Tianqi pledges its SQM shares and seeks a partner

“It’s like when a snake eats an elephantThis is how they describe in China the situation of Tianqi that in less than two years went from being one of the leaders of the global lithium industry to a firm that in the coming weeks might not be able to pay part of the millionaire credit for US $ 3,500 million with which in 2018 it bought 23.7% of the Chilean SQM.

The ambitious move that two years ago made the Asian company the second largest shareholder in SQM – and one of the main global players in the booming business of key mineral for electromobility and batteries – could end in an uncertain way. Although Tianqi itself has assured in numerous communications to the Shenzhen Stock Exchange that it is in negotiations to extend terms and conditions, while applying various plans to cut costs and solve its problems, its shares continue to fall. All eyes are on November, when the deadlines for paying the millionaire purchase made in Chile are met.

The crisis as such began to unfold in May, when Chinese regulators asked him to clarify his results. In that country, requests for additional information from companies are very common, but in this case the questions focused on the Chilean operations of the firm, which in addition to SQM owns Sala, a complex of seven salt flats, located 235 kilometers from the northeast of Copiapó and that has not yet come into operation (see box).

The regulator also asked Tianqi about his relationships with SQM’s controllers (the Pampa group, owned by Julio Ponce), how he plans to pay the mega-loan he requested to sit on the board of that firm, for the dividends, what is the joint action pact with Pampa for and what does it intend to do with its other assets in the country, among other things.

Partner wanted

The firm’s responses came a few weeks later, but it ended up being the start of a long chain of reports to the market about the real situation of the Chengdu-based company.

This Monday 19, the firm published its results for the third quarter. And his shares collapsed, because his losses kept mounting. This is already its fifth quarter of decline. Y all for the credit to buy a stake in SQM, when the international lithium market was at its peak.

But everything changed. The coronavirus pandemic deepened the decline in lithium and the company also faces a series of problems in its Australian operations and the end of subsidies for electric cars by the Chinese government.

In its latest report to the market, Tianqi acknowledged that the sum of all this has caused a severe liquidity crisis that has led it to suspend or slow down all its construction projects, reduce costs, stop expenses and activate emergency mode. He even suspended his publicized Hong Kong IPO, where he intended to raise US $ 1,000 million to pay for the Chilean adventure.

But in addition to having to compromise with his creditors, he has even thought of associating. “Although a legally binding strategic investor introduction agreement has not yet been signed, the related work has been continuously and actively promoted,” the firm specified to the market.

And he acknowledged that they are also working with “the party and the governments of Sichuan province, Suining city and Shehong city” to prevent a fall. In those places there are firm operations that employ thousands of people.

Pledge shares

In 2018 Tianqi borrowed US $ 3.5 billion to finance part of its entry as the second largest shareholder in SQM. A group of banks led by China CITIC Bank gave him the resources, of which US $ 1,884 million must be amortized at the end of November.

The mining company has already paid more than US $ 67 million in interest, it did not pay those that were due in October, but in any case it has this purchase guaranteed with the shares of SQM and Tianqi’s numerous Chinese subsidiaries.

In addition to the 23.77% that Tianqi bought from Canada’s Nutrien in 2018, the Asian conglomerate owns an additional 2.1% of SQM, bringing its stake in the Chilean firm to 25.86%.

Last year, through a subsidiary in Hong Kong, Tianqi also seized that remainder of shares to the investment bank Morgan Stanley in exchange for a three-year loan.

In total, according to the reports sent to the stock exchange, Tianqi Group has pledged or pledged 53.52% of its shares and 17.69% of all the capital of the company.

The SQM purchase has been heavily criticized in China. On August 13, when President Vivian Wu left the company, that market attributed her departure to her leading role in the disputed Chilean operation. Above all, after in its same responses to the market, Tianqi revealed that the 23.77% purchased at US $ 4,066 million in 2018 is now worth US $ 3,526 million and that it could continue to fall, as indicated by a study commissioned at the end of December last year to the Beijing Zhongming International Assets Appraisal investment bank.

Wu was also the promoter of the coexistence agreement between Tianqi and the Pampa Group signed in April of last year. And the regulator also asked them about the contents of that text. “So far, the ‘Agreement’ has been successfully implemented. The two parties signed the “Renewal Letter” on March 26, 2020, with a validity period of one year ”, the firm responded, clarifying that this contract only gives them a vote and very little voice. “The company occupies 3 positions on SQM’s board of directors, which can make decisions about the production and operation of SQM up to a certain point,” it indicates in its response.

The company’s stock plunge deepened this week when two of its top executives – Zou Jun, CFO and Li Bo, vice president – announced that they plan to sell part of their shares. Together they have no more than 0.05% of Tianqi, but in their IPO report they said they would put their papers on the market because they had personal financing needs.

In the year, the papers of the firm fell 28% on average.

Trouble in Australia

In 2016, Tianqi Lithium announced the construction of a project in Australia for US $ 225 million, which between delays, cost overruns and legal disputes has already doubled its costs. Today it is semi-suspended due to lack of resources and has been fully prosecuted.

The company recognized in its reports to the Chinese market a “serious” lack of experience and talents in its management of engineering works abroad as one of the causes of this problem.

Also semi-paralyzed is the expansion plan at its Sichuan mine, due to declining Chinese subsidies for electric vehicles.

The firm was established in 2004 and is already one of the top five lithium ore suppliers in the world. Today, its mining and smelting business represents 55.73% of its revenues, while the area of ​​manufacturing chemical raw materials and chemical products generates 44.22% of sales.

Next week, the firm is due to announce new measures to face its delicate moment, driven by the acquisition in Chile. Snakes take time to eat an elephant.

Other deposits in Chile

The Chinese regulator also asked Tianqi about their Siete Salares or SALA project, how they consolidate it.
It is a strategic deposit of the mining company, located in the so-called “Lithium Triangle” of the Andes between Chile, Argentina and Bolivia, which is why it is expected to contain important resources.
The firm owns 188 mining exploration concessions – not yet exploited – spread over an area of ​​almost 51 thousand hectares,
Tianqi is associated there with the Canadian Tellison Lithium and between 2010 and 2012 they carried out various explorations and prospects. According to the Chinese, currently, all that lithium and potassium exploration project that includes 7 salty lakes in the interior of Copiapó is on hold, as it was acquired. “It has not been mined,” the firm explained in a document to the regulator.
At the end of December last year, the Australian mining consultancy SRK Consulting was carrying out an appraisal of “Sala”, setting its asset value at around US $ 121 million.