While the financial world is buzzing about SQM's positive first-quarter sales volume growth and their ongoing lithium expansion plans, a quiet storm is brewing on their balance sheet. A storm that could have far-reaching consequences for the global lithium market and ultimately, the affordability of electric vehicles.

Buried in the Q1 2024 earnings call transcript is a single, seemingly innocuous line: "Our net profit was impacted by a one-time adjustment related to the accounting treatment of the lithium mining tax in Chile from previous years, adding up to almost $1.1 billion as of March 31, 2024."

This seemingly technical accounting detail masks a potential earthquake for SQM's profitability and the future of lithium pricing. SQM has long disputed the Chilean government's assertion that lithium extraction is subject to the mining tax, arguing that it is a chemical process and therefore exempt. However, a recent ruling by the appeals court has forced SQM to change its accounting treatment, acknowledging the tax liability.

While SQM insists this is a one-time adjustment and the majority of the $1.1 billion has already been paid, the implications are significant. The company booked an $8 million tax expense in Q1 alone, directly attributable to this dispute.

This tax burden, if it persists, could become a major headwind for SQM, forcing them to re-evaluate their aggressive expansion plans and potentially even curtail production. The company is already projecting a significant inventory build in 2024, opting to prioritize production capacity over immediate sales volume. If their profitability is squeezed by the new tax liability, maintaining such an inventory strategy might become unsustainable.

This scenario could have a domino effect on the global lithium market. SQM is a major player, responsible for a significant portion of global lithium supply. Any production cuts or delays in their ambitious expansion plans could significantly tighten the market, putting upward pressure on lithium prices.

Remember the sky-high lithium prices of 2022? While Gonzalo Aguirre, SQM's lithium market intelligence expert, downplays the impact of lithium price on the final cost of electric vehicles, any significant price increase will undoubtedly be felt by consumers. A $1 increase in lithium carbonate price, for instance, translates to a $50 increase in the final cost of a Tesla Model Y.

With the Inflation Reduction Act hanging by a thread and the potential for a Trump presidency looming in the U.S., global EV demand faces uncertainties. If this uncertainty translates to a slowdown in EV adoption coupled with a tighter lithium market driven by SQM's tax woes, the dream of affordable electric vehicles for everyone might remain just that – a dream.

SQM's expansion plans are ambitious, aiming to reach a production capacity of 300,000 metric tons by the end of 2025. This expansion is critical to meet the projected fourfold increase in lithium demand over the next decade. However, if the company is forced to shoulder a hefty tax burden, these expansion plans could become financially untenable.

The Chilean government's lithium strategy, embodied in the Salar Futuro project, aims to balance environmental concerns with economic growth. However, the imposition of the mining tax on lithium extraction could inadvertently undermine this strategy by squeezing the profitability of a key player like SQM, potentially slowing down their crucial role in driving the global lithium supply.

SQM's Projected Lithium Production Capacity (Metric Tons)

Projected Global Electric Vehicle Sales (Millions of Units)

While SQM assures investors that their agreement with CODELCO remains unchanged and they are committed to the Salar Futuro project, the $1.1 billion tax adjustment hangs like a sword of Damocles over their future plans. The next few quarters will be crucial in determining whether SQM can navigate this challenge and maintain their leading role in supplying the world with the lithium needed for the electric vehicle revolution.

"Fun Fact: The Salar de Atacama in Chile, where SQM operates, is not only a major source of lithium but also holds the world's largest reserves of natural iodine. This unique location highlights the strategic importance of this region for both the clean energy and healthcare industries."