UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
Commission file number 33-65728 / 33-99188 / 333 -10068
SOCIEDAD QUIMICA Y MINERA DE CHILE S.A. (Exact name of registrant as specified in its charter)
CHEMICAL AND MINING COMPANY OF CHILE INC.(Translation of registrant’s name into English)
CHILE (Jurisdiction of incorporation or organization)
El Trovador 4285, Piso 6, Santiago, Chile (562) 425-2000 (Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Securities registered or to be registered pursuant to Section 12(g) of the Act. NONE
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. NONE
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark which financial statement item the registrant has elected to follow.
ii
Back to Contents
PRESENTATION OF INFORMATION
In this Annual Report on Form 20-F, unless the context requires otherwise, all references to “we”, “us”, “Company” or “SQM”are to Sociedad Química y Minera de Chile S.A., an open stock corporation (sociedad anónima abierta) organized under the laws of the Republic of Chile, and its consolidated subsidiaries.
All references to “$,”“US$,” “U.S. dollars” and “dollars” are to United States dollars, references to “pesos” or “Ch$” are to Chilean pesos, and references to “UF” are to Unidades de Fomento. The UF is an inflation-indexed, peso-denominated unit that is linked to, and adjusted daily to reflect changes in, the previous month’s Chilean consumer price index. As of June 15, 2005, UF 1.00 was equivalent to US$ 29.63 and Ch$ 17,463.
The Republic of Chile is governed by a democratic government, organized in twelve regions plus the Metropolitan Region (surrounding and including Santiago, the capital of Chile). Our production operations are concentrated in northern Chile, specifically in the First Region, also named Tarapacá Region, and in the Second Region, also named Antofagasta Region.
Our fiscal year ends on December 31.
We use the metric system of weights and measures in calculating our operating and other data. The United States equivalent units of the most common metric units used by us are as shown below:
We are not aware of any independent, authoritative source of information regarding sizes, growth rates or market shares for most of our markets. Accordingly, the market size, market growth rate and market share estimates contained herein have been developed by us using internal and external sources and reflect our best current estimates. These estimates have not been confirmed by independent sources.
Percentages and certain amounts contained herein have been rounded for ease of presentation. Any discrepancies in any figure between totals and the sums of the amounts presented are due to rounding.
GLOSSARY
“assay values ” Chemical result or mineral component amount that contains the sample.
“average global metallurgical recoveries” Percentage that measures the metallurgical treatment effectiveness based on the quantitative relationship between the initial product contained in the mine-extracted material and the final product produced in the plant.
“average mining exploitation factor” Index or ratio that measures the mineral exploitation effectiveness (defined below), based on the quantitative relationship between (in-situ mineral minus exploitation losses) / in-situ mineral.
“Corfo” Corporation of Promotion of Production (Corporación de Fomento de la Producción), formed in 1939, a national organization in charge of promoting and facilitating Chile’s manufacturing productivity and commercial development.
“cut-off grade ” The minimal assay value or chemical amount of some mineral component above which results in economical exploitability.
“dilution” Loss of mineral grade because of contamination with barren material (or waste) incorporated in some exploited ore mineral.
“exploitation losses” Amounts of ore mineral that have not been extracted in accordanc e with exploitation designs.
iii
“fertigation” The processing of plant nutrients using an irrigation system.
“geostatistical analysis” Statistical tools applied to mining planning, geology and geochemical data that allow estimation of averages, grades and quantities of mineral resources and reserves.
“heap leaching pads” Padding or filling of rocks from which will be extracted the soluble mineral by irrigation with water.
“horizontal layering” Rock mass (stratiform seam) with generally uniform thickness that conform to the sedimentary fields (mineralized and horizontal rock in these cases).
“hypothetical resources” Mineral resources that have limited geochemical reconnaissance, based mainly in geological data and samples assays values spaced between 500–1000 meters.
“Indicated Mineral Resource” See “Resources —Indicated Mineral Resource.”
“Inferred Mineral Resource” See “Resources—Inferred Mineral Resource.”
“industrial crops” Refers to crops that require processing after harvest in order to be ready for consumption or sale. Tobacco, tea and seed crops are examples of industrial crops.
“LIBOR” London Inter Bank Offer Rate.
“limited reconnaissance” Low or limited level of geological knowledge.
“ Measured Mineral Resource ” See “Resources—Measured Mineral Resource.”
“metallurgical treatment” A set of chemical and physical processes applied to rocks to extract their useful minerals (or metals).
“old waste ore deposits” Ore deposits that have been previously mined but not entirely depleted because of the low-grade quality of the ore the mine yields.
“ore depth” Depth of the mineral that may be economically exploited.
“ore type ” Main mineral having economic value contained in the caliche ore (sodium nitrate or iodine).
“ore” A mineral or rock from which a substance having economic value may be extracted.
“Probable Mineral Reserve” See “Reserves—Probable Mineral Reserve.”
“Proved Mineral Reserve ” See “Reserves—Proved Mineral Reserve.”
“Reserves—Probable Mineral Reserve”* The economically mineable part of an Indicated Mineral Resource and, in some circumstances, Measured Mineral Resource. It includes diluting of materials and allowances for losses which may occur when the material is mined. Appropriate assessments, which may include feasibility studies, have been carried out and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. These assessments demonstrate at the time of reporting that extraction is reasonably justified. A Probable Mineral Reserve has a lower level of confidence than a Proved Mineral Reserve.
“Reserves—Proved Mineral Reserve ”* The economically mineable part of a Measured Mineral Resource. It includes diluting materials and allowances for losses which may occur when the material is mined. Appropriate assessments, which may include feasibility studies, have been carried out and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. These assessments demonstrate at the time of reporting that extraction is reasonably justified.
“Resources—Indicated Mineral Resource”* That part of a Mineral Resource for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a reasonable level of confidence. It is based on exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings, and drill holes. The locations are too widely or inappropriately spaced to confirm geological continuity and/or grade continuity but are spaced closely enough for continuity to be assumed. An Indicated Mineral Resource has a lower level of confidence than that applying to a Measured Mineral Resource, but has a higher level of confidence than that applying to an Inferred Mineral Resource.
iv
A deposit may be classified as an Indicated Mineral Resource when the nature, quality, amount and distribution of data are such as to allow the Competent Person determining the Mineral Resource to confidently interpret the geological framework and to assume continuity of mineralization. Confidence in the estimate is sufficient to allow the appropriate application of technical and economic parameters and to enable an evaluation of economic viability.
“Resources—Inferred Mineral Resource ”* Is that part of a Mineral Resource for which tonnage, grade and mineral content can be estimated with a low level of confidence. It is inferred from geological evidence and assumed but not verified geological and/or grade continuity. It is based on information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes which is of limited or uncertain quality and/or reliability. An Inferred Mineral Resource has a lower level of confidence than that applying to an Indicated Mineral Resource.
“Resources—Measured Mineral Resource” The part of a Mineral Resource for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a high level of confidence. It is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings, and drill holes. The locations are spaced closely enough to confirm geological and/or grade continuity.
A deposit may be classified as a Measured Mineral Resource when the nature, quality, amount and distribution of data are such as to leave no reasonable doubt, in the opinion of the Competent Person determining the Mineral Resource, that the tonnage and grade of the deposit can be estimated within close limits and that any variation from the estimate would not significantly affect potential economic viability. This category requires a high level of confidence in, and understanding of, the geology and controls of the mineral deposit. Confidence in the estimate is sufficient to allow the appropriate application of technical and economic parameters and to enable an evaluation of economic viability.
“waste” Rock or mineral which is not economical for metallurgical treatment.
“waste-to-ore ratio” Relation or ratio between waste/ore.
“weighted average age” In this Annual Report means the sum of the product of the age of each fixed asset at a given facility and its current gross book value as of December 31, 2004 divided by the total gross book value of the Company’s fixed assets at such fac ility as of December 31, 2004.
* The definitions we use for resources and reserves are based on those provided by the “Instituto de Ingenieros de Minas de Chile” ( Chilean Institute of Mining Engineers).
SQM will provide without charge to each person to whom this Annual Report is delivered, on the written or oral request of any such person, a copy of any or all of the documents incorporated herein by reference (other than exhibits, unless such exhibits are specifically incorporated by reference in such documents). Written requests for such copies should be directed to Sociedad Química y Minera de Chile S.A., El Trovador 4285, Piso 6, Santiago, Chile, Attention: Investor Relations Department. Requests may also be made by telephone (562-425-2000), facsimile (562-425-2493) and e-mail (ir@sqm.cl).
v
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 20-F contains statements that are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear throughout this Form 20-F and include statements regarding the intent, belief or current expectations of the Company and its management, including but not limited to any statements concerning:
trends affecting the Company’s financial condition or results of operations;
Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements included in this Form 20-F, including, without limitation, the information under Item 4. Information on the Company and Item 5. Operating and Financial Review and Prospects. Factors that could cause actual results to differ materially include, but are not limited to:
vi
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
The following table presents selected consolidated financial information for SQM and one or more of its subsidiaries, as applicable, for each of the periods indicated. This information should be read in conjunction with, and is qualified in its entirety by reference to, the Audited Consolidated Financial Statements of the Company for each year in the five-year period ended December 31, 2004. The Company’s Consolidated Financial Statements are prepared in accordance with Chilean GAAP, which differs in certain material respects from U.S. GAAP. Note 27 to the Consolidated Financial Statements for December 31, 2004 provides a description of the principal differences between Chilean GAAP and U.S. GAAP and a reconciliation to U.S. GAAP of net income and total shareholders’ equity as of and for the years ended December 31, 2004, 2003 and 2002.
1
EXCHANGE RATES
Prior to 1989, Chilean law authorized the purchase and sale of foreign exchange only in those cases explicitly authorized by the Central Bank of Chile (the “Central Bank”). The Ley Orgánica Constitucional del Banco Central de Chile No. 18,840, the “Central Bank Law,” enacted in 1989, liberalized the rules that govern the ability to buy and sell foreign exchange.
The Central Bank Law now provides that the Central Bank may determine that certain purchases and sales of foreign exchange specified by law must be carried out exclusively in the Formal Exchange Market. The Formal Exchange Market is formed by the banks and other entities authorized by the Central Bank. All payments and distributions with respect to the New ADSs described herein must be transacted exclusively in the Formal Exchange Market.
For the purposes of the operation of the Formal Exchange Market, the Central Bank sets a reference exchange rate (dólar acuerdo) (the “Reference Exchange Rate”). The Reference Exchange Rate is determined daily by the Central Bank, taking into account internal and external inflation and is adjusted daily to reflect variation in parities between the Chilean peso and each of the U.S. dollar, the Japanese yen and the Euro. The purpose of the Reference Exchange Rate is to establish the range of spot market exchange rates at which transactions may occur, while the Observed Exchange Rate is the average exchange rate at which transactions are actually carried out in the Formal Exchange Market on a particular day. Authorized transactions by banks are generally conducted within a certain band above or below the Reference Exchange Rate. In January 1992, the Central Bank reduced the Reference Exchange Rate by 5% and widened the band for transactions in the Formal Exchange Market from 5% to 10%. In November 1994, the Central Bank reduced the Reference Exchange Rate by approximately 10%. In November 1995, the Central Bank reduced the Reference Exchange Rate by approximately 2%. In January 1997, the Central Bank widened the band for transactions in the Formal Exchange Market to 12.5%. In June 1998, the Central Bank narrowed the band for transactions in the Formal Exchange Market to 3.5% in the case of purchases and 2% in the case of sales. In September 1998, the Central Bank widened the band for transactions in the Formal Exchange Market to 3.5% in the case of sales and introduced a formula on which the band increases daily by a fixed amount. In December 1998, the Central Bank widened the band for transactions in the Formal Exchange Market to 8% and maintained the formula for the expansion of the band introduced in September 1998. In January 1999, the Central Bank replaced the German mark with the Euro in its formula to determine the Reference Exchange Rate. In September 1999, the Central Bank decided to suspend its formal commitment to the band, but agreed to intervene in the market by buying or selling foreign exchange on the Formal Exchange Market only in exceptional cases.
2
The Central Bank is authorized to carry out its transactions at the Reference Exchange Rate and at the spot market rate. It generally carries out its transactions at the spot market rate. However, when commercial banks request to buy dollars from the Central Bank or request to sell dollars to the Central Bank, the Central Bank is authorized to apply an increase in the rate with respect to the Reference Exchange Rate for its sales or a decrease in the rate with respect to the Reference Exchange Rate. Authorized transactions by banks are generally transacted at the spot market rate.
Purchases and sales of foreign exchange that may be carried out outside the Formal Exchange Market can be carried out in the Informal Exchange Market, which is a recognized currency market in Chile. The Informal Exchange Market and its predecessor, the “Unofficial Market,” reflect the supply and demand for foreign currency. There are no limits imposed on the extent to which the rate of exchange in the Informal Exchange Market can fluctuate above or below the Observed Exchange Rate. Since 1992, the difference between the Formal Exchange Market and the Informal Exchange Market has narrowed, particularly as a result of measures taken to liberalize the Formal Exchange Market during 1996 and 1997.
The following table sets forth, for the periods and dates indicated, certain information concerning the Observed Exchange Rate reported by the Central Bank. No representation is made that the Chilean peso or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Chilean pesos, as the case may be, at the rates indicated or at any other rate. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos.
On June 15, 2005, the Observed Exchange Rate was Ch$589.38 = US$1.00.
3.B. Capitalization And Indebtedness
Not applicable.
3.C. Reasons For The Offer And Use Of Proceeds
3
3.D. Risk Factors
Our operations are subject to certain risk factors that may affect SQM’s financial condition or results of operations. In addition to other information contained in this Annual Report on Form 20-F, you should consider carefully the risks described below. These risks are not the only ones we face. Additional risks not currently known to us or that we currently believe not significant may also affect our business operations. Our business, financial condition or results of operations could be materially affected by any of these risks.
Risks Related to Our Business
Our sales to emerging markets expose us to risks related to economic conditions and trends in those countries
We sell our products in more than 100 countries around the world. In 2004, approximately 50% of our sales were made to emerging market countries in Latin America (including Chile) and Asia, and we expect to expand our sales in these and other emerging markets in the future. The results and prospects for our operations in these countries and other countries in which the Company establishes operations can be expected to be dependent, in part, on the general level of political stability and economic activity and policies in those countries. Although certain countries in Latin America and other emerging markets have experienced substantial improvement in their economies in the past decade, which has resulted in increased political stability, overall increased economic growth, lower inflation rates and revitalized economies, during the past five years these areas have been affected by a series of global and/or regional economic downturns. There can be no assurance that such progress, to the extent achieved, can be maintained or that further progress will be made. Future developments in the political systems or economies of these countries or the implementation of future governmental policies in those countries, including the imposition of withholding and other taxes or restrictions on the payment of dividends or repatriation of capital or the imposition of new environmental regulations or price controls, could have a material adverse effect on the Company’s sales or operations in those countries.
Volatility of world fertilizer and chemical prices and changes in production capacities could impact our operating margins
The prices of our products are determined principally by world prices, which in some cases have been subject to substantial volatility in recent years. World fertilizer and chemical prices vary depending upon the relationship between supply and demand at any given time. Further, the supply of certain fertilizers or chemical products, including certain products produced by SQM, varies principally depending upon the production of the few major producers (including SQM) and their respective business strategies.
In particular, world iodine prices declined from approximately US$18.40 per kilogram for large purchases in early 1990 to less than US$8.00 per kilogram for large purchases in June 1994. The price increased to approximately US$18 in 1999, and subsequently it began to diminish, reaching approximately US$12.5 during early 2003. By late 2003 and during 2004 prices reversed the downward trend and began to increase. The average price for 2004 reached approximately US$14.5 per kilogram and it has continued to increase during the first half of 2005.
Similarly, the Company started production of lithium carbonate from the Salar de Atacama brines in October 1996 and started selling lithium carbonate commercially in January 1997. SQM’s entrance into the market created an oversupply of lithium carbonate, resulting in a drop in prices from over US$3,000 per ton before its entrance to less than US$2,000 per ton. Currently, prices are higher than US$3,000 per ton.
We expect that prices for the products we manufacture will continue to be influenced by similar supply and demand factors and the business strategies of major producers, some of which (including SQM) have increased or have the ability to increase their production. As a result, the prices of the Company’s products may be subject to substantial volatility. A substantial decline in the prices of one or more of our products could have a material adverse effect on our financial condition or results of operation.
Currency fluctuations may have a negative effect on our financial results
The Chilean peso has been subject to large devaluations in the past and may be subject to significant fluctuations in the future. Our Company transacts a significant portion of its business in U.S. dollars, and the U.S. dollar is the currency of the primary economic environment in which we operate. Nevertheless, as an international company operating in Chile andseveral other countries, we transact a portion of our business and have assets and liabilities in Chilean pesos and other non-dollar currencies. As a result, fluctuation in the exchange rate of such local currencies to the U.S. dollar may affect SQM’s financial condition and results of operations.
4
Sustained high raw materials prices, including energy, increase our production costs and cost of goods sold
We rely on certain raw materials, including all sources of energy (diesel, electricity and others), to manufacture our products. Purchases of raw materials that we do not produce constitute a significant part of our production costs (approximately 11.8% in 2004). To the extent we are unable to pass on increases in raw materials prices to our customers, our financial results could be reduced. See Item 4. Information on the Company—Raw Materials. Additionally, increases in ocean freight rates raise our cost to deliver products to offshore customers that purchase our products with freight costs included.
Our reserves estimates could significantly vary
The mining reserves estimates included in Item 4. Information on the Company—Property, Plants and Equipment are prepared by our own personnel using geological methods. Estimation methods involve numerous uncertainties as to the quantity and quality of the reserves, and these could change, up or down. A downward change in the quantity and/or quality of the reserves could affect future production and therefore impact the Company’s financial condition or results of operations.
Pending lawsuits could adversely impact us
We are currently involved in pending lawsuits and arbitrations involving commercial matters. Although we intend to defend our position vigorously, our defense of these actions may not be successful. Any judgment in or settlement of these lawsuits may have a material adverse effect on our financial condition or results of operations. See Item 8.A.7. Legal Proceedings and Note 21 to the Consolidated Financial Statements.
Furthermore, our strategy of being a world leader includes carrying out commercial and production alliances, joint ventures and acquisitions to improve our global competitive position. As these operations increase in complexity and are carried out in different jurisdictions, our Company might be subject to legal proceedings that, if settled against us, may have a significant impact in the Company’s financial condition or results of operations.
Our business is subject to many operational and other risks for which we may not be fully covered in the insurance policies
Our facilities located in Chile and abroad are insured against losses, damages or other risks, by insurance policies that are standard for the industry and that would reasonably be expected to be maintained by prudent and experienced persons engaged in a business or businesses similar to those of SQM. Nonetheless, we may be subject to certain catastrophic events, including fires, major equipment failures, natural disasters, accidents, terrorist acts, war, etc., that may not be fully included in the insurance policies, and that could affect our financial condition or results of operations.
The continuity of our natural gas supply is dependent on Argentinean authorities policy
As part of a cost reduction effort, our Company interconnected its facilities to a natural gas network. The natural gas, which originates in Argentina and is subject to a 10-year agreement, is used mainly for heat generation purposes at our industrial facilities. Due to energy shortages in Argentina, local authorities decided to restrict exports of natural gas to Chile in order to increase the supply to their domestic markets. Additionally, even though we have long-term price agreements related to natural gas, the Argentinean Government increased taxes to gas exports and there can be no assurance that they will not do it again in the future.
We suffered partial shortages during May and June 2004. Even though natural gas flows are recovering, we have adopted measures intended to mitigate the effect of any further decrease in the natural gas supply. Our diverse industrial equipment that uses natural gas may also operate on diesel and some of it — after certain investments — may also operate on fuel oil. Diesel’s purchase price is higher than the natural gas price while fuel oil price is lower than that of diesel and higher than the natural gas price.
5
The extent to which we incur increased costs as a result of decreases in the natural gas supply will depend on the volume of such a decrease and on the duration of the period during which natural gas supplies are restricted. Therefore, we cannot estimate the economic impact that additional natural gas supply reductions might have. However, sustained periods of increased natural gas costs could have an adverse effect on our results of operations. During 2004, purchases of natural gas represented approximately 1.4% of our total costs.
Decline in the supply of natural gas and increasing global oil prices could negatively affect our electricity contracts
As natural gas supply continues to be uncertain, as discussed above, and world oil prices continue to increase, we are faced with potential revisions to our long-term electricity supply agreements. We maintain contracts with two main utilities in Chile, Electroandina and Gener, and both have requested revision of the tariffs involved. They have also informed SQM that if we do not reach an agreement they will demand an arbitration proceeding. Electroandina has made a formal request for arbitration relating to the contracted tariffs. Arbitration proceedings have not commenced pending ongoing discussions between Electroandina and SQM.
Although we believe tariffs should not be modified, to the extent that contracts are in fact revised and modified we will suffer increased costs, thereby negatively affecting our results of operations. During 2004, purchases of electricity represented approximately 3.2% of our total costs.
We are exposed to labor strikes that could impact our production levels
Of our permanent employees in Chile, 74% are represented by 30 labor unions, which represent their members in collective bargaining negotiations with the Company. Accordingly, we are exposed to labor strikes that could impact our production levels. Should a strike occur and extend for a sustained period of time, we could be faced with increased costs and even disruption in our product flow that could have a material adverse effect on our financial condition or results of operations.
Water supply from the El Salvador and El Loa rivers could be affected by regulatory changes and/or natural problems
Even though we have not experienced significant difficulties obtaining the necessary water from the rivers to conduct our operations in María Elena, Pedro de Valdivia and Coya Sur, there can be no assurance that we will not face problems in the water supply that could affect our operations, negatively affecting our financial condition and results of operations.
Risks related to regulatory actions in Chile
As we are a Chilean-based company, we are exposed to Chilean political risks
The prospects and results of operations of the Company could be affected by changes in policies of the Chilean government, other political developments in or affecting Chile, and regulatory and legal changes or administrative practices of Chilean authorities, over which the Company has no control.
Changes in mining and water rights laws could affect our operating costs
We conduct our mining (including brine extraction) operations under exploitation and exploration concessions granted pursuant to judicial proceedings in accordance with provisions of the Chilean Constitution and the Constitutional Mining Law and related statutes. Exploitation concessions, which account for the majority of the mining rights held by SQM, including those applicable to all of our properties which are currently being mined, essentially grant a perpetual right to conduct mining operations in the areas covered by the concessions, provided that we pay annual concession fees. Exploration concessions permit us to explore for mineral resources on the land covered thereby for a specified period of time, and to subsequently request a corresponding exploitation concession. We also hold water rights obtained from the Chilean Water Authority for a supply of water from rivers and wells near our production facilities which is sufficient to meet current and anticipated operational requirements. We operate port facilities at Tocopilla, Chile, for the shipment of our products and delivery of certain raw materials, pursuant to concessions granted by Chilean regulatory authorities. These concessions are renewable provided that we use such facilities as authorized and pay annual concession fees.
6
The Chilean Congress recently approved a proposal that modifies Chilean laws relating to water rights (the “Water Code”). On the basis of the proposal alone, the changes to the Water Code include establishing annual fee payments for owners of water rights who do not use the water associated with them. The fee contemplated by the proposal, does not affect the holder’s right to the respective aquifers. The criteria used to determine what rights or what part of such rights would be subject to this annual fee relate to whether the resource is consumed or re-injected into the stream after its use (defined as the water right’s “consumptive condition”), whether the use of the resource is sporadic or permanent (frequency of use) and the geographical location of the intake points relative to an area’s overall water supply.
On May 18, 2005, the Chilean Congress approved Law N°20.026, also known as the “Royalty II Law,” which established a royalty to be applied to mining companies operating in Chile with revenues higher than or equal to the equivalent of 50,000 metric tons of copper. This new mining royalty, which will be applicable as of 2006, consists in 5% of the taxable operating income, excluding revenues and costs related to activities not directly related to the resource exploited, such as our trading activity.
The total amount to be paid for 2006 will depend on the taxable operating income (related to the resource exploited) which differs from the consolidated operating income. A detailed interpretation from the Chilean Internal Revenue Service is expected in order to better assess the impact of this royalty.
Environmental laws and regulations could expose us to higher costs, liabilities, claims and failure to meet current and future production targets
Our operations in Chile are subject to a variety of national and local regulations relating to environmental protection. The main environmental laws in Chile are the Health Code and Law No. 19,300 and its related rules and regulations. Except for particulate matter levels exceeding permissible levels in María Elena facilities (see Item 4. Information on the Company—Environmental Regulations) we are currently in compliance in all material respects with applicable environmental regulations in Chile.
We continuously monitor the impact of our operations on the environment and have, from time to time, made modifications to our facilities to minimize any adverse impact. We anticipate that additional laws and regulations will be enacted over time with respect to environmental matters. While we believe that our company will continue to be in compliance with all applicable environmental regulations of which we are aware, there is a risk that future legislative or regulatory developments will impose material restrictions on SQM.
Our worldwide operations are subject to environmental regulations. Since laws and regulations in the different jurisdictions in which we operate may change, we cannot guarantee that future laws, or changes to existing ones, will not materially impact SQM’s financial condition or results of operations.
In connection with our current investments at the Atacama Salar we have submitted an Environmental Impact Assessment study. The success of these investments is dependent on the approval of said submission by the pertinent governmental authorities. Failure to obtain approval of this submission could seriously impair our ability to maintain our current production levels or increase production capacities in the near future, thus having a material adverse effect in our financial condition or results of operations.
Additionally, in connection with our current investments in the nitrate and iodine operations in María Elena, we have submitted several Environmental Impact Assessment studies. The success of these investments is dependent on the approval of said submissions by the pertinent governmental authorities. Failure to obtain approval for one or more of these submissions could seriously impair our ability to maintain our current production levels or increase production capacities in the near future, thus having a material adverse effect on our financial condition or results of operations.
Furthermore, the future development of our company depends on our ability to sustain future production levels, which require additional investments and the submission of the corresponding Environmental Impact Assessment studies. Again, if we fail to obtain approval, we will be seriously impaired to maintain production at specified levels, thus having a material adverse effect on our financial condition or results of operations.
7
Risks related to our financial activities
Interest rate fluctuations may have a material impact on our financial results
We maintain short and long-term debt priced at Libor, plus a spread. As we do not have derivative instruments to hedge the Libor, we are subject to fluctuations in this rate. Even though this risk is limited, as of May 31, 2005, we had 33% of our long-term financial debt priced at Libor, and therefore significant increases in the rate could impact our financial condition.
Risks related to our shares and to our ADSs
The price of our ADSs and the U.S. dollar value of any dividends will be affected by fluctuations in the U.S. dollar/Chilean peso exchange rate
Chilean trading in the shares underlying our ADSs is conducted in Chilean pesos. The depositary will receive cash distributions that we make with respect to the shares in pesos. The depositary will convert such pesos to U.S. dollars at the then prevailing exchange rate to make dividend and other distribution payments in respect of ADSs. If the value of the peso falls relative to the U.S. dollar, the value of the ADSs and any distributions to be received from the depositary will decrease.
Developments in other emerging markets could materially affect our ADSs value
The Chilean financial and securities markets are, to varying degrees, influenced by economic and market conditions in other emerging market countries or regions of the world. Although economic conditions are different in each country or region, investor reaction to developments in one country or region can have significant effects on the securities of issuers in other countries and regions, including Chile and Latin America. Events in other parts of the world may have an adverse effect on Chilean financial and securities markets and on the value of our ADSs.
The volatility and low liquidity of the Chilean securities markets could affect the ability of our shareholders to sell our ADSs
The Chilean securities markets are substantially smaller, less liquid and more volatile than the major securities markets in the United States. The volatility and low liquidity of the Chilean markets could increase the price volatility of our ADSs and may impair the ability of a holder to sell our ADSs into the Chilean market in the amount and at the price and time he or she wishes to do so.
Our share price may react negatively to future acquisitions and investments
As part of our strategy as world leaders in our core businesses, we are constantly looking for opportunities that will allow us to consolidate and strengthen our competitive position. Pursuant to this strategy, we may from time to time, evaluate and eventually carry out acquisitions in any of the businesses in which we are. Depending on our then current capital structure, we may need to raise significant debt and/or equity which will affect our financial condition and future cash flows. Any change in our financial condition could affect our results of operations, negatively impacting in our share price.
You may be unable to exercise preemptive rights.
Because we are a Chilean company subject to Chilean law, the rights of our shareholders may differ from the rights of shareholders in companies incorporated in the United States, and you may not be able to enforce or may have difficulty enforcing rights currently in effect on U.S. Federal or State securities laws.
Our Company is a “sociedad anónima abierta” (open stock corporation) incorporated under the laws of the Republic of Chile. Most of SQM’s directors and officers reside outside the United States, principally in Chile. All or a substantial portion of the assets of these persons are located outside the United States. As a result, if any of our shareholders, including holders of our ADSs, were to bring a lawsuit against our officers or directors in the United States, it may be difficult for them to effect service of legal process within the United States upon these persons. Likewise, it may be difficult for them to enforce against them in United States courts judgments obtained in United States courts based upon the civil liability provisions of the federal securities laws of the United States.
8
In addition, there is no treaty between the United States and Chile providing for the reciprocal enforcement of foreign judgments. However, Chilean courts have enforced judgments rendered in the United States, provided that the Chilean court finds that the United States court respected basic principles of due process and public policy. Nevertheless, there is doubt whether an action could be brought successfully in Chile in the first instance on the basis of liability based solely upon the civil liability provisions of the Un ited States federal securities laws.
As preemptive rights may be unavailable for our ADS holders, they have the risk of being diluted if we issue new stock
Chilean laws require companies to offer their shareholders preemptive rights whenever selling new shares of capital stock. Preemptive rights permit holders to maintain their existing ownership percentage in a company by subscribing for additional shares. If we increase our capital by issuing new shares, a holder may subscribe for up to the number of shares that would prevent dilution of the holder’s ownership interest.
If we issue preemptive rights, United States holders of ADSs would not be able to exercise their rights unless a registration statement under the Securities Act were effective with respect to such rights and the shares issuable upon exercise of such rights or an exemption from registration were available. We cannot assure holders of ADSs that we will file a registration statement or that an exemption from registration will be available. We may, in our absolute discretion, decide not to prepare and file such a registration statement. If our holders were unable to exercise their preemptive rights because SQM did not file a registration statement, the depositary would attempt to sell their rights and distribute the net proceeds from the sale to them, after deducting the depositary’s fees and expenses. If the depositary could not sell the rights, they would expire and holders of ADSs would not realize any value from them. In either case, ADS holders’ equity interest in SQM would be diluted in proportion to the increase in SQM’s capital stock.
9
ITEM 4. INFORMATION ON THE COMPANY
Historical Background
Sociedad Química y Minera de Chile S.A. “SQM” is an open stock corporation (sociedad anónima abierta) organized under the laws of the Republic of Chile. The Company was constituted by public deed issued on June 17, 1968 by the Public Notary of Santiago, Mr. Sergio Rodríguez Garcés. Its existence was approved by Decree No. 1.164 of June 22, 1968 of the Ministry of Finance, and it was registered on June 29, 1968 in the Business Registry of Santiago, on page 4.537 No. 1.992. SQM’s headquarters are located at El Trovador 4285, Piso 6, Santiago, Chile. The Company’s telephone number is 562-425-2000.
Commercial exploitation of the caliche ore deposits in northern Chile began in the 1830s, when sodium nitrate was extracted from the ore for use in the manufacture of explosives and fertilizers. By the end of the nineteenth century, nitrate production had become the leading industry in Chile and the country was the world’s leading supplier of nitrates. The accelerated commercial development of synthetic nitrates in the 1920s and the global economic depression in the 1930s caused a serious contraction of the Chilean nitrate business, which did not recover significantly until shortly before the Second World War. After the war, the widespread commercial production of synthetic nitrates resulted in a further contraction of the natural nitrate industry in Chile, which continued to operate at depressed levels into the 1960s.
SQM was formed in 1968 through a joint venture between Compañía Salitrera Anglo Lautaro S.A. (”Anglo Lautaro”), and Corporación de Fomento de la Producción (”Corfo”). At the time, Anglo Lautaro was the largest privately owned Chilean company engaged in nitrate mining and Corfo was a Chilean state-owned development corporation. The combination of the two companies came about, in part, as a result of the government’s plan to reorganize the Chilean nitrate industry. Properties contributed by Anglo Lautoro and Corfo constituted the principal properties of the company. Three years following its formation in 1971, Anglo Lautaro sold all of its shares of SQM to Corfo and SQM remained wholly owned by the Chilean Government until 1983.
In 1983, Corfo began a process of privatizing SQM by selling the Company’s shares to the public and subsequently listing such shares on the Bolsa de Comercio de Santiago Bolsa de Valores S.A., the “Santiago Stock Exchange.” In the years that followed, Corfo sold additional shares of SQM and, by 1988, all of the Company’s shares were privately owned. In September 1993, we established our American Depositary Receipt (ADR) program and, in connection with an international offering leading to a capital increase of approximately US$170 million, SQM American Depositary Receipts were listed on the New York Stock Exchange (the “NYSE” ).
Between the years 1994 to 1999, we participated in the biggest non-metallic mining project ever carried out in Chile, the development of the Atacama Salar project in northern Chile. During this period, the project required an investment of approximately US$300 million, which was used in the construction of a 500,000-ton capacity potassium chloride plant, a 22,000-ton capacity lithium carbonate plant, a close to 200,000-ton capacity potassium sulfate plant and a close to 10,000-ton capacity boric acid plant. The potassium chloride, lithium carbonate, potassium sulfate and boric acid plants are currently in operation.
To help finance the above projects, we accessed the international capital markets by issuing more ADRs on the New York Stock Exchange in 1995 and 1999.
The period from 2000 through 2003 were years of consolidation of the investments carried out in the preceding five years. We focused on reducing costs and improving efficiencies throughout the organization.
During 2004, we invested in the start-up of the construction of a new water soluble fertilizer plant in Egypt, the acquisition of a nitrate operation in Chile and the construction of a lithium hydroxide plant in Chile, adjacent to our current lithium carbonate plant. SQM signed agreements to produce and distribute plant nutrients in Thailand and Turkey during 2005.
10
Capital Expenditure Program
We are constantly reviewing different opportunities for improving our production methods, increasing production capacity of current products and developing new products and markets. Additionally, significant maintenance of capital expenditures are required every year in order to sustain our production capacity. We are focused on developing new products in response to identified customer demand and products that can be derived as part of our existing production. Our capital expenditures in the past five years were mainly related to the acquisition of new assets, construction of new facilities and renewal of plant and equipment. The highest concentration of capital expenditures was in the development of the Atacama Salar project, which, with an original investment of approximately US$300 million, enabled SQM to reduce its costs significantly by supplying its own needs of potassium chloride for the production of potassium nitrate, and to introduce new products such as potassium chloride, lithium carbonate, boric acid and potassium sulfate. Other projects included ongoing renewal of our mining equipment, revamping of our iodine and nitrate production facilities, construction of new solar evaporation ponds, installation of new drilling equipment at our mines, acquisition of new mining trucks, construction of potassium nitrate facilities at Coya Sur, increasing nitrate production capacity with the start-up of the Pampa Blanca project, construction of a butyl lithium plant in the U.S.A., increase in lithium carbonate production capacity, refurbishing of Nueva Victoria production facilities and construction of several soluble/NPK mixing plants.
During 2004, we invested approximately US$91 million, the most important projects being the start-up of the construction of a new water soluble fertilizer plant in Egypt, the acquisition of PCS Yumbes’ nitrate operation in Chile from PotashCorp, and the construction of a lithium hydroxide plant in the Salar del Carmen (Antofagasta), adjacent to the current lithium carbonate plant.
SQM’s capital expenditures in the 2000-2004 period were the following:
We have developed a Capital Expenditure Program calling for investments totaling approximately US$450 million between 2005-2007 which will go toward maintaining and refurbishing existing fac ilities, reducing production costs, increasing production capacity and efficiency at existing facilities and developing new products.
The main projects considered during this period are:
We believe that our capital expenditure program for the years 2005-2007 will be mainly financed with cash and, as necessary, loans.
We continuously review our capital expenditure program and revisions are made as appropriate. The capital expenditure program is subject to change from time to time due to changes in market conditions affecting the Company’s products, general economic conditions in Chile and elsewhere, interest and inflation rates, competitive conditions and other factors.
11
We evaluate from time to time other opportunities to expand our business both within and outside of Chile and expect to continue to do so in the future. We may decide to acquire part or all of the equity of, or undertake joint ventures or other transactions with, other companies involved in our businesses or in other businesses.
As a consequence of the above, current capital expenditures for the period 2005-2007 could significantly vary from the projected US$450 million stated above.
The Company
Today, we are the world ’s largest integrated producer of potassium nitrate, iodine, lithium carbonate. We also produce other specialty plant nutrients and certain industrial chemicals, including industrial nitrates. Our products are sold in over 100 countries through our worldwide distribution network and we generate approximately 80% of our revenues from exports to countries outside Chile. Our products are derived from mineral deposits found in the first and second regions of northern Chile, where we mine and process caliche ore and brine deposits. The caliche ore in northern Chile contains the largest known nitrate and iodine deposits in the world and is the world’s only commercially exploited source of natural nitrates. The brine deposits of Atacama Salar, a salt encrusted depression within the Atacama Desert in northern Chile, contain high concentrations of lithium and potassium in the world as well as significant concentrations of sulfate and boron.
From our caliche ore deposits, we produce a wide range of nitrate-based products, used for specialty plant nutrients and industrial applications, as well as iodine and iodine derivatives. At Atacama Salar, we extract brines rich in potassium, lithium and boron and produce potassium chloride, potassium sulfate, lithium solutions, boric acid and bischofite. We produce lithium carbonate at a plant near the city of Antofagasta, Chile, from the solutions brought from the Atacama Salar. We market all these products through an established worldwide distribution network.
Our products are divided into five main categories: specialty plant nutrition, iodine, lithium, industrial chemicals and other products. Specialty plant nutrition is comprised of specialty plant nutrients which are fertilizers that have certain characteristics that enable farmers to improve yields and quality of certain crops. Iodine, lithium and their derivatives are used in human nutrition, pharmaceuticals, polymers, and in the production of ceramics, aluminum, batteries and other industrial applications. Industrial chemicals have a wide range of applications in certain chemical processes such as the manufacturing of glass, explosives and ceramics. Other products include potassium chloride and other commodity fertilizers that are bought from third parties, and sold mostly in Chile. We have become the largest importer and distributor of commodity fertilizers in Chile with respect to commodity fertilizers, largely due to the support of our own distribution network.
During 2004, specialty plant nutrition accounted for approximately 54% of our revenues, iodine and iodine derivatives accounted for 14%, lithium carbonate and lithium derivatives accounted for 8%, industrial chemicals (industrial grade nitrates, sodium sulfate and boric acid) accounted for 9%, and other products (mainly imported fertilizers distributed in Chile and Mexico, and potassium chloride sold to third parties) accounted for 15%.
Specialty Plant Nutrition: We produce five principal types of specialty plant nutrients: sodium nitrate, potassium nitrate, sodium potassium nitrate, potassium sulfate and specialty blends. All of these specialty plant nutrients are used in either solid or liquid form mainly in high value crops such as fruits, vegetables, industrial crops (mainly tobacco and coffee), cereals and cotton, and are widely used in crops that employ modern agricultural techniques such as hydroponics, greenhousing, fertigation (where fertilizer is dissolved in water prior to irrigation) and foliar application. According to the type of use or application the products are marketed under the brands: Ultrasol™ (fertigation), Qrop™ (field application), Speedfol™ (foliar application), Allganic™ (organic farming) and Nutrilake™ (acquaculture). Specialty plant nutrition has certain advantages over commodity fertilizers, such as rapid and effective absorption (without requiring nitrification), superior water solubility, alkaline pH (which reduces soil acidity) and low chlorine content. These advantages, plus customized specialty blends that meet specific needs and the technical service provided by us, may be considered as plant nutrients solutions adding value to the crops through higher yields and better quality production. Because our products are natural or derived from natural nitrate compounds or natural potassium brines (in the case of potassium sulfate), they have certain advantages over synthetically produced fertilizers, such as the presence of certain beneficial trace elements and their organic nature, which makes them more attractive to customers who prefer products of natural origin. As a result, our specialty plant nutrients enable our customers to achieve higher yields and better quality crops. Accordingly, specialty plant nutrients are sold at a premium price compared to commodity fertilizers.
12
Iodine: We are the world’s leading producer of iodine and iodine derivatives, which are used in a wide range of medical, pharmaceutical, agricultural and industrial applications, including x -ray contrast media, antiseptics, biocides and disinfectants, human and animal nutritional supplements, in the synthesis of pharmaceuticals, herbicides, electronics, pigments, dye components and heat stabilizers.
Lithium: We are the world’s leading producer of lithium carbonate, which is used in a variety of applications, including batteries, frits for the ceramic and enamel industries, heat resistant glass (ceramic glass), primary aluminum, lithium bromine for air conditioner equipment, continuous casting powder for steel extrusion, pharmaceuticals, and lithium derivatives. We are also the world’s leading supplier of lithium hydroxide, which is used primarily as a raw material in the lubricating grease industry. We recently commenced production of butyl lithium, a product used as a catalyst in the synthetic rubber and pharmaceutical industries.
Industrial Chemicals: We produce five industrial chemicals: sodium nitrate, potassium nitrate, sodium sulfate, boric acid and potassium chloride. Sodium nitrate is used primarily in the production of glass, explosives, charcoal briquettes and metal treatment. However, other uses, such as adhesives and wastewater treatment also account for important sales volumes. Potassium nitrate, while also used in the manufacture of specialty glass, is consumed primarily in cathode ray tubes (TV and computer monitors). In addition, potassium nitrate is an important raw material for the production of frits for the ceramics and enamel industries. Sodium sulfate is used primarily as a raw material in the production of detergents and for the bleaching of paper pulp. Boric acid is used in the manufacture of frits for the ceramics and enamel industries, glass, and fiberglass. Potassium chloride is used as an additive in oil drilling as well as in the production of carragenine.
Other Products: We produce and market granular potassium chloride, which is distributed through our subsidiary Soquimich Comercial S.A. in Chile. We have 100% of the market share for this product in Chile. In addition, we import fertilizers that are distributed through Soquimich Comercial S.A. in Chile and Fertilizantes Olmeca S.A. de C.V. in Mexico, offering a complete fertilizing service to our customers.
The following table sets forth the percentage breakdown of our revenues in the 2000-2004 period according to our product lines:
Business Strategy
Our general business strategy is to:
13
We have identified market demand in each of our major product lines, both within our existing customer base and in new markets, for existing products and for additional products that can be extracted from our natural resources. In order to take advantage of these opportunities, we have developed a specific strategy for each of our product lines, as set forth below:
Specialty Plant Nutrition
We expect to (i) continue expanding our sales of natural nitrates by continuing to exploit the advantages of our products over commodity nitrates and ammonia-based nitrogen and potassium chloride fertilizers; (ii) increase our sales of higher-margin specialty plant nutrients based on natural nitrate, particularly potassium nitrate; (iii) pursue investment opportunities in complementary businesses to increase production, reduc e costs and add value to and improve the marketing of our products; (iv) emphasize development of locally produced new specialty nutrient blends and customized products intended to meet local specific customer needs in all of our principal markets; (v) focus more on the soluble and foliar plant nutrient market in order to establish a leadership position; and (vi) further develop our global distribution and marketing system directly and through strategic alliances with other producers and global or local distributors.
Iodine
We expect to (i) maintain our leadership in the iodine market encouraging demand growth and expanding our production capacity in line with the demand growth; (ii) develop new iodine derivatives and participate in the iodine recycling projects; and (iii) continue reducing our production costs through improved processes and higher labor productivity so as to compete more effectively.
Lithium
We expect to (i) maintain our leadership in the lithium industry as the largest producer and distributor of litium carbonate and lithium hydroxide and (ii) selectively pursue forward integration of the lithium derivatives business.
Industrial Chemicals
We expect to (i) maintain our leadership position in sodium nitrate and potassium nitrate; (ii) develop new industrial markets for our current products; and (iii) focus our sales of boric acid and sodium sulfate in industrial niche markets.
From time to time we evaluate opportunities to expand our business, both within and outside Chile, and expect to continue to do so in the future. We may decide to acquire part or all of the equity of, or undertake joint ventures or other transactions with, other companies involved in our businesses or in other businesses. There can be no assurance that we will decide to pursue any such transaction.
Production Process
Our integrated production process can be classified according to our natural resources:
Caliche Ore Deposits
We mine caliche ore from open pit deposits located in northern Chile. Caliche deposits are the largest known source of natural nitrates in the world. The geological origin of caliche ore deposits in northern Chile is uncertain, there being a number of different geological formation theories. The most agreed upon is that a volcanic formation of deposits was followed by water runoff, leaching and depositing in existing sediments.
Caliche deposits are located in northern Chile, where we currently operate four mines: Pedro de Valdivia, María Elena, Pampa Blanca and Nueva Victoria. Our four mining areas cover in excess of 300,000 hectares.
14
Caliche ore is found under a layer of barren overburden, in seams with variable thickness from twenty centimeters to five meters, with the overburden varying in thickness from half a meter to one and a half meters.
Before proper mining begins, a full exploration stage is accomplished, including full geological reconnaissance and dust recovery drill holes to determine the features of each deposit and its quality. Drill hole samples properly identified are tested at our chemical laboratories. With the exploration information on a closed grid pattern of drill holes the ore evaluation stage provides information for mine planning purpose. Mine planning is done on a long-term basis (10 years), medium-term basis (3 years) and short-term basis (1 year). A mine production plan is a dynamic tool that details daily, weekly and monthly production plans. Following the production of drill holes, information is updated to offer the most accurate ore supply schedule to the processing plants.
Generally, bulldozers first rip and remove the overburden in the mining area. This process is followed by production drilling and blasting to break the caliche seams. Front-end loaders load the ore on off-road trucks. In the Pedro de Valdivia mine, trucks deliver the ore to stockpiles next to rail loading stations. The stockpiled ore is later loaded on to railcars that take the mineral to the processing plant. In the María Elena mine, trucks haul the ore and dump it directly to a primary crushing installation, after which a 14-kilometer long overland conveyor belt system delivers the ore to the processing plant.
The ore in Pedro de Valdivia and María Elena plants is crushed and leached to produce concentrated solutions carrying the nitrate, iodine and sodium sulfate. The crushing of the ore delivers two products, a coarse fraction that is leached in a vat system and a fine fraction that is leached by agitation. These are followed by liquid-solid separation, where solids precipitate as sediment and liquids concentrated in nitrate and iodine are sent to processing.
In Pampa Blanca and Nueva Victoria the run of mine ore is loaded in heaps and leached to produce concentrated solutions.
Caliche Ore-Derived Products
Caliche ore derived products are: sodium nitrate, potassium nitrate, sodium potassium nitrate, sodium sulfate and iodine.
Sodium Nitrate
Sodium nitrate for both agricultural and industrial applications is produced at the María Elena and Pedro de Valdivia facilities using the Guggenheim method, which was originally patented in 1921. This closed circuit method involves adding a heated leaching solution to the crushed caliche in the vats to selectively dissolve the valuable contents. The concentrated solution is then cooled, causing the sodium nitrate to crystallize. Part of the unloaded solution is then recycled to the leaching vats. The other part of the solution is stripped of its iodine content at the proper treatment plants. The crystallized sodium nitrate is separated from the remaining solution by centrifuging. The residue resulting from the crushing of the calic he ore is leached at ambient temperature with water, producing a weak solution that is pumped to solar evaporation ponds at our Coya Sur facilities, nearby María Elena, for concentration. While the process of extracting sodium nitrate from caliche ore is well established, variations in chemical content of the ore, temperature of the leaching solutions and other operational features require a high degree of know-how to manage the process effectively and efficiently.
The remaining material out of the sodium nitrate crystallization process are vat leach tailings and a weak solution. The ore tailings are unloaded from the leaching vats and deposited at sites near the production facilities. The weak solution is recycled for further leaching and for the extraction of iodine.
Crystallized sodium nitrate is processed further at Pedro de Valdivia and María Elena to produce prilled sodium nitrate, which is transported to our port facilities in Tocopilla for bulk shipping to customers and distributors worldwide or for bagging and shipping to customers and distributors. Our current crystallized sodium nitrate production capacity at Pedro de Valdivia and María Elena is approximately 770,000 metric tons per year. A portion of the sodium nitrate produced at María Elena and Pedro de Valdivia is used in the production of a highly refined industrial grade sodium nitrate or in the production of potassium nitrate at Coya Sur and sodium potassium nitrate at María Elena.
15
Potassium Nitrate
Potassium nitrate is produced at our Coya Sur facility using production methods developed by us. The solutions from the leaching of the fine fraction of the ore, once the iodine is extracted, is pumped to the Coya Sur plant. These solutions loaded with nitrate are concentrated in solar evaporation ponds. Once an adequate level of concentration is reached, the solution is combined with potassium chloride to produce potassium nitrate and discard sodium chloride. The resulting rich potassium nitrate in solution is crystallized using a cooling and centrifuging process. The crystallized potassium nitrate is either processed further to produce prilled potassium nitrate or used for the production of sodium potassium nitrate. The weak solution of the process is re-used for further production of potassium nitrate. A portion of the potassium nitrate is used in the production of a high purity technical grade potassium nitrate.
We also produce potassium nitrate at our recently acquired facility in Yumbes, Taltal, formerly owned by Potash Corporation of Saskatchewan. This facility is currently processing concentrated nitrate salts from Pampa Blanca and potassium chloride from Atacama Salar which are sent by truck. After production the product is sent by truck to Coya Sur for final processing. Our intention is to relocate this plant in the future closer to our caliche mines.
Concentrated nitrate salts are produced at Pampa Blanca by leaching caliche ore in leach pads from we extract rich iodine and nitrate solutions that are sent to iodine plants for iodine extraction. After iodine has been extracted, the solutions are sent to solar evaporation ponds where solutions are evaporated, where rich nitrate salt is produced. These concentrated nitrate salts are sent to Coya Sur or other of our salt processing facilities where they are leached and the resulting rich nitrate solution is used in the production of potassium nitrate.
Our current potassium nitrate production capacity at Coya Sur is more than 650,000 metric tons per year, including 260,000 metric tons per year of technical grade potassium nitrate at Coya Sur.
Crystallized or prilled potassium nitrate produced at Coya Sur and María Elena is transported to Tocopilla for bulk or bagged for shipping to customers and distributors.
Sodium Potassium Nitrate
Sodium potassium nitrate is a mixture of approximately two parts sodium nitrate per one part potassium nitrate. We produce sodium potassium nitrate at our María Elena facilities using standard, non-patented production methods developed by us. Crystallized sodium nitrate is mixed with the crystallized potassium nitrate to make sodium potassium nitrate, which is then prilled. The prilled sodium potassium nitrate is transported to Tocopilla for bulk shipment to customers.
The production process for sodium potassium nitrate is basically the same as that for sodium nitrate and potassium nitrate.
Our installed prilling capacity is approximately 1,100,000 metric tons per year. With certain production restraints and following market conditions we may supply sodium nitrate, potassium nitrate or sodium potassium nitrate in prilled form.
Sodium Sulfate
We produce sodium sulfate at our Coya Sur facilities. Crystallized sodium sulfate decahydrate (Glauber salt) is extracted from the leaching solutions after the iodine production process at Pedro de Valdivia and María Elena. The salt is transported to Coya Sur, where it reacts with sodium chloride salt harvested from the solar evaporation ponds to produce anhydrous sodium sulfate. The sodium sulfate is shipped in bulk directly to customers and distributors, principally in Chile. The remaining solution is recycled back to the solar evaporation pond system.
Iodine and Iodine Derivatives
We produce iodine at our Pedro de Valdivia and Nueva Victoria production facilities, extracting it from the solutions resulting from the leaching of caliche ore at the Pedro de Valdivia, María Elena, Nueva Victoria and Pampa Blanca facilities. As in the case of nitrate, the process of extracting iodine from the caliche ore is well established, but variations in the iodine and other chemical contents of the treated ore and other operational parameters require a high level of knowhow to manage the process effectively and efficiently.
16
The solutions from the leaching of caliche will carry iodine in iodate form. Part of the iodate in solution is reduced to iodide using sulfur dioxide, which is produced by burning sulfur. The resulting iodide is combined with the rest of untreated iodate solution to release elemental iodine. The solid iodine is then refined through a smelting process and prilled. We have obtained patents in Chile and in the United States for its iodine prilling process.
Prilled iodine is tested for quality control purposes, then packed in 20 or 50 kilogram drums, 350 kilogram or 700 kilogram maxibags and transported by truck to Antofagasta or Iquique for export. Our iodine and iodine derivative production plants have qualified under the ISO-9002 program, providing third-party certification of the quality management system and international quality control standards that we have implemented.
Our total iodine production in 2004 was approximately 7.2 thousand metric tons: approximately 2.3 thousand metric tons from Pedro de Valdivia, 1.5 thousand metric tons from María Elena, 1.4 thousand metric tons from Pampa Blanca and 1.9 thousand metric tons from Nueva Victoria. The Nueva Victoria facility is also used for tolling iodine delivered from Pampa Blanca and María Elena. We have the flexibility to adjust our production according to market conditions.
We use a portion of the produced iodine to manufacture inorganic iodine derivatives, which are intermediate products used for manufacturing agricultural and nutritional applications, at facilities located near Santiago, Chile, and also produce inorganic and organic iodine derivative products together with Ajay North America L.L.C., “Ajay,” a U.S.-based Company that purchases iodine from us. We had in the past primarily marketed our iodine derivative products in South America, Africa and Asia, while Ajay and its affiliates had primarily sold their iodine derivative products in North America and Europe.
Atacama Salar Brine Deposits
The Atacama Salar, located approximately 250 kilometers east of Antofagasta, is a salt encrusted depression within the Atacama Desert, within which lies an underground deposit of brines contained in porous sodium chloride rock fed by an underground inflow of water from the Andes Mountains. The brines are estimated to cover a surface of approximately 2,900 square kilometers and contain commercially exploitable deposits of potassium, lithium, sulfates and boron. Concentrations vary at different locations throughout the salar.
Brines are pumped from depths between 1.5 and 40 meters below surface, through a field of wells that are located in areas of the salar that contain relatively high concentrations of potassium, lithium, sulfate, boron and other minerals.
We process these brines to produce potassium chloride, lithium carbonate, potassium sulfate, boric acid and bischofite (magnesium chloride). The first stage in the Atacama Salar development project was to produce potassium chloride, an important raw material used in the manufacture of potassium nitrate, which has allowed us to reduce our potassium nitrate production costs. The second stage involved the production of lithium carbonate using a portion of the remaining solutions after the production of potassium chloride, a project that began its operations in late 1996 at a production facility near Antofagasta. The third stage, which has operated at the Atacama Salar since the second half of 1998, broadens the product portfolio of specialty plant nutrition and industrial chemicals by introducing two new products, potassium sulfate a non chlorine potassium fertilizer and boric acid respectively.
Potassium Chloride
We began production of potassium chloride in late 1995. We use potassium chloride in the production of potassium nitrate and, before 1995, we used to purchase our potassium chloride requirements from external sources. Production of our own supplies of potassium chloride provided us with substantial raw material cost savings.
In order to produce potassium chloride, brines from the Atacama Salar are pumped to solar evaporation ponds. Evaporation of the brines results in a complex crystalized mixture of salts of potassium chloride and sodium chloride, of which one portion is harvested and stored and the other portion of which is reprocessed and the remaining salts are transferred by truck to a proc essing facility where the potassium chloride is separated by a grinding, flotation, and filtering process. Potassium chloride is trucked approximately 300 kilometers our Coya Sur facilities, where it is used in the production of potassium nitrate. We sell potassium chloride produced at the Atacama Salar and in excess of its needs to third parties. During the year 2000, we successfully finished the construction of a plant to compact potassium chloride with a capacity of 100,000 metric tons per year. It is currently operating at a production capacity up to 650,000 metric tons per year.
17
The by-products of the potassium chloride production process are (i) brines remaining after removal of the potassium chloride, which are used to produce lithium carbonate as described below, and the excess of our needs is reinjected into the Atacama Salar, (ii) sodium chloride, which is identical to the surface material of the Atacama Salar and is deposited at sites near the production facility, and (iii) other salts containing magnesium chloride.
Lithium Carbonate
Our operation of lithium carbonate from the Atacama Salar brines began in October 1996. A portion of the brines remaining after the production of potassium chloride is sent to additional solar concentration ponds adjacent to the potassium chloride production facility. Following additional evaporation, the remaining lithium chloride concentrated solution is transported by truck to a production facility located near Antofagasta, approximately 250 kilometers from the Atacama Salar. At the production facility, the solution is purified and treated with sodium carbonate to produce lithium carbonate, which is dried then, if necessary, compacted and finally packaged for shipment. Our lithium carbonate facility production capacity is approximately 28,000 metric tons per year. Future production will depend on the actual volumes and quality of the lithium solutions sent by the Salar Operations.
Potassium Sulfate and Boric Acid
Approximately 12 kilometers northeast of the potassium chloride facilities at the Atacama Salar, we produce potassium sulfate and boric acid from the salar brines. The plant stands on an area of the salar where higher sulfate and potassium concentrations are found in the brine. Brines are pumped to pre-concentration solar evaporation ponds where waste sodium chloride salts are removed by precipitation. After further evaporation, the sulfate and potassium salts are harvested and sent for treatment at the potassium sulfate plant. Potassium sulfate is produced using a flotation, concentration and reaction processes, after which it is crystallized, dried and packaged for shipment. Boric acid is produced in crystallized form by acidulation of the final concentrated brines, dried and packaged for shipment at the same facility.
The principal by-products of the production of potassium sulfate are (i) non-commercial sodium chloride, which is deposited at sites near the production facility, and (ii) remaining solutions, which are reinjected into the Atacama Salar or returned to the evaporation ponds. The principal by-products of the boric acid production process are remaining solutions that after treatment with sodium carbonate to neutralize acidity, are reinjected into the Atacama Salar.
Ulexite Deposits
At the Ascotán Salar, located approximately 400 kilometers northeast of Antofagasta, approximately 3,900 meters above sea level, we have a 25,000 to 30,000 tons per year operation of ulexite extraction. Backholes first remove the overburden, normally ranging in depth from 30 to 100 centimeters. After that the mineral is extracted manually or using the same equipment. The extracted material is placed in solar drying fields, where the product’s humidity is lowered to between 20 to 30%. The mineral, containing between 30% to 33% B2O3 on dry basis, is then transported by truck to our Boron facility located at the Salar del Carmen, outside of Antofagasta, where specialty plant nutrients products are processed and sent to final customers.
We are the world’s largest producer of potassium nitrate. We also produce the following specialty plant nutrients: sodium nitrate, potassium nitrate, sodium potassium nitrate, potassium sulfate, natural boron (ulexite) and specialty blends (containing various combinations of nitrogen, phosphate and potassium and generally known as “NPK blends”). These specialty plant nutrients have particular characteristics that increase productivity and enhance quality when used on certain crops and soils. Additionally, these plant nutrients are well suited for high-yield agricultural techniques such as hydroponics, fertigation, greenhousing and foliar applications. High value crop farmers are prompted to invest in specialty plant nutrients due to their technical advantages over commodity fertilizers (such as urea and potassium chloride), which in turn translate into products and crops with higher yields and added quality. Our specialty plant nutrients have significant advantages for certain applications over commodity based nitrogen and potassium fertilizers, such as the mentioned urea and potassium chloride.
18
In particular, our specialty plant nutrients :
In the year 2004, our revenues from specialty plant nutrients were approximately US$428.2 million, representing approximately 54% of our total revenues for that year.
Specialty Plant Nutrition: Market
The target market for our specialty plant nutrients are high value crops such as fruits, vegetables, and crops raised using modern agricultural techniques. Since 1990, the international market for specialty plant nutrients has grown at a substantially faster rate than the international market for commodity-type fertilizers. This is mostly due to (i) the application of new agricultural technologies such as fertigation and hydroponics and increasing use of greenhousing; (ii) the increase in the cost of land which has forced farmers to improve their yields; (iii) the scarcity of water; (iv) the increase of consumption of vegetables per capita, and (v) the increasing demand for higher quality crops.
Worldwide scarcity of water forces farmers to develop new agricultural techniques such as fertigation that minimize the water requirements. These applications require fully water soluble plant nutrients.
Increasing land costs near urban centers also force farmers to maximize their yields per surface area. Specialty plant nutrients, when applied to certain crops, help to increase productivity for various reasons. In particular, since our nitrate-based specialty plant nutrients provide nitrogen in nitric form, as opposed to in ammonium form as urea provides, they are absorbed faster by the crop. Crops absorb nitrogen in nitric form; thus nitrogen in ammonium form has to be first converted to nitric form in the soil. This process is not immediate and releases hydrogen into the soil, increasing soil acidity, which in most cases is harmful to the soil and the crop. Nitric nitrogen application facilitates a more efficient application of nutrients to the plant, thereby increasing the crop’s yield and improving its quality.
Our potassium-based specialty plant nutrients are chlorine free, unlike potassium chloride, which is the most commonly used potassium-based commodity fertilizer. In certain crops, chlorine has negative effects, which translate into lower yield and quality.
The principal agricultural applications of sodium nitrate, potassium nitrate, potassium sulfate and sodium potassium nitrate plant nutrients are: tobacco, coffee, vegetables, fruits, horticulture, sugar beet, cotton and other high value crops.
Specialty Plant Nutrition: The Company’s Products
Potassium nitrate, sodium potassium nitrate and specialty blends are higher -margin products derived from, or consisting of, sodium nitrate, all of which are produced in crystallized or prilled form. Specialty blends are produced using our own specialty plant nutrients and other components at blending plants operated by the Company or its affiliates and related companies in Chile, USA, Mexico, United Arab Emirates, Belgium, Holland, South Africa, Turkey and Egypt.
19
The following table sets forth our sales volume of specialty plant nutrient fertilizer products and the revenues during the 2000-2004 period.
Specialty Plant Nutrition: Marketing and Customers
In 2004, we sold our specialty plant nutrients to more than 100 countries. During the same year, approximately 90% of the Company’s specialty plant nutrients sales was exported: approximately 29% was sold to customers in Central and South America, 22% to customers in North America, 19% to customers in Europe and 20% to customers in other regions. Not considering sales to related parties, no single customer accounted for more than 4.5% of SQM’s specialty plant nutrients sales in 2004, and our 10 largest customers accounted in the aggregate, during the same year, for less than 25% of such sales.
We sell our specialty plant nutrition products outside Chile principally through our own worldwide network of representative offices and through our sales, technical support and distribution affiliates.
In November of 2001 we signed an agreement with Yara International ASA (ex Norsk Hydro ASA), which started to be implemented during 2002. In 2003 we finalized its implementation and we began to reap its benefits until today. This agreement allows us to make use of Yara International ASA’s distribution network in countries in which its presence and commercial infrastructure are larger than ours. Similarly, in those markets where our presence is larger, our specialty plant nutrients and Yara International ASA’s are marketed through our offices. Both parties, however, maintain an active control in the marketing of their own products.
In the same way, in 2004 we continued receiving the full benefits of the joint venture agreement (JVA) we signed with Yara International and Israel Chemicals Limited at the end of 2001. Under the JVA, SQM, Yara International ASA, and Israel Chemicals Limited are developing the liquid and soluble plant nutrient blends market through their participation in a company called NU3 N.V. to which SQM and Israel Chemicals Limited contributed their blending facility in Belgium, and Yara International ASA contributed its blending facility in Holland. With the joint venture agreement, important synergies have been achieved, particularly in production costs, administration and marketing of soluble blends, strengthening the development of new products and improving costumer service.
We maintain stocks of our specialty plant nutrients in the principal markets of the Americas, Europe, Middle East and Africa to facilitate prompt deliveries to customers. In addition, we sell specialty plant nutrients directly to certain of our large customers. Sales are made pursuant to spot purchase orders and short-term contracts.
In connection with our marketing efforts, we provide technical and agronomic assistance and support to our customers. By working closely with our customers, we are able to identify new higher value added products and markets. Our specialty plant nutrition products are used on a wide variety of crops, particularly higher value-added crops that allow our customers to increase yield and command a premium price.
20
Our customers are located in the northern and southern hemispheres. Accordingly, there are no seasonal or cyclical factors that can substantially affect the sales of our specialty fertilizer products.
Specialty Plant Nutrition: Fertilizer Sales in Chile
We market specialty plants nutrients in Chile through Soquimich Comercial S.A. which sells these products either alone or in blends with other imported products, principally urea, triple super phosphate (TSP) and diammonium phosphate (DAP). Soquimich Comercial sells imported fertilizers to farmers in Chile principally for application in the production of sugar beets, cereals, industrial crops, potatoes, grapes and other fruits. Most of the fertilizers that Soquimich Comercial imports are purchased on a spot basis from different countries of the world.
We believe that all contracts and agreements between Soquimich Comercial and third party suppliers with respect to imported fertilizers contain standard and customary commercial terms and conditions. During the preceding ten years, Soquimich Comercial has experienced no material difficulties in obtaining adequate supplies of such fertilizers at satisfactory prices, and we expect that it will be able to continue to do so in the future.
We estimate that Soquimich Comercial’s aggregate sales of fertilizers in the year 2004 accounted for approximately 40% of total fertilizer sales in Chile in that period. No single customer accounted for more than 6% of Soquimich Comercial’s total revenues from sales of fertilizers in 2004, and the 10 largest customers accounted in the aggregate, for less than 20% of revenues.
Revenues generated by Soquimich Comercial and its subsidiary Comercial Hydro S.A.— formerly known as Norsk Hydro Chile S.A.—accounted for 17.7% of the Company’s 2004 consolidated revenues. Soquimich Comercial’s consolidated revenues were approximately US$140 million, US$121 million and US$86 million in 2004, 2003 and 2002, respectively.
On April 29, 2003, Soquimich Comercial announced the acquisition of 100% of the shares of Norsk Hydro Chile S.A., a Chilean subsidiary of Yara International ASA, in the approximate amount of US$3.2 million. Due to the similar nature of Norsk Hydro Chile S.A. commercial operations to those carried out by Soquimich Comercial, this acquisition allowed the latter to improve its fertilizer distribution business in Chile. Soquimich Comercial will continue with the distribution in Chile of the fertilizers produced by Yara International ASA and its affiliates, allowing the former to improve its fertilizer distribution business in Chile.
Specialty Plant Nutrition: Competition
We are currently the world’s largest producer of sodium and potassium nitrate for agricultural use. S.C.M. Virginia, a Chilean nitrate and iodine company controlled by Inverraz S.A., produces sodium nitrate as raw material for potassium nitrate. S.C.M. Virginia is currently producing small amounts of sodium nitrate for agricultural use. Our sodium nitrate products compete indirectly with specialty and commodity-type substitutes, which may be used by some customers instead of sodium nitrate depending on the type of soil and crop to which the product will be applied. Such substitute products include calcium nitrate, ammonium nitrate and calcium ammonium nitrate.
In the potassium nitrate market we have one significant competitor: Trans Resources International Inc., with its subsidiary Haifa Chemicals Ltd. in Israel. During the first quarter of 2002, the potassium nitrate facility owned by Trans Resources International in the United States called Cedar Chemicals shut down its operations. We estimate that sales of potassium nitrate by Trans Resources International and Haifa Chemicals accounted for approximately 33% of total world sales during the year 2004. The principal means of competition in the sale of potassium nitrate are product quality, customer service, location, logistic and agronomic expertise and price.
S.C.M. Virginia has begun to produce potassium nitrate from caliche ore at a facility in northern Chile. We believe that we have certain advantages over S.C.M. Virginia due to, among other factors, our greater experience with the processing of caliche ore, our proven processes, the size and nature of our caliche ore reserves, our experience in marketing fertilizers, our efficient and proven logistics, which are very important, especially when the freight rates are volatile as they were in 2004, and our own production of potassium chloride in the north of Chile, which is an essential raw material in the production of potassium nitrate.
Kemira, a Finnish producer, announced the shut down of its potassium nitrate and NPK fertilizers facilities at Denmark, aiming to keep the site as a warehouse and distribution center for its Danish customers. Additionally, they started theselling process of the new 150 thousand metric tons potassium nitrate facility they jointly own with Arab Potash, through the company Kemapco at Jordan
21
In December 2004, we acquired the potassium nitrate facilities of PCS in Chile.
In the potassium sulfate market, we have several competitors of which the most important are Kali und Salz GmbH, Tessenderlo Chimie and Great Salt Lake Minerals Corp., from Germany, Holland and the United States, respectively. We believe that those three producers account for a majority of the world production of potassium sulfate. We estimate that once we reach full production of potassium sulfate, we will account for approximately 6% of total world sales.
Through a partially owned facility, NU3, we also produce soluble and liquid fertilizers using our potassium nitrate as a raw material. Through this activity, we have acquired production technology and marketing know-how, which we believe will be useful for selling our products to greenhouse growers and for use in certain high-technology processes such as fertigation and hydroponics.
We are the largest Chilean producer of bulk specialty blends and with the start-up of potassium sulfate production we have broadened our variety of specialty blends to reach a wider range of clients. In Chile, our products compete principally with imported fertilizer blends that use calcium ammonium nitrate or potassium magnesium sulfate. Our specialty plant nutrients also compete indirectly with lower-priced synthetic commodity-type fertilizers such as ammonia and urea, which are produced by many producers in a highly price-competitive market. Our products compete on the basis of advantages that make them more suitable for certain applications as described above.
We are the world’s largest producer of iodine. In 2004, our revenues from iodine and iodine derivatives amounted to approximately US$110.5 million, representing approxim ately 14% of our total revenues in that year. We estimate that our sales accounted for approximately 29% of world iodine sales by volume in 2004.
Iodine: Market
Iodine and iodine derivatives are used in a wide range of medical, agricultural and industrial applications as well as in human and animal nutrition products. Iodine and iodine derivatives are used as a raw materials or catalysts in the formulation of products, such as x-ray contrast media, biocides, antiseptics and disinfectants, pharmaceutical intermediates, polarizing films for Liquid Crystal Displays (LCD), chemicals, herbicides, organic compounds, pigment and ink dyes. Iodine is added in the form of potassium iodate or potassium iodide to edible salt to prevent iodine deficiency disorders.
Iodine: The Company’s Products
We produce iodine and, through a joint venture with Ajay, organic and inorganic iodine derivatives. Through our joint venture with Ajay, we are also actively participating in the iodine recycling business using iodinated side-streams from a variety of chemical processes in Europe and the United States.
Ajay-SQM Group (ASG) was formed in mid 90s, as a 50-50 joint venture between SQM and Ajay Chemical, a U.S.-based company. ASG has currently production plants in USA, Chile and France and is the world’s leading inorganic and organic iodine derivatives. In 2004, approximately 25% of SQM’s iodine sales were made to ASG.
Consistent with our business strategy, we are constantly working on the development of new applications for our iodine-based products, pursuing a continuing expansion of our businesses and maintaining our market leadership.
We manufacture our iodine and iodine derivatives in accordance with international quality standards and have qualified our iodine facilities and production processes under the ISO-9001:2000 program, providing third party certification of the quality management system and international quality control standards that we have implemented.
22
The following table sets forth our total sales and revenues from iodine and iodine derivatives in the 2000-2004 period:
Iodine: Marketing and Customers
In 2004, we sold our iodine products to more than 300 customers in more than 80 countries. During the same year, most of our iodine production was exported: approximately 27% was sold to customers in Europe, 38% to customers in North America, 13% to customers in Central and South America and 22% to customers in Asia, Oceania and other regions. Not considering sales to related parties, no single customer accounted for more than 9% of the Company’s iodine sales in 2004, and our ten largest cus tomers accounted in the aggregate for less than 51% of sales.
We sell iodine through our own worldwide network of representative offices and through our sales, support and distribution affiliates. We maintain stocks of iodine at our facilities throughout the world to facilitate prompt delivery to customers. Iodine sales are made pursuant to spot purchase orders and short, medium and long-term contracts. Long-term contracts generally specify annual minimum and maximum purchase commitments, and prices which vary according to prevailing market prices and in some cases with price caps.
Iodine: Competition
SQM and several producers in Chile, Japan and the USA are the world’s main iodine producers.
Japanese producers extract iodine from underground brines, which are mainly obtained as together with the extraction of natural gas.
We estimate that eight Japanese iodine producers accounted for approximately 32% of world iodine sales in the year 2004. We estimate that the largest Japanese producer, Ise Chemicals Ltd., accounted for approximately 8% of such world’s iodine sales.
We estimate that iodine producers in the United States (one of which is owned by Ise Chemicals) accounted for approximately 6% of world iodine sales in the year 2004, while five Chilean companies, including SQM, accounted for approximately 58% of such sales (29% by SQM and 29% by the other Chilean producers).
The prices of our iodine and iodine derivative products are determined by world iodine prices, which are subject to substantial volatility. World iodine prices vary depending upon the relationship between supply and demand at any given time. The supply of iodine varies principally depending upon the production of the few major iodine producers (including the Company) and their respective business strategies. World iodine prices declined sharply, from a high of US$18.40 per kilogram for large purchases in early 1990, to less than US$8 per kilogram for large purchases as of June 1994. The decline in world iodine prices from 1990 to 1994 was in part the result of SQM’s and certain other producers’ business strategies to take advantage of their relatively lower production costs and increase production at a rate greater than the increase in total demand so as to increase their market shares. From 1994 to 1999, iodine price recovered to lev els close to US$18 per kilogram, beginning then a downward trend due to oversupply. At the end of 2003 iodine prices started to recover, continuing throughout 2004. Average price for 2004 reached approximately US$14.5 per kilogram, and it has continued to increase during the first half of 2005.
Demand for iodine varies depending upon overall levels of economic activity and the level of demand in the medical, pharmaceutical, industrial and other sectors that are the main users of iodine and iodine derivative products. Prices for iodine and iodine derivative products in the future are expected to be influenced by similar supply and demand factors and the business strategies of major producers, some of whom either have or can acquire additional production capacity.
23
The main means of competition in the sale of iodine and iodine derivative products are reliability, price, quality, customer services and the price and availability of substitutes. We believe we have competitive advantages compared to other producers due to the size of our mining reserves, the installed capacity and relatively lower production costs as most part of our iodine is produced as part of a process that also produces other products (mainly sodium nitrate and potassium nitrate for agricultural and industrial purposes), allowing some production costs to be shared by several product lines. We believe our iodine is competitive with that produced by other manufacturers in certain advanced industrial processes. We also believe we have benefited competitively from the long-term relationship we have established with our larger customers. While there are substitutes for iodine available for certain applications, such as coloring processes and for use as antiseptics and disinfectants, there are no cost-effective substitutes currently available for the main nutritional, pharmaceutical, animal feed, and main chemical uses of iodine, which together account for most iodine sales.
We are the world’s largest producer of lithium carbonate and the world’s largest supplier of lithium hydroxide. In 2004, our revenues from lithium sales amounted to approximately US$62.6 million, representing approximately 8% of the Company’s total revenues. We estimate that our sales accounted for approximately 41% of world’s lithium units used in production of lithium chemicals. Lithium is also used in production of lithium minerals. However, there is virtually no overlapping among the markets demanding lithium minerals and lithium chemicals.
Lithium: Market
Lithium carbonate is used in a variety of applications, including batteries, frits for the ceramic and enamel industries, heat resistant glass (ceramic glass), primary aluminum, air conditioning chemicals, continuous casting powder for steel extrusion, pharmaceuticals, and lithium derivatives. Lithium hydroxide is primarily used as a raw material in the lubricating grease industry, as well as in the dyes and battery industries. Butyl lithium is used as a catalyst in the synthetic rubber and pharmaceutical industries.
Lithium: The Company’s Products
We produce lithium carbonate at the Salar del Carmen facilities, nearby Antofagasta, Chile, from solutions with high concentrations of lithium coming from the potassium chloride production at the Atacama Salar. The technology we use, together with the high concentrations of lithium we obtain from the Atacama Salar, allow us to be one of the lowest cost producers worldwide.
We currently produce lithium hydroxide through tolling operations in USA and Russia. During the second half of 2005, SQM expects to complete a lithium hydroxide plant in Chile which will be integrated with its existing lithium carbonate plant.
Consistent with our policy of vertical integration to develop value added products and markets, we have started up a butyl lithium plant in Houston, Texas. The main applications for this product are in the production of synthetic rubbers and pharmaceuticals. We expect our new butyl lithium plant will commence operations on industrial scale during the second half of 2005.
The following table sets forth our total sales and revenues from lithium carbonate and derivatives in the 2000-2004 period:
24
Lithium: Marketing and Customers
In 2004, we sold our lithium products to approximately 240 customers in approximately 50 countries. Virtually all of our lithium products were sold overseas: approximately 32% to customers in Europe, 26% to customers in North America, 37% to customers in Asia and Oceania and 5% to customers in other regions. No single customer accounted for more than 12% of the Company’s sales in 2004, and our ten largest customers accounted in the aggregate for approximately 52% of sales.
Lithium: Competition
Our main competitors in the lithium carbonate and lithium hydroxide businesses are Chemetall GmbH, a subsidiary of Rockwood Specialties Group Inc., and FMC Corporation. We estimate that they together sold approximately 45% of lithium in the lithium chemicals market (excluding lithium minerals) in 2004. Chemetall produces lithium carbonate in its operations located in Chile (Sociedad Chilena del Litio) and Nevada, USA. Its production of downstream lithium products is mostly performed in the United States, Germany and Taiwan. FMC has production facilities in Argentina (Minera del Altiplano), where they produce lithium chloride and lithium carbonate. Production of its downstream lithium products is mostly performed in USA and UK.
We estimate that world-wide sales of lithium chemicals expressed as lithium carbonate equivalent (excluding lithium minerals) amounted to approximately 71,000 metric tons in 2004. Our sales of lithium carbonate (including lithium hydroxide) reached over 32,600 metric tons in 2004.
In addition to producing sodium nitrate for agricultural applications, we produce three grades of sodium nitrate for industrial applications: industrial, refined and technical grades. The three grades differ mainly in purity. Our industrial grades of potassium nitrate also differ from agricultural grade potassium nitrate in its degree of purity. We enjoy certain operational flexibility when producing industrial sodium nitrate because it is produced from the same process as its equivalent agricultural grade, needing only an additional step of purification. We may, with certain constraints, shift production from one grade to the other depending on market conditions. This flexibility allows us to maximize yields as well as to reduce commercial risk. In addition to producing industrial nitrates, we produce sodium sulfate and boric acid. Sodium sulfate and boric acid are by-products of the production of sodium nitrate and potassium sulfate, respectively. In 2004, our revenues from industrial chemicals were approximately US$71.7 million, representing approximately 9% of our total revenues for that year.
Industrial Chemicals: Market
Industrial sodium nitrate and potassium nitrate are used in a wide range of industrial applications, including the production of glass, ceramics, explosives and charcoal briquettes and various chemical processes and metal treatments. Sodium sulfate is mainly used for bleaching in the cellulose industry, as a filler in detergents and in the chemical industries. Boric acid is mainly used in the glass, ceramics, fiberglass, enamels and chemical industries.
We estimate that our sales of industrial sodium nitrate (excluding production in China and India, which is consumed internally), potassium nitrate and sodium sulfate in 2004 accounted for 63%, 35% and less than 1%, respectively, of worldwide sales in that period.
Industrial Chemicals: The Company’s Products
We produce technical potassium nitrate and three grades of industrial sodium nitrate in crystallized and prilled form. We market our refined grade sodium nitrate under the brand name Niterox.” We produce sodium sulfate and boric acid in crystalline form.
25
The following table sets forth our sales volumes of industrial chemicals and total revenues in the 2000-2004 period:
Our aggregate current sodium nitrate capacity is approximately 740,000 metric tons per year (agricultural and industrial grades). Within certain production constraints, we may use our production capacity to produce either agricultural or industrial sodium nitrate. We have a plant capacity to produce approximately 260,000 metric tons per year of technical potassium nitrate, approximately 75,000 metric tons per year of sodium sulfate and 10,000 metric tons per year of boric acid.
Industrial Chemicals: Marketing and Customers
We sold our industrial nitrate products in approximately 60 countries in the year 2004. Approximately 38% of our sales of industrial chemicals was to customers in North America, 23% to customers in Europe, 24% to customers in Central and South America and 15% to customers in Asia, Oceania and other regions. No single customer accounted for more than 5% of the Company’s sales of industrial chemicals in 2004, and our ten largest customers accounted in the aggregate for less than 35% of such sales.
We sold approximately 95% of our 2004 sodium sulfate production to customers in the domestic market. Our main customers for this product are the Chilean producers of detergents and paper pulp.
In 2004, we sold approximately 88% of our boric acid production to the North American market.
We sell our industrial chemical products mainly through our own worldwide network of representative offices and through our sales and distribution affiliates. We maintain inventories of our industrial sodium nitrate and technical potassium nitrate products at our facilities in Europe, North America and South America to achieve prompt deliveries to customers. Industrial sodium nitrate and technical potassium nitrate sales are made pursuant to spot purchase orders and sodium sulfate sales pursuant to renewable medium term contracts.
Our Research and Development department, together with our foreign affiliates, provide technical support to our customers and work with them to develop new products or applications for the Company’s products.
Industrial Chemicals: Competition
We are the world’s largest producer of industrial sodium nitrate. We estimate that we accounted for approximately 63% of world production of industrial sodium nitrate in 2004 (excluding China and India, for which reliable estimates are not available). Our competitors are mainly in Europe and Asia. These producers together represent 37% of total production and produce sodium nitrate as a by-product of other production processes. In the refined grade sodium nitrate market, Bayerische Anilinen und Soda Fabrik AG (BASF), a German corporation, and several producers in Japan (the largest of which is Mitsubishi & Co. Ltd.), are highly competitive in the European and Asian markets. Our industrial sodium nitrate products also compete indirectly with substitute chemicals, including sodium carbonate, sodium hydroxide, sodium sulfate, calcium nitrate and ammonium nitrate, which may be used in certain applications instead of sodium nitrate and are available from a large number of producers worldwide.
Our main competitor in the technical potassium nitrate market is Haifa Chemicals Ltd., which we estimate has a 30% market share. We estimate our market share at approximately 35% for 2004.
26
We have no significant domestic competitors for sodium sulfate in Chile. Limited amounts of imported sodium sulfate products are currently available in the market.
Producers compete in the market for industrial sodium nitrate and technical potassium nitrate based on reliability, product quality, price and customer service. We believe that we are a low cost producer of industrial sodium nitrate and are able to produce high quality products.
Raw Materials
The principal raw material we require for the production of nitrate, sulfate and iodine products is caliche ore, which is obtained from surface mines. The principal raw material for the production of potassium chloride, lithium carbonate, potassium sulfate and boric acid is the brine extracted from the Atacama Salar.
We require water (for the leaching process and general purposes), potassium chloride (in the manufacture of potassium nitrate), sodium carbonate (soda ash, in lithium carbonate production and for neutralization of iodine solutions), anti-caking, sulfur (in iodine production), ammonium nitrate (in the preparation of the anfo that is used in explosives for mining operations), diesel (mainly in mining equipment), natural gas (in heat generation and fusion processes) and electricity acquired from electric utilities (to supply the power needs at Pedro de Valdivia, María Elena, Coya Sur, Pampa Blanca, Nueva Victoria, Atacama Salar and the lithium carbonate plant in Salar del Carmen). Our raw material costs (excluding caliche ore and salar brines) represented approximately 11.8% of our cost of sales in 2004.
Most of our raw materials, especially energy-related raw materials, have experienced significant price increases in the last year.
The main sources of water for our nitrate, sulfate and iodine facilities at Pedro de Valdivia, María Elena and Coya Sur are the Loa and San Salvador rivers, which run near our production facilities. Water for our Pampa Blanca, Nueva Victoria and Atacama Salar facilities is obtained from wells near the production facilities. We have permits from the Chilean Water Authority to explore for additional non-potable water and permits to use granted water rights for an indefinite period of time (based on specified maximum volumes) without charge. In addition, we purchase potable water from local utility companies. We have not experienced significant difficulties obtaining the necessary water to conduct our operations.
During 1999, we entered into a long-term (ten years) electricity supply agreement with a major Chilean electricity producer, Electroandina S.A. Since April 2000, the Company has been connected to the Sistema Interconectado del Norte Grande, (SING), which is our current electricity supplier and is the supplier for most cities and industrial facilities in northern Chile. For a discussion of risks related to electricity supply, see Item 3. Key Information—Risk Factors.
During 2001, we connected our facilities to natural gas pipelines for heat generation and fusion processes. The facilities at Pedro de Valdivia, María Elena and Coya Sur gradually switched over to natural gas during the second half of 2001. During the second half of 2002, the lithium carbonate facility was also connected. Our industrial equipment has a dual system that allows operation either with natural gas or with diesel. After certain minor investments, most of our industrial equipment could also operate with fuel oil.
In May 2001, we entered into a 10-year gas supply contract. We have estimated that covers approximately 3,850,000 million Btu per year. This gas supply is sufficient to satisfy the requirements for the installations that are connected to a gas supply. Nonetheless, we currently have a restriction that limits our supply to approximately 3,200,000 million Btu per year. Right now this restriction is not affecting us, but if we were to use 100% of the equipment connected to the gas supply we would have to replace part of the natural gas consumption with higher cost diesel or fuel oil. For a discussion of risks related to natural gas supply see Item 3. Key Information—Risk Factors.
We obtain ammonium nitrate, sulfur and soda ash from several large suppliers, principally in Chile, Canada and the United States, respectively, under long-term contracts or general agreements, some of which contain provisions for annual revisions of prices, quantities and deliveries. Prior to beginning production of potassium chloride at our Atacama Salar facility in late 1995, we obtained potassium chloride requirements principally from suppliers in Chile (under a long-term contract), and in Canada and Israel (under spot contracts). As a result of the commencement of production of potassium chloride, we have decreased our purchases of potassium chloride. Currently we acquire potassium chloride from Sociedad Chilena del Litio Limitada, a local Chilean supplier, pursuant to a contract that expires in 2009. Diesel fuel is obtained under contracts terminable upon specified notice by either party and which generally provide for sales of fuel at international market prices.
27
We believe that all of the contracts and agreements between SQM and third-party suppliers with respect to our principal raw materials contain standard and customary commercial terms and conditions. During the past ten years, we have experienced no significant difficulties in obtaining adequate supplies of necessary raw materials at market prices, and do not expect to experience any such difficulties in the future.
Government Regulations
We are subject to the full range of government regulations and supervision generally applicable to companies engaged in business in Chile, including labor laws, social security laws, public health laws, consumer protection laws, environmental laws, securities laws and anti-trust laws. These include regulations to ensure sanitary and safe conditions in manufacturing plants.
We conduct our mining operations pursuant to exploration concessions and exploitation concessions granted pursuant to applicable Chilean law. Exploitation concessions, which account for the majority of the mining rights we hold, including all of our concessions relating to land which is currently being mined, essentially grant a perpetual right to conduct mining operations in the areas covered by the concessions, provided that annual concession fees are paid. We also hold water rights obtained from the Chilean water regulatory authority for a supply of water from rivers or wells near our production facilities sufficient to meet our current and anticipated operational requirements. See Item 3. Key Information for a discussion under “Risk Factors” of how changes in mining and water rights laws could affect our operating costs. We operate port facilities at Tocopilla for shipment of products and delivery of certain raw materials pursuant to maritime concessions, under applicable Chilean laws, which are normally renewable on application, provided that such facilities are used as authorized and annual concession fees are paid.
There are currently no material legal or administrative proceedings, except as discussed under “Environmental Regulation” below, pending against the Company with respect to any regulatory matter, and we believe that we are in compliance in all material respects with all applicable statutory and administrative regulations with respect to our business.
Environmental Regulations
Our operations in Chile are subject to both national and local regulations related to the environment’s protection. The fundamental environmental laws in Chile are the Health Code and Law Nº19,300 and their Rules and Regulations. We believe that we are currently in compliance in all material respects with applicable environmental regulations in Chile.
Law Nº19,300 created the National Environment Comission, (Environment Commission), and requires that the Environment Commission drafts and publishes regulations to mandate that companies should conduct environmental impact studies of any future mining or production projects or other activities that are likely to have an environmental impact. Law Nº19,300 also created regional commissions to supervise any required environmental impact studies for all new projects, including those of SQM.
On August 10, 1993, the Ministry of Health published in the Official Gazette a determination pursuant to the Health Code stating that atmospheric particulate levels at our production facilities in María Elena and Pedro de Valdivia exceeded quality standards for breathable air affecting the nearby towns. The high particulate matter levels are principally from dust produced during the processing of caliche ore, particularly the crushing of the ore before leaching. Subsequently, residents of the town of Pedro de Valdivia were relocated to the town of María Elena, practically removing Pedro de Valdivia from the scope of the determination of the Ministry of Health. A plan to reduce the atmospheric particulate levels below permissible levels by July 2000 was approved, with certain amendments, by Decree Nº164/2000. Although we followed the plan and reduced substantially the atmospheric particulate levels at our principal production facilities, as a result of the investments and processes implemented, we were not able to fully comply with the July 2000 timetable. Resolution Nº384, published in the Official Gazette on May 16, 2000, initiated the revision and reformulation of the plan. The new plan was published by Decree N°37/2004 on March 2004. The new timetable requires a reduction by 80% of the emissions for atmospheric particulate material by April 1, 2006. We are working on the basic engineering and environmental impact evaluation for a project that modifies the milling and screening systems used in the processing of the caliche ore at María Elena facilities that should allow for the necessary reduction of particulate material emissions.
There can be no assurance that we will not be subject in the interim to warnings, fines and possible temporary closures of our referred production facilities in María Elena.
28
We continuously monitor the impact of our operations on the environment and have, from time to time, made modifications to our facilities trying to eliminate any adverse impact. We anticipate that additional laws and regulations will be enacted over time with respect to environmental matters. While we believe that we will continue to be in compliance with all applicable environmental regulations of which we are now aware, there can be no assurance that future legislative or regulatory developments will not impose material restrictions on our operations. We are both committed to complying with all applicable environmental regulations and applying an Environmental Management System (EMS) to continuously improve our environmental performance.
We have submitted and will continue to submit several environmental impact assessment studies related to our projects to the governmental authorities. We require the authorization of these submissions in order to maintain and to increase our production capacity.
4.C. Organizational Structure
All of our principal operating subsidiaries are essentially wholly-owned, except for Soquimich Comercial, which is 61% owned by SQM and whose shares are listed and traded on the Chilean Stock Exchanges, and Ajay SQM Chile S.A., which is 51% owned by SQM. The following is a summary of our main subsidiaries. For a list of all affiliates see Note 2(a) to the Consolidated Financial Statements.
29
Discussion of our mining rights is organized below according to the geographic location of our mining operations. First are SQM’s mining interests located throughout the valley of the Tarapacá and Antofagasta regions of northern Chile (el Norte Grande), referred to collectively as the “Caliche Ore Mines.” Second are the company’s mining interests within the Atacama Desert in the eastern region of el Norte Grande (the “Atacama Salar Brines”).
DESCRIPTION OF THE CALICHE ORE MINES
We hold exploration rights or exploitation rights to mineral resources representing more than 2,145,000 hectares. We have six mines covering an area of 384,000 hectares. Of these six mines, four are being exploited and two are without current operations. We have also submitted applications for exploration and exploitation rights for more than 444,000 additional hectares.
Pedro de Valdivia
The mine and facilities that we operate at Pedro de Valdivia are located 170 kilometers northeast of Antofagasta and are accessible by highway. These facilities have been in operation for approximately 75 years and were previously owned and operated by Anglo Lautaro. The area currently being mined is located approximately 30 kilometers west of the Pedro de Valdivia production facilities. Our mining facilities at Pedro de Valdivia have a Weighted Average Age of 12.2 years. Electricity, diesel and natural gas, and fuel oil are the primary source power for this operation.
María Elena
The mine and facilities that we operate at María Elena are located 220 kilometers northeast of Antofagasta and are accessible by highway. These facilities have been in operation for approximately 80 years and were previously owned and operated by Anglo Lautaro. The area currently being mined is located approximately 14 kilometers north of the María Elena production facilities. The power source utilized is mainly electricity, diesel, natural gas and fuel oil. The Weighted Average Age of the Company’s mining facilities at María Elena is approximately 12.8 years.
Pampa Blanca
We currently conduct caliche ore operations at Pampa Blanca, which is located 100 kilometers northeast of Antofagasta and is accessible by highway. Beginning in 1987, the output from Pampa Blanca was derived from old waste ore deposits. In 1997 we began mining new caliche ore deposits at Pampa Blanca. Ore from this mine is transported by truc k to nearby heap leaching pads where it is used to produce iodine and nitrate salts. Various companies conducted mining operations at the site in the late 1920s. The Weighted Average Age of the ore recovery facilities at Pampa Blanca is approximately 10.5 years. The power source utilized is mostly electricity, produced by diesel mobile generators.
Nueva Victoria
At the end of 2002, we restarted our caliche ore operations at Nueva Victoria. This site is located 180 kilometers north of María Elena and is accessible by highway. Ore from Nueva Victoria is transported by truck to heap leaching pads where it is then used to produce iodine. The Weighted Average Age of the ore recovery facilities at Nueva Victoria is approximately 6.8 years. The power source utilized is mostly electricity, obtained from the SING.
Mapocho— Inactive
The Mapocho mine is located 67 kilometers northeast of Iquique in the First Region and is accessible by highway. During its years of operation, Mapocho was mined for caliche ore. Production started in 1996 from old waste deposits and then shifted to new caliche ore deposits in 1997. The ore in Mapocho was transported by truck to heap leaching pads and then used to produce iodine. We shut down the plant and dismantled it in 1999.
30
Soronal—Stand By
We have proven and probable reserves at Soronal, which is located 35 kilometers to the north of Nueva Victoria and is accessible by highway. This area has not been exploited yet, but represents a future extension of Nueva Victoria mining operations.
Description of the Atacama Salar Brines
Atacama Salar Brines
We hold rights to exploit the mineral resources in an area covering approximately 196,000 hectares of land in the Atacama Salar in northern Chile, and have applied for additional rights to exploit and explore approximately 26,000 hectares and 145,000 hectares, respectively. The Weighted Average Age of our mining facilities at Atacama Salar is approximately 6.8 years. The main source of power used by the operation is electricity.
Additional Mining Operations Leased in the Atacama Salar Region
SQM Salar S.A. holds exclusive rights to exploit the mineral resources in an area covering approximately 196,000 hectares of land in the Atacama Salar in northern Chile. These rights include 147,000 hectares that are owned by Corfo and leased to SQM Salar S.A. pursuant to a lease agreement between Corfo and SQM Salar S.A., (the Lease Agreement). Corfo may not unilaterally amend the Lease Agreement and the rights to exploit the resources cannot be transferred. The Lease Agreement provides that SQM Salar S.A. is responsible for the maintenance of Corfo´s exploitation rights and for annual payments to the Chilean government and expires on December 31, 2030. SQM Salar S.A. is required to make lease-royalty payments to Corfo according to specified percentages of the value of production of minerals extracted from the Atacama Salar brines. In the years 2004, 2003 and 2002, royalty payments amounted to approximately US$4.9 million, US$4.0 million and US$3.4 million, respectively.
In addition to the mining rights leased to SQM Salar S.A. described above, Corfo has exclusive mining rights covering a total area of approximately 58,000 additional hectares in the Atacama Salar. Under the terms of the Atacama Salar Project Agreement between Corfo and SQM Salar S.A., (the Project Agreement), Corfo has agreed that it will not permit any other person to explore, exploit or mine any mineral resources in those 58,000 hectares of the Atacama Salar. The Project Agreement expires on December 31, 2030.
Concessions, Extraction Yields and Reserves for the Caliche Ore Mines and Salar Brines
Concessions Generally
Caliche ore. We hold our mineral rights pursuant to one of two types of exclusive concessions granted pursuant to applicable law in Chile:
An Exploration Concession is generally obtained for purposes of evaluating the mineral resources in an area. Generally, after the holder of the Exploration Concession has determined that the area contains exploitable mineral resources, such holder will apply for an Exploitation Concession for the area. Such application will give the holder absolute priority with respect to such Exploitation Concession against third parties. If the holder of the Exploration Concession determines that the area does not contain commercially exploitable mineral resources, the concession is usually allowed to lapse, although it is our policy to convert substantially all Exploration Concessions to Exploitation Concessions. An application also can be made for an Exploitation Concession without first having obtained an Exploration Concession for the area involved.
31
Concessions for the Caliche Ore Mines and Salar Brines
Approximately 68% of our total mining concessions are held pursuant to Exploitation Concessions and 32% pursuant to Exploration Concessions, not including areas within the Atacama Salar Mines. Chile owns substantially all the surface land covering our Exploration and Exploitation Concessions.
We made payments to the Chilean government for our Exploration and Exploitation Concessions of approximately US$4.09 million in the year 2004.
The following table sets forth our exploitation and exploration concessions:
32
Extraction Yields
The following table sets forth certain operating data relating to each of our mines (1):
(Values in thousands unless otherwise stated)
33
Reserves
Caliche ore
Our in-house staff of geologists and mining engineers prepares our estimates of caliche ore reserves. The proven and probable reserve figures presented below are estimates, and no assurance can be given that the indicated levels of recovery of nitrates and iodine will be realized. See Item 3.D. Risk Factors.
We estimate ore reserves based on engineering evaluations of assay values derived from sampling of drill-holes and other openings. Several drill-hole spacing have been used for recognizing min ing resources. Normally, we start with 400 x 400 meters and then we reduce spacing to 200x200 meters and 100x100 meters and 50x50 meters. The geological occurrence of caliche mineral is unique and different from other metallic and non-metallic minerals. Caliche ore is found in large horizontal layers at depths ranging from 1 to 4 meters and has an overburden between 0 to 2 meters. This horizontal layering is a natural geological condition and allows the Company to estimate the continuity of the caliche bed based on surface geological reconnaissance and analysis of samples and trenches. Mining resources can be calculated using the information from the drill-hole sampling.
According to our experience in caliche ore, the grid pattern drill-holes with spacing equal to or less than 100 meters produce data on the caliche resources that is sufficiently defined to consider them measured resources and then, adjusting for economic and legal aspects, as proven reserves. Similarly, the information obtained from detailed geologic work and samples taken from grid pattern drill-holes with spacing equal to or less than 400 meters can be considered indicated resources and then, adjusting for economic and legal aspects, as probable reserves. The degree of certainty of probable reserves, although lower than that of proven reserves, is high enough to assume continuity between points of observation.
The updated estimates of our proven reserves of caliche ore at each of our mines, as of December 2004, are the following:
In addition, the updated estimates of our probable reserves of caliche ore at each of our principal mines as of December 2004, are the following:
The proven and probable reserves shown above are the result of exploration and evaluation in approximately 15% of the total caliche-related mining property of our Company. However, we have explored those areas in which we believe there is a higher potential of finding high-grade caliche ore minerals. The remaining 85% of this area has not been explored yet or has limited reconnaissance as inferred or hypothetical resources.
Proven and probable reserves are determined using extensive drilling, sampling and mine modeling which attempts to account for restrictions for cut-off grades, ore type, dilution, waste-to-ore-ratio and ore depth from which economic feasibility has been determined. Nonetheless, metric tons of nitrates and iodine contained in the proven and probable caliche ore reserves are shown before exploitation losses and prior to any losses from metallurgical treatment.
Considering the normal lower degree of certainty in probable reserves compared to proven reserves, and in accordance with caliche ore continuity, sampling and reserves calculations, it is possible to transform the values calculated as probable reserves in order to show them at similar basis of proven reserves. The transforming factors depend on the different geologic conditions and continuity recognized mine by mine, but on average are higher than 60%.
34
Additionally, proven and probable reserves could be affected by mining exploitation methods which result in differences between reserves estimates that are available for exploitation in the mining plan and recoverable material that is finally transferred to the leaching vats or heaps. The average mining exploitation factor for our different mines ranges between 80% and 90%. Additionally, the average global metallurgical recoveries of processes for nitrate and iodine contained in the recovered material varies between 55% to 65%.
Exploration Program. We maintain a permanent program of exploration and resource evaluation on the land surrounding the mines at Pedro de Valdivia and María Elena and at other sites for which we have the appropriate concessions. In 2004, we continued a basic reconnaissance program on the new mining properties including a geological mapping of the surface and spaced drill-holes campaign covering approximately 75,000 hectares. Additionally, we conducted general explorations based on a closer grid pattern drill-holes in a total area of approximately 2,603 hectares and, in addition, carried out in-depth sampling of approximately 1,843 hectares (281 hectares at Pedro de Valdivia, 593 hectares at María Elena, 28 hectares at Pampa Blanca and 941 hectares at Nueva Victoria). The exploration and development program in 2005 calls for a basic reconnaissance program over a total area of 100,000 hectares, general exploration over a total area of about 5,584 hectares and, in addition, in-depth sampling of approximately 1,902 hectares.
Reserves and Concessions for the Atacama Salar Brines
Reserves for the Atacama Salar Brines
Our in-house staff of geologists and mining engineers prepares our estimates of potassium, sulfate, lithium and boron reserves at the Atacama Salar. We have explored 52% of the land (to a depth between 40 and 100 meters) to which we hold exploitation rights in the Atacama Salar mines and estimate that our proven and probable reserves, based on economic restrictions, geostatistical analysis and brine sampling up to a depth of 30 and 50 meters, are as follows:
The proven and probable reserves are based on drilling, brine sampling and geo-statistic reservoir modeling in order to estimate brine volumes and their composition. This procedure considers process restrictions from which economic feasibility has been determined to produce commercial products like potassium chloride, potassium sulfate, lithium carbonate and boric acid. Nonetheless, metric tons of potassium, sulfate, lithium and boron considered in the proven and probable reserves are shown before losses from evaporation processes and metallurgical treatment.
The recoveries of each ion depend on brine composition, which changes in time, and the process applied to produce the desired commercial products. The overall recovery for potassium varies from 72% to 40% while for sulfate varies from 50% to 19%. The recoveries for lithium and boron are estimated to vary between 26% and 30%.
PORTS AND WATER RIGHTS
We operate port facilities at Tocopilla for shipment of products and delivery of certain raw materials pursuant to renewable concessions granted by Chilean regulatory authorities, provided that such facilities are used as authorized and annual concession fees are paid. We also hold water rights for a supply of water from rivers and wells near our production facilities sufficient to meet our current and anticipated operational requirements.
35
36
PRODUCTION FACILITIES
Our principal production facilities are located near our mines and extraction facilities in northern Chile. The following table sets forth the principal production facilities:
We own, directly or indirectly through Subsidiaries, all of the facilities, free of any material liens, pledges or encumbrances, and believe that they are suitable and adequate for the business we conduct in them. As of December 31, 2004, the gross book value of the property and associated plant and equipment at the Pedro de Valdivia, María Elena, Coya Sur, Pampa Blanca, Nueva Victoria, Atacama Salar, Salar del Carmen and Tocopilla was approximately US$155.3 million, US$265.6 million, US$116.6 million, US$16.5 million, US$62 million, US$368.3 million, US$61.8 million and US$59.2 million, respectively.
In addition to the above- listed facilities, we operate a computer and information system linking our principal subsidiaries to our operating facilities throughout Chile via a local area network. The computer and information system is used mainly for accounting, monitoring of supplies and inventories, billing, quality control and research activities. The system’s mainframe computer equipment is located at our offices in Santiago.
The Weighted Average Age of our production facilities at Pedro de Valdivia, María Elena, Coya Sur, Nueva Victoria, Atacama Salar and Salar del Carmen is approximately 12.3 years, 11.5 years, 11 years, 8.5 years, 6.8 years and 7.7 years, respectively. The Weighted Average Age of our iodine facilities at Pampa Blanca is approximately 10.5 years. Our railroad line between our production facilities and Tocopilla was originally constructed in 1890, but the rails, locomotives and rolling stock have been replaced and refurbished as needed. The Tocopilla port facilities were originally constructed in 1961 and have been refurbished and expanded since that time. The Weighted Average Age of the Tocopilla port facilities is approximately 11.6 years. We consider the condition of our principal plants and equipment to be good.
TRANSPORTATION AND STORAGE FACILITIES
Through our subsidiary SIT, we own and operate railway lines and equipment, as well as port and storage facilities, for the transport and handling of finished products and consumable materials.
The main center for our production and storage of raw material is the hub composed by the facilities in Coya Sur, Pedro de Valdivia and María Elena. Our Salar de Atacama facilities constitute the second largest concentration of plants and raw material storage. Other facilities include Nueva Victoria, Pampa Blanca, the Yumbes Nitrate Plant, and the finished products plants of Boron and Lithium Carbonate in the Salar del Carmen, near Antofagasta. The Tocopilla Port Terminal, which we own, is the main facility for storage and shipment of our products.
Nitrates and sodium sulfate raw materials are produced and first stored at our Pampa Blanca and Yumbes mines. They are transported by rail (Pedro de Valdivia), conveyor (María Elena) and truck (others) to the plants described in the next paragraph, to continue the production process.
Nitrates and sodium sulfate finished products are produced at our facilities in Pedro de Valdivia, María Elena and Coya Sur and then transported by our rail system to Tocopilla Port Terminal, where they are stored and finally shipped, either bagged or as bulk. Sodium sulfate is bagged in Coya Sur and shipped by truck directly to Chilean customers in Santiago and southern regions.
37
Potassium chloride is produced at our facilities in the Salar de Atacama and transported either to Tocopilla Port Terminal or Coya Sur by a dedicated dual transport system (rail/truck) owned by a third party dedicated contractor. Product going to Coya Sur is used as raw material for the production of potassium nitrate or for potassium chloride finished product.
Potassium sulfate and boric acid are both produced at our facilities in the Salar de Atacama and then are transported to Tocopilla Port Terminal to follow the rest of the process. Potassium sulfate is transported by the same dual mode system as potassium chloride, and boric acid is transported, already bagged at the Salar de Atacama, by contracted truck company.
Lithium solutions, produced at our facilities in the Salar de Atacama, are transported to the lithium facility in the Salar del Carmen area near Antofagasta, where finished lithium carbonate is produced, bagged and stored. These products are then transported by truck to Tocopilla Port Terminal or to the Antofagasta Terminal for shipment in charter vessel and container vessel, respectively.
Boron raw material (ulexite) is produced in the Salar de Ascotán near Ollague and then transported to the boron facility 15 km north of the lithium plant in Salar del Carmen. In this plant our boron products are produced and then handled the same way as the lithium products.
Iodine raw material, obtained in the same mines as nitrates, is processed, bagged and stored exclusively in the facilities of Pedro de Valdivia and Nueva Victoria, and then shipped by truck to Antofagasta or Iquique for container vessel transport or by truck to Santiago, where iodine derivatives are produced.
The facilities at Tocopilla Port Terminal are located approximately 186 kilometers north of Antofagasta and approximately 124 kilometers west of Pedro de Valdivia, 84 kilometers west of María Elena and Coya Sur and 372 kilometers west of the Atacama Salar. SIT operates the facilities under maritime concessions granted pursuant to applicable Chilean laws. The Tocopilla Port Terminal facilities include a railcar dumper to transfer bulk product into the Conveyor Belt system used to store and ship bulk product.
Storage facilities consist of a six silo system, with a total capacity of 54,000 metric tons, and an open storage area for approximately 180,000 metric tons. A bagging station capable of bagging both small and maxi bags, is also connected to the conveyor system.
For shipping bulk product, the conveyor belt system extends over the coast line to deliver product directly inside bulk carrier hatches. Using this system, the loading capacity is 1,200 tons per hour. Bags are loaded to bulk vessels using barges that are loaded in Tocopilla Port Terminal dock and unloaded by vessel cranes into the hatches. Both bulk and bagged trucks are loaded in Tocopilla Port Terminal for transferring product directly to customers or for container vessels shipping from another port, mainly Antofagasta, San Antonio and Iquique.
Bulk carrier loading in Tocopilla Port Terminal are mostly contracted by us to transfer the product to our hubs around the world or for shipping to customers, which in very few cases use their own contracted vessels for delivery. Trucking is provided by a mix of spot, contracted and customer owned equipment.
SIT also owns fuel oil storage facilities at Tocopilla where these products are held on a consignment basis, purchased from suppliers as needed and shipped to processing plants.
38
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, which would potentially result in materially different results under different assumptions and conditions.
We believe that our critical accounting policies in the preparation of our Chilean GAAP financial statements are limited to those described below. It should be noted that in many cases, Chilean GAAP specifically dictates the accounting treatment of a particular transaction, with no need for management’s judgment in their application. Additionally, significant differences can exist between Chilean GAAP and U.S. GAAP, as explained below in the Notes to the Financial Statements at Note 27—Differences between Chilean and United States Generally Accepted Accounting Principles. There are also areas in which management’s judgment in selecting available alternatives would not produce materially different results. For a summary of significant accounting policies and methods used in the preparation of the financial statements, see Note 2 to the Consolidated Financial Statements.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the assessed inability of our customers to make required payments. If the financial condition of our customers were to deteriorate unexpectedly, impacting their ability to make payments, additional allowances may be required. We routinely review the financial condition of our customers and make assessments of collectibility.
Income and Deferred Taxes
Our Company and each of its subsidiaries compute and pay tax on a separate basis, except for the U.S. subsidiary. We estimate our tax exposure and assess temporary differences resulting from differing treatment of items, such as depreciation, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are reflected in our consolidated balance sheet.
We then assess the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is unlikely, we establish a valuation allowance. Revisions to the estimated realizable value of deferred tax assets or estimated average reversal periods of contra assets or liabilities could cause the provision for income taxes to vary significantly from period to period.
Inventories
Inventories of finished products and work in process are valued at average production cost. Raw materials and products acquired from third parties are stated at average cost and materials-in-transit are valued at cost. We regularly review inventory for impairment and record an obsolescence provision so that carrying values do not exceed net realizable values.
Staff severance indemnities
We have significant benefit plan liabilities, which are developed from accrual valuations. Inherent in these valuations are key assumptions, including discount rates and expected returns on plan assets. We are required to consider current market conditions, including changes in interest rates, in selecting these assumptions. Changes in the related benefit plan liabilities may occur in the future due to changes resulting from fluctuations in our related headcount or to changes in the assumptions.
Units of production amortization
We amortize mine development costs using units-of-production method based on the total proven and probable reserves. Determining the amount of proven and probable reserves requires us to make significant estimates based on geological studies. If our estimates of proven and probable reserves were to change, this would directly impact the amount of amortization of the mine development costs.
39
Goodwill
We have intangible assets related to goodwill. Under Chilean GAAP, goodwill should be reviewed for impairment when events or circumstances, such as recurrent losses for two or more periods, indicate a possible inability to realize the carrying amount. Under SFAS No. 142, goodwill must be allocated to reporting units and tested for impairment at least annually or more frequently if events or circumstances, such as adverse changes in the business climate, indicate that there may be justification for conducting an interim test. The first part of the test is a comparison, at the reporting unit level, of the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value is less than the carrying value, then the second part of the test is needed to measure the amount of potential goodwill impairment. The implied fair value of the reporting unit goodwill is calculated and compared to the carrying amount of goodwill recorded in the Company’s financial records. If the carrying value of reporting unit goodwill exceeds the implied fair value of that goodwill, then we would recognize an impairment loss in the amount of the difference, which would be recorded as a charge against net income.
The fair values of the reporting units are determined using discounted cash flow models based on each reporting unit’s internal forecasts.
The impairment analysis requires management to make subjective judgments concerning estimates of how the assets will perform in the future using a discounted cash flow analysis. Additionally, estimated cash flows may extend beyond ten years and, by their nature, are difficult to determine. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behavior and attrition, changes in revenue growth trends, cost structures and technology and changes in interest rates and specific industry or market sector conditions. Impairment is recognized earlier whenever warranted.
Accounting changes
Until June 30, 2004 the financial statements of the subsidiary SQM Lithium Specialties LLP were not consolidated because this subsidiary was in development stage. Starting July 1, 2004, SQM Lithium Specialties LLP began operating, therefore, we have consolidated this subsidiary in the financial statements as of December 31, 2004.
Beginning January 1, 2004, we adopted Technical Bulletin 72 of the Chilean Association of Accountants, which changes the basis for determining accounting for goodwill and negative goodwill generated in transactions after January 1, 2004, based on an allocation of the purchase price based on the fair value of the identifiable assets acquired and identifiable liabilities assumed.
Both goodwill and negative goodwill are normally amortized over the maximum period of twenty years considering the expected period of return of the investments.
This Bulletin has resulted in greater international comparability in the accounting for business combinations. Differences are no longer significant with U.S. GAAP, except for the amortization of goodwill which is not recorded for U.S. GAAP purposes and the annual impairment test of goodwill.
See note 3 to the consolidated Financial Statements for further discussion on accounting changes.
40
5.A. Operating Results
Introduction
The following discussion should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes thereto included in Item 18. Consolidated Financial Statements. Certain calculations (including percentages) that appear herein have been rounded.
Our Consolidated Financial Statements are prepared in accordance with Chilean GAAP, which differ in certain material respects from U.S. GAAP. Note 27 to the Consolidated Financial Statements provides a description of the material differences between Chilean GAAP and U.S. GAAP and a reconciliation to U.S. GAAP of net income for the years ended December 31, 2004, 2003 and 2002 and of total shareholders’ equity as of December 31, 2004, 2003 and 2002. Our Consolidated Financial Statements are prepared in U.S. dollars. The U.S. dollar is the primary currency in which we operate.
We operate as an independent corporation and are not a “controlled corporation”, as that term is defined under Chilean law.
Discussion of segment and geographical financial information is provided at Note 27—Differences between Chilean and United States Generally Accepted Accounting Principles—II.k) Industry segment and geographic area information.
Overview Of Our Results Of Operations
We divide our operations into the following four product lines:
Additionally we sell other products, including imported commodity fertilizers that we distribute mainly in Chile and Mexico and potassium chloride, which complement our product portfolio.
We sell our products through three primary channels: our own sales offices, a network of distributors and, with respect to our fertilizer products, through Yara International ASA pursuant to a commercial agreement.
FACTORS AFFECTING OUR RESULTS OF OPERATIONS
Our results of operations substantially depend on:
41
The following table sets forth our revenues (in millions of U.S. dollars) and the percentage accounted for by each of our product lines for each of the periods indicated:
42
The following table sets forth certain financial information of the Company (in millions of U.S. dollars) for each of the periods indicated, as a percentage of revenues:
43
Results of Operations - 2004 compared to 2003
During 2004, we generated total revenues of US$788.5 million, which is approximately 14% higher than the US$691.8 million recorded for the year 2003.
The main factors that explain the increase in revenues and the operational variations in the different product lines are the following:
Revenues from sales of specialty plant nutrition increased 18% to US$428.2 million in 2004 from US$362.8 million in 2003. Set forth below are sales volume data by product category.
The increase in specialty plant nutrition revenues was mainly driven by a different product mix, our strategy to increase our sales volume in markets that offer higher returns, and generally improved pricing conditions in the market.
The increase in prices responds mainly to two factors: the strong demand, which for the last five years has experienced annual growth of approximately 7%, and the tight conditions on the supply side. Considering this, we are actively carrying out the necessary investments to increase our production capacity. We expect that the positive market and price trends will continue during 2005.
Changes in sales volume were due to the following:
44
Iodine and derivatives
Revenues from sales of iodine and derivatives increased 30.7% to $110.5 million in 2004 from US$84.6 million in 2003. Set forth below are sales volume data.
The increase both in revenues and sales volume was mainly due to the following:
During 2004, we slightly increased our market share of iodine and derivatives. We are currently expanding our iodine production capacity.
Full year average prices for iodine, excluding iodine salts that react somewhat slower to iodine pricing, increased by approximately US$1.9 per kilogram, or approximately 14%. Considering the strength of the fundamentals that are driving demand, which we expect to keep growing at the present rate in the short to medium term, together with the supply situation, we believe volume and pricing trends observed to date will continue for the next year.
Lithium and derivatives
Revenues from sales of lithium and derivatives increased 26.0% to US$62.6 million in 2004 from US$49.7 in 2003. Set forth below are sales volume data.
45
Considering present supply-demand dynamics and the expected continued increase in demand, we expect this trend in prices to continue during the next year.
Revenues from sales of industrial chemicals decreased by 2.8% to US$71.7 million in 2004 from US$73.7 million in 2003. Set forth below are sales volume data by product category.
The decrease in revenues from sales of industrial chemicals in 2004 was mainly due to the following:
Other Products
Revenues from other products were US$115.5 million, including US$37.2 million from potassium chloride and US$78.3 million from commodity fertilizers.
Total revenues from other products decreased 4.6% from US$121.0 million in 2003.
Potassium Chloride revenues decreased by 7.1% to US$37.2 million in 2004 from US$40.0 million in 2003.
46
The decrease in Potassium Chloride sales volume was mainly due to the following:
Sales of commodity fertilizers remained relatively constant during the year, reaching US$78.3 million compared to the US$81.0 million in 2003.
Cost of Sales
Cost of sales during 2004 was approximately US$608.7 million, an increase of 9.9% compared to the US$554.0 million recorded during 2003. Cost of sales consists primarily of production related expenses, depreciation, raw material costs, logistics expenses and the cost of imported fertilizers and blends used both for resale and in the production of other products. As a percentage of revenues, cost of sales were 77.2% in the year 2004 compared to 80.1% in 2003.
The higher costs of sales in 2004 reflect the increased trading of commodity and specialty fertilizers as well as the trading of lithium hydroxide. We expect to replace the trading of certain specialty fertilizers and lithium hydroxide with our own production within the next few years, increasing the gross margin derived from those operations.
The main factors affecting our costs of sales were the following:
Gross Profit
As a result of the factors described above, gross profit increased 30.4% to US$179.8 million in 2004 from US$137.8 million in 2003.
Selling and Administrative Expenses
Selling and administrative expenses (SG&A) were US$55.7 million (7.1% of revenues) in 2004 compared to US$50.6 million (7.3% of revenues) in 2003. The decrease of SG&A as a percentage of sales responds to our efforts to optimize the use of our sales affiliates, especially those acquired during 2003, SQM Mexico and Mineag.
Operating Income
As a result of the factors described above, operating income increased 42.3% to US$124.1 million in 2004 from US$87.2 million in 2003.
47
Non-Operating Results (net)
The principal components of our non-operating results were as follows:
Net of capitalized interests. During the years, 2004, 2003 and 2002, the Company capitalized interest in the amount of US$1.7 million, US$2.1 million and US$1.9 million, respectively.
During 2004, we had non-operating expenses of US$17.6 million, 17% lower than the US$21.2 million of expenses in 2003. The main reasons for this reduction in non-operating expenses were:
Income Taxes
In 2004 income taxes were US$27.3 million, resulting in an effective consolidated tax rate of 25.6%, compared to income taxes of US$16.0 million and an effective consolidated tax rate of 24.3% in 2003. In accordance with Chilean law, SQM and each of its subsidiaries compute and pay taxes on an individual basis, not on a consolidated basis. We had tax loss carry-forwards of US$198.2 million at December 31, 2004, the majority of which have no expiration dates and are expected to be utilized in the future.
The corporate income tax rates in Chile were 17 % and 16.5% for 2004 and 2003 respectively.
The 71% increase in income taxes is mainly due to the increase in our net profits. Most of the 2004 tax provision relates to a deferred tax provision, which is determined in accordance with Chilean GAAP.
For a more detailed analysis of the company’s income and deferred taxes see Note 13 to the Consolidated Financial Statements.
48
Results of Operations: 2003 compared to 2002
During 2003 we generated total revenues of US$691.8 million, which were 24.9% higher than the US$553.8 million recorded for 2002.
The main factors that explain the increase in revenues and the operational variations in the different product lines are discussed separately below.
Revenues from sale of specialty plant nutrition increased to US $362.8 in 2003 from US$281.4 million in 2002.
Includes Blended Fertilizers, Yara International Specialty Fertilizers and Other Specialty Fertilizers. Yara International Specialty Fertilizers sales for the year 2003 reached approximately US$ 17 million.
The significant increase in sales volumes for 2003 is mainly explained by:
In addition to the increase in sales volumes, average price level for our specialty fertilizers business increased during 2003 compared to the year 2002, mainly due to the strengthening of demand and the fact that producers are operating close to their nominal capacities.
Revenues for iodine and iodine derivatives in 2003 reached US$84.6 million, similar to the US$84.1 million of the previous year.
49
The slightly higher sales volumes during 2003 compared to 2002 are primarily explained by the following:
Revenues from sales of lithium and lithium derivatives in 2003 reached US$49.7 million, compared to US$37.3 million in 2002.
The increase in revenues in 2003 compared to 2002 is mainly due to the following:
Sales prices during 2003 were approximately 8% higher than sales prices in 2002.
Revenues from industrial chemicals sales in 2003 reached US$73.7 million, compared to US$70.8 million in 2002.
The increase in 2003 compared to 2002 is mainly explained by the following:
Revenues from other products were US$121.0 million, including US$40.0 million from potassium chloride and US$81.0 million from commodity fertilizers.
Total revenues from other products increased 51.1% from US$80.1 million in 2002.
50
Revenues for potassium chloride for 2003 reached US$40.0 million, compared to US$38.2 million in 2002.
Our revenues for commodity fertilizers in 2003 reached US$81.0 million, higher than the US$41.9 million of the previous year. The main reason for this significant increase was the consolidation during 2003 of our subsidiaries in Mexico and in South Africa, and the acquisition of Norsk Hydro Chile operations, all of which increased our sales of other products, mainly in the form of trading of other fertilizers.
Cost of sales during 2003 was US$554.0 million, which represented a 30.4% increase compared to US$424.8 million recorded during 2002. Cost of sales consists primarily of production related expenses, depreciation, raw material costs, logistics expenses and the cost of imported fertilizers and blends used both for resale and in the production of other products. As a percentage of revenues, cost of sales were 80.1% in 2003, higher than the 76.7% observed in 2002.
The higher costs of sales in 2003 reflect the increased trading of commodity and specialty fertilizers as well as the trading of lithium hydroxide. We expect to replace the trading of certain specialty fertilizers and lithium hydroxide with our own production within the next few years, increasing the gross margin derived from those operations. Additionally, the appreciation of the Chilean peso against the U.S. dollar during 2003 has negatively affected the portion of the costs incurred in Chilean currency, mainly salaries and certain local contracts.
As a result of the factors described above, gross profit increased 6.8% to US$137.8 million in 2003 from US$129.0 million in 2002.
Selling and Administrative Expenses reached US$50.6 million (7.3% of revenues) in 2003 compared to US$46.3 million (8.4% of revenues) in 2002.
The total increase in selling and administrative expenses is mainly explained by the consolidation of subsidiaries in South Africa and in Mexico, and of the operations of Norsk Hydro Chile during 2003. The additional selling and administrative expenses related to these three subsidiaries is approximately US$4.9 million.
As a result of the factors described above, operating income increased 5.5% to US$87.2 million in 2003 from US$82.7 million in 2002.
51
During 2003, total net non-operating expenses were US$21.2 million, US$8.8 million decrease compared to US$30.0 million expended in 2002. The primary reasons were the following:
Income taxes reached US$16.0 million in 2003, resulting in an effective consolidated tax rate of 24.3% compared to income taxes of US$10.6 million in 2002, which resulted in an effective consolidated tax rate of 20.0%. In accordance with Chilean law, SQM and each of its subsidiaries compute and pay taxes on an individual basis and not on a consolidated basis. We had tax loss carry-forwards of US$62.6 million on December 31, 2003, the majority of which had no expiration dates and were expected to be utilized in the future.
Income taxes applied to companies in Chile were 16.5 % during 2003. Income tax will be raised during 2004 to a new tax rate of 17 %.
For a more detailed analysis of income and deferred taxes see Note 13 to the Consolidated Financial Statements.
Foreign Exchange Rates - Inflation
As noted above, the U.S. dollar is the primary currency in which we operate. Nevertheless, as an international company operating in Chile and several other countries, we transact a portion of our business and have assets and liabilities in other non-dollar currencies. During 2004, we had net foreign exchange loss caused mainly by appreciation in the Chilean peso.
52
We also have a portion of our expenses in Chilean pesos and UF, which are partially offset by revenues denominated in Chilean pesos and UF. If the Chilean peso appreciates and the UF increases the process of translating these amounts to U.S. dollars will result in higher values in U.S. dollars, thereby generating exchange differences: 1) losses related to an increase of Chilean peso and UF denominated expenses, and 2) gains associated to Chilean peso and UF denominated revenues in the Chilean GAAP Consolidated Financial Statements. If there is a peso depreciation the opposite would occur. The net impact of price level adjustments to non-monetary assets and liabilities and equity for those subsidiaries which maintain their accounting records in Chilean pesos is also presented in the Chilean GAAP financial statements as part of the net foreign exchange gains and losses and is affected by the level of inflation in Chile. Although other income statement accounts are not affected by monetary correction adjustments, operating expenses that are denominated in UF or are linked to inflation in some manner would increase in U.S. dollar denominated Chilean financial statements if Chilean peso appreciation exceeds inflation.
The exposure to currency fluctuation is mainly originated by assets and liabilities in Euro, Chilean Peso, Mexican Peso and South African Rand. The following is a summary of the aggregate net monetary assets and liabilities that are subject to foreign exchange gain or loss by currency at December 31, 2004 and 2003:
The main reason for the decrease in net monetary assets and liabilities in Chilean pesos is due to the sale on August 18, 2004, of our 14.05% stake in Empresas Melón. See Note 8 to the Consolidated Financial Statements included in Item 18 of this Form 20-F. Partly offsetting this decrease, the Chilean peso appreciated 7.1% against the U.S. dollar, which at the close of 2003 was 599.40 Ch$/US$ and at the close of 2004 was 559.83 Ch$/US$.
We monitor and attempt to maintain our non-dollar assets and liabilities position in balance and make use of foreign exchange contracts and other hedging instruments to try to minimize our exposure to the risks of changes in foreign exchange rates. As of December 31, 2004, for this purpose we had open forward exchange contracts and options to buy U.S. dollars and sell foreign currency for approximately US$58.1 million in Euros, US$9 million in Chilean Pesos, US$1.6 million in South African rands and US$3.5 million in Mexican pesos.
The prospects and results of operations of SQM could be adversely affected by changes in policies of the Chilean government, other political developments in or affecting Chile, and regulatory and legal changes or administrative practices of Chilean authorities, over which we have no control.
U.S. GAAP Reconciliation
The principal differences between Chilean GAAP and U.S. GAAP as they relate to our Company are (i) the elimination of the effects of a reappraisal of fixed assets undertaken in 1988, (ii) the effect of monetary correction and the treatment of foreign currency translation gains and losses, (iii) the accounting for derivative contracts, (iv) the treatment of the investment in Empresas Melón S.A., (v) the treatment of companies in development stage, (vi) the accounting for staff severance indemnities, and (vii) the elimination of complementary accounts in deferred taxes. For further details of these differences between Chilean GAAP and U.S. GAAP, see Note 27 to the Consolidated Financial Statements.
Net income under U.S. GAAP for 2004, 2003 and 2002 was US$86.8 million, US$57.8 million and US$46.9 million, respectively, compared to that reported under Chilean GAAP of US$74.2 million, US$46.8 million and US$40.2 million, respectively.
Total shareholders’ equity under U.S. GAAP at December 31, 2004 and 2003 was US$856.9 million and US$794.7 million, respectively, compared to that reported under Chilean GAAP of US$948.6 million and US$890.0 million, respectively.
53
5.B. Liquidity and Capital Resources
We operate a capital-intensive business that requires significant investments in revenue-producing assets. Our growth strategy has included the purchase of production facilities and equipment and has also entailed the improvement and expansion of existing facilities. Funds for capital expenditures and working capital requirements have been obtained from net cash provided by operating activities, corporate borrowing under credit facilities, issuance of debt securities and increases in capital.
The current ratio increased from 3.62:1 as of December 31, 2003 to 4.38:1 as of December 31, 2004 due to a decrease in short term borrowings, and increases in accounts receivable and intermediate product inventories.
As of December 31, 2004, we had total debt (short-term borrowings, current portion of long-term bank debt, long term bank debt and sundry creditors) of US$213.6 million, as compared to total debt of US$324.1 million as of December 31, 2003. Of the total debt of US$213.6 million at December 31, 2004, US$12.5 million was short-term debt plus the current portion of long-term bank debt. Of the total debt of US$324.1 million at December 31, 2003, US$62.0 million was short-term debt plus the current portion of long-term bank debt. All of our long-term bank debt (including the current portion) as of December 31, 2004 was denominated in U.S. dollars. The following table sets forth the maturities of our long-term bank debt as of June 25, 2005:
On December 2002, we renegotiated an older syndicated loan into another of US$60 million at an interest rate of LIBOR + 1.00% (2.226% at December 31, 2003). During 2003, we prepaid in full the US$80 million syndicated loan. Under the terms of that facility, we were required to comply with certain financial ratios. In particular, we had to maintain a ratio of debt to total capitalization (measured as interest indebtedness to interest indebtedness plus shareholder’s equity) of less than 0.45:1 and a maximum level of short term-debt interest indebtedness (for this purpose only short-term interest indebtedness of SQM and certain subsidiaries is considered) to current assets of 0.30:1. As of December 31, 2003, we were in compliance with these ratios. In addition, we borrowed US$200 million in September 1996, which is due in 2006 and bears interest at a fixed rate of 7.7%.
Recently, at the end of February 2005, SQM subscribed a loan agreement oriented to refinance future debt maturities and part of the Capex program. The 5-year loan is for US$100 million and bears interest at an initial rate of Libor + 0.325%.
Several proposals for the refinancing of our long-term debt are being reviewed from public and private debt markets as well as from the equity markets, all of which are being currently evaluated by our management. We believe we face no significant refinancing risk considering our current financial structure.
We believe that the terms and conditions of our debt agreements are standard and customary and that we are in compliance in all material respects with such terms and conditions.
As of December 31, 2004, we had US$66.8 million of cash and cash equivalents, including marketable securities. See Note 2 to the Consolidated Financial Statements. In addition, as of December 31, 2004, we had unused credit lines amounting to approximately US$435 million. For information on the level of borrowings as of December 31, 2004, see Item 18. Consolidated Financial Statements.
Shareholders’ equity increased from US$890.0 million in 2003 to US$948.6 million in 2004. Our ratio of total liabilities to equity (including minority interest) decreased from 0.53:1 to 0.48:1 due to both the slight reduction of our consolidated debt and the mentioned increase in equity.
Our capital expenditures in 2004 amounted to US$91.4 million, of which US$35 million corresponded to the acquisition of PCS Yumbes.
54
For a description of the items included in our capital expenditures in previous years as well as future plans, see Item 4. Information on the Company—Capital expenditure program.
We evaluate from time to time our cash requirements to fund capital expenditures and increases in working capital. If we find that resources coming from our internally generated cash flows (including depreciation and retained earnings) will not be enough to fund future capital expenditures, we evaluate and choose the best financial alternative available for the company. As debt requirements also depend on the increase or decrease of accounts receivables and inventories, we cannot accurately determine the amount of debt we will use to finance part of our capital expenditures program, but we believe that cash flow generated by internal operations, cash balances and available credit lines, will enable us to meet our working capital, capital expenditure and debt services requirements for 2005, 2006 and 2007.
Pension Plan
Our wholly owned subsidiary SQM North America Corporation has a defined benefit, noncontributory pension plan covering substantially all employees who qualify as to age and length of service. Plan benefits are based on years of service and the employee’s highest five-year average compensation during the last ten years of employment. The plan’s assets consist primarily of equity mutual funds and group annuity contracts. Assumptions used in determining the actuarial present value of the projected benefit obligation as of December 31 are as follows:
For further discussion see Note 27 Differences between Chilean and United States Generally Accepted Accounting Principles— II.m) Post retirement obligations and staff severance indemnities.
Environmental Commitments
Regarding the María Elena Project, see Item 4. Information on the Company—Environmental Regulation. We have committed to future disbursements in the amount of US$53.0 million. The most important of these investments is the engineering and building of the María Elena piles that represent US$52 million. For further discussion see Note 24. to the Consolidated Financial Statements.
One of the main objectives of our Research and Development team consists of developing new processes and products in order to maximize the returns obtained from the resources that we exploit. The areas of research cover topics such as chemical process design, phase chemistry, chemical analysis methodologies and physical properties of finished products. This unit, which depends on the GIDMA (Research, Development and Environmental Department), provides technical advice to production, quality and commercial areas.
Our research and development activities are conducted principally at the Antofagasta Research and Development Center. The center has a total staff of 28 people, including seven Ph.D, three MSc, and seven professionals in the fields of engineering and chemistry conducting research on various projects. Our research and development policy emphasizes the following: (i) optimization of current processes in order to decrease costs and improve product quality through the implementation of new technology, (ii) development of higher -margin products from current products through vertical integration or different product specifications, (iii) development of new products, and (iv) improvement of technical customer service.
For the years ended December 31, 2004, 2003, 2002 and 2001, we spent approximately US$1.8 million, US$1.4 million, US$2.2 million and US$2.2 million respectively, on research and development activities.
Our research and development activities have been instrumental in improving our production processes and developing new products. As a result of research and development activities new methods of extraction and finishing have been developed, including methods for heap leaching nitrates and a method to produce mono-granular blends of fertilizers that permit the incorporation of different nutrients (including micro-nutrients) into one grain. In recent years, we have also been focusing on the development of processes for lithium compounds coming out of the brines from the Atacama Salar.
55
We have patented several production processes for nitrate, iodine, and lithium products. These patents have been filed mainly in the U.S. and Chile, and other countries when necessary.
In 2004, iodine prices continued to increase, following a trend initiated during the last quarter 2003. We expect this trend to continue during 2005 due to sustained growth in demand accompanied by only marginal increases in production, as most of the producers are operating close to their full capacities
We expect the increased demand for lithium carbonate observed in the past years to continue. Demand is mostly driven by lithium batteries, x-ray contrast media and biocides producers. Further price recovery is forecasted in the short run.
Potassium nitrate and sodium potassium nitrate sales volumes slightly increased during 2004 compared with 2003. Additionally, prices increased during 2004, and we expect this trend to continue during 2005.
Sodium nitrate third party sales for 2005 are expected to continue to decrease subsequent to the past ten years’ trend. This trend is related to the use of sodium nitrate as raw material for some specialty plant nutrients such as potassium nitrate and other specialty fertilizer blends, whose sales are expected to increase in the years to come. Additionally, and similar to potassiu m nitrate, prices are expected to continue increasing during 2005.
During 2004, logistics cost increased by approximately 15% due to higher oil costs and the recovery of the word economy that generated an increase in the shipments demand. We expect this trend will continue during 2005.
We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, retained or contingent interests in transferred assets, derivative instruments or other contingent arrangements that would expose us to material continuing risks, contingent liabilities, or any other obligation arising out of a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us or that engages in leasing, hedging or research and development services with us.
The following table sets forth our material expected obligations and commitments as of December 31, 2004:
56
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
We are managed by our executive officers under the direction of our Board, which, in accordance with the Company’s By -laws, consists of eight directors who are elected at the annual ordinary shareholders’ meeting. The Board consists of seven members elected by shareholders of the Series A shares, and one member elected by shareholders of the Series B shares. The entire Board of Directors is regularly elected every three years at our ordinary shareholders meeting. Cumulative voting is allowed for the election of directors. The current members of the Board of Directors were elected on April 29, 2005 and their terms expire in 2008. The Board of Directors may appoint replacements to fill any vacancies that occur during periods between elections. If a vacancy occurs, the entire Board must be elected or re-elected at the next regularly scheduled meeting of shareholders. Our Chief Executive Officer is appointed by the Board of Directors and holds office at the discretion of the Board. The Chief Executive Officer appoints our executive officers. There are regularly scheduled meetings of the Board of Directors once a month. Extraordinary meetings may be called by the Chairman, when requested by (i) the director elected by holders of the Series B shares, (ii) any other director with the assent of the Chairman or (iii) an absolute majority of all directors. The Board has a Directors’ Committee and its regulations are discussed below.
Our directors and executive officers as of June 20, 2005 are as follows:
57
58
59
60
61
Directors are paid a monthly fee (UF 300 to the Chairman and UF 50 to each of the remaining seven Directors), which is independent of the number of Board sessions held per month. In addition, the Directors receive additional compensation (in Chilean pesos) each year based on a profit-sharing program approved by the shareholders in an amount equal to 0.65% of the net income (after amortization of negative goodwill) for the Chairman of the Board and of 0.65% of the net income (after amortization of negative goodwill) for the remaining seven Directors, divided equally among those directors. Profit-sharing payments are paid in the year following the fiscal year in respect of which they are earned.
62
During 2004, the total compensation paid to each of our directors under the foregoing was as follows:
For the year ended December 31, 2004, the aggregate compensation paid to our 66 main executives based in Chile was approximately Ch$ 4,905.4 million. We do not disclose to our shareholders or otherwise make available public information as to the compensation of our individual executive officers.
We do not maintain any pension or retirement programs for the members of the Board or our officers in Chile.
Information regarding the period of time each of SQM’s current Board of Directors has served in their respective office is provided in the discussion of each member of the Board above at Item 6.A Directors and Senior Managers.
The date of expiration of the term of the current Board of Directors is April 2008. The contracts of our executive officers are indefinite.
The members of the Board are remunerated in accordance with the information provided above in Item 6.B. Compensation. There exist no contracts between SQM, or any of its subsidiaries, and the members of the Board providing for benefits upon termination of their term.
Directors’ Committee – Audit Committee
As required by Chilean Law, we have a Comité de Directores (Directors’ Committee) composed of three directors, which performs many of the functions of an Audit Committee.
The members of our Directors’ Committee are Hernán Büchi B., José Antonio Silva B. and Daniel Yarur Elsaca. This Committee operates in accordance with article 50 bis of Law Nº 18.046, which provides that the Committee shall:
63
Article 50 bis states that the Committee should consist of three directors, of which the majority must be independent from the controller, if any, and that their functions are to be remunerated. On April 29, 2005, the General Shareholders Meeting agreed to pay a remuneration of UF50 per director per month, independently of the number of meetings of the Committee for the period between May 2005 and April 2006, both included. This remuneration is independent from their compensation as Directors of the Board. At that same meeting, an operational budget for the Committee of UF1,800 was approved.
The activities carried out by the Committee, as well as the expenses incurred by it, are to be disclosed at the General Shareholders Meeting.
On June 21, 2005, the Board of Directors approved the establishment of an audit committee to comply with the requirements of the NYSE corporate governance rules.
The members of the audit committee are Hermán Büchi B., José Antonio Silva B. and Daniel Yarur Elsaca. Each of the three members meets the NYSE independence requirements for audit committee members.
Under the NYSE corporate governance rules, the audit committee of a U.S. company must perform the functions detailed in the NYSE Listed Company Manual Rules 303A.06 and 303A.07. Non-U.S. companies are required to comply with Rule 303A.06 beginning July 31, 2005, but are not at any time required to comply with Rule 303A.07.
Comparative Summary Of Differences In Corporate Governance Standards
The following table provides a comparative summary of differences in corporate governance practices followed by us under our home-country rules and those applicable to U.S. domestic issuers pursuant to Section 303A of the New York Stock Exchange (NYSE) Listed Company Manual.
64
NYSE Standards
As of December 31, 2004, we had 3,418 permanent employees, of whom 280 were employed outside of Chile. The average tenure of our full time employees is approximately 9.4 years.
Of our permanent employees in Chile, 73,7% are represented by 30 labor unions, which represent their members in collective bargaining negotiations with the Company. Compensation for unionized personnel is established in accordance with the relevant collective bargaining agreements. The terms of most such agreements currently in effect are three years, and expiration dates of such agreements vary from contract to contract. Under these agreements, employees receive a salary according to a scale that depends upon job function, seniority and productivity. Unionized employees also receive certain benefits provided for by law and certain benefits, which vary depending upon the terms of the collective bargaining agreement, such as housing allowances and additional death and disability benefits.
In addition, the Company owns all of the equity of Institución de Salud Previsional Norte Grande Limitada, (Isapre Norte Grande), which is a health maintenance organization that provides medical services primarily to our employees. We make specified contributions to Isapre Norte Grande in accordance with Chilean laws and the provisions of our various collective bargaining agreements but is not otherwise responsible for its liabilities.
Non-unionized employees receive individually negotiated salaries, benefits provided for by law and certain additional benefits provided by us.
We provide housing and other facilities and services for employees and their families at the María Elena site.
We do not maintain any pension or retirement programs for our Chilean employees. Most workers in Chile are subject to a national pension law, adopted in 1980, which establishes a system of independent pension plans that are administered by the corresponding Sociedad Administradora de Fondos de Pensiones, (AFP). We have no liability for the performance of any of these pension plans or any pension payments to be made to our employees.
65
We have experienced no strikes or significant work stoppages in the last ten years and consider the relationship with our employees to be good.
Recent legislation to reform Chilean Labor Law has amended several articles of Employment Law N° 19.759. One of the most relevant amendments to the Company was the Article 22, which reduced the hours in a working week from 48 to 45, effective as of January 1, 2005. During 2004, we changed all our work shifts that had more than 45 working hours, in order to comply with the new requirement. These changes did not result in significant higher costs or operational problems.
Mr. Julio Ponce L., Chairman of the Board of SQM, and related persons control Inversiones SQ Holding S.A. Inversiones SQ Holding S.A. and Yara International ASA beneficially own 51% and 49%, respectively, of Inversiones SQYA S.A. Inversiones SQYA S.A. indirectly controls and beneficially owns Sociedad de Inversiones Pampa Calichera S.A., which in turn owns 100% of Global Mining Investments (Chile) S.A. Therefore, Mr. Ponce and related persons beneficially own through the above entities 65,702,424 Series A Shares, constituting 46% of the outstanding Series A Shares and 24.96% of the total shares of SQM. See Item 7.A. Major Shareholders.
Pursuant to the Company’s By-laws, as amended, as of May 25, 2005, no holder of Series A or Series B shares will have the right to exercise for itself or on behalf of other holders of Series A or Series B shares the right to vote more than 37.5% of the outstanding shares of each such class entitled to vote. For purposes of calculating such percentage, shares owned by persons related to such shareholder shall be added to shares held by such shareholder.
The following table shows the combined stakes that Mr. Julio Ponce and Yara International ASA have held in SQM as of December 31:
No other director or executive officer owns more than 1% of each share class of the Company as of June 15, 2005. See Item 6. Directors, Senior Management and Employees—footnote (1). Individual ownership has not been publicly disclosed. Directors and executive officers as a group own 0.61% of total shares
We do not grant stock options or other arrangement involving the capital of SQM to directors, managers or employees.
66
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Taking into account the ownership structure of the stockholders, the Company does not have a controlling entity. The following table sets forth certain information concerning beneficial ownership of the Series A shares and Series B shares of SQM as of June 15, 2005 with respect to each shareholder known by us to beneficially own more than 5% of the outstanding Series A shares or Series B shares and with respect to all of our directors and executives officers as a group. The following information is derived from our records and reports filed by certain of the persons named below with the Superintendencia de Valores y Seguros (the Superintendency of Securities and Insurance or SVS) and the Chilean Stock Exchange.
Series A and Series B shares have the same economic rights (i.e. both Series are entitled to share equally in any dividends declared on the outstanding stock) and voting rights at any shareholders meeting, whether ordinary or extraordinary. One share equals one vote, with the sole exception of the election of the Board of Directors, in which the Series A shareholders elect seven members and the Series B shareholders elect one member. Additionally, Series B shares cannot exceed 50% of our issued and outstanding stock, shareholders of at least 5% of this Series may call an ordinary or extraordinary Shareholders Meeting and the Director elected by this Series may request an extraordinary Board Meeting without the authorization of the Chairman of the Board. Maximum individual voting power per series is 37.5 %. In addition, the Director elected by the Series B shares cannot vote in the election of the Chairman of the Board after a tie vote has occurred in the prior voting process. There are currently 142,819,552 Series A shares and 120,376,972 Series B shares outstanding.
67
Article 89 of the Chilean Companies Act requires that our transactions with related parties be on a market basis or on terms similar to those customarily prevailing in the market. Directors and executive officers of companies that violate Article 89 are liable for losses resulting from such violations. In addition, Article 44 of the Chilean Companies Act provides that any transaction in which a director has a personal interest or is acting on behalf of a third party may be implemented only after the same is approved by the Board of Directors under terms similar to those prevailing in the market. Resolutions approving such transactions must be reported to the Company’s shareholders at the next shareholders’ meeting. Violation of Article 44 may result in administrative or criminal sanctions and civil liability to the Company, shareholders or interested third parties that suffer losses as a result of such violations. We believe that we have complied with the requirements of Article 89 and Article 44 in all transactions with related parties.
Accounts receivable from and payable to related companies are stated in U.S. dollars and accrue no interest. Transactions are made under terms and conditions that are similar to those offered to unrelated third parties.
We further believe that we could obtain from third parties all raw materials now being provided by related parties. The provision of such raw materials by new suppliers could initially entail additional expenses.
For additional information concerning our transactions with affiliates and other related parties, see Note 5 of the Consolidated Financial Statements as of December 31, 2004.
Not applicable
ITEM 8. FINANCIAL INFORMATION
8.A.1 See Item 18. Consolidated Financial Statements for our consolidated financial statements.
8.A.2 See Item 18. Consolidated Financial Statements.
8.A.3 See Item 18. Consolidated Financial Statements—Report of Independent Registered Public Accounting Firm.
8.A.4 Not applicable.
8.A.5 Not applicable.
8.A.6 Export Sales
We derive most of our revenues from sales outside of Chile. The following is the composition of the consolidated sales for the periods ending on December 31:
68
8.A.7 Legal Proceedings
We are or were during 2005 a party to the following legal proceedings:
During the first quarter of 2001, the Company filed an arbitration claim against its insurers, ACE Seguros S.A. and Chubb de Chile Compañía de Seguros Generales S.A., for payment of ThUS$36,316 in indemnifications related to the leak of brines from the pre-concentration ponds that were built by the Company in the Salar de Atacama, which caused losses to the Company of boron, lithium, potassium sulfate and other salts that were to be obtained from such ponds and used in production. The insurance companies argued that the leak was caused by a defect in the design of the ponds attributable to SQM and, therefore, have denied payment of all amounts. Recently, the Santiago Court of Appeals ruled in favor of the insurance companies. This litigation is not subject to further appeal.
During the last quarter of 2002, the French company Compagnie Du Guano de Poisson Angibaud S.A. (”Angibaud”) filed an arbitration claim under French arbitration laws (Association Francaise d’Arbitrage) against the Company requesting indemnification for the alleged early termination of a contract with Generale de Nutrition Vegetale SAS (”GNV”), a French company in which Angibaud and the Company had a 50% share ownership, that held the distribution rights to certain of the Company’s products in France. Angibaud has since filed additional claims against the Company for payment of GNV’s debts, recovery of invoiced amounts and other matters. The total amount demanded is ThEuro$ 30,295.
In October 2004, Tallepsen Services Company L.P. commenced an arbitration proceeding against SQM Lithium Specialties Limited Partnership LLP seeking an award of ThUS$900 for professional fees allegedly owed. In June 2005 its was determined that SQM was not required to make any payment to Tellepsan.
The Company is party to various other lawsuits arising in the ordinary course of business. Management considers it unlikely that any losses associated with such lawsuits will significantly affect the Company’s results of operations, financial position, and cash flows.
8.A.8. Dividend Policy
As required by Chilean law and regulations, our dividend policy is decided upon from time to time by our Board of Directors and is announced at the Annual Ordinary Shareholders’ Meeting, which is generally held in April of each year. Shareholder approval of the dividend policy is not required. However, each year the Board must submit to the annual ordinary shareholders’ meeting for approval the declaration of the final dividend or dividends in respect of the preceding year, consistent with the then-established dividend policy. Dividends are not price-level adjusted between the end of the preceding year and the date of the declaration of the final dividend. As required by the Chilean Companies Act, unless otherwise decided by unanimous vote of the holders of issued shares, we must distribute a cash dividend in an amount equal to at least 30% of our consolidated net income for that year (determined on a Chilean GAAP basis), unless and except to the extent it has a deficit in retained earnings.
Since 1990, our Board of Directors has followed a policy of paying a single dividend equal to approximately 50% of our consolidated net income for the year (determined on a Chilean GAAP basis), and dividends for each year have been paid not later than May of the following year. During 2005, and considering our capacity to deliver increasing cash flows, at the Annual Ordinary Shareholders’ Meeting held on April 29, 2005, the shareholders approved a single dividend with respect to 2004 of US$0.18282 per share, equal to 65% of the net income, before amortization of negative goodwill for that year, which was paid on May 12, 2005. The Board of Directors also reaffirmed for 2005 a dividend policy that authorizes distribution of cash dividends in an amount equal to 65% of our net income before amortization of negative goodwill for the year. The Board of Directors currently expects to recommend that such dividend be paid in a single distribution in May 2006.
We generally declare dividends in U.S. dollars (but may declare dividends in Chilean Pesos), and pay such dividends in Chilean Pesos. If a dividend is declared in U.S. dollars, the exchange rate to be used to convert the dividend into Chilean Pesos is decided by the shareholders at the meeting that approves the dividend, which has usually been the Observed Exchange Rate on the date the dividend is declared.
69
Although the Board of Directors has no current plan to recommend a change in the dividend policy, the amount and timing for payment of dividends is subject to revision from time to time, depending upon our then-current level of sales, costs, cash flow and capital requirements, as well as market conditions. Accordingly, there can be no assurance as to the amount or timing of declaration or payment of dividends in the future. Any change in dividend policy would ordinarily be effective for dividends declared in the year following adoption of the change, and a notice as to any such change of policy must be filed with Chilean regulatory authorities and would be publicly available information.
Dividends are paid to shareholders of record on the fifth business day preceding the date set for payment of the dividend. The applicable record dates for the payment of dividends to holders of ADRs will be determined by the Depositary.
Dividends
Each Series A Share and Series B Share is entitled to share equally in any dividends declared on the outstanding capital stock of SQM.
The following table sets forth the U.S. dollar equivalent of dividends per share and per ADS paid in each of the years indicated, based on the Observed Exchange Rate for the date on which the dividend was declared.
Dividends payable to holders of ADRs will be paid net of conversion expenses of the Depositary and will be subject to Chilean withholding tax, currently imposed at the rate of 35% (subject to credits in certain cases).
As a general requirement, a shareholder who is not a resident of Chile must register as a foreign investor under one of the foreign investment regimes contemplated by Chilean law to have dividends, sale proceeds or other amounts with respect to its shares remitted outside Chile through the Formal Exchange Market. Under the Foreign Investment Contract, the Depositary, on behalf of ADR holders, will be granted access to the Formal Exchange Market to convert cash dividends from Chilean Pesos to U.S. dollars and to pay such U.S. dollars to ADR holders outside Chile net of taxes, and no separate registration of ADR holders is required.
8.B. Significant Changes
No significant change has occurred since the date of the financial statements set forth in Item 18.
70
ITEM 9. THE OFFER AND LISTING
9.A Offer And Listing Details
Price History
The table below sets forth, for the periods indicated, the reported high and low closing prices for our shares on the Santiago Stock Exchange and the high and low closing prices of the ADSs as reported by the NYSE, as the two main Exchanges on which our shares are traded.
(a) Last 5 years
(b) Last 10 quarters
71
c) Last 6 months
As of June 15, 2005, there were 18,741 Series A and 3,213,512 Series B ADSs (equivalent to 187,410 Series A shares and 32,135,120 Series B shares respectively) outstanding held by 4 holders of record for Series A ADSs and 10 holders of record for the Series B ADSs. As of June 15, such ADSs represented approximately 12.28% of the total number of issued and outstanding shares of our Company.
9.B Plan Of Distribution
Not Applicable
9.C Markets
The Series A shares and the Series B shares are currently traded on the Santiago Stock Exchange, the Bolsa Electrónica de Chile Bolsa de Valores S.A., (the Electronic Stock Exchange), and the Bolsa de Corredores Bolsa de Valores S.A., (the Valparaíso Stock Exchange). Each series also is traded on the New York Stock Exchange in the form of ADSs, each representing 10 Series B and 10 Series A shares respectively. The Bank of New York (the Depositary) is the Depositary of both Series. The ADSs representing Series A shares have traded on the NYSE since April 9, 1999; the ADSs representing Series B shares have traded on the NYSE since September 21, 1993.
9.D Selling Shareholders
9.E Dilution
9.F Expenses Of The Issue
72
ITEM 10. ADDITIONAL INFORMATION
10.A. Share Capital
10.B. Memorandum And Articles Of Association
SQM, headquartered at El Trovador Nº 4285, Piso 6, Santiago, Chile, is an open stock corporation (sociedad anónima, abierta) organized under the laws of the Republic of Chile. The Company was constituted by public deed issued on June 17, 1968 by the Notary Public of Santiago Mr. Sergio Rodríguez Garcés. Its existence was approved by Decree No. 1.164 of June 22, 1968 of the Ministry of Finance, and it was registered on June 29, 1968 in the Business Registry of Santiago, on page 4.537 Nº 1.992.
Corporate purposes
Our specific purposes, which appear on article 4 of our By-laws, are to: (a)perform all kinds of chemical or mining activities and businesses and, among others, those related to researching, prospecting, extracting, producing, working, processing, purchasing, disposing of, and commercializing properties, as applicable, of all metallic and non-metallic and fossil mining substances and elements of any type or nature, to be obtained from them or from one or more concessions or mining deposits, and in their natural or converted state, or transformed into different raw materials or manufactured or partially manufactured products, and of all rights and properties thereon; (b)manufacture, produce, work, purchase, transfer ownership, import, export, distribute, transport, and commercialize in any way, all kinds of fertilizers, components, raw materials, chemical, mining, agricultural, and industrial products, and their by-products; (c)generate, produce, distribute, purchase, transfer ownership, and commercialize, in any way, all kinds of electrical, thermal, or other type of power, and hydric resources or water rights in general; (d)request, manifest, claim, constitute, explore, work, lease, transfer ownership, and purchase, in any way, all kinds of mining concessions; (e)purchase, transfer ownership, and administer, in any way, any kind of telecommunications, railroads, ships, ports, and any means of transport, and represent and manage shipping companies, common carriers by water, airlines, and carries in general;(f)manufacture, produce, commercialize, maintain, repair, assemble, construct, disassemble, purchase and transfer ownership, and in any way, any kind of electromechanical structure, and substructure in general, components, parts, spares, or parts of equipment, and machines, and execute, develop, advice, and commercialize, any kind of electromechanical or smelting activities; (g)purchase, transfer ownership, lease, and commercialize any kind of agroindustrial and farm forestry activities, in any way; (h)purchase, transfer ownership, lease, and commercialize, in any way, any kind of urban or rural real estates; (i)render any kind of health services and manage hospitals, private clinics, or similar facilities; (j)construct, maintain, purchase, transfer ownership, and manage, in any way, any kind of roads, tunnels, bridges, water supply systems, and other required infrastructure works, without any limitation, regardless of whether they may be public or private, among others, to participate in bids and enter into any kind of contracts, and to be the legal owner of the applicable concessions; and (k)purchase, transfer ownership, and commercialize, in any way, any kind of intangible properties such as stocks, bonds, debentures, financial assets, commercial papers, shares or rights in corporations, and any kind of bearer securities or instruments, and to administer such investments, acting always within the Investment and Financing Policies approved by the applicable General Shareholders Meeting. We may comply with the foregoing acting ourselves or through or with other different legal entities or natural persons, within the country or abroad, with properties of our own or owned by third parties, and additionally, in the ways and territories, and with the aforementioned properties and purposes, we may also construct and operate industrial or agricultural facilit ies or installations; constitute, administer, purchase, transfer ownership, dissolve, liquidate, transform, modify, or form part of partnerships, institutions, foundations, corporations, or associations of any kind or nature; perform all actions, enter into all contracts, and incur in all obligations convenient or necessary for the foregoing; perform any business or activity related to its properties, assets, or patrimony, or with that of its affiliates, associated companies, or related companies, and render financial, commercial, technical, legal, auditing, administrative, advisory, and other pertinent services.
73
Directors
The Company’s By-laws, in articles 16 and 16 bis, essentially establishes that the transactions in which a Director has a material interest must comply with the provisions set forth in articles 44 and 136 of Law Nº 18.046 and the applicable regulations of such Law. Notwithstanding the above, the said operations must be approved by two thirds of the Board of Directors.
The Board of Directors’ duties are remunerated, as stated in article 17 of the Company’s By-laws, and the amount of that compensation is fixed yearly by the General Ordinary Shareholders Meeting. Therefore, Directors can neither determine nor modify their compensation.
Directors cannot authorize Company loans on their behalf.
As stated in article 10 of the Company’s By-laws, Directors can be reelected indefinitely; thus, there is no age limit for their retirement.
As stated in article 9 of the Company’s By-laws, the possession of shares is not a necessary condition to become a Director of our Company.
Shares
Dividends are annually distributed to the Series A and Series B shareholders of record on the fifth business day prior to the date for payment of the dividends. The By-laws do not specify a time limit after which dividend entitlement elapses but Chilean regulations establish that after 5 years, unclaimed dividends are to be donated to the Fire Department.
Article 5 of the Company’s By-laws establishes that Series B shares may in no case exceed fifty percent of our issued, outstanding and paid shares. Series B shares have a restricted right to vote as they can only elect one Director of the Company, regardless of its capital stock’s share and the preferences. An Ordinary or Extraordinary Shareholders Meeting may be called when the shareholders of at least 5% of Series B issued shares request so and an Extraordinary Board of Directors Meeting may be called without the Chairman’s authorization when it is requested by the Director elected by the shareholders of the Series B shares. Series A shares have the option to exclude the Director elected by Series B shareholders from the voting process in which the Chairman of the Board is to be elected, if there is a tie in the first voting process. However, articles 31 and 31 bis establish that in General Shareholders Meetings each shareholder will have a right to one vote for each share he owns or represents and that no shareholder will have the right to vote for himself or on behalf of other shareholders of the same Series A or Series B shares representing more than 37.5% of the outstanding shares with right to vote of each Series. On May 25, 2005, in an Extraordinary General Shareholders meeting, the shareholders approved an amendment to article 31 of the Company’s By-laws, which now requires that in calculating a single shareholder’s ownership of Series A or B shares, the shareholder’s stock and those pertaining to third parties related to them are to be added.
Article 5 bis of the Company’s By-laws establishes that no person may directly or by means of related third persons, state-owned companies, decentralized, autonomous, municipal, or other institutions, concentrate more than 32% of our total shares with right to vote.
Each Series A Share and Series B Share is entitled to share equally in the Company’s profits, i.e., they have the same rights on any dividends declared on the outstanding shares of SQM.
Our By-laws do not contain any provision relating to: (i) redemption provisions, (ii) sinking funds or (iii) liability to capital calls by the Company.
As established in Article 103 of Law 18.046, a company subject to the supervision of the Chilean Securities and Exchange Commission may be liquidated in the following cases:
74
Article 40 of the Company’s By-laws states that in the event of liquidation, the Shareholders Meeting will appoint a three-member receiver committee that will have the authority to carry out the liquidation process. Any surplus will be distributed equally among the shareholders.
The only way to change the rights of the holders of our shares is by modifying the By-laws, which can only be carried out by an Extraordinary Shareholders Meeting, as set forth in article 28 of the Company By-laws.
Shareholders meetings
Article 29 of the Company’s By -laws states that the call to a Shareholders Meetings, either Ordinary or Extraordinary, will be by means of a highlighted public notice that will be published at least three times, and on different days, in the newspaper of the legal address determined by the Shareholders Meeting, and in the way and under the conditions indicated by the Regulations. Additionally, a notice will be sent by mail to each shareholder at least fifteen days prior to the date of the Meeting, which note shall include a reference of the matters to be addressed thereat. However, those meetings with the full attendance of the shares with right to vote may be legally held, even if the foregoing formal notice requirements are not met. Notice of any Shareholders Meeting shall be delivered to the Chilean Securities Commission (SVS), at least fifteen days in advance of such meeting.
Any holder of Series A and/or Series B shares registered in the Company’s shareholder registry on or before the fifth business day prior to the date of the meeting will have a right to participate at that meeting.
Foreign shareholders
There exists no restriction on ownership or share concentration, or limiting the exercise of the related right to vote, by local or foreign shareholders other than those discussed under Item 10.B. Memorandum and Articles of Association—Shares above.
Change in Control
Our Company By-laws provide that no shareholder may concentrate more than 32% of our shares, unless the by-laws are modified at an extraordinary shareholders meeting. Moreover, on December 12, 2000, the government published the Ley de Oferta Pública de Acciones (Public Share Offering law) or (OPA law) that seeks to protect the interests of minority shareholders of open stock corporations in transactions involving a change in control, by requiring that the potential new controller purchase the shares owned by the remaining shareholders either in total or pro rata. The law applies to those transactions in which the controlling party would receive a material premium price compared with the price that would be received by the minority shareholders.
There are three conditions that would make it mandatory to operate under the OPA law:
Parties interested in taking control of a company must (i) notify the company of such intention in writing, and notify its controllers, the companies controlled by it, the SVS and the markets where its stocks are traded and (ii) publish a highlighted public notice in two newspapers of national circulation at least 10 business days prior to the date of materialization of the OPA.
75
Disclosure of share ownership
The Company’s By-laws do not provide for a minimum threshold at which share ownership must be disclosed.
10.C. Material Contracts
As mentioned elsewhere in this document, we connected our production facilities in the north of Chile to the SING power grid with the purpose of reducing our power generation related costs. As a result, we entered into two long term supply contracts with two electric power companies: Electroandina S.A. and Norgener S.A. Additionally, we replaced the fuel oil used in heat generation and in fusion processes by connecting our facilities to international natural gas pipelines, for which there is also a long term supply contract. We believe that the terms and conditions of these contracts are standard for the industry.
The following summarizes the terms and conditions of the main contracts to which SQM or any subsidiary is a party:
In addition, our Company, during the normal course of business, has entered into different contracts—some of which have been described herein—related to its production, commercial and legal operations. All of these contracts are standard for this type of industry and none of them is expected to have a material effect on the Company’s results of operations.
10.D. Exchange Controls
The Central Bank of Chile is responsible for, among other things, monetary policies and exchange controls in Chile. Appropriate registration of a foreign investment in Chile permits the investor access to the Formal Exchange Market. Foreign investments can be registered with the Foreign Investment Committee under Decree Law Nº600 of 1974 or can be registered with the Central Bank of Chile under the Central Bank Act, Law Nº18840 of October 1989. The Central Bank Act is an organic constitutional law requiring a “special majority” vote of the Chilean Congress to be modified.
Our 1993, 1995 and 1998 capital increases were carried out under and subject to the then current legal regulations, whose summary is hereafter included:
A ’Convención Capítulo XXVI del Título I del Compendio de Normas de Cambios Internacionales’ or Compendium of Foreign Exchange Regulations of the Central Bank of Chile, “Foreign Investment Contract” was entered into and among the Central Bank of Chile, our Company and the Depositary, pursuant to Article 47 of the Central Bank Act and to Chapter XXVI of the Compendium of Foreign Exchange Regulations of the Central Bank of Chile, “Chapter XXVI”, which addresses the issuance of ADSs by a Chilean company. Absent the Foreign Investment Contract, under applicable Chilean exchange controls, investors would not be granted access to the Formal Exchange Market for the purpos es of converting from Chilean Pesos to U.S. dollars and repatriating from Chil e amounts received in respect to deposited Series A or B shares or Series A or B shares withdrawn from deposit on surrender of ADRs (including amounts received as cash dividends and proceeds from the sale in Chile of the underlying Series A and Series B shares and any rights arising therefrom). The following is a summary of the material provisions contained in the Foreign Investment Contract. Thissummary does not purport to be complete and is qualified in its entirety by reference to Chapter XXVI and the Foreign Investment Contract.
76
Under Chapter XXVI and the Foreign Investment Contract, the Central Bank of Chile has agreed to grant to the Depositary, on behalf of ADR holders, and to any investor not residing or not domiciled in Chile who withdraws Series A or Series B shares upon delivery of ADRs (such Series A and Series B shares being referred to herein as “Withdrawn shares”) access to the Formal Exchange Market to convert Chilean Pesos to U.S. dollars (and remit such U.S. dollars outside of Chile) in respect of Series A and Series B shares represented by ADSs or Withdrawn shares, including amounts received as (a) cash dividends, (b) proceeds from the sale in Chile of Withdrawn shares, or from shares distributed because of the liquidation, merger or consolidation of the Company, subject to receipt by the Central Bank of Chile of a certificate from the holder of such shares (or from an institution authorized by the Central Bank of Chile) that such holder’s residence and domicile are outside Chile and a certificate from a Chilean stock exchange (or from a brokerage or securities firm established in Chile) that such shares were sold on a Chilean Exchange, (c) proceeds from the sale in Chile of preemptive rights to subscribe for additional Series A and Series B shares, (d) proceeds from the liquidation, merger or consolidation of the Company and (e) other distributions, including without limitation those resulting from any recapitalization, as a result of holding Series A and Series B shares represented by ADSs or Withdrawn shares. Transferees of Withdrawn Shares will not be entitled to any of the foregoing rights under Chapter XXVI unless the Withdrawn Shares are redeposited with the Depositary. Investors receiving Withdrawn Shares in exchange for ADRs will have the right to redeposit such shares in exchange for ADRs, provided that the conditions to redeposit described hereunder are satisfied.
Chapter XXVI provided that access to the Formal Exchange Market in connection with dividend payments will be conditioned upon certification by the Company to the Central Bank of Chile that a dividend payment has been made and any applicable tax has been withheld. Chapter XXVI also provides that access to the Formal Exchange Market in connection with the sale of Withdrawn Shares or distributions thereon will be conditioned upon receipt by the Central Bank of Chile of certification by the Depositary that such shares have been withdrawn in exchange for ADRs and receipt of a waiver of the benefit of the Foreign Investment Contract with respect thereto until such Withdrawn Shares are redeposited.
Chapter XXVI and the Foreign Investment Contract provided that a person who brings certain types of foreign currency into Chile, including U.S. dollars, to purchase Series A shares and/or Series B shares with the benefit of the Foreign Investment Contract must convert it into Chilean Pesos on the same date and has 5 banking business days within which to invest in Series A shares and/or Series B shares in order to receive the benefits of the Foreign Investment Contract. If such person decides within such period not to acquire Series A shares and/or Series B shares, he can access the Formal Exchange Market to reacquire foreign currency, provided that the applicable request is presented to the Central Bank within 7 banking business days of the initial conversion into pesos. Series A shares and/or Series B shares acquired as described above may be deposited for ADSs and receive the benefits of the Foreign Investment Contract, subject to receipt by the Central Bank of Chile of a certificate from the Depositary that such deposit has been effected and that the related ADRs have been issued and receipt by the Custodian of a declaration from the person making such deposit waiving the benefits of the Foreign Investment Contract with respect to the deposited Series A shares and/or Series B shares.
Access to the Formal Exchange Market under any of the circumstances described above is not automatic. Pursuant to Chapter XXVI, such access required approval of the Central Bank of Chile based on a request presented through a banking institution established in Chile. The Foreign Investment Contract will provide that if the Central Bank of Chile has not acted on such request within seven banking days, the request will be deemed approved.
Under current Chilean law, foreign investments abiding by the Foreign Investment Contract cannot be changed unilaterally by the Central Bank of Chile. No assurance can be given, however, that additional Chilean restrictions applicable to the holders of ADRs, the disposition of underlying Series A shares and/or Series B shares or the repatriation of the proceeds from such disposition could not be imposed in the future, nor can there be any assessment of the duration or impact of such restrictions if imposed.
As of April 19, 2001, Chapter XXVI of Title I of the Compendio de Normas de Cambios Internacionales of the Central Bank of Chile was eliminated and new investments in ADR’s by non-residents of Chile, are now governed by Chapter XIV of the Compendio de Normas de Cambios Internacionales of the Central Bank of Chile. This was made with the purpose of simplifying and facilitating the flow of capital to and from Chile. According to the new regulations, such investments must be carried out through Chile’s Formal Exchange Market and only reported to the Central Bank of Chile. Foreign investments may still be registered with the Foreign Investment Committee under Decree Law 600 of 1974, as amended, and obtain the benefits of the contract executed under Decree Law 600.
77
The Central Bank is also responsible for controlling incurrence of loan obligations to be paid from Chile and by a Chilean borrower to banks and certain other financial institutions outside Chile. The following is a summary of the relevant portions of Chapter XIV regarding the incurrence of loan obligations and does not purport to be complete and is qualified in its entirety by reference to the provisions of Chapter XIV.
The Central Bank must be informed of any incurrence of loan obligations to be paid from Chile and by a Chilean borrower to banks and certain other financial institutions outside of Chile. As of December 31, 2004, we had one long-term loan outstanding obtained in the international markets (a Rule 144-A of US$200 million). Additionally, in February 2005, Royal Seed Trading Corporation, a wholly owned subsidiary fully guaranteed by us, negotiated a US$100.0 million syndicated loan.
The Central Bank authorized our 144- A long-term loan, and was duly informed about the guaranty given to Royal Seed. Accordingly, all purchases of U.S. dollars in connection with payments on these loans will occur in the Formal Exchange Market. There can be no assurance, however, that restrictions applicable to payments in respect of the loans could not be imposed in the future, nor can there be any assessment of the duration or impact of such restrictions if imposed.
10.E. Taxation
Chilean Tax Considerations
The following describes the material Chilean income tax consequences of an investment in the ADRs by an individual who is not domiciled or resident in Chile or any legal entity that is not organized under the laws of Chile and does not have a permanent establishment located in Chile, a “foreign holder.” This discussion is based upon Chilean income tax laws presently in force, including Ruling No. 324 (1990) of the Chilean Internal Revenue Service and other applicable regulations and rulings. The discussion is not intended as tax advice to any particular investor, which can be rendered only in light of that investor’s particular tax situation.
Under Chilean law, provisions contained in statutes such as tax rates applicable to foreign investors, the computation of taxable income for Chilean purposes and the manner in which Chilean taxes are imposed and collected may only be amended by another statute. In addition, the Chilean tax authorities issue rulings and regulations of either general or specific application and interpret the provisions of Chilean tax law. Chilean tax may not be assessed retroactively against taxpayers who act in good faith relying on such rulings, regulations and interpretations, but Chilean tax authorities may change said rulings, regulations and interpretations prospectively.
Cash Dividends and Other Distributions
Cash dividends paid by the Company with respect to the shares, including shares represented by ADSs held by a U.S. holder will be subject to a 35% Chilean withholding tax, which is withheld and paid by the Company, the “Withholding Tax.” If the Company has paid corporate income tax, the “First Category Tax”, on the income from which the dividend is paid, a credit for the First Category Tax effectively reduces the rate of Withholding Tax. When a credit is available, the Withholding Tax is computed by applying the 35% rate to the pre-tax amount needed to fund the dividend and then subtracting from the tentative withholding tax so determined the amount of First Category Tax actually paid on the pre-tax income. Under Chilean income tax law, dividends are assumed to have been paid out of our oldest retained tax profits for purposes of determining the rate at which the First Category Tax was paid.
The effective Withholding Tax rate, after giving effect to the credit for First Category Tax, generally is:
(Withholding Tax rate)–(First Category Tax effective rate)1–(First Category Tax effective rate)
The effective rate of Withholding Tax to be imposed on dividends paid by the Company will vary depending upon the amount of the First Category Tax paid by the Company on the earnings to which the dividends are attributed. From 1992 through 1997, the Company paid First Category Tax at an effective rate below the 15% statutory rate. The effective rate ofthe Withholding Tax on dividends paid from income attributable to those years therefore will be higher. During the years 1999 and 2000, the Company distributed dividends from income qualified under Chilean law as non-taxable, which is why the Company did not withhold any taxes. The dividends distributed by the Company corresponding to the business year 2004 were dividends considered taxable, and the total tax retention rate was approximately 22%.
78
Dividend distributions made in property (such as distribution of cash equivalents) would be subject to the same Chilean tax rules as cash dividends. Stock dividends are not subject to Chilean taxation.
Capital Gains
Gains from the sale or other disposition by a foreign holder of ADR outside Chile will not be subject to Chilean taxation. The deposit and withdrawal of the shares in exchange for ADSs will not be subject to any Chilean taxes.
The tax basis of the shares received in exchange for ADSs (repatriation) will be the acquisition value of the shares. The shares exchanged for ADSs are valued at the highest price at which they trade on the Chilean Stock Exchange on the date of the exchange or on either of the two business days preceding the exchange. Consequently, the conversion of ADSs into the shares and the immediate sale of such shares at a price equal to or less than the highest price for Series A shares or Series B shares on the Chilean Stock Exchange on such dates will not generate a gain subject to Chilean taxation.
Gain recognized on a sale or exchange of shares (as distinguished from sales or exchanges of ADSs representing such shares) will be subject to both the First Category Tax and the Withholding Tax if either (i) the foreign holder has held the shares for less than one year since exchanging the ADSs for the shares, (ii) the foreign holder acquired and disposed of the shares in the ordinary course of its business or as a regular trader of shares, or (iii) the foreign holder and the purchaser of the shares are related parties within the meaning of Chilean tax law. The amount of the First Category Tax may be credited against the amount of the Withholding Tax. In all other cases, gain on the disposition of the shares will be subject only to a capital gains tax, which is assessed at the same rate as the First Category Tax. Gain recognized in the transfer of common shares that have a high presence in the stock exchange, however, is not subject to capital gains tax in Chile, provided that the common shares are transferred in a local exchange, in other authorized stock exchanges, or within the process of a public tender of common shares governed by the Chilean Securities Market Act. The common shares must also have been acquired either in a stock exchange, within the referred process of a public tender of a common shares governed by the Chilean Securities Market Act, in an initial public offer of common shares resulting from the formation of a corporation or a capital increase of the same, or in an exchange of convertible bonds. Common shares are considered to have a high presence in the stock exchange when they: a) are registered in the Securities Registry b) are registered in a Chilean Stock Exchange, c) have an adjusted presence equal to or above 25%.
As of June 19, 2001 capital gains obtained in the sale of common shares that are publicly traded in a stock exchange are also exempt from capital gains tax in Chile when the sale is made by “foreign institutional investors” such as mutual funds and pension funds, provided that the sale is made in a stock exchange or in accordance with the provisions of the securities market law (law 18.045), or in any other form authorized by the SVS. To qualify as foreign institutional investors, the referred entities must be formed outside of Chile, not have domicile in Chile, and they must be an “investment fund” in according with the Chilean tax law.
The exercise of preemptive rights relating to shares will not be subject to Chilean taxation. Any gain on the sale or assignment of preemptive rights relating to shares will be subject to both the First Category Tax and the Withholding Tax (the former being creditable against the latter).
Other Chilean Taxes
No Chilean inheritance, gift or succession taxes apply to the transfer or disposition of the ADSs by a foreign holder, but such taxes generally will apply to the transfer at death or by gift of the shares by a foreign holder. No Chilean stamp, issue, registration or similar taxes or duties apply to foreign holders of ADSs or shares.
79
Withholding Tax Certificates
Upon request, the Company will provide to foreign holders appropriate documentation evidencing the payment of Chilean withholding taxes.
United States Tax Considerations
The following discussion summarizes the material U.S. federal income tax consequences to beneficial owners arising from the acquisition, ownership and disposition of the Series A shares and the Series B shares (together the “shares” and the ADSs. The discussion which follows is based on the United States Internal Revenue Code of 1986, as amended, the “Code”, the Treasury regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect on the date hereof, and is subject to any changes in these or other laws occurring after such date. In addition, the summary is based in part on representations of the depositary and assumes that each obligation provided for in or otherwise contemplated by the Deposit Agreement or any other related document will be performed in accordance with its terms.
For purposes of this summary, the term “U.S. Holder” means a beneficial owner of shares or ADSs that is, for U.S. federal income tax purposes, (a) an individual who is a United States citizen or resident, (b) a corporation or partnership (other than a partnership that is not treated as a U.S. person under any applicable Treasury regulations and certain partnerships that have one or more partners who are not U.S. persons) created or organized under the laws of the United States or any political subdivision thereof, or (c) an estate or trust that is subject to United States federal income tax on a net basis with respect to its worldwide income. The term “Non-U.S. Holder” means a beneficial owner of shares or ADSs that is, for U.S. federal income tax purposes, a (a) nonresident alien individual, (b) foreign corporation, or (c) nonresident alien fiduciary of a foreign estate or trust.
The discussion that follows is not intended as tax advice to any particular investor and is limited to investors who will hold the shares or ADSs as “capital assets” within the meaning of Section 1221 of the Code and whose functional currency is the United States dollar. The summary does not address the tax treatment of U.S. Holders and Non-U.S. Holders that may be subject to special U.S. federal income tax rules, such as insurance companies, tax-exempt organizations, banks, U.S. Holders who are subject to the alternative minimum tax, or U.S. Holders and Non-U.S. Holders who are broker-dealers in securities, who hold the shares or ADSs as a hedge against currency risks, as a position in a “straddle” for tax purposes, or as part of a conversion or other integrated transaction, or who own (directly, indirectly or by attribution) 10% or more of the total combined voting power of all classes of the Company’s capital stock entitled to vote or 10% or more of the value of the outstanding capital stock of the Company.
There exist no reciprocal tax treaties between the Republic of Chile and the United States.
The discussion below does not address the effect of any United States state, local, estate or gift tax law or foreign tax law on a U.S. Holder or Non-U.S. Holder of the shares or ADSs. U.S. HOLDERS AND NON-U.S. HOLDERS OF SHARES OR ADSs SHOULD CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE CONSEQUENCES UNDER ANY SUCH LAW OF INVESTING IN THE SHARES OR ADSs.
For purposes of applying U.S. federal income tax law, any beneficial owner of an ADS will be treated as the owner of the underlying shares represented thereby.
The gross amount of a distribution with respect to shares or ADSs (other than distributions in redemption or liquidation) will be treated as a taxable dividend to the extent of the Company’s current and accumulated earnings and profits, computed in accordance with U.S. federal income tax principles. A dividend distribution will be so included in gross income when received by (or otherwise made available to) (i) the U.S. Holder in the case of the shares or (ii) the depositary in the case of the ADSs, and in either case will be characterized as ordinary income for U.S. federal income tax purposes. Distributions in excess of the Company’s current and accumulated earnings and profits will be applied against and will reduce the U.S. Holder’s tax basis in the shares or ADSs and, to the extent distributions exceed such tax basis, the excess will be treated as gain from a sale or exchange of such shares or ADSs. U.S. Holders that are corporations will not be allowed a deduction for dividends received in respect of distributions on the shares or the ADSs. For example, if the gross amount of a distribution with respect to the shares or ADSs exceeds the Company’s current and accumulated earnings and profits by US$10.00, such excess will generally not be subject to a U.S. tax to the extent the U.S. Holder’s tax basis in the shares or ADSs equals or exceeds US$10.00.
80
If a dividend distribution is paid in Chilean pesos, the amount includable in income will generally be the U.S. dollar value, on the date of receipt by the U.S. Holder in the case of the shares or by the depositary in the case of the ADSs, of the peso amount distributed, regardless of whether the payment is actually converted into U.S. dollars. Any gain or loss resulting from currency exchange rate fluctuations during the period from the date the dividend is includable in the income of the U.S. Holder to the date the pesos are converted into U.S. dollars will be treated as ordinary income or loss.
A dividend distribution will be treated as foreign source income and will generally be classified as “passive income” or “financial services income” for U.S. foreign tax credit purposes. If Chilean withholding taxes are imposed on a dividend, U.S. Holders will be treated as having actually received the amount of such taxes (net of any credit for the First Category Tax) and as having paid such amount to the Chilean taxing authorities. As a result, the amount of dividend income included in gross income by a U.S. Holder will be greater than the amount of cash actually received by the U.S. Holder with respect to such dividend income. A U.S. Holder may be able, subject to certain generally applicable limitations, to claim a foreign tax credit or a deduction for Chilean withholding taxes (net of any credit for the First Category Tax) imposed on dividend payments. The rules relating to the determination of the U.S. foreign tax credit are complex, and the calculation of U.S. foreign tax credits and, in the case of a U.S. Holder that elects to deduct foreign taxes, the availability of deductions, involve the application of rules that depend on a U.S. Holder’s particular circumstances. U.S. Holders should, therefore, consult their own tax advisors regarding the application of the U.S. foreign tax credit rules to dividend income on the shares or ADSs.
Non-U.S. Holders generally will not be subject to U.S. tax on a distribution with respect to shares or ADSs unless such Non-U.S. Holder has certain connections to the United States.
A U.S. Holder will generally recognize gain or loss on the sale, redemption or other disposition of the shares or ADSs in an amount equal to the difference between the amount realized on the sale or exchange and the U.S. Holder’s adjusted basis in such shares or ADSs. Thus, if the U.S. Holder sells the shares for US$40.00 and such U.S. Holder’s tax basis in such shares is US$30.00, such U.S. Holder will generally recognize a gain of US$10.00 for U.S. federal income tax purposes. Gain or loss upon the sale of the shares or ADSs will be capital gain or loss if the shares or ADSs are capital assets in the hands of the U.S. Holder. Capital gains on the sale of capital assets held for one year or less are subject to U.S. federal income tax at ordinary income tax rates. Net capital gains derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. Gain or loss realized by a U.S. Holder on the sale or exchange of shares or ADSs will be U.S.-source income. In addition, certain limitations exist on the deductibility of capital losses by both corporate and individual taxpayers. Any tax imposed by Chile directly on the gain from such a sale would generally be eligible for the U.S. foreign tax credit; however, because the gain would generally be U.S.-source, a U.S. Holder might not be able to use the credit otherwise available. U.S. Holders should consult their own tax advisors regarding the foreign tax credit implications of the sale, redemption or other dispos ition of a Share or ADS.
A Non-U.S. Holder of ADSs or shares will not be subject to United States income or withholding tax on gain from the sale or other disposition of ADSs or shares unless, in general (i) such gain is effectively connected with the conduct of a trade or business within the United States or (ii) the Non-U.S. Holder is an individual who is present in the United States for at least 183 days during the taxable year of the disposition and certain other conditions are met.
Information Reporting and Backup Withholding
Payments of dividends on the shares or ADSs and the proceeds of sale or other disposition of the shares or ADSs within the United States by certain non-corporate holders may be subject to U.S. information reporting and backup withholding. A U.S. Holder generally will be subject to U.S. information reporting and backup withholding at a rate of 30% unless the recipient of such payment supplies an accurate taxpayer identification number, as well as certain other information, or otherwise establishes an exemption, in the manner prescribed by law. U.S. information reporting and backup withholding of U.S. federal income tax at a rate of 30% may also apply to Non- U.S. Holders that are not “exempt recipients” and that fail to provide certain information as may be required by United States law and applicable regulations. Any amount withheld under U.S. backup withholding is not an additional tax and is generally allowable as a credit against the U.S. Holder’s federal income tax liability upon furnishing the required information to the IRS.
81
HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING RULES TO THEIR PARTICULAR CIRCUMSTANCES
Dividends And Paying Agents
Statement By Experts
Documents On Display
Documents referred to in this form 20-F are available to the public at:
http://www.sec.gov/edgar/searchedgar/companysearch.html, CIK: 909037.
Subsidiary Information
See Item 4.C. Organizational Structure.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As explained elsewhere in this Annual Report, we transact our businesses in more than 100 countries, thereby rendering our market risk dependent upon the fluctuations of foreign currencies and local and international interest rates. These fluctuations may generate losses in the value of financial instruments taken in the normal course of business.
We, from time to time and depending upon then current market conditions, review and re-establish our financial policies to protect our operations. Management is authorized by our Board of Directors to engage in certain derivative contracts such as forwards and swaps to specifically hedge the fluctuations in interest rates and in currencies other than the U.S. dollar.
Derivative instruments used by us are transaction-specific so that a specific debt instrument or contract determines the amount, maturity and other terms of the hedge. We do not use derivative instruments for speculative purposes.
Interest Rate Risk. As of December 31, 2003, we had a total financial debt of US$ 264.6 million where 23% was priced at a variable rate and 77% was priced at a fixed rate. During 2004 we prepaid all our financial debt priced at a variable rate using mostly internal cash flow generation, and therefore, as of December 31, 2004, we had 100% of our long-term financial debt priced at a fixed rate and a US$ 6 million short-term financial debt priced at a variable rate.
82
We maintain the majority of our short-term debt priced at Libor plus a spread for which we do not have any kind of derivative contract.
Exchange Rate Risk. Although the U.S. dollar is the primary currency in which we transact our businesses, our operations throughout the world expose us to exchange rate variations for non-U.S. dollar currencies. Therefore, fluctuations in the exchange rate of such local currencies may affect our financial condition and results of operations. To lessen these effects, we maintain derivatives contracts to protect the net difference between our principal assets and liabilities for currencies other than the U.S. dollar. These contracts are renewed periodically depending on the amount to cover in each currency. Aside from this, we do not hedge potential future income and expenses in currencies other than the U.S. dollar with the exception of the Euro and Chilean Peso. We estimate annual sales in Euro and expenses in Chilean Peso and secure the exchange difference with derivatives contracts.
As of December 31, 2004 we had the following net monetary assets and liabilities that are subject to foreign exchange gain or loss fluctuation:
As of December 31, 2004, we had open forward exchange contracts to buy U.S. dollars and sell foreign currency for approximately US$58.1 million in euros, US$9 million in Chilean pesos, US$1.6 million in South African rands and US$3.5 million in Mexican pesos. These contracts are all short-term and a summary of them is shown in Note 17 to the Consolidated Financial Statements.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
83
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
In May of 2005, SQM’s by-laws were amended at an extraordinary shareholders meeting in order to change the method of calculating the total percentage of shares held by a single individual for voting purposes. As a result of the amendment, shares that are held directly and shares held indirectly by related third parties are included in each shareholders total percentage of ownership. This calculation is used for determining whether a shareholder’s voting influence exceeds certain limits which are set forth in Article 31 of the By-laws.
ITEM 15. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, pursuant to Exchange Act Rules 13(a)-15(b), as of the end of the period covered by this Annual Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective in providing reasonable assurance that material information is made known to management and that financial and non-financial information is properly recorded, processed, summarized and reported.
The procedures associated to our internal controls are designed to provide reasonable assurance that our transactions are properly authorized, assets are safeguarded against unauthorized or improper use, and transactions are properly recorded and reported. However, through the same design and evaluation period of the disclosure controls and procedures, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, recognized that there are inherent limitations to the effectiveness of any internal control system regardless of how well designed and operated. In such a way they can provide only reasonable assurance of achieving the desired control objectives and no evaluation can provide absolute assurance that all control issues or instances of fraud, if any, within the Company have been detected.
There were no significant changes in our internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses in our internal controls and procedures requiring corrective actions.
84
ITEM 16. [Reserved]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
On June 21, 2005, the Board of Directors approved the establishment of an audit committee to comply with the requirements of the NYSE corporate governance rules. At that meeting, the Board of Directors determined that the Company does not have an audit committee financial expert within the meaning of the regulations adopted under Sarbanes-Oxley Act of 2002.
Pursuant to Chilean regulations, the Company has a Directors’ Committee whose main duties are similar to those of an audit committee. Each of the members of the Directors’ Committee is a member of the audit committee. See 6.C. Board Practices.
Our Board believes that the members of the Directors’ Committee have the necessary expertise and experience to perform the functions of the Directors’ Committee pursuant to Chilean regulations.
ITEM 16B. CODE OF ETHICS
We adopted at the beginning of 2003 a Code of Business Conduct that applies to the Chief Executive Officer, the Chief Financial Officer and the Internal Auditor, as well as to all our officers and employees. Our Code adheres to the definition set forth in Item 16B of Form 20F under the Exchange Act.
No waivers have been granted therefrom to the officers mentioned above.
The full text of the code is available on our website at http://www.sqm.com/ingles/IR_home_fr.htm
Amendments to, or waivers from one or more provisions of the code will be disclosed on our website.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The table sets forth the amount of fees billed for each of the last two fiscal years by our independent auditors, Ernst & Young, in relation to audit services, audit-related services, tax and other services provided to us (Th.US$).
Audit fees in the above table are the aggregate fees billed by Ernst & Young in connection with the audit of our annual Consolidated Financial Statements, as well as the review of other statutory filings.
Audit-related fees in the above table are fees billed by Ernst & Young for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.”
Tax fees in the above table are fees billed by Ernst & Young for tax advice and tax planning services.
85
Directors’ Committee Pre-Approval Policies and Procedures
Chilean law states that public companies are subject to “pre-approval” requirements under which all audit and non-audit services provided by the independent auditor must be pre-approved by the Directors’ Committee. Our Directors’ Committee approves all audit, audit-related, tax and other services provided by Ernst & Young.
Any services provided by Ernst & Young that are not specifically included within the scope of the audit must be pre-approved by the Directors’ Committee prior to any engagement.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
86
PART III
ITEM 17. FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
See Item 19(a) for a list of all financial statements filed as part of this Form 20-F annual report.
ITEM 19. EXHIBITS
(a) Index to Financial Statements
(b) Exhibits
87
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
SOCIEDAD QUIMICA Y MINERA DE CHILE S.A.
(CHEMICAL AND MINING COMPANY OF CHILE INC.)
88
Consolidated Financial Statements
Santiago, Chile
December 31, 2004 and 2003
SOCIEDAD QUIMICA Y MINERA DE CHILE S.A. As of December 31, 2004 and 2003
and for the three years in the period ended December 31, 2004
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and Directors Sociedad Química y Minera de Chile S.A.:
We have audited the accompanying consolidated balance sheets of Sociedad Química y Minera de Chile S.A. and subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sociedad Química y Minera de Chile S.A. and subsidiaries at December 31, 2004 and 2003 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in Chile and standards set forth by the Superintendency of Securities and Insurance, which differ in certain respect from U.S. generally accepted accounting principles (see Note 27 to the consolidated financial statements).
Santiago, Chile, March 4, 2005 (except for Note 27 for which the date is June 10, 2005)
F-2
Consolidated Balance Sheets
The accompanying notes form an integral part of these consolidated financial statements.
F-3
F-4
Consolidated Statements of Income
F-5
Consolidated Statements of Cash Flows
F-6
Notes to the Consolidated Financial Statements
Note 1 – Company Background
Sociedad Química y Minera de Chile S.A. (the “Company”) was registered with the Chilean Superintendency of Securities and Insurance (“SVS”) on March 18, 1983. The Company is regulated by the SVS as well as by the United States Securities and Exchange Commission (“SEC”) since issuing American Depositary Receipts (“ADRs”) in December 1995.
References herein to “SQM S.A.” or the “Parent Company” are to Sociedad Química y Minera de Chile S.A. and references herein to the “Company” are to Sociedad Química y Minera de Chile S.A. together with its consolidated subsidiaries and the companies in which Sociedad Química y Minera de Chile S.A. holds significant equity interests.
The Company is an integrated producer and distributor of specialty fertilizers, iodine, lithium and other industrial chemicals. The Company extracts natural resources and develops them into products, which it then distributes to more than 100 countries.
Note 2 – Summary of Significant Accounting Policies
The accompanying consolidated financial statements have been prepared in U.S. dollars in accordance with accounting principles generally accepted in Chile (“Chilean GAAP”) and the regulations of the SVS.
The consolidated financial statements include the accounts of SQM S.A. and its majority-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in the consolidation.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
The majority-owned subsidiaries of the SQM S.A. as of December 31, 2003 and 2004 are as follows:
F-7
Note 2 – Summary of Significant Accounting Policies (continued)
F-8
As the Company exerts control over the subsidiary Fertilizantes Naturales S.A., it has been included in the consolidation for the years ended December 31, 2004 and 2003.
F-9
F-10
Income and expense accounts are translated at average exchange rates between the US dollar and the local currenc y.
Foreign exchange differences for the period ended December 31, 2004, 2003 and 2002 generated net (losses) gains of ThUS$ (475), ThUS$ 6,590 and ThUS$(3,483), respectively, which have been charged to the consolidated statements of income in each respective period.
The monetary assets and liabilities of foreign subsidiaries were translated into US dollars at the exchange rates per US dollar prevailing as of December 31, as follows:
The Company uses the “observed exchange rate”, which is the rate determined daily by the Chilean Central Bank based on the average exchange rates at which bankers conduct authorized transactions.
F-11
The Company considers all highly liquid investments with a remaining maturity of less than 90 days as of the closing date of the financial statements to be cash equivalents. As of December 31, cash and cash equivalent are as follows:
Time deposits are recorded at cost plus accrued interest and UF indexation adjustments, as applicable.
Marketable securities are recorded at the lower of cost plus accrued interest or market value.
The Company records an allowance for doubtful accounts based on estimated probable losses from specific customer identification. This allowance is presented as a deduction from Trade accounts receivable, Notes receivable and Other accounts receivables.
Inventories of finished products and work in process are valued at average production cost. Raw materials and products acquired from third parties are stated at average cost and materials-in-transit are valued at cost. These values do not exceed net realizable values.
Inventories of non-critical spare parts and supplies are classified as other current assets, except for those items for which the Company estimates a turnover period in excess of one year, which are classified as other long-term assets.
F-12
The Company records income taxes in accordance with Technical Bulletin No. 60 and complementary technical bulletins thereto issued by the Chilean Association of Accountants, and with SVS Circulars No. 1466 and No. 1560, recognizing, using the liability method, the deferred tax effects of temporary differences between the financial and tax values of assets and liabilities. As a transitional provision at the date of adoption, a contra asset or liability has been recorded offsetting the effects of the deferred tax assets and liabilities not recorded prior to January 1, 2000. Such contra asset or liability must be amortized to income over the estimated average reversal periods corresponding to the underlying temporary differences to which the deferred tax asset or liability relates calculated using the tax rates that will be in effect at the time of reversal. As well, the measurement of deferred tax assets are further reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized.
Under Chilean law, the Parent Company and its subsidiaries are required to file separate tax returns.
Property, plant, equipment and property rights are recorded at acquisition cost, considering in general an average residual value of 5%, except for certain assets that were restated in accordance with a technical appraisal in 1988. Depreciation expense has been calculated using the straight-line method based on the estimated useful lives of the assets and is charged directly to expenses.
Property, plant and equipment acquired through financial lease agreements are accounted for at the present value of the minimum lease payments plus the purchase option based on the interest rate included in each contract. The Company does not legally own these assets and therefore cannot freely dispose of them.
In conformity with Technical Bulletin No. 31 and 33 of the Chilean Association of Accountants, the Company capitalizes interest cost during the construction period of assets.
Maintenance costs of pla nt and equipment are charged to expenses as incurred.
F-13
The Company obtains property rights and mining concessions from the Chilean state. Other than minor filing fees, the property rights are usually obtained without initial cost, and once obtained, are retained by the Company as long as the annual fees are paid. Such fees, which are paid annually in March, are recorded as prepaid assets to be amortized on a straight-line basis over the following twelve months.
Investments in related companies over which the Company has significant influence, are included in other assets and are recorded using the equity method of accounting, in accordance with SVS Circulars Nos. 368 and 1,697 and Technical Bulletins No. 64 and 72 issued by the Chilean Association of Accountants. Accordingly, the Company’s proportional equity share in the net income or net loss of each investee is recognized in non-operating income and expenses in the consolidated statements of income on an accrual basis, after eliminating any unrealized profits from transactions with the related companies.
The translation adjustment to U.S. dollars of investments in domestic subsidiaries that maintain their accounting records and are controlled in Chilean pesos is recognized in other reserves within shareholders’ equity. Direct and indirect investments in foreign subsidiaries or affiliates are controlled in U.S. dollars.
Until December 31, 2003, goodwill was calculated as the excess of the purchase price of companies acquired over their net book value, whereas negative goodwill occurred when the net book value exceeds the purchase price of companies acquired. Beginning January 1, 2004, the Company adopted Technical Bulletin No. 72 of the Chilean Association of Accountants that changes the basis for accounting for goodwill and negative goodwill, introducing the fair value of the acquired net assets as the basis to be compared with purchase price in a business combination in order to determine the existence of goodwill or negative goodwill.
Goodwill and negative goodwill resulting from equity method investments are maintained in the same currency in which the investment to which it relates is measured. Both goodwill and negative goodwill are amortized based on the estimated period of investment return, which is generally 20 and 10 years for goodwill and negative goodwill, respectively.
Intangible assets are stated at cost plus acquisition expenses and are amortized over a maximum period of 40 years, in accordance with Technical Bulletin No. 55 of the Chilean Association of Accountants.
F-14
Mining development costs are recorded in other long-term assets and are amortized using the unit of production basis based on proven and probable reserves.
The Company calculates the liability for staff severance indemnities based on the present value of the accrued benefits for the actual years of service worked based on an average employee tenure of 24 years and a real annual discount rate of 9%.
The cost of employee vacations is recognized in the financial statements on an accrual basis.
Dividends are generally declared in U.S. dollars but are paid in Chilean pesos.
The Company maintains derivative contracts to cover the risk of fluctuation in foreign currencies, which are recorded in conformity with Technical Bulletin No. 57 of the Chilean Association of Accountants. Such contracts are generally recorded at fair value with net gain or losses recognized in results.
For comparison purposes, certain reclassifications have been made to the 2003 and 2002 financial statements.
Revenue is recognized on the date goods are physically delivered or when they are considered delivered according to the terms of the contract.
Computational systems developed internally using the Company’s personnel and materials are charged to income during the year in which the expenses are incurred.
In accordance with Circular No. 981 dated December 28, 1990 of the SVS, computer systems acquired by the Company are recorded at cost.
F-15
–Research and development cost are charged to the income statement in the period in which they are incurred. Property, plant and equipment that are acquired for use in research and development activities and determined to provide additional benefits to the Company are recorded in property, plant and equipment.
Note 3 – Changes in Accounting Principles
Until June 30, 2004, the financial statements of the subsidiary SQM Lithium Specialities LLP were not consolidated because this subsidiary was in development stage. Starting July 1, 2004, SQM Lithium Specialities LLP began operating and therefore the Company has consolidated this subsidiary in the financial statements as of December 31, 2004.
Prior to January 1, 2004, goodwill arose from the excess of the purchase price of companies acquired over their net book value; negative goodwill arose when net book value exceeded the purchase price of companies acquired. Goodwill and negative goodwill is also accounted for in the purchase of investments accounted for by the equity method. Chilean GAAP also provided that goodwill and negative goodwill amortization may be accelerated if the proportional net income or net loss of the investee exceeds the respective straight-line amortization amount. Beginning January 1, 2004, the Company adopted Technical Bulletin 72 of the Chilean Association of Accountants, which changes the basis for determining accounting for goodwill and negative goodwill generated in transactions after January 1, 2004, based on an allocation of the purchase price based on the fair value of the identifiable assets acquired and identifiable liabilities assumed. Both goodwill and negative goodwill are normally amortized over the maximum period of twenty years considering the expected period of return of the investments.
F-16
Notes to the Consolidated Financial Statements–
Note 4 – Short-term and Long-term Accounts Receivable
Changes in the allowance for doubtful accounts for the years ended December 31 are as follows:
F-17
Note 4 – Short-term and Long-term Accounts Receivable (continued)
Consolidated Short-term and Long-term Receivables – by Geographic Location
F-18
Note 5 – Balances and Transactions with Related Parties
Accounts receivable from and payable to related companies are stated in US dollars and accrue no interest.
Transactions are made under terms and conditions that are similar to those offered to unrelated third parties.
a) Amounts included in balances with related parties as of December 31, 2004 and 2003 are as follows:
F-19
Note 5 – Balances and Transactions with Related Parties (continued)
a) Amounts included in balanc es with related parties as of December 31, 2004 and 2003, continued:
There were no outstanding long-term accounts payable with related parties as of December 31, 2004 and 2003.
F-20
b) During 2004 and 2003, principal transactions with related parties were as follows:
F-21
Note 6 – Inventories
Inventories are summarized as follows:
F-22
Note 7 – Property, Plant and Equipment
Property, plant and equipment as of each December 31are summarized as follows:
F-23
Note 7 – Property, Plant and Equipment (continued)
Depreciation expense for the years ended December 31 2004, 2003 and 2002 is as follows:
The Company has capitalized assets obtained through leasing, which are included in other property, plant and equipment and are as follows:
The administrative office buildings were acquired for 230 installments of UF 663.75 each and an annual, contractually established interest rate of 8.5%. The vehicles were acquired for 36 installments of ThUS$ 98 each.
F-24
Note 8 – Investments in and Receivables from Related Parties
There are no plans for the foreign investments to pay dividends, as it is the Company’s policy to reinvest those earnings.
The Company has not designated its non U.S. dollar denominated liabilities as net investment hedges of its foreign investments.
* In January 2004, the subsidiary Soquimich European Holding B.V. made a capital contribution of ThUS$ 475 on its affiliate Misr Specialty Fertilizers. In accordance with BT 72 of the Chilean Association of Accountants and SVS Circular 1,697, the investment in Misr Specialty Fertilizers was valued using the book value of equity as of December 31, 2003, which did not differ significantly from its fair value determined as of the same date.
* At the shareholders’ meeting of Empresas Melón S.A. held on February 25, 2004, the shareholders agreed its spin-off in 2 companies, Empresas Melón S.A. and Inmobiliaria San Patricio S.A. As a result, SQM S.A. maintained its ownership of 14.05% in Empresas Melón S.A. and a same ownership percentage was assigned to this entity in the new company.
* In April 2004, the subsidiary Soquimich European Holding B.V. increased capital by ThUS$ 475 in its affiliate Misr Specialty Fertilizers. In accordance with BT 72 of the Chilean Association of Accountants and SVS Circular 1,697, the investment in Misr Specialty Fertilizers was valued using the book value of equity as of March 30, 2004, which did not differ significantly from its fair value determined as of the same date.
* On August 13, 2004, SQM S.A. transferred 653,748,837 shares of Inmobiliaria San Patricio to Blue Circle South American Holding S.A., which was the totality of the shares held by SQM S.A. (14.05% participation). This transfer was performed in accordance with the contract for acquiring shares of Empresas Melón during 1998. The effect on income is presented as part of the gain from the sale of Empresas Melón.
* On August 18, 2004, 653,748,837 shares of Empresas Melón S.A. representing all the shares held at the time by the Company (14.05% participation) were sold in a public auction in the Santiago Stock Market for ThUS$69,337. The proceeds were rec eived in cash and a gain on sale of ThUS$ 8,179 was recorded in net income.
* On August 20, 2004, SQM Potasio S.A. decreased its capital in RS Agro Chemical Trading A.V.V. by ThUS$ 25,000, leaving it with 99.98% participation and SQM S.A. with 0.02%. This operation did not produce goodwill or negative goodwill.
F-25
Note 8 – Investments in and Receivables from Related Parties (continued)
b) Transactions executed in 2004 (continued)
* In October 2004, the subsidiary Soquimich European Holding B.V. increased its capital in Misr Specialty Fertilizers by ThUS$ 475. In accordance with BT 72 of the Chilean Association of Accountants and SVS Circular 1697, the investment in Misr Specialty Fertilizers was valued using the book value of equity as of September 30, 2004, which did not differ significantly from its fair value determined as of the same date.
* On November 18, 2004, the subsidiary Soquimich European Holding B.V., contributed ThUS$268 to a joint venture with SQM Eastmed Turkey.
* On November 25, 2004, SQM Potasio S.A. decreased its capital in RS Agro Chemical Trading A.V.V. by ThUS$ 30,000, leaving it with 1.667% participation and SQM S.A. with 98.333%. This operation did not produce goodwill or negative goodwill.
* On December 23, 2004, SQM S.A. and SQM Nitratos S.A. acquired 43,733,165 and 2,000 shares, respectively, of PCS Yumbes S.C.M. for ThUS$ 39,707 (equivalent to 99.9954% and 0.0046% participation, respectively), of which ThUS$34,511 was paid on the date of acquisition and the remaining ThUS$5,196 will be paid on January 27, 2005.
In accordance with BT 72 (see note 3), the Company began valuing the assets and liabilities of the individual financial statements of PCS Yumbes S.C.M. as of December 31, 2004, valuing them at their respective fair values. This valuation method created goodwill of ThUS$ 12,637, produced principally by the valuation of property, plant and equipment carried out using appraisals performed in accordance with SVS Circular 1,698. The goodwill will be amortized over a period of 20 years.
Therefore, the assets, liabilities and equity incorporated in the consolidation at their respective fair values as of December 31, 2004 are as follows:
The Company is in the process of finalizing the purchase price allocation related to the purchase of PCS Yumbes S.C.M. Pursuant to BT 72, the Company has a period of one year to finalize this allocation.
F-26
* On January 27, 2003, SQM Comercial de México S.A. de C.V. and SQM Nitratos S.A. acquired 8,750 shares of the related company Fertilizantes Olmeca y SQM S.A. de C.V. which represented 50% of its share capital. Consequently, Fertilizantes Olmeca y SQM S.A. de C.V. became a subsidiary of SQM S.A. This transaction generated goodwill of ThUS$279. Subsequently, SQM Nitratos S.A. acquired from SQM Comercial de México S.A. de C.V. 8,749 shares in Fertilizantes Olmeca y SQM S.A. de C.V. This transaction did not produce goodwill.
* On January 31, 2003, SQM S.A. acquired shares owned by SQM Nitratos S.A. in Sociedad Contractual Minera Antucoya for ThUS$ 100. This united all the shares of SCM Antucoya in one shareholder and consequently SCM Antucoya was liquidated and SQM S.A. assumed of all this company’s assets and liabilities.
* On March 30, 2003, Fertilizantes Olmeca y SQM S.A. de C.V. increased its capital by ThUS$2,000 through the issuance of 431,200 shares, which were subscribed in full by SQM Nitratos S.A. As a result, SQM Nitratos S.A. had an ownership interest of 78.29% and SQM Comercial de Mexico had an ownership interest of 21.71%.
* On March 30, 2003, Soquimich European Holding acquired 50% ownership of Mineag SQM Africa Ltd. from Ravlin Investment Limited for ThUS$990. Consequently, Mineag SQM Africa Ltd. became a subsidiary of SQM S.A. This transaction did not produce goodwill.
* On April 28, 2003, SQM Comercial S.A. acquired from Norsk Hydro ASA, 819,999 shares in Norsk Hydro Chile S.A., SQM Comercial Internacional Ltda., a subsidiary company of SQMC, acquired the one remaining share consequently and SQMC became the sole owner and controlled 100% of Norsk Hydro Chile S.A. This transaction generated goodwill of ThUS$ 1,282.
* On June 30, 2003, SQM Nitratos S.A. acquired the shares owned by SQM S.A. in Sociedad Energía y Servicios S.A. The shares amounted to ThUS$2,422. This transaction resulted in the consolidation of all the shares of Energía y Servicios S.A. by one shareolder, SQM Nitratos S.A. Consequently under Chilean law, Energía y Servicios S.A. was dissolved and SQM Nitratos S.A. assumed all its assets and liabilities.
* On June 30, 2003, the subsidiaries SQM Virginia LLC and North American Trading Company, made a capital contribution to the subsidiary SQM Lithium Specialties LLP of ThUS$ 1,678, in a proportion of 99% and 1%, respectively.
* On July 16, 2003, the subsidiary Norsk Hydro Chile changed its name to “Comercial Hydro S.A.”.
*On September 30, 2003, the subsidiaries SQM Virginia LLC and North American Trading Company, made a capital contribution to the subsidiary SQM Lithium Specialties LLP of ThUS$ 367, in a proportion of 99% and 1%, respectively.
F-27
* On September 30, 2003, SQM Corporation N.V. participated in a capital increase of Ajay Europe SARL in equal parts with Ajay Chemicals Inc., both therefore maintaining the same ownership percentages.
* On November 10, 2003, SQM Nitratos S.A. and SQM S.A. liquidated the subsidiary SQM Colombia Limitada.
* On November 18, 2003, the subsidiary Soquimich European Holding BV, provided capital of ThUS$ 676 to initiate a joint venture with the company Misr Specialty Fertilizer in Egypt.
* On November 20, 2003, SQM Potasio S.A. made a capital contribution of ThUS$ 55,000 to RSAgro Chemical Trading AVV, increasing its participation in this subsidiary to 99.99%.SQM S.A. did not participate and therefore reduced its participation by 0.01%.
Investments in which the Company has less than 20% participation and the capacity to exert significant influence or control over the investment, because SQM forms part of its Board of Directors, have been accounted for using the equity method.
F-28
Note 8 – Investments in and Receivables from Related Companies (continued)
F-29
Note 9 – Goodwill and Negative Goodwill
Goodwill, negative goodwill and the related amortization is summarized as follows:
F-30
Other long-term assets are summarized as follows:
Short-term bank debt is detailed as follows:
F-31
Long-term bank debt is detailed as follows:
The maturity of long-term debt is as follows:
F-32
As of December 31, 2004 and 2003, accrued liabilities are summarized as follows:
As of December 31, 2004 and 2003, the Company has the following consolidated balances for distributable retained taxed earnings, income not subject to taxes, tax loss carry-forwards and credit for shareholders:
Income tax losses in Chile can be carried forward indefinitely.
F-33
The deferred taxes as of December 31, 2004 and 2003 represented a net liability of ThUS$ 42,022 and ThUS$ 29,273, respectively, and are detailed as follows:
F-34
F-35
Note 13 – Current and Deferred Income Taxes (continued)
c) Income tax expense is summarized as follows:
Note 14 – Staff Severance Indemnities
Staff severance indemnities are summarized as follows:
F-36
Note 15 – Minority Interest
Minority interest is summarized as follows:
F-37
Note 16 – Shareholders’ Equity
a) Movements within shareholders’ equity are detailed as follows:
F-38
Note 16 – Shareholders’ Equity (continued)
b) Other comprehensive income as of December 31, 2004 is as follows:
c) Capital consists of 263,196,524 fully authorized, subscribed and paid shares with no par value, divided into 142,819,552 Series A shares and 120,376,972 Series B shares.
The preferential voting rights of each series are as follows:
F-39
Note 17 – Derivatives Instruments
Derivative instruments are recorded at their fair value as of year-end. Changes in fair value are recognized in income with the liability recorded in other current liabilities. Losses from options relate to fees paid by the Company to enter into such contracts. As of December 31, 2004, the Company’s derivative instruments are as follows:
F-40
SOCIEDAD QUIMICA Y MINERA DE CHILE S.A. AND SUBSIDIARIES
Note 18 – Non-Operating Income and Expenses
Non-operating income and expenses are detailed as follows:
a) Non-operating income
b) Non-operating expenses
F-41
Note 19 – Price-level Restatement
Amounts charged or credited to income relating to price-level restatement during the year ended December 31, are summarized as follows:
Note 20 – Assets and Liabilities Denominated in Foreign Currency
F-42
Note 21 – Commitments and Contingencies
F-43
Note 21 – Commitments and Contingencies (continued)
F-44
Note 22 – Third Party Guarantees
As of December 31, 2004 and 2003 the Company has the following indirect guarantees outstanding:
Note 23 - Sanctions
During 2004 and 2003, the SVS did not apply sanctions to the Company, its directors or managers.
Note 24 – Environmental Projects
Disbursements incurred by the Company for the years ended December 31, 2004, 2003 and 2002 relating to its investments in production processes and compliance with regulations related to industrial processes and facilities were as follows:
F-45
Note 24 – Environmental Projects (continued)
On August 10, 1993, the Ministry of Health published a resolution under the Sanitary Code that established that the levels of breathable particles present at Maria Elena Plant exceeded the level allowed for air quality and, consequently, affected the nearby city of Maria Elena. Particles mainly come from dust that results from processing the sod ium nitrate, particularly at the crushing process prior to leaching. The Company has implemented a series of measures that have shown notable improvement in air quality at María Elena. A new decontamination plan for this area, released on March 13, 2004, is intended to meet air quality standards by April 1, 2006. On December 30, 2004, the Company submitted a proposal entitled “Technological Change at María Elena”, which intends to reduce particle emission, to the government’s Environmental Impact Evaluation System. This proposal is presently pending evaluation by the environmental regulators, whose decision should be made public during the first semester of 2005.
Ore treatment operations, as they are controlled processes, produce solid residual materials that are the non-soluble by product and a certain degree of moisture.
Productive operations based on brine, are carried out at the Atacama Salt Mine and almost 95% of the energy used is solar energy and the remaining 5% comes from natural gas, electricity and fossil fuels. Residual brine left after the production processes are again injected to the Atacama Salt Mine in order to minimize the possible environmental impact.
SQM entered into a contract with the National Forestry Corporation (CONAF) aimed at researching the activities of flamingo groups that live in the Atacama Salt Mine lagoons. Such research includes a population count of the birds and wildlife, breeding research, additional behavior research and the climate phenomena of the area.
Consistent with the Company’s ongoing commitment with the environmental authorities, the Company actively participates in the Joint Monitoring Research project for the Atacama Salt Mine watershed along with other mining companies that make use of the water resourc es that supply the Atacama Salt Mine. To perform this study, SQM has involved diverse scientists from prestigious research institutions such as Dictuc of Pontificia Universidad Católica, the University of Nevada, Cornell University and the University of Binghamton in New York.
F-46
Note 25 – Significant Events
On March 19, 2004, the Company informed the Superintendency of Securities and Insurance that the Board of Directors of SQM, at its meeting dated March 16, 2005, unanimously agreed to propose payment of a final dividend of US$ 0.08811 per share in favor of SQM’s shareholders that were registered in the respective registry during the fifth working day prior to the payment of this dividend.
This proposal was approved by the Company’s shareholders’ at their meeting held on April 30, 2004, thus allowing the Company to pay and distribute, as stated in the respective Dividend Policy, an annual dividend equivalent to 50% of the net profits.
On April 30, 2004, the Company held a general shareholders’ meeting. At this meeting, a majority of the Company’s shareholders, agreed the following issues, among others:
Note 26 – Subsequent Events
On January 19, 2005, the Company’s Board of Directors informed the SVS that, in an Ordinary Session of the Board on January 18, 2005, they accepted the voluntary and irrevocable resignation of Mr. Avi Milstein as Director and appointed Mr. Daniel Yarur E. in his place.
On February 25, 2005, Royal Seed Trading Corp A.V.V., a subsidiary of Sociedad Química y Minera de Chile S.A., entered into a syndicated loan for ThUS$ 100,000, guaranteed by SQM Potasio S.A., with the following banks: BBVA Securities Inc., BNP Paribas and Rabobank Curacao N.V. The loan matures in 5 years, with quarterly interest payments at an initial annual interest rate of Libor + 0.325%”, which could vary depending on any possible future modifications in the subsidiary’s external debt classification. There are no guarantees of real property associated with this loan.
The director Mr. José Antonio Silva B. consulted with the Chilean Superintendency of Securities and Insurance (“SVS”) as to the applicability of the concept of “limitation of related persons” to Article 31 of the by-laws of SQM S.A. and as equal to this concept already existing in Article 31 Bis of the aforementioned by-laws- and also in respect to the quorum required to modify the percentage of “37.5%” referred to in Article 31. The SVS, through Ordinary Official Communication N002622 dated March 16, 2005, asked the Company’s opinion in this respect and the Company, through its management informed the Board of Directors that the concept of “limitation of related persons” does not exist in Article 31 and that the history of both articles plus the interpretation of these articles at the different Shareholders’ meetings held throughout the years and the different objectives of these articles, among other aspects, allow concluding that this concept is not applicable to article 31 and that; in addition, the amendment of the percentage requires the vote by absolute majority of shares issued with voting rights present at the Shareholders’ meeting that analyze this amendment. Four directors agreed with the opinion provided by the management of SQM S.A. and two directors disagreed with this opinion and this was informed to the SVS. The SVS confirmed the opinion provided by the management of SQM S.A. based on matter of law of fact considerations explained in Ordinary Official Communication N003821 dated April 19, 2005.
Inversiones El Boldo Limitada, owner of more than 10% of voting right shares issued of SQM S.A. and related to Potash Corporation of Saskatchewan Inc., on April 25, 2005 has requested from the Board of directors of SQM S.A. that it requests an Extraordinary Shareholders’ Meeting of the Company to vote as to the convenience of either eliminating or not Series A and B shares - and preferences related to these series - in which the Company’s capital is currently divided through the amendment of the pertinent articles of the Company’s by-laws required to reflect this possible elimination and; alternately, and provided that the shareholders do not approve this elimination, to modify article 31 of these by-laws with the purpose of incorporating in this article the concept of “related persons” already included in Article 31 Bis of the aforementioned by-laws. The Company’s Board of Directors unanimously agreed on its meeting held on April 26, 2005 to summon such a meeting for May 25, 2005 at 10.00 a.m.
Up to December 31, 2004, the financial statements of the subsidiary Fertilizantes Naturales S.A. were considered in consolidation given that the Company maintained the control of this subsidiary (due to its right to manage this subsidiary’s financial and operating policies). Beginning on January 1, 2005, the Company no longer controls this subsidiary and therefore the aforementioned subsidiary has been excluded from consolidation in accordance with letters a) to d) of No.6 in Attachment 1 to Technical Bulletin No. 72 issued by the Chilean Association of Accountants.
On March 10, 2005, the subsidiary PCS Yumbes SCM, changed its name to Yumbes SCM.
At the Annual Ordinary Shareholders’ Meeting held on April 29, 2005, the shareholders approved a single dividend with respect to 2004 of US$0.18282 per share, equal to 65% of the net income, before amortization of negative goodwill for that year, which was paid on May 12, 2005. The Board of Directors also reaffirmed for 2005 a dividend policy that authorizes distribution of cash dividends in an amount equal to 65% of our net income before amortization of negative goodwill for the year.
Management is not aware of any significant subsequent events that have occurred after December 31, 2004 and that may affect the Company’s financial position or the interpretation of these financial statements.
F-47
Note 27 – Differences between Chilean and United States Generally Accepted Accounting Principles
Accounting principles generally accepted in Chile (“Chilean GAAP”) vary in certa in important respects from accounting principles generally accepted in the United States (“US GAAP”). Such differences involve certain methods for measuring the amounts shown in the financial statements, as well as additional disclosures required by US GAAP.
The principal differences between Chilean GAAP and US GAAP are described below together with explanations, where appropriate, of the method used in the determination of the adjustments that affect net income and total shareholders’ equity. References below to “SFAS” are to Statements of Financial Accounting Standards issued by the Financial Accounting Standards Board of the United States of America.
The preparation of financial statements in conformity with Chilean GAAP, along with the reconciliation to US GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
I. DIFFERENCES IN MEASUREMENT METHODS
The principal methods applied in the preparation of the accompanying financial statements, which have resulted in amounts that differ from those that would have otherwise been determined under US GAAP, are as follows:
As described in Note 2 k), certain property, plant and equipment are reported in the financial statements at amounts determined in accordance with a technical appraisal performed in 1988. US GAAP does not allow the revaluation of property, plant and equipment. The effects of the reversal of this revaluation, as well as of the related accumulated depreciation and depreciation charge for each year are set-forth under paragraph I p) below.
On January 1, 2000 the Company began applying Technical Bulletin No. 60, and related amendments, of the Chilean Association of Accountants concerning deferred taxes. These technical bulletins require the recognition of deferred income taxes for all temporary differences arising after January 1, 2000, using the liability method. For US GAAP purposes, the Company applies SFAS 109, “Accounting for Income Taxes”, whereby income taxes are also recognized using the same asset and liability approach with deferred income tax assets and liabilities established for temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities based on enacted tax rates.
Prior to implementation of Technical Bulletin No. 60 and related amendments, no deferred income taxes were recorded under Chilean GAAP if the related timing differences were expected to be offset in the year that they were projected to reverse by new timing differences of a similar nature.
F-48
In order to mitigate the effects of not recording deferred income taxes under the prior deferred income tax accounting standard, Technical Bulletin N° 60 provided for a period of transition whereby a transitional provision, a contra asset or liability (referred to as “complementary”) was recorded, offsetting the effects of the deferred tax assets and liabilities not recorded prior to January 1, 2000. Such contra assets or liabilities must be amortized to income over the estimated average reversal periods corresponding to the underlying temporary differences to which the deferred tax asset or liability relates.
The primary difference between Chile an GAAP and US GAAP relates to the reversal of the amortization of the complementary asset and liability recorded in accordance with the transition procedures for unrecorded deferred income taxes as of January 1, 2000, the elimination of complementary accounts included in consolidation with PCS Yumbes S.C.M. as of December 31, 2004 and the recognition of the deferred income tax impact of US GAAP adjustments, the effect of which is set-forth under paragraph I p) below. Additional disclosures required under SFAS 109 are set forth under paragraph II b) below.
In accordance with Chilean GAAP, the financial statements of subsidiaries which do not maintain their accounting records in US dollars, are transla ted from local currency to US dollars as described in Note 2 d).
For the purposes of reconciling to US GAAP, the Company applies SFAS 52, “Foreign Currency Translation”, which requires a functional currency translation approach. Under SFAS 52 the Company has determined that the US dollar is the functional currency of all domestic and foreign subsidiaries. Accordingly, financial statements of subsidiaries, which do not maintain their accounting records in US dollars, are remeasured into US dollars, after the elimination of price-level adjustments, if any, as follows:
Balance sheet accounts:
F-49
Note 27 – Differences between Chilean and United States Generally Accepted Accounting Principles, continued
Income statement accounts:
Remeasurement gains and losses are included in the determination of net income for the period.
The effect of eliminating price-level restatement and the inclusion in income of translation gains and losses from subsidia ries that maintain their records in Chilean pesos is included in paragraph I p) below.
During 1998, the Company purchased a 14.05% participation in Empresas Melón S.A., (“Melon”) a cement manufacturing company. As mentioned in Note 8 b), this investment was sold during 2004. Significant adjustments between Chilean GAAP and US GAAP relating to Melón both in the accounting of the purchase and in the subsequent accounting treatment are which as follows:
At the time of the purchase, under Chilean GAAP, the Company recorded goodwill on the transaction, calculated as the difference between the purchase price and the proportionate share of net book value acquired as presented in the most recent mont h end financial statements of Melon prior to the date of the acquisition. Such goodwill is being amortized over a period of 20 years.
Under US GAAP, the Company calculates goodwill as the difference between the purchase price and the proportionate fair value of the assets and liabilities purchased. The purchase price is allocated to the assets and liabilities based on the estimated fair market value of such assets and liabilities at the date of acquisition.
Under US GAAP, due to the increased net value of the acquired assets and liabilities, negative goodwill was generated. Such negative goodwill was allocated to the fixed assets acquired, reducing the accounting base, and consequently the depreciation of such fixed assets.
The effects of reversing goodwill recorded and its related amortization recognized under Chilean GAAP and the recognition of the new basis of assets and liabilities and subsequent depreciation until December 31, 2003 are set forth in paragraph I p) below.
F-50
Accounting for participation in Melón on a US GAAP basis
Pursuant to a shareholders agreement, until August of 2004 the Company exerted significant influence over Melón and thus it accounts for this investment under the equity method, consistent with Chilean GAAP.
Until that date, the Company recognized its participation of income and net assets of Melón under US GAAP, therefore a US GAAP basis of Melón was prepared. The principle differences between Chilean GAAP and US GAAP as they exist in Melón relate to deferred taxes and the elimination of price-level restatement.
Under US GAAP the financial statements of Melón must be converted into dollars in accordance with SFAS 52 as described in paragraph c) above. The effect of recognizing income and net assets under the equity method under US GAAP until December 31, 2003 is set forth in paragraph I p) below.
Consolidation and net loss of subsidiaries in the development stage
Under Chilean GAAP subsidiaries in the development stage are not consolidated and their results from operations are not included in the income statement. For purposes of US GAAP, these subsidiaries must be consolidated with their losses recorded in the income statement. Until June 30, 2004, SQM Lithium Specialties Limited Partnership LLP was the only development stage company in operation (see Note 3). The effects of recognizing its net loss for the years ended December 31, 2002, 2003 and 2004 is set forth in paragraph I p) below.
The principal effects in 2003 of recognizing assets and liabilities as recorded under US GAAP, which would result from the consolidation of the subsidiary SQM Lithium Specialties Limited Partnership LLP, are as follows:
F-51
As required by the Chilean Companies Act, unless otherwise decided by the unanimous vote of the holders of issued and subscribed shares, an open stock corporation must distribute a cash dividend in an amount equal to at least 30% of the company’s net income for each year as determined in accordance with Chilean GAAP, unless and except to the extent the Company has unabsorbed prior year losses. Since the payment of the 30% dividend out of each year’s income is a legal requirement in Chile, a provision has been made in the accompanying US GAAP reconciliation in paragraph I p) below to recognize the corresponding decrease in net equity at December 31 for each year for the difference between 30% of net income and interim dividends paid during the year.
Net income related to the amortization of negative goodwill can only be distributed as an additional dividend by the approval of the shareholders, and accordingly, is not included in the calculation of the minimum dividend to be distributed.
During 1989, 1995 and 2000, the Company loaned, in the aggregate, ThUS$ 1,452, ThUS$ 8,224 and ThUS$ 6,435, respectively, at market interest rates, to certain employees for the purpose of acquiring shares of the Company in the open market. In accordance with US GAAP, the remaining unpaid bala nce of such loans, amounting to ThUS$ 764, ThUS$ 1,102and ThUS$ 3,903 at December 31, 2004, 2003 and 2002, respectively, has been treated as a reduction of shareholders’ equity under paragraph I p) below.
During 1992 and 1994, the Compa ny entered into rental agreements covering certain equipment, which had an original cost basis of ThUS$16,507. In accordance with Chilean GAAP these transactions have been recorded as operating leases with the rental payments recognized in income on an accrual basis. Under US GAAP, the transactions were recorded as capital leases, with the equipment recorded in fixed assets and the associated present value of future minimum lease payments recorded as an obligation. During 2002, the Company exercised the purchase option on such assets. Accordingly, the fixed assets were recognized at the cost of the purchase option in Chilean GAAP, and as of December 31, 2002 had been fully depreciated under Chilean and US GAAP. The effect of accounting for the equipment as capital leases under US GAAP and the subsequent exercise of the purchase option is set-forth in paragraph I p) below.
Staff Severance Indemnities
The Company has negotiated certain collective bargaining agreements with employees for staff severance indemnities. Under Chilean GAAP the liability has been recorded at the present value of the accrued benefits which are calculated by applying a real discount rate to the benefit accrued over the estimated average remaining service period.
F-52
Staff Severance Indemnities, continued
Under US GAAP, termination indemnity employee benefits are accounted for in accordance with SFAS 87 consistent with that of a defined benefit pension plan, measuring the liability by projecting the future expected severance payments using an assumed salary progression rate, net of inflation adjustments, mortality and turnover assumptions, and discounting the resulting amounts to their present value using real interest rates. The effect of accounting for the indemnities in accordance with SFAS 87 is set forth under paragraph I p) below. Additional disclosure requirements are presented in paragraph II m) below.
The Company’s marketable securities may be sold in the short term if appropriate based on market conditions. Under Chilean GAAP, these securities are valued at the lower of cost or market value. Under US GAAP such securities are classified as available-for-sale and are shown at market value in the balance sheet with any unrealized gains or losses recognized in other comprehensive income. The unrealized gains and losses related to these securities are not material for the periods presented.
Derivatives
In June 1998, the Financial Accounting Standards Board issued SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 133 requires that all of a company’s derivative instruments be recorded in the balance sheet at fair value and that changes in a derivative instrument’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative instrument’s gains and losses to offset related results on the hedged item in the income statement, to the extent effective, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting
Sale of swaps
During 2000, the Company sold three interest rate swap contracts with original expiration dates in 2001 and 2003, which generated a gain of ThUS$3,213. Under Chilean GAAP, the gain was recognized in income at the time of sale. Under US GAAP, the gain is deferred and amortized over the effective life of the instruments that it hedged. The effect of deferring the gain is set forth under paragraph I p) below.
F-53
Derivatives, continued
Fair value accounting of derivatives
The Company enters into forward exchange contracts principally to mitigate the risk associated with maintaining certain accounts receivable in foreign currencies. The purpose of the Company’s foreign currency-hedging activities is to protect the Company from the risk that cash flows will be adversely affected by changes in exchange rates resulting from the collection of receivables from international customers. The effects of accounting for derivatives under Chilean GAAP are recorded in income.
The Company periodically uses interest rate swap agreements to manage interest rate risk on its floating rate debt portfolio. Interest rate swap agreements are generally entered into at the time floating rate debt is issued, in order to convert the floating rate debt to a fixed rate. As of December 31, 2004 the Company had no interest rate swap contracts in place.
The Company does not have the documentation and hedge effectiveness to qualify for hedge accounting, as required under SFAS 133. Therefore all derivatives have been accounted at fair value with changes in fair value recorded in income.
The effect of measuring the derivative instruments at their fair value and the corresponding effect in income is set forth under paragraph I p) below.
Business combinations and Goodwill
For US GAAP purposes, the Company adopted SFAS 142, “Goodwill and Other Intangible Assets”, as of January 1, 2002, and did not amortize goodwill related to acquisitions made after June 30, 2001. SFAS 142 applies to all goodwill and identified intangible assets acquired in a business combination.
The Company has performed the required annual impairment test, which did not result in any impairment.
Under Chilean GAAP, goodwill is amortized over the estimated period of return of the investment made. Impairment tests are only performed if there is evidence of impairment. No impairment has been recognized for any of the periods presented under either Chilean GAAP or US GAAP. The effect of reversing the amortization of goodwill under Chilean GAAP is set forth under paragraph I p) below.
F-54
Negative goodwill
Negative goodwill was generated on the acquisition of the investments in SQM Salar S.A. and Minera Mapocho S.A. Under Chilean GAAP, such negative goodwill was capitalized as a credit to the balance sheet and is being amortized over a period of 10 years.
Under US GAAP, prior to the adoption of SFAS 142, negative goodwill was considered as a reduction of the long-term assets of the acquired company, and if a credit remained after reducing those assets to zero, negative goodwill was recorded and amortized over the period of expected benefit. However, in the period of adoption, SFAS 141, “Business Combinations” requires that unamortized negative goodwill be written off and the resulting gain be recognized as an effect of a change in accounting principle. The effects of reversing goodwill recorded and its related amortization, the recognition of the new basis of assets and liabilities and subsequent depreciation and writing off the remaining balance of negative goodwill are set-forth in paragraph I p) below as follows:
The reversal of negative goodwill amortization recorded under Chilean GAAP.
Capitalized interest
In accordance with Chilean GAAP, only those legal entities that have financial expenses may capitalize interests on debt related to property, plant, equipment under construction and other projects.
Under US GAAP, the capitalization of interest on qualifying assets under construction is required, regardless of whether interest is associated with debt directly related to a project. The accounting differences between Chilean and US GAAP for financing costs and the related depreciation expense are included in the reconciliation to US GAAP under paragraph I p) below.
Minority interest
The effects on the minority interest of the US GAAP adjustments in subsidiaries that are not wholly-owned by the Company have been reflected in Minority interest and are included in paragraph I p) below.
F-55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The adjustments to reported net income required to conform to US GAAP are as follows:
F-56
The adjustments required to conform shareholders’ equity amounts under Chilean GAAP to US GAAP are as follows:
F-57
The changes in the net equity accounts determined under US GAAP are summarized as follows:
F-58
The following disclosures are not generally required or recommended for presentation in the financial statements under Chilean GAAP, but are required under US GAAP:
The following disclosure of earnings per share information is not generally required for presentation in financial statements under Chilean accounting principles but is required under US GAAP:
The earnings per share data shown above is determined by dividing net income for both Chilean GAAP and US GAAP purposes by the weighted average number of shares of common stock outstanding during each year. For the years presented the Company did not have convertible securities outstanding.
F-59
The provision for income taxes differs from the amount of income tax determined by applying the applicable Chilean statutory income tax rate of 17% (16.5% in 2003 and 16% in 2002) to pretax accounting income on a US GAAP basis as a result of the following differences:
F-60
b) Income taxes, continued
Deferred tax assets (liabilities) are summarized as follows at December 31 under US GAAP.:
For 2004 the table includes deferred tax assets and liabilities of PCS Yumbes S.C.M., which were consolidated as of December 31, 2004 due to the acquisition of this company (see Note 8 b) and paragraph II i) below).
F-61
Tax loss carry forwards relate to the following countries as of December 31:
The classification of the deferred tax assets and liabilities detailed above is as follows:
The provision for income taxes in accordance with US GAAP is as follows:
In accordance with Chilean Law No, 19,753, which was issued on September 28, 2001, the corporate income tax rate was 16% in 2002, 16.5% for the year 2003, and 17% for the year 2004 and thereafter.
F-62
US GAAP before tax income related to Chile and foreign operations for the years ended December 31 is as follows:
The portion of current and deferred taxes that related to Chile and foreign operations for the years ended December 31 in accordance with US GAAP is as follows:
F-63
b) Other Comprehensive Income
In accordance with SFAS No, 130, “Reporting Comprehensive Income”, the Company reports a measure of all changes in shareholders’ equity that result from transactions and other economic events of the period other than transactions with owners (“comprehensive income”). Comprehensive income is the total net income and other non-owner equity transactions that result in changes in net equity,
The following represents accumulated other comprehensive income balances, net of tax, as of December 31, 2004, 2003 and 2002:
F-64
c) Credit Agreements
The Company has renewable lines of credit arrangements for short-term US dollar borrowings with various Chilean and foreign banks totaling, in the aggregate, ThUS$ 449,000 and ThUS$ 422,000 at December 31, 2004 and 2003 respectively. There was US$ 435 million and US$ 307 million available as of December 31, 2004 and 2003, respectively. The Company pays no commitment fees on such credit lines and the average rate was in the range of LIBOR+0,40%.
d) Lease commitments
The Company leases office facilities by way of a capital lease payable in installments through 2011, with a bargain purchase option at the end of the lease.
Minimum lease payments under capital leases are recorded in Other accounts payable and are as follows:
F-65
SQM Salar S,A,, a consolidated subsidiary of the Company, entered into a contract with a government agency for the rental of land for the purpose of exploration and exploitation of certain minerals. Rental payments are stated in US dollars and are determined based on actual mineral sales through 2030 in accordance with specified rates in the agreement, The Company paid ThUS$ 4,910, ThUS$ 4,024 and ThUS$ 3,411 in 2004, 2003 and 2002 respectively, related to such rental payments (including the minimum annual rental, which was ThUS$ 3,477, ThUS$ 2,995 and ThUS$ 2,816 for 2004, 2003 and 2002, respectively. Future minim um annual rentals are as follows:
For US GAAP presentation purposes, the net foreign exchange gains and losses on transactions in foreign currencies and UF amounted to ThUS$ 3,000 , ThUS$ 14,036 and ThUS$ (5,868) in 2004, 2003 and 2002, respectively.
Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of cash, investments and trade accounts receivable.
The Company maintains cash and cash equivalents, marketable securities, and certain other financial instruments with various financial institutions, These financial institutions are located in Chile and other parts of the world, and the Company’s policy is designed to limit exposure to any one institution, The Company performs periodic evaluations of the relative credit standing of these financial institutions as part of the Company’s investment strategy.
Concentrations of credit risk with respect to trade accounts receivable are limited because of the large number of entities comprising the Company’s customer base and their dispersion around the world, The Company’s policy is to require collateral (such as letters of credit, guarantee clause or others) and/or maintain credit insurances for certain accounts as deemed necessary by management.
F-66
Advertising costs are expensed as incurred and amounted to ThUS$ 1,719, ThUS$ 1,346 and ThUS$ 1,134 for the years ended December 31, 2004, 2003 and 2002, respectively.
Research and development costs are expensed as incurred and amounted to ThUS$ 1,803, ThUS$ 1,444 and ThUS$ 2,197 for the years ended December 31, 2004, 2003 and 2002.
As described in paragraph I l) above the Company adopted SFAS 142 as of January 1, 2002, SFAS 142 applies to all goodwill and identified intangible assets acquired in a business combination.
Goodwill under US GAAP as of December 31 is summarized as follows:
As described in Note 8 b), during 2004 the Company purchased PCS Yumbes S.C.M. Although with the issuance of BT 72 no significant differences exist between Chilean GAAP and U.S. GAAP when accounting for business combinations, certain complementary accounts of deferred taxes (see paragraph I b) above) were not eliminated in the process of identify the fair value of acquired net assets. Therefore, for US GAAP purposes the allocation of the purchase price is as follows:
F-67
The following reclassifications are required to conform the presentation of Chilean GAAP income statement information to that required under US GAAP. The reclassification amounts are determined in accordance with Chilean GAAP.
F-68
The Company provides disclosures in accordance with SFAS 131, “Disclosures About Segments of an Enterprise and Related Information”, which establishes standards for reporting information about operating segments in annual financial statements as well as related disclosures about products and services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial statement information available is evaluated regularly by the chief operating decision maker in making decisions about allocating resources and assessing performance, In accordance with SFAS 131, the Company has five segments, which are split into geographical areas: Chile, Latin American and Caribbean except Chile, Europe, USA and Asia and other.
The accounting policies of each segment are the same as those described in the “Summary of Significant Accounting Policies”(Note 2).
The following segment information is presented in accordance with US GAAP reporting requirements, however, the amounts have been determined in accordance with Chilean GAAP.
F-69
F-70
Sales by product type to unaffiliated customers for the years ended December 31 are as follows:
The accompanying tables provide disclosure of the estimated fair value of financial instruments owned by the Company. Various limitations are inherent in the presentation, including the following:
The methodologies and assumptions used depend on the terms and risk characteristics of the various instruments and include the following:
F-71
The following is a detail of the Company’s financial instruments’ Chilean GAAP carrying amount and estimated fair value:
The Company’s subsidiary SQM North America Corporation has a defined benefit, noncontributory pension plan covering substantially all employees who qualify as to age and length of service. Plan benefits are based on years of service and the employee’s highest five-year average compensation during the last ten years of employment. The plan’s assets consist primarily of equity mutual funds and group annuity contracts.
In September 2002, the Board of Directors of SQM North America Corporation voted to suspend the plan such that after December 31, 2002, participants do not earn additional benefits for future services, Such action resulted in a curtailment loss (equal to the amount of unrecognized prior service cost) of approximately US$1.3 million for the year ended December 31, 2002.
Assumptions used in determining the actuarial present value of the projected benefit obligation as of December 31 are as follows:
F-72
The long-term rate of return on assets was determined based upon past investment experience and the expectation for future experience.
The following table sets forth the plan’s funded status and amounts recognized in the consolidated balance sheet as of December 31:
F-73
Net periodic pension expense was comprised of the following components for the year ended December 31, 2003 and 2004:
The plan’s asset allocations by asset category as of December 31 are as follows:
The transition liability (asset) re-established on January 1, 1992 is being amortized in level amounts over 11.66 years. As of January 1, 2004, the transition asset has been fully amortized.
The excess of the unrecognized (gain) or loss (if any) over the larger of 10% of the projected benefit obligation or 10% of the market related value of assets is amortized in level amounts over 12-48 years.
All unrecognized prior service costs have been considered fully amortized as a result of the December 31, 2002 curtailment brought about as the result of the December 31, 2002 cessation of benefit accruals.
The Company expects the plan to be fully funded for 2005. As a result no contribution is anticipated during this period.
F-74
Note 27- Differences between Chilean and United States Generally Accepted Accounting Principles, continued
Cash and cash equivalents
Under Chilean GAAP cash and cash equivalents are considered to be all highly liquid investments with a remaining maturity of less than 90 days as of the closing date of the financial statements, whereas, US GAAP considers cash and cash equivalents to be all highly liquid investments with an original maturity date of less than 90 days. The difference between the balance under US GAAP and Chilean GAAP of cash and cash equivalents is not material for the periods presented.
Under US GAAP, the cash movements within subsidiaries in the development stage would be included in the consolidated statement of cash flows, as described in paragraph I e). The effect on the consolidated statement of cash flows is not material for the periods presented.
Recently issued accounting pronouncements
In March 2005 the Financial Accounting Standards Board (FASB) published FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”. Interpretation 47 will result in (a) more consistent recognition of liabilities relating to asset retirement obligations, (b) more information about expected future cash outflows associated with those obligations, and (c) more information about investments in long-lived assets because additional asset retirement costs will be recognized as part of the carrying amounts of the assets.
Interpretation 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Interpretation 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation.
Interpretation 47 is effective for fiscal years ending after December 15, 2005. The Company is in process of analyzing the impact of the Interpretation on its results of operations and financial position.
Inventory costs
In November 2004, the FASB issued Statement of Financial Accounting Standards No.151 (SFAS 151), “Inventory Costs – an amendment of ARB No. 43, Chapter 4”, which clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) should be recognized as a current period expense. In addition, SFAS 151 requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after 15 June 2005. The Company is in process of analyzing the impact of this Statement on its results of operations and financial position.
Stripping costs
In March 2005, the FASB Emerging Issues Task Force (“EITF”) issued EITF No. 04-06 “Accounting for Stripping Costs in the Mining Industry” and concluded that stripping costs incurred during the production phase of a mine are variable production costs that should be included in the costs of the inventory produced during the period that the stripping costs are incurred. EITF No. 04-06 does not address the accounting for stripping costs incurred during the pre-production phase of a mine. EITF 04-06 is effective for the first reporting period in fiscal years beginning after December 15, 2005, with early adoption permitted. The effect of initially applying this consensus should be accounted for in a manner similar to a cumulative-effect adjustment. Since the Company have historically adhered to the accounting principles similar to EITF 04-06, the Company does not believe that adoption of EITF 04-06 will have a material impact on the Company’s consolidated financial statements.
Impairment of mining assets
In March 2004, the EITF issued EITF 04-03, “Mining Assets’ Impairment and Business Combinations”. EITF 04-03 requires mining companies to consider cash flows to the economic value of mining assets (including mineral properties and rights) beyond those assets’ proven and probable reserves, as well as anticipated market price fluctuations, when assigning value in a business combination in accordance with SFAS 141 and when testing the mining assets for impairment in accordance with SFAS 144. The consensus is effective for reporting periods beginning after March 31, 2004, but earlier adoption is permitted. The Company is in process of analyzing the impact of this Statement on its results of operations and financial position.
F-75