suitors as prices for the so-called white gold - a key ingredient in electric car batteries - have skyrocketed.

But the buyer of the 32 percent of SQM being sold by Canadian Potash Corp of Saskatchewan’s, which needs to divest the stake as part of a merger, will need to navigate tricky politics well before any deal is inked.

With a presidential election in Chile on Sunday, conservative billionaire Sebastian Pinera has emerged as the favorite with investors, but neither he nor his opponent in the second-round runoff, center-left candidate Alejandro Guillier, have expressed a favorable view of the scandal-plagued miner.

Chilean authorities accuse SQM of underpaying royalties, environmental violations and illicit political financing, making the sale more complicated, raising the specter of delays or a steep price discount, according to analysts.

The government has long had a frosty relationship with SQM’s controlling shareholder, Julio Ponce Lerou, the former son-in-law of ex-dictator Augusto Pinochet.

SQM denies the allegations and maintains it is confident a high-stakes arbitration with the government over royalties in Chile’s lithium-rich Salar de Atacama region - the source of half of SQM’s revenue - will be resolved in its favor.

But the company would still need to renegotiate its production quota with an incoming government unlikely to hold the miner in high esteem.

There is much at stake for Potash Corp, which purchased its interest in SQM piecemeal a decade ago and could stand to earn billions of dollars in the transaction. With shares in SQM up around 80 percent so far this year, Potash’s shareholding is worth around $4.8 billion, according to Reuters data.

The price of lithium, an essential ingredient for batteries used in electric vehicles, has surged as automakers like Volkswagen and General Motors Co have unveiled plans to ramp up production over the next few years.

“There’s lots of action and lots of interest because it’s the sexiest commodity on the planet,” said Ben Isaacson, an analyst with Scotiabank. “But if I’m buying Potash’s stake, I certainly wouldn’t be spending four or five billion dollars wondering if SQM may have to stop producing in five years.”

SQM’s bitter relationship with authorities has put Potash in a tight spot.

Indian regulators have given the fertilizer company until April 2019 to divest its stake as part of its proposed merger with Canadian rival Agrium Inc.

SQM, however, has said a final judgment in the arbitration case could linger through next year, casting uncertainty over the sale. Meanwhile, the company’s stock has fallen over 7 percent in the month since the country’s first-round presidential election, compared to a dip of 4.7 percent for the wider Chilean market.

Potash Corp CEO Jochen Tilk last week met with Eduardo Bitran, who heads Chilean development agency Corfo, in Santiago after talks to resolve the royalty dispute between SQM and Corfo broke down in October.

Potash Corp spokesman Randy Burton declined to comment. A Corfo spokesman told Reuters that the two had discussed “the current state of the arbitration over serious contractual breaches on the part of SQM.”

Days later, Bitran told reporters: “Because (Potash) is obligated to sell, having this conflict is a problem.”

Representatives of global miner Rio Tinto Plc, U.S. lithium producer Albemarle Corp and Chinese private equity firm GSR Capital have also met with Corfo’s Bitran in recent weeks to discuss lithium, according to the Chilean government’s transparency website.

While interest appears high, analysts say a deal is unlikely without assurances that Corfo will extend the miner’s production quota.

‘LITTLE RISK PRICED IN’

Investors are pricing in both a favorable arbitration ruling and a successful renegotiation of its production quota, said Seth Goldstein, an equity analyst with Morningstar in Chicago.

SQM’s shares traded in New York dipped after the first-round presidential vote on Nov. 19, but last traded at $53.70.

“There seems to be very little risk priced in,” said Goldstein, who estimates SQM’s fair value at $46 per share. “The market appears to be assuming that they’re going to have a successful outcome of the dispute and then negotiate a new, longer-term lease.”

But a ruling allowing SQM to keep its lease would not spell the end of the company’s troubles. At its current rate of extracting brine, SQM would reach its quota by 2023 with seven years left on its lease.

That means that SQM would need to cut a deal with Corfo to keep output steady. SQM has repeatedly clashed with President Michelle Bachelet’s center-left government, so a victory by Guillier, who has pledged continuity with Bachelet’s policies, would bode poorly for the miner.

Conversely, Pinera’s recent statements attacking the company’s controlling shareholder mean his pro-business agenda may come as little solace to the lithium miner.

“I am not a friend of (Julio) Ponce Lerou. Quite the opposite,” Pinera said in a recent interview with local newspaper La Tercera.

Mending fences with Chilean authorities may first mean reaching an agreement to buy out the mysterious Ponce, who resigned as SQM chairman last year after investigations uncovered insider trading and illicit political financing.

Corfo’s Bitran told Reuters this year that developing a good relationship with SQM was impossible while Ponce remained in control.

Ponce in 2016 offered to sell an indirect stake valued at $1.5 billion, but ended the sale after receiving no suitable offers.

“I think if you’re looking at buying the (Potash) stake, you have to have at least two conversations. The first is with the Chilean government. The second is going to have to be with Ponce,” Isaacson said. (Additional reporting by Luc Cohen and Rod Nickel in Winnipeg; editing by Daniel Flynn, Christian Plumb and G Crosse)

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