Preparing the soil. Recommendation and investment thesis

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1 SQM-B Target price: CLP 32,300 Recommendation: Hold Risk: Medium June 21 st, 2011 Sector: Mining Update report Analyst: Camila Pindar Preparing the soil Recommendation and investment thesis SQM is the worldwide largest producer of specialty plant nutrition, iodine and lithium. One of its strengths is the integrated production and distribution. Its main sources of raw material are the caliche deposits in the Atacama Desert and brines of the Salar de Atacama. The first s one contain the largest deposits of nitrates and iodine in the world. We have updated our 2011 year-end target price for SQM-B, reaching a price of CLP 32,300 with a Hold recommendation and Medium Risk. The new price includes all the investments that the company is accomplishing in order to increase its potash and specialty plant nutrition (SPN) production mainly. The factors underlying our recommendation are the sector s good perspective, the strong investment plan that the company is carrying out and access to low production costs. It is worth to mention that, while SQM is the largest worldwide lithium producer -with a 26% market share as of December it is facing growing interest from new competitors since the demand for this ore is expected to increase. Assumptions We have projected a long term price for potash of 520 USD/ton. The price of this product is the main driver of the company and influences both the direct sales of this fertilizer and products that use it as a raw material. Investments SQM is carrying out a USD 750 million investment plan for the periods. During 2011, USD 500 million will be invested and USD 250 million in This plan is focused to increase potash and fertilizers production. We estimate that both potash and fertilizers production will increase around 33% as of the beginning of Valuation Based on the weighted average of prices suggested by the DCF and the EV / EBITDA multiple, we obtained a CLP 32,300 per share target price for 2011 year-end. This means a 13.1% upside compared to the current stock market price, and adding the 2011 dividend yield it reaches a 14.6% total return. This is in line with the expected return for the IPSA of 16.6%, so our recommendation is to Hold. The associated risk is Medium (Beta 0.92).

2 Target Price: 32,300 Recommendation Hold Sector Mining Date 20-Jun-11 Price (CLP/share) 28,556 Shareholders: Price YtD 7.6% Calichera + PCS (32% each) 64% Shares Outstanding (mn) 263 IPSA YtD -6.0% Float 36% Market Cap (USDmn) 15, week range (CLP) ADTV (USD mn) 43.2 Shares / ADR 1 Market price Gross Margin Breakdown 1Q11 Valuation e 2012e Dic-08 SQM/B IPSA Jul-09 Feb-10 Sep-10 Abr-11 Description Strengths Weaknesses Largest integrated producer of potassium nitrate, iodine and lithium. Lider in its three main business. Strong Investment (USD 750 mn.) plan for the period w ith a special focus in potash production. 85% of sales is done abroad. SPN 29% Potash 29% Low cost and flexible product. processes give SQM advantages over its competitors. Option of quick change in its strategy. High potential application for its products. New Lithium applications in electric pow ered vehicles batteries and industrial nitrates in solar pow er plants are opening new markets. EPS (USD) P/E (x) EV / EBITDA (x) P/BV (x) Div. Yield (%) 1.2% 1.5% 1.9% ROA 11.3% 15.2% 15.3% ROE 23.5% 29.7% 27.3% EVA 11.5% 12.1% 16.7% Exposure to Potash prices. This prices drive Potash revenues and revenues of products that use Potash as a raw material. Attractive new applications of its products could encourage the entry of new players in the market w ith potential effects in sales volumes and prices. Higher Lithium competition Year e 2012e 2013e 2014e Operating Data Balance (USD mn.) March 11 Volumes (Th. MT) Cash and equivalents 564 Potash+SOP 1,273 1,397 1,570 1,668 1,828 Current assets 1,756 SPN Fixed assets 1,729 Lithium Total assets 3,484 Iodine Current liabilities 487 ICh Long term liabilities 1,216 Income Statement (USD mn.) Equity 1,732 Revenues 1,830 2,211 2,348 2,497 2,618 Debt March 11 Var (%) 20.8% 6.2% 6.3% 4.9% Total debt (USD mm) 1,259 Operating Result Debt / Equity (x) 0.7 EBITDA ,040 1,087 1,136 EBITDA / Interest (x) 19.9 Var (%) 42.0% 5.9% 4.5% 4.6% Net financial debt / EBITDA (x) 0.9 Net Financial Expenses (35) (59) (56) (56) (38) Peers (2011) EV / Net Income P/E EBITDA Var (%) 52.7% 6.8% 5.6% 5.7% PCS Margins Mosaic Operating margin (%) 29.9% 37.6% 37.5% 37.0% 37.1% Agrium EBITDA margin (%) 37.8% 44.4% 44.3% 43.5% 43.4% Silvinit 10.6 n.a. Neto income margin (%) 20.9% 26.4% 26.6% 26.4% 26.6% Uralkali SQM-B Preparing the soil Camila Pindar June, Lithium 9% Iodine 25% Indust. Chem. 8%

3 Update Potassium Chloride We updated our 2011 year-end target price, obtaining a price of CLP 32,300, Hold recommendation and medium risk. The new price includes investments that the company is accomplishing in order to expand its production of potassium chloride, potassium sulfate and specialty fertilizers, mainly. After Uralkali and Silvinit -two major Russian manufacturers of potassium- merged creating the largest producer of potassium in the world, the potash industry will be more consolidated, giving stability to this mineral price. In addition, during 2010 potash demand was positively influenced by increased consumption by the largest buyers: China, India and Brazil, which normalized inventory levels. Lithium It is noteworthy that, while SQM is the largest worldwide lithium producer -with a 26% market share as of December it is facing growing interest from new competitors since the demand for this ore is expected to increase. One of these competitors is the Pan American Lithium Canadian company that owns mineral rights in nine salt lakes in the region of Atacama, Chile, and through an agreement with Garesta Company would buy the rights of three other properties in Salar de Pedernales Salar Maricunga and Llanta, for future exploration. Another competitor is Li3 Energy, American firm that signed an agreement with South Korea's Posco, and that recently acquired 60% of Maricunga Project; 1,500 hectares located in the salt of the same name in the Atacama region, Chile, and would own 1.2 million tons of lithium. The most important competitor that would also be looking into this business is Mitsubishi, which currently acquires this product from SQM to supply its car plants, and would be willing to find its own source of supply in Chile. Bolivia, on the other hand, would focus part of its public investment to iron ore, steel and lithium since it has one of the largest proven lithium reserves of the world. Chile considers that lithium is a non-target mineral for concessions, because it is a strategic military reserve. Thus, SQM has seen frustrated its intention to extend the concession currently held which dates from 1993 and expires in Hence, it looks with particular interest the opportunity to participate in future lithium tenders, since it would ensure continuity of its production. Investments The investment plan that the company is accomplishing reaches USD 750 million for the period USD 500 million would be invested during 2011 and USD 250 million during This plan has as its main focus in the increasing of potash and SPN production. Potash production would increase from 1.5 million tons in late 2010 to 1.7 million tons by the end of 2011 and 2.0 million tons in early SPN production would increase from 850 thousand tons by the end of 2010 to 1,130 thousand tons in early SQM-B Preparing the soil Camila Pindar June,

4 Valuation To determine a target price for SQM we used the DCF and the EV / Ebitda multiple methods. The Price / Earnings multiple is currently at a too high level, thus we did not use it to valorize SQM / B. Assumptions For potassium, we projected a price of 480 USD / ton for the end of 2011, of 500 USD / ton for 2012 and 520 USD / ton from the year 2013 onwards. The price of this product is the main driver of the company and influences both, direct sales of this fertilizer as well as the price of the products that use it as a raw material. Potassium Chloride We have incorporated in our model an increase in potassium production reaching 2.0 million tons in early 2013 from 1.5 million tons in December Specialty Plan Nutrition For this business line we expect higher volume sales due to markets recovery, rising prices of agricultural products and water shortages. These lead farmers to increase fertilizer demand in order to increase crop yields and take advantage of the better prices. For potassium nitrate, we have incorporated in our model the production of the plant at Coya Sur that began its operations during April It has a production capacity of 300 thousand tons per year. Lithium and Iodine According to the company, the total demand for lithium would reach 250 thousand metric tons by 2020 and 430 thousand by 2030, from the current 125 thousand, mainly driven by increased use of this mineral in electric car batteries. However, given the growing interest of new competitors to produce and commercialize these mineral, we have not included significant changes of lithium production in our projections. For 2011 we expect 38 thousand tons in sales. Iodine, used primarily in the technology, food and medical care industries, would reach sales for 12.5 thousand tons in late Industrial Chemicals In this business line we expect a growing demand for industrial nitrates for energy power plants which, we believe, will promote the consumption of these products. Free cash flow Our model incorporates flows up to 2020 and then a perpetuity growing 2.5% per year. We used a 5.8% WACC (Figure 1) obtaining a CLP 31,242 per share price (Figure 2) for 2011 year-end. SQM-B Preparing the soil Camila Pindar June,

5 Figure 1 Assets Discount Rate Figure 2 Sensibilization Treasury10 3.0% Perpetuity Growth Price Risk 5.5% WACC 2.0% 2.5% 3.0% USA Inflation Rate 2.0% 4.3% 41,769 51,415 68, % 35,566 41,769 51,415 Debt Rate 6.2% 5.3% 31,242 35,566 41,769 Debt /Assets % 28,056 31,242 35,566 Beta % 25,610 28,056 31,242 Country Risk % 23,674 25,610 28,056 Tax Rate 17% 7.3% 22,103 23,674 25, % 20,802 22,103 23,674 Equity Rate (nominal) 9.4% 8.3% 19,708 20,802 22,103 Assets Rate (nominal) 7.9% 8.8% 20,085 21,310 22,775 WACC 5.8% 9.3% 20,085 21,310 22,775 EV / Ebitda To obtain a price, we are using a 20x EV/Ebitda multiple, which is above the last three years average, of 17x. Currently the company is trading above its average (2010 EV/Ebitda of 23.9x) as a consequence of the strong investment plan that it is carrying out. That is the reason why we believe that this multiple would stay above the average during this year to converge towards a level consistent with the long run stability during the next years. The price suggested by this method is CLP 33,978 for 2011 year-end (Figure 3) Figure 3: EV/EBITDA Multiple Multiple Target price 2011e 2012e 2013e ,396 25,200 26, ,160 27,069 28, ,924 28,938 30, ,687 30,806 32, ,451 32,675 34, ,215 34,543 36, ,978 36,412 38, ,742 38,280 40, ,506 40,149 42, ,269 42,017 44, ,033 43,886 46, ,796 45,754 48,351 SQM-B Preparing the soil Camila Pindar June,

6 Target price To establish a target price we weighted 60% the DCF price and 40% the EV/Ebitda price (Figure 4). Considering the weighted average, we established a CLP 32,300 per share target price for 2011 year-end. This means a 13.1% upside compared to the current stock market price and adding the 2011 dividend yield it reaches a 14.6% total return. This is in line with the expected return for the IPSA of 16.6%, so our recommendation is to Hold. We believe that this share has Medium risk based on the 0.92 Beta. Target price Method Price Weight DCF WACC 5,8%; 2,5% 31,242 60% EV/Ebitda ,978 40% Average 32,300 SQM-B Preparing the soil Camila Pindar June,

7 Apendix A: Operating Data Sales Volumes (th. tons) e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Specialty Plant Nutrition ,062 1,065 1,069 1,142 1,146 Iodine and Iodine derivatives Lithium and Lithium derivatives Industrial Chemicals Potassium Chloride (Potash) 690 1,273 1,397 1,570 1,668 1,828 1,849 1,895 1,917 1,940 2,037 2,061 1,555 2,334 2,679 2,850 3,001 3,175 3,208 3,333 3,368 3,404 3,583 3,622 Revenues (USD million) e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Specialty Plant Nutrition Iodine and Iodine derivatives Lithium and Lithium derivatives Industrial Chemicals Potassium Chloride (Potash) ,009 1,059 1,072 Other Commodity Fertilizer ,439 1,640 2,037 2,416 2,504 2,617 2,772 2,773 2,774 2,775 2,776 2,777 Costs (USD million) e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Specialty Plant Nutrition Iodine and Iodine derivatives Lithium and Lithium derivatives Industrial Chemicals Potassium Chloride (Potash) ,123-1,232-1,311-1,411-1,480-1,499-1,574-1,610-1,626-1,721-1,760 Prices (USD) e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Specialty Plant Nutrition Iodine and Iodine derivatives 26,514 26,625 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 Lithium and Lithium derivatives 5,531 4,658 3,650 3,650 3,650 3,650 3,650 3,650 3,650 3,650 3,650 3,650 Industrial Chemicals Potassium Chloride (Potash) SQM-B Preparing the soil Camila Pindar June,

8 Appendix B: SQM Financial statements Income statement (USD millon) 2, e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Revenues 1,830 2,211 2,348 2,497 2,618 2,655 2,746 2,774 2,802 2,920 2,951 Costs (1,204) (1,285) (1,364) (1,464) (1,533) (1,552) (1,627) (1,663) (1,679) (1,774) (1,812) Operating income ,000 1,018 1,009 Ebitda ,040 1,087 1,136 1,155 1,169 1,163 1,174 1,191 1,182 Net financial expenses (22) (46) (45) (42) (42) (24) (22) (9) (8) (6) (8) Non operating result (54) (61) (58) (54) (51) (33) (30) (17) (10) (9) (10) Earnings before taxes , Taxes; Min. Int. (101) (171) (182) (193) (204) (211) (215) (216) (219) (224) (221) Net income Cash flow statement (USD mn) 2, e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Ebitda ,040 1,087 1,136 1,155 1,169 1,163 1,174 1,191 1,182 CAPEX (336) (500) (250) (175) (175) (175) (175) (175) (175) (175) (175) Taxes (106) (179) (191) (202) (213) (221) (224) (226) (230) (234) (232) Change in working capital 82 (194) (65) (71) (58) (18) (43) (14) (13) (56) (15) Free cash flow Net financial expenses (22) (46) (45) (42) (42) (24) (22) (9) (8) (6) (8) Debt amortization (633) (187) (103) (16) (235) (156) (212) (16) (16) (16) (262) Dividends net (176) (241) (302) (321) (339) (355) (364) (368) (372) (379) (380) New debt (150) Financing activities Cash Flow (266) (224) (450) (379) (765) (535) (598) (393) (396) (401) (650) Total Cash Flow 65 (116) (75) End of period Cash ,064 1,420 1,780 2,105 2,216 Balance sheet (USD million) 2, e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Cash and equivalents ,064 1,420 1,780 2,105 2,216 Current assets 1,695 1,824 1,972 2,304 2,288 2,506 2,677 3,041 3,414 3,802 3,929 Non Current assets 1,678 2,008 2,099 2,111 2,120 2,126 2,130 2,133 2,135 2,136 2,138 Total assets 3,373 3,832 4,071 4,415 4,408 4,632 4,807 5,173 5,548 5,939 6,066 Current Liabilities Long term Liabilities 1,225 1,350 1,334 1, Equity + Min Int. 1,623 1,962 2,284 2,622 2,979 3,347 3,717 4,086 4,465 4,851 5,227 Total Liabilities 3,373 3,832 4,071 4,415 4,408 4,632 4,807 5,173 5,548 5,939 6,066 SQM-B Preparing the soil Camila Pindar June,

9 Glossary Term Definition / Translation Calculation EBITDA Earnings Before Interests, Taxes, Depreciation and Amortization Operational Income plus Depreciation and Amortization EBITDAR Earnings Before Interests, Taxes, Depreciation, Amortization and Rents Operational Income plus Depreciation and Amortization plus rent of fixed assets. It is used the at transport industries to reverse the rent of airplanes or ships. EV Enterprise Value Market capitalization plus Net Financial Debt plus EV/EBITDA Valuation multiple. While greater it is, more expensive it is the stock Minority Interest EV divided by Ebitda FCF Free Cash Flow Operational Income plus Depreciation and Amortization minus tax minus capital expenditures plus (minus) working capital variation. Free-float Percentage of stocks that can be freely traded in the market Percentage of stock that does not belong to controller s shareholders. Margin Operational Ebitda Net Percentage of sales Operational Income / Revenue Ebitda / Revenue Net Income / Revenue P/E Price / Earnings Market Price divided by EPS P/B Price to Book value ratio Market price divided by the accounting value of the stock. Dividend Yield The return in terms of dividends of investing in equities Dividends distributed in a year divided by the market price. FCF yield Free Cash Flow Return. FCF / Market Price ROA Return on Assets Net Income / Total Assets ROE Return on Equity Net Income / Accounting capitalization EPS Earnings Per Share Net Income / Shares outstanding YtD Year to Date Percentage variation year to date x Times Stocks recommendations: these are established according to the stock yield relative to the IPSA. We define a yield to be In line with the IPSA when it is within a range whose scope is equivalent to a third of the variation expected for the index, with a minimum of 5%. Once that SQM-B Preparing the soil Camila Pindar June,

10 is settled, we recommend Hold, when we expect the share to have a yield in line with the IPSA; Buy, when the yield expected for the share is above to that expected for the IPSA; and Sell, when the yield expected for the share is below to that expected for the IPSA. CorpResearch Álvaro Donoso CorpResearch Director adonoso@corpgroup.cl Economic Research Sebastián Cerda Economic Studies Director scerda@corpgroup.cl Nicolas Birkner Economic Analyst nicolas.birkner@corpgroup.cl Andrés Vicencio Economic Analyst andres.vicencio@corpgroup.cl Equities Research Cristina Acle Head of Equities Research. cristina.acle@corpgroup.cl Camila Pindar Senior analyst. Sector: Natural Resources (Forestry & Mining) camila.pindar@corpgroup.cl Jorge Ríos Analyst. Sectors: Banks, Transport and Construction jorge.rios@corpgroup.cl Carlos Ferruz Analyst. Sector: Energy carlos.ferruz@corpgroup.cl María José Ortiz Analyst. maria. ortiz@corpgroup.cl Rosario Norte 660 Floor 17, Las Condes, Santiago, Chile. Telephone: (562) Bloomberg: CORG <GO> SQM-B Preparing the soil Camila Pindar June,