Dissecting the SQM-Codelco Agreement: An Economic Perspective

The recent agreement between SQM and Codelco over lithium production in the Salar de Atacama has sparked a significant debate, especially following businessman Francisco Javier Errázuriz Ovalle's critique of the deal. Errázuriz calculated the value of 49.999% of the partnership at approximately US$ 12.9 billion, contrasting it with the US$ 1.8 billion valuation based on SQM’s assets. This discrepancy has raised questions about the financial prudence of the agreement.

Economist Tomás Flores, associated with Libertad y Desarrollo and a former Minister of Economy, countered Errázuriz's argument by pointing out flaws in the valuation methodology. Flores emphasized the importance of relying on precise data and correct financial methodologies for such evaluations.

Flores critiqued Errázuriz's use of Albemarle's company value and its production capacity to infer the price per ton of production capacity. He noted that this approach oversimplifies the valuation process, which should instead consider multiple factors like future cash flows, volume and price projections, costs, taxes, and required investments. The discount rate, encompassing returns demanded by shareholders and creditors, is also a critical component.

Market Reaction and Real ValueFlores further argued that if Errázuriz's calculations were accurate, implying a substantial undervaluation of the state’s assets in the deal, it would have likely elicited a significant positive market reaction post-announcement. However, such a market reaction was not observed, suggesting that the actual value might be closer to the figures agreed upon in the deal.

The debate highlights the complexity of valuing large-scale mining projects and the importance of employing comprehensive financial analysis methods. While quick relative valuations can be helpful, they may not always provide the full picture, especially in diverse and evolving industries like mining. Flores’s critique underlines the necessity for a more nuanced and detailed approach to valuation, ensuring that financial decisions, especially those involving state assets, are made with precision and due diligence.