Brazilian firm IG4 Capital offers US$916 million for major stake in Chilean lithium giant SQM – sources

RIO DE JANEIRO, BRAZIL – (Reuters) São Paulo-based private equity firm IG4 Capital has delivered a US$916 million (R$5.2 billion) bid to buy into holding companies that have large stakes in Chilean lithium miner Sociedad Quimica y Minera de Chile, known as SQM, two sources with knowledge of the matter said.

If SQM’s shareholder Julio Ponce agrees to the proposed deal, IG4 would become one of the largest shareholders of the world’s second-largest lithium producer. The group intends to appoint up to four board members, according to the proposal described by the sources.

They would serve alongside three board members designated by China’s Tianqi Lithium Corp, which owns about a quarter of SQM.

A non-binding offer was delivered last Monday in Santiago to Ponce, through his financial adviser K2 Advisors, after almost a year of talks, according to the people, who requested anonymity to disclose private discussions.

SQM and IG4 Capital declined to comment. K2 Advisors’ partner Cristian Araya, who represents Ponce, did not immediately comment on the matter.

IG4 is close to hiring Brazilian investment bank Banco BTG Pactual SA to advise on the deal and help with the financing, the sources added.

If the bid is accepted within 30 days, IG4 will begin due diligence to structure a binding offer which would represent the biggest single investment yet for the firm, which closed its second fund, focused on special opportunities in Latin America, last year.

One of the transactions’ main goals is to simplify SQM’s ownership structure, reducing discount on the share’s prices and easing the company’s access to capital markets.

The second-largest lithium producer in the world, SQM has a US$14.3 billion market capitalization. It trades at a steep discount to competitors such as Australia’s Orocobre, China’s Ganfeng Lithium Co Ltd and Albermarle, the industry leader, even though the company has one of the world’s lowest production costs.

The inclusion of an international financial firm among SQM’s largest shareholders could improve acceptance by banks and investors needed to help the company finance future expansion and projects, the people added.

TENDER OFFER, RESHUFFLING AT HOLDING LEVEL

The deal would trigger a complex restructuring in the cascading holding companies that hold a 30% stake in SQM. In the end, IG4 will own 45.6% of a new holding company called SQYA-OB, to be majority held by Ponce.

This company will own 90% of another holding, Pampa Grande, which in turn will own 21.4% of SQM series A listed shares, with voting rights. Another holding company, Pampa Chica, will have an additional 8.6% stake in SQM.

This result will be achieved after series of mergers, spin offs and buyouts between the existing holding companies that comprise Pampa Calichera.

IG4 intends to make a tender offer to buy out minority shareholders in listed holding companies Norte Grande SA, Sociedad de Inversiones Oro Blanco and Sociedad de Inversiones Pampa Calichera, according to documents related to the deal seen by Reuters.

The fund expects to spend around $610 million in the tender offers. The first aims to buy 70% of Oro Blanco float for 4.34 Chilean pesos per share and the second, 60% of Norte Grande float for 4.62 pesos per share.

Of the total $916 million bid, around $100 million would come in the form of a loan to holding company SQYA.

Ponce, 75, former son-in-law of Chilean dictator Augusto Pinochet, bought a stake in SQM in its privatization in the 1980s and has held power in the company since.

He remains a controversial figure in Chile and has been criticized by the country’s current government. The company does not have a formal shareholders agreement any more, the result of a deal struck with Chilean development agency Corfo, although Ponce still appoints board members.

Ponce was fined by the Chilean securities industry regulator in 2014 for market manipulation, but has since obtained a reduction of the amount appealing to courts.

This would be the first mining deal for IG4, whose other investments have been in areas as diverse as grain port terminals, sanitation and health care.