The lithium mining giant Tianqi Lithium's first quarter results have sent shockwaves through the industry, revealing another substantial lossAs disclosed in a notification on the evening of April 23, the company anticipates a staggering net loss between 36 billion to 43 billion yuan for the first quarter of 2024. This stands in stark contrast to the impressive net profit of 48.75 billion yuan reported during the same period last year.

The figures are significantly alarming when one considers that even the conservative estimates suggest this new loss is nearing half of the company's total net profit of 72.97 billion yuan for the entire previous yearTianqi attributes this bleak forecast primarily to a recent tax litigation ruling affecting its joint venture, Sociedad Química y Minera de Chile S.A(commonly known as SQM). Additionally, the consistent decline in lithium carbonate prices continues to exert tremendous pressure on the financial performance of lithium mining firms, resulting in diminishing net profit margins.

The implications of this announcement reverberated swiftly across the lithium sector

On April 24, trading began with Tianqi's shares plummeting to the daily limit, leading the downturn within the lithium mining concept segmentThe stock eventually closed at 40.63 yuan, marking a notable 9.99% decrease from the previous day, while its H-shares fell by over 19%. Competitors within the lithium mining sphere, including Ganfeng Lithium and Shengxin Lithium Energy, did not escape unscathed, experiencing declines exceeding 5% in their respective share prices.

But what exactly led to such a devastating forecast for Tianqi Lithium? One primary factor indicated in the performance report refers to the ongoing tax disputes facing SQM, which is a significant player within Tianqi’s operational portfolioAccording to announcements made by SQM, the Santiago court in Chile adjudicated a tax lawsuit concerning the fiscal years of 2017 and 2018. This recent ruling overturned a previous decision made by the tax and customs court in November 2022. As a result, it is projected that this could diminish SQM's net profit for the first quarter of 2024 by approximately $1.1 billion, creating a ripple effect impacting Tianqi Lithium's investment calculations.

Currently, SQM has yet to release its first-quarter financial report, juxtaposing the uncertainty surrounding Tianqi’s projections, which relied on analytical projections regarding SQM's earnings forecast as sourced from Bloomberg

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The relationship with SQM has historically been pivotal to Tianqi Lithium’s growth strategy as they operate the world’s largest lithium brine project located at the Atacama Salt Flat in ChileData from Fastmarkets for the fourth quarter of 2023 highlights that the Atacama salt flat accounted for 44% of the global lithium supply in production, underscoring the project's significance.

However, Tianqi’s acquisition of a 23.77% stake in SQM through its Chilean subsidiary, Inversiones TLC SpA, was not without complicationsFollowing the acquisition, Tianqi quickly found itself in a precarious debt crisis, and its earnings faced substantial volatilityIn fact, the company recorded a staggering loss of 59.83 billion yuan in 2019 alone, primarily due to an impairment provision exceeding 5 billion yuan related to its long-term investment in SQMThe yield from this investment in the same year was merely 4.03 billion yuan — a stark contrast to the extensive impairment charges sustained.

By 2020, this trend seemed to worsen, with SQM yielding a meager investment return of 1.75 billion yuan

This compounded Tianqi's financial struggles, culminating in a further loss of 18 billion yuan that yearHowever, with the boom in the electric vehicle market, SQM's performance revived between 2021 and 2023. Investment returns during these years were reported at 7.6 billion, 56.41 billion, and 29.31 billion yuan respectively, pulling Tianqi out of the red into profitable zones, with net profits jumping to 20.79 billion, 241.2 billion, and 72.97 billion yuan during this period.

Yet now, the renewed turmoil at SQM threatens to destabilize Tianqi's forecast yet againApart from the aforementioned tax dispute, recent reports suggest that SQM, together with the Chilean state-owned copper firm Codelco, has reached a memorandum of understanding to form a joint venture meant to explore and develop lithium resources in ChileThis development holds the potential to truncate Tianqi's existing interests in SQM's lithium ventures, increasing uncertainty over its future revenues.

The Shenzhen Stock Exchange has shown keen interest in the developments surrounding SQM, posing inquiries regarding the specifics of the tax dispute and its ramifications for Tianqi's operations, demanding clarity on how the development of a joint venture with Codelco might influence the company moving forward.

While the pressure from SQM creates a tangible threat to Tianqi Lithium's financial health, the company faces a broader market landscape that’s unabatedly contemplative

Industry insiders have cautioned that the projected $1.1 billion loss tied to SQM may not entirely account for Tianqi's drastic loss forecast of 36 billion to 43 billion yuanThe consensus suggests that the downturn reflects deeper, systemic issues in the lithium market.

Tianqi Lithium acknowledged in its performance forecasts that volatility in the lithium pricing landscape has led to a substantial decline in sales prices compared to the previous year, which in turn significantly slashed gross marginsIndeed, the fourth quarter of 2023 saw Tianqi report an 8.02 billion yuan loss, which was a stark shift from the three previous quarters, where profits were consistently reported (48.75 billion, 15.77 billion, and 16.46 billion yuan respectively).

Tianqi's core business revolves around various facets of the lithium value chain, from the exploration of hard rock lithium ore to the processing and sales of lithium ore and lithium chemical products

However, 2023 has brought an unfortunate decline in lithium prices that correlate closely with Tianqi's revenueFastmarkets has indicated that the average price of lithium carbonate has nosedived from around 500,000 yuan per tonne at the beginning of the year to hovering at around 100,000 yuan per tonne by year's endReports from Zhuo Chuang Information also indicated that the average price of battery-grade lithium carbonate in the first quarter of 2024 is expected to stand at around 100,000 yuan per tonne, reflecting a staggering 24.5% decrease when compared to the last quarter of 2023.

The fluctuations in market pricing are evidently reflected in Tianqi's financialsAccording to the annual report for 2023, the operational revenue from lithium compounds and derivatives reached 13.28 billion yuan, which marks a 46.86% decrease year-on-year, with a gross profit margin contracting to 73.85%, down by 12% from the prior year.

In a broader industry context, companies comparable to Tianqi Lithium, such as Ganfeng Lithium, Shengxin Lithium Energy, and Albemarle, have also reported similar downturns in performance

Ganfeng's fourth-quarter financial disclosures revealed an income of 7.29 billion yuan, down 48.7% year-on-year, coupled with a net loss of 1.06 billion yuanShengxin reported even lower revenues of 1.32 billion yuan, less than half of its initial quarterly earnings, with a net loss closing at 393 million yuan.

Overseas firms have faced analogous conditions, exemplified by Albemarle's fourth-quarter net sales dropping to 2.4 billion USD, lagging behind the previous year’s figures of 2.6 billion, with a corresponding net loss of $617.7 millionThe reports showcase that these dynamics are part and parcel of a broader contraction within the lithium market particularly as the industry seeks to navigate these unprecedented price fluctuations.

Amidst these turbulent developments, the Shenzhen Stock Exchange has sought to further probe the situation, asking Tianqi Lithium to elaborate on the operational aspects impacting its core business such as production, sales volumes, pricing strategies, and raw material procurement costs