"Lithium King" Tianqi Lithium is expected to suffer a significant loss in the first quarter, triggering investors' pessimistic sentiment. Behind this, in addition to the impact of the continuous decline in the price of lithium carbonate, the more important factor is its $4 billion investment in SQM, which is not only entangled in lawsuits and has seen a significant reduction in profits, but also may break away from its "control," potentially pushing the company further into the "abyss."

SQM, which took four years of debt to acquire, has become the "catalyst" for Tianqi Lithium's performance bombshell.

On the evening of April 23, Tianqi Lithium disclosed its performance forecast for the first quarter of 2024, with the company expecting a net loss of 3.6 billion to 4.3 billion yuan for the first quarter of this year, compared to a net profit of 4.875 billion yuan in the same period last year, with performance turning from profit to loss.

The performance bombshell directly shattered Tianqi Lithium's stock price, and after the opening on the 24th, both Tianqi Lithium's A-shares and Hong Kong stocks suffered heavy blows. Tianqi Lithium's A-shares opened at a limit down, reporting 40.63 yuan, with a total market value of 66.68 billion yuan; Tianqi Lithium's Hong Kong stocks plummeted by 19.15%, closing at 28.5 Hong Kong dollars per share, with a total market value of 46.77 billion Hong Kong dollars.

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It is worth noting that Tianqi Lithium had already incurred a loss of over 800 million yuan in the fourth quarter of last year. With the disclosure of this year's first quarter forecast, the company's performance has shown consecutive losses and an increasing magnitude.

The maximum expected loss is 4.3 billion yuan.

The glory of the lithium industry giant is no longer.

With the disclosure of the forecast for the first quarter of 2024, Tianqi Lithium once again stands at the forefront of public attention. Data shows that in the first quarter of 2024, Tianqi Lithium's expected maximum loss could reach 4.3 billion yuan. It should be noted that the company's net profit attributable to the parent company in 2023 was 7.3 billion yuan, which means that the loss in just the first quarter of this year will consume half of last year's annual net profit.

It is worth mentioning that in the same period last year, Tianqi Lithium's net profit was 4.875 billion yuan.

Public information shows that Tianqi Lithium's core business is lithium, covering key stages of the lithium industry chain, including the development of hard rock lithium ore resources, the processing and sale of lithium concentrate, and the production and sale of lithium chemical products. In addition, the company has strategically laid out lithium resources in China, Australia, and Chile.Regarding the reasons for the recent financial blowout at the company, Tianqi Lithium has stated that one of the main factors is the impact of market fluctuations in lithium products, leading to a significant decrease in the sales prices of the company's lithium products compared to the same period last year, resulting in a substantial decline in gross margins for lithium products.

Research reports from Zheshang Securities indicate that in the first quarter of this year, the average price of battery-grade lithium carbonate was 102,000 yuan/ton, a decrease of 27.71% quarter-on-quarter and a significant reduction of 73.01% year-on-year. The average price of battery-grade lithium hydroxide was 89,000 yuan/ton, with a quarter-on-quarter decrease of 31.03%.

Furthermore, Tianqi Lithium also stated that the performance of its significant associated company, SQM, is expected to decline significantly in the first quarter compared to the same period last year. Due to a tax ruling that may reduce SQM's net profit by approximately $1.1 billion in the first quarter of 2024, the company's investment income recognized for this associated company during this reporting period has decreased significantly compared to the same period last year.

After the disclosure of the first-quarter forecast, the Shenzhen Stock Exchange issued a letter of concern regarding Tianqi Lithium's significant expected loss. The company was asked to provide a quantitative analysis of the reasons for the substantial increase in losses in the first quarter of 2024 compared to the fourth quarter of 2023, taking into account specific changes in the main business operations, product production and sales volumes, product prices, raw material procurement prices, cost and expenses, impairment provisions, and other factors. The company was also asked to explain whether there is a risk of continuous losses.

In addition, concerning the tax dispute ruling involving SQM, the Shenzhen Stock Exchange also required Tianqi Lithium to clarify the specific situation, subsequent progress, the impact amount and calculation basis on the first-quarter net profit, as well as the rationality of recognizing the impact of the tax dispute ruling in the first quarter.

Massive investments become the "push hand" for the financial blowout.

In fact, compared to the overall weakness of the lithium industry, the various unstable factors brought by Tianqi Lithium's associated company, Chilean SQM, have a more fatal impact on the company.

It is reported that SQM is a world-leading lithium producer with the world's largest Atacama lithium salt lake, containing about 10.8 million tons of lithium metal equivalent. In terms of both resource quantity and quality, it ranks among the top in the world. In 2023, Atacama was the project with the highest lithium salt lake production globally, accounting for about 44% of the total global supply.

It is worth mentioning that when Tianqi Lithium acquired SQM, the funds exceeded the total assets of the company at that time, which is also a style that the company's actual controller, Jiang Weiping, is quite fond of.

In December 2013, Tianqi Lithium, with total assets of only 1.569 billion yuan, managed to raise 3.876 billion yuan in acquisition funds in a short period, successfully intercepting Rockwood's acquisition of Talison and taking over Talison. The success of the "snake swallowing an elephant" helped Tianqi Lithium to advance and also allowed Jiang Weiping to taste the sweetness.As early as 2016, Tianqi Lithium had set its sights on SQM, but it had not yet encountered the right opportunity. It wasn't until November 2017 that, due to an antitrust investigation, Nutrien Group, which held a 32% stake in SQM, was required to divest its SQM shares within 18 months starting from November 2, 2017. Jiang Weiping's chance had arrived.

Jiang Weiping, who had previously succeeded in a "David and Goliath" acquisition, decided to employ the same strategy. On May 31, 2018, Tianqi Lithium announced its intention to acquire 23.77% of SQM's Class A shares from Nutrien Group at a price of $65 per share, with a total transaction value of $4.066 billion.

This substantial sum exceeded Tianqi Lithium's total assets at the time, so only 17.8% of the funds were from Tianqi Lithium's own capital, with the remainder being resolved through cross-border financing loans.

The enormous debt burden took Tianqi Lithium over four years to repay. In April 2019, Tianqi Lithium raised 7 billion yuan to repay the merger loan, and it was not until July 27, 2022, that Tianqi Lithium announced that it had fully repaid the SQM debt.

It is worth mentioning that during this period, the penetration rate of new energy vehicles was quite strong. Leveraging the substantial production capacity brought by acquiring SQM, Tianqi Lithium developed rapidly, and the company's stock price soared to 148.57 yuan per share. However, this favorable situation did not last long.

On December 27, 2023, SQM announced that it had reached a memorandum of understanding with the Chilean state-owned copper company, Codelco, to form a government-controlled joint venture to jointly develop lithium resources.

Under this arrangement, SQM's lithium business would be spun off into a joint venture with Codelco, which would hold a 50% plus one share stake. This move not only potentially dilutes Tianqi Lithium's existing interests in SQM's lithium business but may also cause Tianqi Lithium to lose the advantage in securing high-quality lithium resources, thereby affecting the potential returns of Tianqi Lithium's substantial investment.

Trouble was not over yet. SQM announced that the Santiago Court in Chile ruled on its tax litigation for the fiscal years 2017 and 2018 in April 2024, overturning the decision made by the Tax and Customs Court on November 7, 2022.

This situation led SQM to re-examine the accounting treatment of all disputed tax amounts, ultimately resulting in a reduction of its first-quarter net profit by approximately $1.1 billion. Based on Tianqi Lithium's stake in SQM, Tianqi Lithium's net profit was affected by about $244 million.

In fact, SQM has always had a significant impact on Tianqi Lithium's performance. According to Tianqi Lithium's 2023 annual report data, as of the end of 2023, based on the dividend plans announced by SQM, the company's share of dividends corresponding to its equity stake amounted to approximately 7.9 billion yuan.It is worth mentioning that the annual report also indicates that SQM's performance in 2023 decreased by approximately 48% year-on-year, which also led to Tianqi Lithium's investment income from SQM to decrease by the same percentage in 2023 compared to 2022.

Furthermore, SQM's performance in the secondary market has been equally disappointing. Since the beginning of the year, SQM's stock price has plummeted by 25.62%, with the stock price at $44.79 per share and a total market value of $12.79 billion.

The Fall of the Lithium Industry Giant from its Pedestal

In fact, the continuous rise in the performance of Tianqi Lithium and SQM in 2022 was due to the strong upward trend in the price of lithium carbonate.

However, in 2023, the growth rate of global demand for new energy vehicles slowed down, especially the slowdown in the growth rate of China's new energy vehicle market, which led to a slowdown in the demand for lithium salts. Coupled with the fact that in the past two years, the production capacity of various enterprises has been in excess due to the significant surge in lithium prices, this further led to a substantial decline in the price of lithium carbonate.

Data shows that the price of lithium carbonate once reached 600,000 yuan/ton in 2022. However, by the end of 2023, the domestic mixed average price for battery-grade lithium carbonate was only 103,000 yuan/ton, which is an 80% drop from the high point in 2022.

In addition, Kaiyuan Securities also stated that it expects lithium prices to continue to bottom out in 2024. Projects such as Australian mines, non-mines, and South American salt lakes continue to expand. Although many projects have been delayed, it is expected that in 2024, various projects will gradually start production and ramp up, releasing additional capacity, and shifting the supply-demand structure towards surplus.

It is worth noting that although some lithium mine projects continue to proceed, the issue of overcapacity in the lithium industry has led to recent announcements of production suspensions by high-cost mines such as Finnis. At the same time, mines like Greenbush and MtCattlin have reduced their production guidance for 2024, and the expansion progress of some mines has slowed down.

Against this backdrop, Tianqi Lithium's performance has been weak. Data shows that the company achieved a total operating income of 40.503 billion yuan in 2023, a year-on-year increase of 0.13%; the net profit attributable to the parent company was 7.297 billion yuan, a year-on-year decrease of -69.75%; and the net profit attributable to the parent company after deducting non-recurring gains and losses was 7.177 billion yuan, a year-on-year decrease of -68.88%.

It is noteworthy that Ganfeng Lithium, another lithium industry giant, is facing a similar situation. Annual report data shows that Ganfeng Lithium achieved a net profit attributable to the parent company of 4.947 billion yuan for the full year, a year-on-year decrease of 75.87%; and the net profit attributable to the parent company after deducting non-recurring gains and losses was 2.676 billion yuan, a year-on-year decrease of 86.59%. In addition, on April 24, Ganfeng Lithium's stock price plummeted by 6.71%, closing at 33.36 yuan per share.At present, the bottom of lithium prices is still being formed, and how related companies can stabilize their own fundamentals will be a considerable challenge.