April 24 marked a significant downturn for Tianqi Lithium Industries, a leading player in the lithium mining sector, as it faced a drastic drop in stock prices across both its A-share and H-share marketsBy the close of that trading day, Tianqi's A-share reached its lowest permissible price limit, concluding at 40.63 CNY per share, while its H-share plummeted by 19.15% to 28.5 HKD per share.

This unprecedented fluctuation was primarily precipitated by the company's announcement the night prior, revealing a staggering projected net loss of 3.6 billion to 4.3 billion CNY for the first quarter of 2024. This marks an alarming decline of over 173.85% from last year's figures during the same quarterTianqi cited the turbulent lithium product market and tax dispute rulings affecting its joint venture in Chile, SQM (Sociedad Química y Minera de Chile), as significant contributors to this financial shortfall.

In response to this startling news, the Shenzhen Stock Exchange acted swiftly, issuing inquiries demanding that Tianqi provide a quantitative analysis of the surge in losses for the first quarter, assess future loss risks, and evaluate the repercussions of SQM's memorandum of understanding with Codelco, the Chilean state-owned copper company, along with the measures it plans to take in light of these developments.

Massive Losses in Q1

On the evening of April 23, Tianqi Lithium released its earnings forecast for Q1 2024, projecting a net loss of 3.6 billion to 4.3 billion CNY, a staggering drop from last year's profit of 4.875 billion CNY for the same period

The report underscored a decline exceeding 173.85% year-on-year.

The roots of the projected losses stem from a dual-faceted issue: first, the marked decline in the sales price of lithium products, continuing a trend established last year due to instability in the lithium market; and second, the ramifications of the tax dispute ruling impacting SQM, which is expected to see a net profit drop of around $1.1 billion in Q1. Consequently, Tianqi's investment returns from this joint venture are anticipated to fall sharply compared to the previous year.

In the wake of the announcement, the Shenzhen Stock Exchange pressed for a detailed inquiry, requesting Tianqi to analyze various influencing factors such as operational changes, production volumes, pricing trends, raw material procurement expenses, and potential impairment provisions

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The exchange emphasized the need for clarity on whether there are ongoing risks of continued losses.

As a prominent lithium supplier, Tianqi's financial viability is inextricably linked to the health of the lithium product marketA glance at the company’s 2023 earnings report reveals that lithium revenues comprised roughly 70% of its total revenueHowever, the significant plunge in lithium prices throughout 2023 resulted in a net loss of 801 million CNY just in the fourth quarter.

Prior to these revelations, numerous brokerage firms had already slashed their earnings forecasts for TianqiGuosen Securities revised its projections for Tianqi’s net profit attributable to shareholders for 2024-2026 down to 4.527 billion, 5.303 billion, and 6.208 billion CNY, lowering the previous estimates significantly

Huafu Securities similarly recalibrated its outlook, forecasting net profits of 3.295 billion, 3.920 billion, and 5.148 billion CNY for the same duration.

Nevertheless, skepticism looms over Tianqi’s projections as market analysts and investors voice concernsMany question the reasoning behind Tianqi’s substantial Q1 losses given that lithium prices had reached their nadir in Q4 of the previous yearData from industry analysts also revealed that the average price of battery-grade lithium carbonate fell by 24.5% compared to Q4 2023, now sitting at 100,000 CNY per ton.

Looking ahead, analysts at Kaiyuan Securities have raised alarm bells regarding an oversupply shaping the market, predicting that lithium prices will remain depressed as 2024 progresses

They believe that the ensuing cost pressures on profitability will favor companies that can adapt quickly to changing market conditions, highlighting the advantages for firms with flexibility in production capacity and cost management.

Rising Uncertainties in Overseas Investments

In addition to the alarming Q1 losses, market observers are increasingly focused on Tianqi's escalating uncertainties concerning its substantial overseas investments.

The Shenzhen Stock Exchange’s inquiries specifically requested Tianqi to assess the effects of SQM’s recent memorandum of understanding with Codelco and to outline their planned responses.

Formal cooperation between Tianqi Lithium and SQM traces back to 2018. At that time, Tianqi entered a share purchase agreement with Nutrien, SQM's largest shareholder, for approximately $4.066 billion to acquire a 43.80% stake in SQM’s Class A shares, representing about 23.77% of SQM’s total share capital.

The motivation behind this investment of close to $4.1 billion was to bolster Tianqi Lithium's overseas resource reserves in lithium production

SQM, according to statistics from Roskill, was responsible for supplying 16% of the world’s lithium resources and 19% of lithium compounds by 2017, cementing its position as the second-largest supplier in the global lithium market.

However, since late last year, uncertainties surrounding this investment have multipliedReports indicated that as of December 27, 2023, SQM and Codelco had announced a memorandum of understanding to establish a government-controlled joint venture to develop lithium resources, effectively separating SQM’s lithium operations into this new entity.

Analysts caution that this joint venture could dilute Tianqi Lithium's existing interests in SQM's lithium businesses and hinder future opportunities for acquiring high-quality lithium resources

If the deal proceeds, Tianqi's shares in the joint venture may be effectively limited, reducing its influence over the operations.

On April 10, SQM announced that its major shareholder Inversiones TLC SpA requested an extraordinary shareholders meeting to discuss and vote on the transactions related to the memorandumHowever, the SQM board declined to address the matter, stating that an agreement was yet to be finalized, emphasizing the non-binding nature of shareholders' opinions on management duties.

In response, Tianqi Lithium noted its awareness of SQM's recent announcements, indicating that it had requested information from SQM regarding the discussions with CodelcoTianqi affirmed its commitment to monitoring developments closely while acknowledging that no shareable information was currently available.

Moreover, the reported tax disputes affecting SQM have also contributed to the anticipated declines in returns from this extensive investment.

Tianqi disclosed that SQM had received a court ruling in Santiago, Chile, on April 2024 concerning tax litigation for the years 2017 and 2018, which revoked prior judgments from November 2022. SQM expects that its net profit for Q1 2024 may decline by approximately $1.1 billion as a result.

Currently, SQM has yet to release its Q1 2024 earnings report