No let-up for SQM as CORFO pursues lithium lease case

By Laura Syrett, Kasia Patel
Published: Wednesday, 22 July 2015

CORFO claims proof of lease violation by SQM, which has denied the allegations, saying it is still willing to cooperate. Water usage is also under scrutiny at its lithium and iodine sites.

The Chilean economic development agency Corporacion de Fomento de la Produccion (CORFO) issued a statement at the end of June, saying it has proof that miner Sociedad Quimica y Minera (SQM) failed to fulfil its obligations under a lease to extract lithium from land owned by CORFO in the Salar de Atacama.

According to a report by Chilean news service emol, CORFO’s executive vice president, Eduardo Bitran, published an announcement stating that the agency had "abundant and undeniable evidence that SQM has systematically sold production of potassium and lithium carbonate at prices below the market, affecting [CORFO]".

Chile’s Salar de Atacama is one of the world’s richest sources of lithium brines and SQM originally agreed to lease and manage CORFO’s mineral claims in the region back in 1986, with rental fees to be calculated according to revenues from selling minerals extracted from the 81,920 ha (819.2km2) site.

The two sides have been locked in a bitter dispute over the lease since May last year, with CORFO alleging that SQM owes it $8.9m in unpaid fees.

Bitran said that the agency would provide the records of evidence to the Superintendency of Securities and Insurance, Internal Revenue Service, Superintendency of Pension Fund Managers and the US Securities and Exchange Commission, during the evidentiary phase of the arbitration proceedings currently in progress between the two entities.

In a stinging warning to SQM, Bitran said: "SQM must understand one basic thing that is inherent in ethics: the contracts must be fulfilled in good faith and the private partner must be fit to partner with the state".

The announcement followed an earlier statement by SQM denying accusations that it had underpaid CORFO for revenues accrued on its exploitation of, and sale of minerals from, the Atacama leases.

In the statement, SQM asserted its "conviction that it has fulfilled timely and fully all of the obligations of the lease agreement and therefore has no outstanding debt with CORFO".

SQM responded to CORFO’s claims that it could prove the miner had infringed its agreements, reiterating that "it has always acted in good faith in the operation of the lease agreement and has always acted in accordance with [the] lease agreement".

The Santiago and New York Stock Exchange-listed company, which also produces potash and iodine in Chile, noted that under the terms of the lease, any legitimate differences arising between the parties with regard to its administration must be resolved through an arbitration process.

Non-going negotiations

In its latest response to the Chilean government body, SQM said that it would "continue to cooperate with CORFO and the arbitrator in order to resolve the current dispute", and restated its willingness to continue to collaborate with CORFO over the Atacama leases.

The company had issued a previous statement denying reports in the media alleging that the conciliation proposal it made to CORFO had been rejected, implying the termination of the company’s lithium mining lease agreement in the Salar de Atacama.

Responding to a request for additional information from the Santiago Stock Exchange to explain the media reports and a drop in SQM series B share prices, SQM said that it and its subsidiaries maintained a lease agreement with CORFO related to mining property in Atacama.

SQM confirmed that it was involved in an arbitration proceeding with CORFO relating to certain differences in past rental payments and the early termination of the agreement.

"Currently the arbitration proceeding is in the conciliation stage before the arbitrator and SQM has not been informed of any decision by CORFO to no continue in this stage," the company outlined.

Water rights

SQM has also come under scrutiny recently for its use of water to service its mining operations in Chile.

Aside from its use of water to supply its lithium operations in the Salar de Atacama, which the company has asserted "constitute a small percentage of the total water rights constituted by third parties established in the corresponding basins [and] does not affect the interests of CORFO", SQM is facing questions about water it uses for iodine extraction.

Back in 2010, SQM mooted its intention to increase its iodine capacity at Nueva Victoria in Chile’s Tarapaca region to 11,000 tpa in addition to a 1.2m tpa nitrate plant, as part of the company’s Pampa Hermosa project, based in the Pampa de Tamarugal National Reserve.

Seeking to address concerns about how its use of water in this protected desert landscape would affect the environment, SQM stated on its website that: "Under the Pampa Hermosa project, SQM [has developed] an environmental monitoring plan that has a set of environmental variables that establish that the project activities are in accordance with the definitions in the environmental assessment".

According to an article published by the news service Pulse in June, SQM’s Pampa Hermosa project is the subject of a complaint by the Regional Council of Tarapaca, filed with the Chilean Superintendent of Environment, about potential damage caused by its extraction of water for iodine production in the Salar de Llamara.

The report states that the complaint expresses concern that the project could impact water quality at the salar.

A source familiar with SQM’s plans for Pampa Hermosa told IM that the company is regularly following up of its environmental commitments. "Most of the points included in [the Tarapaca Council] claim have already been covered by the environmental authorities in the observations [of] our regular follow up reports. They have all been properly managed by SQM," the source said.

However, another industry observer suggested to IM that SQM was facing further tough questions about its water use policy and that its confidence in its ability to achieve its plans to increase iodine production could be misleading, given the tight control over water rights in the region.

SQM is also subject to a tax investigation and was forced to oust its CEO, Julio Ponce, earlier this year.