Lithium producers get crushed after Chile regulator rules on SQM

Shares of lithium producers, including FMC Corp (FMC) and Albemarle (ALB), are falling after peer Sociedad Quimica y Minera de Chile, or SQM (SQM), announced late Wednesday that SQM and regulator CORFO, Corporacion de Formento de la Produccion, have reached an agreement to end the arbitration process that they have been ensnared in. Lithium is a major component for electric car batteries used in vehicles manufactured by Tesla (TSLA), Ford (F), and Toyota (TM), to name a few. According to SQM, the agreement has been reached within the conciliation process of the arbitration and on the basis presented by the arbitrator to the parties. Both SQM's board and the board of CORFO have approved the agreement. As part of the agreement, Chile-based SQM must amend certain lease agreements at Salar de Atacama, a salt flat in Chile that holds lithium supplies. The agreement includes a payment of $17.5M plus agreed interest which a subsidiary of SQM, SQM Salar, shall pay CORFO. The deal between SQM and CORFO may potentially broaden lithium capacity as the deal reached with the regulator would require SQM to make part of its lithium production to other producers "at preferential price to value-added producers that will potentially develop in Chile," according to the press release. ANALYST VIEWS: Earlier Thursday, Deutsche Bank analyst Chris Terry upgraded SQM to Buy and raised his price target for the shares to $70 from $52. The company's agreement with CORFO now enables it to expand annual production, Terry told investors in a research note. He believes this is a high returning expansion for SQM at the "world's premier lithium asset in Chile with first quartile costs." Another firm, Wells Fargo, chimed in on the sell-off in FMC. The firm sees the reaction as overblown, noting it expects "de minimus, negligible, whatever euphemism you want to use for small" impact to FMC's lithium results in 2018 from this news. Further, there's a chance SQM's Chilean production assets can be nationalized in 2030, which likely caps the capital it is willing to spend, added the firm which kept an Outperform rating on FMC and sees the pullback as a buying opportunity. PRICE ACTION: Shares of SQM are down almost 2% to $58.39, while FMC shares are falling 4.7% to 89.44 per share, and peer Albemarle is lower by over 7% to $117.83 per share in afternoon trading.