Tianqi Lithium's $4 billion investment in Chile could spiral out of control

Introduction: This strategy is at risk as the administration of President Gabriel Boric struggles to regain control of resources.

In 2018, China's Tianqi Lithium paid $4 billion to become the second-largest shareholder of Chile's SQM, a big gamble to compete for a strategic foothold in one of the world's top lithium reserves, at a time when demand for the core metals of the electric vehicle revolution surged.

However, Tianqi Lithium's investments to strengthen its position in Latin America, which include Argentina, Bolivia and Chile, known as the "lithium triangle", are at risk. As the Chilean government seeks to exert more control over the vast saline lands of the Atacama Desert, where SQM produces one-fifth of the world's lithium, Tianqi's investment is in crisis.

SQM has reached a preliminary agreement with state-owned copper producer Codelco to form a joint venture that will fulfil President Gabriel Borric's request that strategic lithium projects should start with or shift to public-private partnerships. The joint venture could dilute Tianqi's existing interest in SQM's lithium business and potentially deprive it of further exposure to high-quality lithium resources.

"I think Tianqi's hope when it entered SQM was to finally take control of the lithium business by buying a controlling stake," said Daniel Jimenez, founder of iLiMarkets, a lithium consultancy who worked at SQM for 28 years. "With SQM's agreement with Codelco, that dream was shattered. ”

Tianqi's plight in Chile comes as several countries around the world are taking back control of commodities critical to the green transition, including lithium, copper, cobalt and nickel – prices of which are expected to rebound from the doldrums as demand soars.

Indonesia has banned nickel ore exports, requiring local processing facilities, while Zimbabwe and Namibia have banned the export of raw lithium. The Democratic Republic of Congo, a major cobalt country, is reviewing the contracts of all producers in order to negotiate a more equitable income distribution for the country.

Shares of China's second-largest lithium producer, listed in Hong Kong, have fallen 17% over the past year under pressure from a plunge in metal prices. In 2023, Tianqi Lithium's net profit fell 70% year-on-year to 7.23 billion yuan (about $1 billion).

SQM and Codelco reached a preliminary agreement in December last year under which SQM's lithium business will be divested into a joint venture with Codelco, which will hold a 50% plus one share.

The joint venture will be launched next year and execute SQM's contract with Chilean government mining agency Corfo until the end of the contract in 2030. After that, the company will take over new contracts until 2060.

If the deal goes ahead, Tianqi will hold a diluted stake in the lithium joint venture, which will limit its influence over the company.

"SQM has effectively signed an agreement to cede control of its [lithium] distribution in the future," Scotiabank said in a report. "Cash flow and dividends from the lithium business will be controlled by a state-owned board of directors whose shareholders are the Chilean people, not Tianqi. ”

Chilean funds are also concerned about SQM's dividend situation once the lithium business unit is divested – which provides most of the chemical company's revenues – as well as possible increased tax and payroll costs under state control, analysts said.

Tianqi asked for a vote on the deal, but Chilean regulators ruled this year that SQM was not required to give shareholders such voting rights.

Tianqi CEO Frank Ha told Chilean media last month: "The lack of transparency and detail limits the ability of all shareholders to make informed decisions. He added: "We would very much like to know what is behind the SQM and Codelco agreement. Tianqi declined to comment further.

A person familiar with the dispute said Tianqi was struggling to retain its influence in SQM's new joint venture with Codelco, fearing that it would end up holding only a stake in a company that primarily produces fertilizers. SQM also produces iodine, potassium and nitrate.

"Through SQM's deal with Codelco, Tianqi is in a difficult position," the person said. "It could be about whether they can get a seat on the board of the new joint venture. But what it really wants is the opportunity to operate in the Atacama Salt Lake, by any means. ”

The day before Tianqi's extraordinary SQM meeting in March, Xu Tieying, one of the three board members nominated by Tianqi, resigned without explanation. His resignation will trigger the election process for the entire SQM board of directors in accordance with Chilean regulations and could delay the transaction process.

SQM Chairman Gonzalo Guerrero accused Tianqi of acting in bad faith and trying to use shareholder votes to block SQM's deal with Codelco in the Atacama Salt Lake in order to launch its own takeover attempt. "Are these statements in the best interest of SQM or are they in the best interest of Tianqi?" he said.

Submitting a trade vote, he said, would effectively give Tianqi a veto. "It is worth pondering whether Tianqi will try to pursue this business opportunity for itself and illegally take possession of the business opportunity belonging to SQM and all of its shareholders once the deal is vetoed. Guerrero added.

Gustavo Lagos, a professor of mining engineering at the Pontificia Universidad Católica de Chile, said Tianqi's goal of increasing control was "always optimistic" as it was unlikely to buy more shares in SQM.

Julio Ponce, SQM's largest shareholder and former son-in-law of former Chilean dictator Pinochet, is unlikely to sell his stake in SQM, Lagos said. This company is "one of the best performing companies in Chile" and forms the basis of his personal wealth.

Jose Hofer, a former SQM employee and commercial manager at Livista Energy, which is trying to build a lithium refinery in Europe, said Tianqi's plight is not limited to Chile. The company is also working to ramp up production at its Kwinana plant in Australia.

"It's not a very positive prospect for them," he said. ”（FT）