Q3 2019 Earnings Call
Well be placed in listen only mode throughout the conference. After the speakers presentation. There will be a question to answer period I'll now turn the conference over to Mr., Daniel Rosen manager Investor Relations and a lot of Corporation. That's Rosen you may begin.
Thank you Sam good morning, everyone and welcome to Livens third quarter 2019 earnings call joining me today, or Paul Graves, President and Chief Executive Officer, <unk>, and Tony Ozzie Chief Financial Officer, the slide presentation that accompanies our results along with our earnings release, which includes our 2019 outlook can be found in the investor real.
Patients section of our website.
The prepared remarks from today's discussion will be made available after the call.
Following our prepared remarks, Poland's Roberto will be available to address your questions.
I'd ask any questions be limited to two per caller.
We'd be happy to address any additional questions directly after the call.
Before we begin let me remind you that today's discussion will include forward looking statements that are subject to various risks and uncertainties concerning specific factors, including but not limited to those factors identified in our lease and in our filings with the Securities and Exchange Commission information presented represents our best judgment based on today's information actual.
Well its mayberry based upon these risks and uncertainties.
Today's discussion will focus on adjusted earnings for all income statement EPS references reconciliations of these terms as well as other non-GAAP financial terms to which we may refer during today's conference calls are provided on our website.
With that I'll turn the call over to Paul.
[laughter].
Thank you Dan good morning, everyone.
Turning to slide three there's a few key points that I would like to highlight.
We met our third quarter, adjusted EBITDA, and adjusted EPS guidance on lower than projected revenues.
We announced a memorandum of understanding with LG from multi year supply agreement for lithium hydroxide.
I'm not able to provide a first look at our expected production and sales volumes for 2020.
Commitments when currently making for 2020 customer deliveries form the basis right decision to build hydroxide inventory and the fourth quarter of 2019.
And as to ensure we have sufficient products in 2020 .
Yeah, and which we will affect you may have no additional production capacity compared to 2019.
A consequence of this fourth quarter inventory build is that we've lowered our expected revenues adjusted EBITDA and adjusted EPS in the fourth quarter by an amount corresponding to the inventory build.
That will also lowering our full year guidance for 2019.
We remain committed to our previously announced capacity expansion initiatives.
And we'll provide an update on the progress about current expansion programs later in this call.
Turning now to slide four enlivens perspective on where the market for lithium carbonate and hydroxide stands today.
Clearly, it's a very challenging time for the industry all lithium producers have been impacted and this declining price environment with the extent of the impact largely dependent on factors such as product mix product quality cost structure customer relationships and the extent of exposure to short term pricing in China.
Whether that is for Carbonite hydroxide, all spot you mean.
The pricing environment did not improve in the third quarter and it does not appear to be improving in the fourth quarter. However, near term prices did not tell a complete story about the covenants conditions in the lithium industry and especially the lithium hydroxide market [laughter]. Let me start I was looking carbonite, which had the largest lithium product by volume.
Given its broad use and less demanding battery applications, such as mobile devices E buses and stationary storage as well as in a broad range of industrial applications.
While still growing at a mid teens annual rate demand growth from these applications. It appears to be slowing relative to the 20% plus growth rates seen in recent years.
It's certainly not growing as fast as demand for hydroxide.
Lithium hydroxide has seen its growth rate increase from the low teens to well north of 22, even 30% for you.
The pricing environment for Carbonite has also been affected by oversupply.
The additional supply isn't just because of the high volume of spoke German being shipped to converters in China from Australia. Although this is the single biggest factor.
We've also seen brine based producers look to reestablish themselves in markets that they've been absent from in recent years, especially China.
This comprehensive additional supply and weaker than expected short term demand has created significant downward pressure on carbonite prices in China, especially over the last few months.
And if the China Monkey price for Carbonite has fallen we've seen price pressure in other markets to notably, Japan, and Korea as high cost China producers seek to place that product in the rest of the world.
Hydroxide pricing in China has also declined in 2019, driven by material from new plants coming online and the same oversupply of sponsored mean, leading to lower cost for China based Nonintegrated converters.
However, the pricing impact has been more muted for hydroxide relative to carbonite.
Several reasons for this.
First demand growth hydroxide is more robust worldwide.
We estimate to be around 100000 metric product tons for 2019, a more than 50% year over year increase.
Geographically in 2019, we saw China as relatively less important as a buyer of hydroxide than it is a combination with Japanese and Korean back to me because Weston cathode material produces an European Oems, playing a great to roll into sourcing decisions.
It's great to diversification in the type of purchase is a notable difference between the hydroxide and Carbonite markets in the battery segment.
Second applications for hydroxide continued to have stricter qualification requirements than that carbonate counterparts and they remain relatively few lithium produces today that are able to consistently achieve both the quality and volume's demand at across multiple hydroxide specifications.
As a result hydroxide crisis outside of China remained relatively stable throughout the year, albeit lower than in recent years in fact, well livens lithium carbonate realized price has declined dramatically since the first quarter of 2019.
Livens average realized price for lithium hydroxide has been very stable over the varying by less than 10 cents per kilo in any quarter.
We believe the covenant hydroxide pricing environment in China is simply not sustainable in the face of rapidly rising demand from high nickel battery applications.
Future hydroxide expansions have been delayed or canceled.
Existing plans spodumene operations are being curtailed all idled financing structures are collapsing and smaller nonintegrated converts is unlikely operate to net cash losses, even with spodumene prices approaching $500 a tough.
Underpinning our longer term confidence is the development of the global E V market.
Well some of the come an E b data coming out of China suggests a slowdown in sales. We did not believe this reflects a new normal but is merely a pause right to the policy policy shifts ahead of the next stage of broken E B cells.
This is not just livens view, but he shared by number of independent consultant lithium experts on the wall Street analysts.
We continue to see the leading Oems and Bactrian cathode make us a positioning themselves for a significant number of new E V model launches beginning in 2020 and accelerating and 2020 Wanna beyond.
The development paths for these models and not reaching into the battery market and indeed into the lithium market.
These development path rely heavily on increased usage of lithium hydroxide.
Government policies in China, and Europe , or the major force driving demand for babies today, with China mandating Oems to sell ever increasing volumes of babies, an aggressive C. O two reduction mandates in Europe creates in the same effect.
We see more and more European Oems and I'm, saying all in on TV strategies.
Just as important we're seeing an acceleration in the shifts to high nickel battery chemistries.
Catheter sales data within China supports this trend for instance, we've seen sales of NMC eight one wanting China more than double in Q3 compared to Q1 or 2019.
For the first time, we've seen 811 sales volumes start to approach NMC six to two volumes.
The data we can see only captures one part of the overall market the trend is clearly that.
We also see broader adoption of Nch chemistries as recent announcements from supported.
As we get closer to launch of the new easy models coming to market the supply chain, but he believes it slowly becoming clearer.
There's more visibility into who is supplying who.
As evidenced by the increased partnership announcements, we've all seen.
Actually producers are making commitments to western Oems with regard to performance volumes and safety that are pushing them to take a more active rolling key aspects of the battery supply chain.
It helps explain why some battery makers are looking to bring more cathode material capacity in house.
And why they're also looking to take a leading role in sourcing critical battery materials, such as lithium hydroxide.
The interplay up and down the supply chain is still not fully transparent oh uniform, but it's definitely better than it was at the start of the and we expect that will only continue to improve.
The evolution of the supply chain is leading to inc. increased adoption of longer term supply agreements with well known high quality lithium produces the can provide a reliable supply of hydroxide to exact specifications and who can grow with the battery market.
Even as always recognize the critical role the battery producers and Oems will play in the future lithium procurement decisions and we have a long history of partnering directly with them.
This is why we're pleased to have signed a memorandum of understanding from multi year supply agreement with LG.
For the first time stopping in 2020 , we expect a significant majority of Livens lithium hydroxide will be supplied a multiyear arrangements with the the battery producers auto Oems.
I'll now hand over to go back so to review third quarter financial results and the full quota outlook, including more detailed on the impact about decision to build hydroxide inventory in the fourth quarter to meet customer commitments in 2020 .
Thank you Paul Good morning, everyone pretty now to slide five.
Well third quarter revenue came in below expectations, both adjusted EBITDA and adjusted EPS were in line with our guidance and consistent on a sequential basis with the first two quarters off this year.
This combination has resulted in adjusted EBITDA margin of 29%.
Representing an improvement of over 400 basis points quarter over quarter.
Revenue for the third quarter was $19 million.
The year over year decline was primarily due to a combination of lower volumes and a decline in the average realized price for both lithium carbonate and hydroxide.
Pricing for Butyllithium and IP, the metals continue to be higher than average on a constant currency basis and foreign exchange at of the headwind of 1% primarily from the RMB and the euro.
Third quarter adjusted EBITDA of $20 million was consistent with first and second quarter results in 2019.
The corresponding margin improvement this quarter versus second quarter was driven by improved customer and product mix as well as lower costs.
We provided lower volumes to one large hydroxide customer on the contract. There has been placed for several years and has a lower price there and you have or other contracts.
Additionally, we realize lower costs from using less third party carbonate.
On slide six.
We have shown bridges for just EBITDA on a year over year and on a quarter over quarter basis.
While we have historically discuss both performance and outlook on a year over year basis. He says these fast shifting market environment, We believe a sequential quarterly comparison adds additional insights.
We are three quarters of the way through 2019.
And you will see that although results over the course of this year has to be very consistent.
With adjusted EBITDA of $20 million in each quarter.
This is despite the broader volatility and downward trend there has characterized the lead to industry. This year.
Writing Oracle system performance, our two factors.
First.
The third eye drops line hydroxide aligned we brought on line in China or the first quarter enable production of higher total volumes in 2019. This volume gains have largely been offset by the need to source third party carbonate you produce them.
This work inversely.
The most recent quarter were sales volumes decreased and we realized a sequential cost they win.
We will continue to require third party carbonate.
2022 phase one of our Argentina expansion comes online.
In the recent price declines.
Carbonate will provide an opportunity to accelerate certain carbonate purchases.
Second one other than what we have seen lithium carbonate the average price livens called the portfolio has remained flat throughout the year end given a reduced sales volumes of carbonate. We have had a smaller impact from the significant price pressure since that market.
To reiterate we sell relatively little hydroxide, you short term China markets.
And Additionally, we have a significant business duly Tim and other specialty areas with long standing customers, where our products is largely specify into their own production process.
These businesses tend to upgrade to a greater stability in our effected by different market conditions.
Turning now.
To the fourth quarter and full year outlook on slide seven.
Well I don't have to revise its fourth quarter and full year 2019 guidance, reflecting the decision to carry up to 4000 metric tons product.
Well, if I drugs like inventory each a 2020.
Order to meet higher customer commitments.
But we'll give more details on our overall anticipated customer commitments for 2020 shortly.
[noise] Liven now expects fourth quarter, 2020, 2019 revenue to be the range of $90 million to $100 million.
Fourth quarter 2019, adjusted EBITDA and adjusted earnings per share are projected to being the range of $21 million to $26 million.
And eight to 11 cents per diluted share respectively.
For full year 2019, leaving expects revenue to be the range of $400 million to $410 million adjusted EBITDA to be in the range of 105 to 110 and adjusted earnings per share should be in the range of 44 cents to 47 cents per diluted share.
For further perspective, obviously the guidance on slide eight we want to provide additional color on anticipated chains for adjusted EBITDA between third and fourth quarter of 2019.
Historically, the last quarter of the or has been highest volume for liven.
And we had expected this pattern to repeat regional guidance.
We have certainly seen historical pattern of higher production volumes in the second half repeat this year with over 3000 tons off additional material available in the second half versus first.
However, given the continued growth demand for hydroxide from our customers in 2020, we're prioritizing the buildup of inventory in the fourth quarter to meet those needs.
Rounding out our sequential comparison or a few factors that combine to essentially offset each other.
We expect modestly favorable price mix in the fourth quarter offset by lower carbon pricing in a small sequential increase in costs.
Finally on slide nine I want to conclude by providing a few comments on select items you income statement as there always give an update on our capital spending plans.
Life and generated adjusted cash from operations $93 million through the third quarter of 2019.
We spent $125 million on capital spending in the same period.
And then of the quarter with debt net of cash of $6700.
In conjunction with our adjusted EBITDA guidance revision for the fourth quarter, we're updating our adjusted cash from operations for the full year sure range of $80 million to $90 million.
Our full year guidance for capital spending remains in the range of 200 intend to $240 million, we expect capital spending to accelerate in the fourth quarter of this year, reflecting cash outlays in a number of important items on our expansion plans a certain construction milestones.
Matt you, both Argentina invest mercy.
Paul will update you on the progress we made in this regard his closing remarks.
With that I'll turn the call back to Paul.
Thank you to go better.
Although we will not be providing full guidance for 2020 until February of next year, we do not we do want to provide a first lot that I've expected 2020 production.
Sales volumes, both lithium hydroxide lithium carbonate.
I will just focused on hydroxide in carbonate today, not the approximately 4000 LC ease of lithium chloride, which supports our businesses in Butyllithium high purity matlin specialty organics.
As you can see on slide 10, all of the lithium carbonate we will produce next year in Argentina will be converted to hydroxide.
And even then this won't be enough to meet our customer demand in 2020 . As a result, we will continue buying third party carbonite and 2020 .
Given what we see for carbonate pricing in the fourth quarter and into the first part of 2020 , we expect to be able to purchase carbonite attempts at a better than those we achieved year to date in 2019.
We expect to sell very small amounts of carbonite in 2020, mainly certain specialty grades on a small amount under existing longstanding commercial relationships.
Our goal for 2020 is to increase lithium hydroxide volumes to meet our customer commitments.
With existing customers, increasing their volumes, a new customers looking for life into supply a significant portion of that 2020 needs.
Even a peak production levels, we will fall short of our committed 2020 sales volumes for hydroxide. If we do not start to build inventory in the fourth quarter of 2019.
To help you better understand these commitments I'll break down to 2020 hydroxide customer commitments a little mall.
Historically, a combination of capital produces an industrial consumers have made up the majority of our sales.
But as I mentioned earlier 2020 will be the first year. The majority about LC ease a committed to either automotive Oems or battery producers.
We would expect to that I have a hydroxide volumes delivered to these two classes of customer will exceed our entire 2019 hydroxide sales volume.
The remainder about volumes are composed primarily of long standing customers of lithium hydroxide across multiple applications and geographies.
As well as some carbonate commitments the long standing customers.
We will have greater clarity on these volumes once we've concluded and to be in negotiations.
We therefore project up to 26000 metric product tons of lithium hydroxide sales in 2020 higher than our annual production capacity by up to 4000 tons.
It is this shortfall the drove the decision.
To build inventory to carry into 2020.
We are making commitments to customers today, the support time expansions in both Argentina, and the United States.
Meaning that as we increase our available capacity at the end of 2020, we will have the customer commitments in place for that high volume.
I'd like to wrap up by giving an update on progress towards our key priorities for 2021st as you'll Battle mentioned, we remain committed to delivering on our announced expansion plans in Argentina.
And we remain on track to meet our key milestones for delivering the first nine and a half thousand metric ton capacity increase for carbonite by the end of 2020 .
Recent milestones we have might include completing camp construction and support infrastructure awarding contracts, what works and civil engineering finalizing union contracts for construction workers in the region Im commencing construction of the water infrastructure infrastructure.
Importantly, we have started the process of shipping modules Pops and equipment for the expansion after the fabrication sites in China and we expect these first shipments to start arriving in Argentina. Later this year ready for deployment at the slot and the first quarter of 2020 .
We continue to fulfill our commitments to undertake all of our activities responsibly with full transparency and engagement with local communities, we see how operations and catch them aka as a partnership between leaving on the local communities and we will continue to operate this way.
Our second priority is further improving the capabilities of our global hydroxide network, our existing lithium hydroxide network is already running at record levels of production after both China and the U.S.
By the end of 2020, we expect to produce an additional 5000 metric tons of lithium hydroxide per year after Bessemer city, bringing total capacity in the U.S. to roughly 14000 metric product in terms of lithium hydroxide per year about the same capacities. We currently have in China.
All of the material we produced in the U.S. will serve customers outside China.
In addition, we continue to add processing capabilities to our existing hydroxide lines, increasing our operational flexibility to better meet the demands of our customers.
In 2020, we will also assessed hydroxide production investments and other locations around the world.
We intend to keep expanding our global hydroxide network to align without commitments to customers.
Especially is that specification and geographic needs continue to evolve.
Lastly, livant continue to direct its innovation efforts towards next generation lithium applications, particularly in the area of lithium metals on production technology is focused on additional Brian resources.
We are advancing next generation lithium metal applications in partnership with many of the battery producers that have increasingly becoming our customers for lithium hydroxide.
I will work to develop printable lithium metal, allowing cost effective pre litigation at commercial scale.
And offering the potential to print lithium metal foils direct them to anodes also at commercial scale as an example of the technology developments, we have investing in.
While the direct impact on license results will not be significant for the next few years, we are seeing that our knowledge of how to use lithium and advanced battery applications at commercial scale is a significant differentiator and our discussions with Oems and battery produces.
We're also investing in and exploring next generation lithium extraction technologies I'm investment any three metals as an example of this.
We believe that even incremental improvements in processing efficiencies will help support long term growth sustainability and most importantly, our ability to better serve customers.
This is I have approach to everything we do and every decision we make the constantly look forward to what the market will need from what I've customizable value.
I'll now turn the call back to down for questions.
Thank you Paul.
Then you may now begin the QNX session.
Thank you have you would like to ask a question at this time. Please press Star then the number one on your telephone keypad. Please limit yourself to one question and one follow up if you have additional questions you can jump back into the queue to withdraw your question. Please press the pound cake, we'll pause for a moment to compiled acuity roster.
Our first question comes a lot of Chris concept of loop capital markets. Your line is open.
Hi, Good morning, Thank you for taking my questions.
So you've characterized your hydroxide pricing is generally stable during the course of 19, despite the spot markets.
And part of this is you know not selling much hydroxide into China market is there any way you characterize the anticipated dynamic on on hydroxide pricing.
Into 2020.
Stable fairly stable be a good characterization given that you have some visibility based on these contractual commitments.
Hey, Chris Yes, it's a difficult one I think it's important that we don't I'm trying to make predictions for next year before we actually have the data available to do it actually because you know the ended the year is clearly a time when.
We all sit down and discuss with our customers what next year's environment looks like on what terms, we're going to transact with each other I think for life and specifically, we do have a degree of stability because of the support we get from existing long term contracts that are in place.
We.
Philosophy of not selling into China spot markets is one that we've always tried to India to it in 2019. It was a relatively small proportion of our sales, but frankly still modem uncomfortable with.
On our objective is to remove all exposure to China short time contracting decisions that doesn't mean, clearly that we won't be a meaningful presence in China, but but as I mentioned before I come to the contract in parts into buying decisions and hydroxide aren't necessarily today residing with that mark.
Jinong Chinese buyout of material the losses sitting with.
Counterparties that have a maybe a different perspective, we will certainly give more guidance on what we can pricing will be once we get through the end of the habit, but at the moment its little premature to to be giving that information now.
Okay Fair enough on my follow up is and I guess reference to slide 10 on your volume outlook, which sort of implies again I guess it.
Capture all of your product lines, but.
The most important ones.
The notion that you can do 50%.
Higher volumes next year. If you if you have sort of fewer low priced carbonate sales, if you're able to source some.
You outsource some permits for conversion to hydroxide, some lower costs, there, maybe a diminished that penalty from exporting hydroxide converted in China. It seems like if there is stable pricing you could have improved margins and with that volume growth it seems like.
Indirectly in endorsement with where street expectations are on the EBITDA line for 2020 any comment on that.
Observation again yeah.
Every point you made is is relevant and clearly our objective is to bring as much stability into next year as possible. It is too early for me to tell you whether in fact some of those Tailwinds. If you will to our EBITDA will in fact play out for next year I'm going to ask for patients from you as we go through year end process clearly.
If we had that degree of visibility on the only thing outstanding was one or two small amounts of all small customers with regards to price we maybe in a different place today, but you just going up to take my word that we still have to conclude conversations with many customers before it's possible, including by the way.
Web product to ship to.
Grades of specific grades are products that are asking for these all kabi important implications on our actual EBITDA for the even they can move the EBITDA in ways that a meaningful enough. The certainly wall Street cares about so I'm going to be as from as I count on this one and say you just going to have to be patient with us for first look at next year.
Fair enough. Thank you.
Our next question has lot of bought court of Goldman Sachs. Your line is open.
Thanks, very much oppose it seems like you characterize maybe a market of a established hydroxide producers into western.
Markets, and then maybe a different market within China.
Can you talk maybe about what that premium is.
And how long you expected to sustain your ability to produce on spec to have availability and surety of supplies.
Actually conceptualize the advantage that you provide there and how long you might be able to retain that advantage.
Yes, I think one of the characteristics that we're trying to get across to people in hydroxide is the buying decision rests today. It was increasingly moving to a buyer of hydroxide, who has frankly, we made some pretty significant commitments to that customers as to the performance of the battery when it's done and so they are paying extremely close attention.
To the performance of the materials that are going into the battery. There's also I think it's fair to say, but have a shift in the business model this developing between inside and outside China supply chains for batteries, where.
It was an attempt in the in the battery industry to own more control over the purchasing decision of raw materials, rather than just treated as a direct pass through.
That means as they as they had down that path. The last thing. They really are looking for is highly volatile pricing now they don't want to be at a cost disadvantage to people with a different strategy and.
That timeframe for this is a multi year timeframe and so we have to make sure the pricing remains competitive regardless.
But the dynamic is very much more to bring more stability and predictability over multi year periods to the input costs for the battery I mean I'll just.
Not that anybody's given money away with him remains a relatively small input cost into the battery lithium hydroxide in the performance of it remains an extremely critical part of the performance of the battery, particularly with regard to safety.
And again every single battery produce it is.
Following a proprietary process of manufacturing them materials cathode materials batteries et cetera, which they frankly don't share broadly all of this is creating a very different dynamic for a Japanese Korean or even European focused supply chain than what we've seen China I wouldn't necessarily describe it as a premium or discount.
I personally conns imagine a tsunami of in the next couple of years, where the China price goes through one of his gyrations upwards through the roofing and it maybe that was selling at a discount to that short term price I just think it will be a different pricing model and it will offer greater stability as time unfolds.
And if I can follow up on your contract approach to those gas producers or through the auto companies I think in the past you guys have it talks about resetting price annually subject to some colors. It appears maybe some of your South American Brian peers abuse different approaches either stop markets or more of a fifth.
Price.
You see your approach to contracting changing in the market and then also how do you make sure that your Brian expansions come through it seems like the industry's had challenges in terms of expansions and selling assets.
Yes, good what to sneak two questions together Bob.
Like I think in terms of the contracting strategy I strategy. This year and I mean, historically has been you know we may but maybe over over state who controls that contracting strategy work in the end is the customers that have that have their own views as to how they want to run the business isn't that trying to line up to supply arrangements, including contracting.
Pricing strategies that aligned with that.
I will jump frankly is to find those customers that are willing to contract on a basis that is.
Active to us and recognize and values what we do so that means that we actually tried to be somewhat agnostic as to whether that fixed price contracts floating price contracts caps and call as annual renegotiations, we do our best not to move into anything that requires frequent renegotiation. It just isn't healthy for us for our relationship of anything.
While at the same time, we want to make sure that our customers feel like they ask you have an open line to us that if monkey and vice versa by the way the monkey price isn't that prices get consistently in long term outlined we ask you have a.
Conversation that we can have with them the basis for that frankly, Bobby is getting in with the customers early making sure that our product is qualified and making sure that our product is being used in their processes and the they're happy with how delivery schedules the quality of what we produce and everything else on the back of that you can start to have a public.
Customer relationship rather than just and I, just a pricing negotiation.
And that really is the philosophy and I would just point to the fact as I said the hydroxide market is evolving differently than how the carbonate monkey behaves today, whether they evolve over time to the same place is hard for me to predict but it certainly feels to me that they were in a different place today with regard to the contracting and under the negotiation on the customer relationship process.
That's probably continuing I, Brian expansions, we remain on track.
We tried to be clear on this I'm just going to say it again I'll estimates have not moved by a single day as to when we will bring production on in Argentina. Since we started the project. We've always said mechanical completion in the back half of 2020, so that we haven't volume available in 2021 that remains to attract that were on in the past that were on the same is true for hydro.
Site expansion in North Carolina, It is absolutely on track still.
Thanks.
And our next question comes lot of Christopher Parkinson with Credit Suisse. Your line is open.
Thank you it seems as though it's mostly timing issue, but given the lower op cash guide can you update us on the current funding capacity for the expansion and then also.
You hit on the slow the end, but can you offer some additional detailed the construction progress you've made during the quarter and probably more importantly highlight any remaining large benchmarks or hurdles that you must execute on prior to the initial commissioning. Thank you.
As you better here so on on the capital funding for expansion again, we have.
We affirm our intention to invest between 200 Thats $240 million. This year again in Q4, we have a lot of activity taking place as fully described a lot worse.
Although shipments that a lot of the real start up of the construction is the solar so we expect a lot of spending this year in terms our finance capability.
Nothing has changed we still have older revolver $400 billion, we've ever seen since.
Place for Us to fund with no problems or expansion.
Yes, I intend to the Argentina expansion.
It really has to us I'll lose to describe it as three three groups. We have the vote infrastructure, we need to put in place to actually complete the the expansion that is largely complete a.
The team listening on the front I'm sure. We'll book that wouldn't seem that me, saying is largely complete but camp infrastructure et cetera is is all well underway. The second is the key aspect of any prime based operation, which has access to a sustainable supply of water that requires us to build essentially a water pipeline on aqueduct construction on that has commenced.
And we deployed contact doesn't have underway. This is a key construction season for was it somewhat down them and so we need to make as much progress as we can on that before the cold weather says Bakken again next March April time, and the third piece is the dish the completion the fabrication of the carbonate and other related modules in China, and then the physical relocation to the slow.
As you know is pretty remote.
That process has started the first modules are underway almost a 100 modules of b the left or about to leave China. The little arrive in Argentina. We ended the year and we'll start the process of deploying them up to this allows the it goes on all of those remain extremely complex processes and while there is no single factor that we see that could could trip as opposed to delay.
Yes.
You never quite know, what you're going to find at various points in time and so.
You know I feel very good about where we I think we have the right team. We have the right processes, we have extremely constructive relationship with the local communities in local authorities, that's helping as when we do and into.
Some logistical issues, so never say never but it feels to me that with we're progressing as well as we could have hoped.
And just a quick follow up just how would you characterize the broader diversification opportunities. You're currently seen the market are you still looking for partnership partnership opportunities in light of some of the uncertainty in Argentina are you still just simply focused on executing kind of marketing Bessemer city for the time being thank you.
You know I think.
We found ourselves in places in the past where with hindsight, we maybe should have been more forward looking and we've delayed decisions. We've been too heavily influenced by short term market conditions and find ourselves several years late to wishing we'd had a better crystal ball I think we look forward and say to remain relevant in this market we have to keep explode.
In ways in which we can expand our capacity I mean, we can take it from an L.C.E. basis and that that makes us look around a little more and we do look upon the ship opportunities for.
Expansion projects, where we think we bring something more than just capital, where we think we've been real expertise and we'll continue to look for those partnership out opportunities to give as cost effective and capital effective access tomorrow, Lcs, we'll continue to expand and hydroxide.
Our business model is a little different than everybody else, we don't intend to build a business model that low case every ton of conversion capacity in the same geographic region and leaves as exposed to a single specific market. We have diversification today with China in the U.S. and there's no doubt that there'll be more and more increasing them out.
And for lithium hydroxide in other geographies, including Europe , and we'll continue to look forward about what we need to do.
As a market evolves without asset footprint.
Thank you.
Our next question comes later, Kevin Mccarthy with vertical research your line is open.
Good morning.
Paul I think you indicated you've got a significant majority of your exit hydroxide volume in 2020.
To be supplied under multiyear arrangements with either battery producers your auto Oems.
My question is for those contracts that you already have in place to what extent do you have visibility or confidence as to what the price is going to be in other words.
You know to what extent is your contract price fixed or variable or perhaps there are examples of each how would you characterize that.
I think it was examples of each of them what went what we're trying to do and we've talked about this in the past is.
Customers with long term contracts on static in that demand requirements and and as they've come back to us as that demands of required and look for additional volume we've been able to effectively layering in additional commitments, maybe slightly different times different prices different structures. So in aggregate happens a lot of a lot of predictability to the.
Supply arrangement, while at the same time, giving both of us the opportunity to revisit and check where we are relative to market pricing on a on a wants to you, but one or two year basis, which is what we found happen.
We're continuing down that path, which were trying to build something that allows both ourselves and our customers without it being a constant negotiation to actually turned around and have frequent conversations to say hey, just the price really reflect what both of us or trying to achieve a we giving you a price that make sure you as a customer do not field cost disadvantage.
While at the same time are we getting the economics that we need to continue to invest alongside you and the contracts and then antibiotics are designed to be structured that way I think because we're going to 2020 I feel very good that we have exactly that kind of contract structure in place. It will evolve, though again in 2020, adding 2021 as demands change as I've capacity.
The increases on our customers ask for more product.
That's helpful and then.
If I may coming back to slide 10, and the hydroxide sales volume range of 25 to 26 kilo tons that you referenced.
If a year from now it turns out that that the sales are different from that level, what would be the most likely reason for that circumstance, you're maybe can just talk about your level of confidence.
You spoke a bit about the contracts but.
What are the other key risks around that level of sales growth next year.
You know, it's a difficult one to answer today, Kevin completes our best estimate and I could be a little bit clip and say well customers take more or less so we produce more or less.
The reality is that what we see is an acceleration each quarter and requirements request demand for product from us and so you shouldn't for example assumed that that 26000 tons is gonna be evenly spread in every single month.
It's not that difficult when you're shipping you know a couple of thousand tons or more per month in some cases, a customer taking 520000 tons in a month that had that demand patterns change a little than they asked to delay some accelerate some which we've had happened in the past it could make a difference, especially when you fully sold out.
You know clearly we can find both cataclysmic issues that a customer completely walks away from a contract all the opposite that a customer suddenly it appears with a massive new basis of demand I don't really expect either of those two to happen next year.
Okay. Thank you very much.
Our next question comes on line. Please state your goodbye.
The bank your line is open.
Yes, hi, good morning.
Good morning, Paul.
The lithium supply chain is very long.
Go from carbonate and hydroxide in China to cat batteries and Oems.
No.
When you look at your marketing diligence, what do you think that.
In Canada.
Yes, it held at more OEM that one or bad pillar, one what is inventory getting back up today.
[noise] <unk>.
I'm not convinced our crystal ball is any better than anybody else as I can I only know what we do see and I can see the days and auto lithium hydroxide inventory out there in the channel and why would that be this is a product with a potentially reasonably short life, depending on how is process to one graded as as well as a a market where most of the.
Short term buyers are looking at it saying prices going down why would I buy more.
We do certainly here and see and feel a lot of spodumene inventory out there.
And we certainly see a lot of carbonite inventory at customers I mean, one of the interesting developments was this year has been some of the battery producers on the other battery chain, where they've been you know.
Relatively they've been quotes out a little by how quickly they themselves are shifting over to hydroxide and they've therefore, maybe over committed in some places to covenant purchases and and we've seen examples of people taking that covenant trying to find ways to toll processing into hydroxide as a need to use it up so I do think some carbonite inventory sitting out there.
At this sort of the cathode level at the battery level I don't frankly, I have a lot of visibility beyond that unfortunately.
Okay. Thank you and then you know your choice of expansion, especially more certainty.
I would assume that most of that product would be sort in the western hemisphere. How is the live Tim supply chain developing outside of China, particularly into your way into your Western Europe . Thank you.
Yeah U.S.U.S. remains on unfortunately, a relatively small demand centre for lithium hydroxide and until we see a significant shift and in battery supply chain cathode material manufactured particularly I don't really see that changing anytime soon we do see that changing and yes, we see.
Customers building capital capabilities on battery capabilities in you have up and I think the policy decisions that we've seen over there whether it's starting with charging infrastructure all subsidies to consumers for E B or C O two mandates.
Oh somewhat aligned with a desire in Europe to actually haven't domestic battery production supply chain and all the way to.
Cathode materials I personally I'm skeptical that there'll be particularly happy about spodumene mining all even spodumene processing and you have it but time will tell but I do think we will expect to see a demand send to growing but we already see a demand for product that is not sourced entirely through China I think that is a a way.
Well recognize pinch point by Oems that as we look forward with almost all the expansion looking like it's going in China for conversion capability, it's reasonably difficult for many Oems to look at that say just is that really a sustainable supply chain that I'm willing to rely upon.
Thank you.
Our next question comes line of Mike Harrison of Seaport Global Securities. Your line is open.
Hi, good morning.
Hey, good morning.
I was wondering if you can talk a little bit about the political situation in Argentina.
That might have any effect on your operations are your expansion plans there.
Any concerns about changes in capital control regime or export taxes or anything like that.
Nothing history has shown as the that when we have a highly interventionists federal government in Argentina, the impact tends to be on those areas that you. Just described FX capital controls just bear in mind that with a net import to a product into Argentina for the foreseeable future capital controls typically.
Was the typically structured to prevent you taking dollars out of the country, we're putting dollars into the country and will be for the next four five years or even more and so in the short term. It really does not make a big direct difference now clearly when we end up with inflation up 40, 50% plus and on a currency that is artificially held down to not depreciate at the same.
Right, we will get some cost headwinds coming from that we've seen that in the past.
And if it continues we will see it again in the future. So so certainly the federal administration change is something we're keeping an eye on as to what that policies will be in that regard.
All the noise as have been positive so far very supportive of of extractive industries very supportive of developing strong <unk> exports, which of course, all the by product is exported.
Very supportive of given more authority in more power to the governors in the regions and that's really perhaps than maybe the main takeaway for us is that what really matters to us as I relationship with the local administration and got to Monica and we spend a lot of time working with them and partnering with them.
We havent always been perfect in the past, but I think we put ourselves now in a place where we have a very good understanding with administration and while the governor did not stand for reelection has successfully somebody we know very well.
<unk> remains extremely committed and supportive to what we're trying to do down there. So it really does not change our expansion plans in Argentina tool.
Right.
Other question I had is on your purchases of third party.
Carbonate you had some disruptions in Argentina early in 2019.
Just trying to get a sense of do you expect.
Party carbon it purchases to be higher in 2020 were lower.
Relative to 2019.
Yeah, I think you can see the math that we have set out and I'm a slide that shows the gap between how much hydroxide.
You know went with what producing and how much covenant, we producing isn't really that different give over years, maybe a little bit higher.
So in terms of the amount of Carbonite. The we will have third party carbonate. The we will have to use in 2020 to support our sales it will be higher on top of that I can we certainly learned our lesson with regard to supply chain management, and making sure that we do not allow a disruption and Argentina foreseen disruption for weather et cetera.
To have such a disruptive effect on us, we certainly revisiting the timing and the patents of buying them carbonate to provide ourselves some protection again.
Thank you very much.
Our next question comes a lot of Steve Byrne of Bank of America. Your line is open.
Good morning, this is Matt on for Steve.
On it.
So just given the shift in volumes to 2020.
Is it safe to say Volumetrically things will be fairly flat between 2020, and 2021 and kind of on the back of that given the LG comments or contract your comments about being forward thinking.
When do you see bring forward. The next line of hydroxide and would that have happened coincidentally with an expansion in Argentina.
No we would expect to see volumes a little higher than 21. This is 2020, I mean I'm impressed with the long term nature that we've already talking about 2021 volumes.
The reality is I have about 18000 tons of so a covenant capacity and I'm, adding nine and a half thousand tons to it. So I clearly we'll have more LC easing 2021, and then by adding a 5000 ton unit investment city you can see by looking at the slide we put out I shouldn't say about to produce about 27000 tons of lithium hydroxide compared to sales of 26 that we're talking about.
So I would expect some increase now.
Just just bear in mind, we trying to be very responsive to customers. If we see demanding 2020 one for lithium hydroxide being higher than the 27000 tons that we can produce for us demand for us we do have the capacity into relatively short timeframe to add additional lines and China. We've done that in the past we've added 4005 times.
Sometimes at a time it takes us somewhere between six and 12 months.
Depending on a few factors so it may be and I'm certainly not putting this out there in your model to it may be that we choose some time in 2020 to commence a full plant in China, if the customer demand is that.
Okay.
And maybe a little bit of a technical question, but can you just.
You mentioned it briefly but hydroxide has the moisture scavenging.
Nature of it I guess, but.
How does that impact the cost to store 4000 metric tons into next year and how should we think about the implications on the cadence in volumes as that product kind of roles to market should that be front end loaded or can you.
Level that after the year.
Yeah, you know you know, it's it's sort of more complex than just simply that the reality to the single biggest factor that tends to drive show shelf life on lithium hydroxide is its tendency to clump is tendency to compact.
And maybe the single biggest factor that is actually the size of the particles, whether you have larger crystal size particles or smaller ones.
Clearly lots crystals that they tend to be harder to make consistently and they tend to have better storage capabilities, but customers don't like them and so they tend to want to have them either ground into smaller particles or to produce a smaller crystal to start with.
All of those factors impact how long you can still the product for we do always have the capability to essentially skip the last step of processing until just before shipping to customer.
So we end up with an almost complete product, which gives us a little bit more shelf life in that regard, but generally speaking we expect the product as we make it will not have a shelf life issue with regard to our customers.
Our next question comes from May two Silverstein of Buckingham Research. Your line is open.
[noise].
Please go ahead, Sir your line is open.
Good morning, everybody. Thanks for taking my call just wanted to quickly sort of follow up on sort of third quarter more so than looking out to 2020 just to understand.
What's going on in the market. So you have much lower carbonite sales in the quarter, which which costs year to take you know the missing in terms of Robin you want to guide down and all that stuff. So I understand that what I'm, what I'm trying to understand is as your were sort of scrambling to make up a shortfall from the.
They should look for that reducing in Argentina have the first half a year.
How do I reconcile that ramp up that we were looking for in a second half a year.
With the results that you actually put off in the third quarter in a decision of not selling.
Hydroxide in the fourth quarter to the level that you originally planned hot melt with I guess, what I'm asking is what changed in the market in terms of your expectations are being able to catch up with a volume, but the over the year.
So let me just differentiate couple of comments the production volumes that we have in the second half of the revealing back in line with what we said at Q2 results and continued to be we produced.
You know.
Mm almost 20% I think more a combination and the second half the year than we did in the first half. The EBIT just just remember whether it is it's on top of a mountain in Argentina and much of that product then has to find its way into the U.S. So China to then be subsequently processed into lithium hydroxide it doesn't move into the market instantaneously.
I think the same is true of hydro outside of hydroxide units, because we didnt bring our third line in China on until the end of the first quarter. We also have meaningfully hydroxide outputs about I think them mid teens higher in the second half than the first half as well so.
Production volumes obvious actually as we just described.
Okay that entire processes is all part of the buildup of inventory that we're talking about going into 2020 into hydroxide that were coming forward.
Okay, I'll I guess I'll follow up offline.
The second thing I think that follow question was on the a memorandum of understanding with LG is you know.
Is there any sort of dimensions that you can provide how impactful that sits for you.
The contract.
Minimum commitments other than the fact that it's going to get contracted business is there anything else you can tell us about though.
This new relationship with LG.
Sure, it's multi year as we said so.
I'm going to be more vague than you all I would probably prefer but this is a commercially sensitive agreement. We are sensitive to commitments. We've made to LG with regard to non disclosure so you're going to have to bear with me on that it is multi yet it is for lithium hydroxide. It is from multiple grades of lithium hydroxide. It is going into multiple applications all energy.
George applications. They are predominantly he be applications, we will be delivering both in China and outside China unto multiple processes of that material. Some of that material will be delivered to LG itself, others will be super delivered into their supply chain.
It does bring it brings both greater certainty than a than we had and also importantly, good to diversification as well for our product. So it's a pretty important contract to as their relationship with LG is a very important relationship to us.
Okay. Thank you for that thank you.
So last question comes a lot of Joel Jackson with BMO capital markets. Your line is open.
Hi, Good morning, Paul.
Hi.
Thank you talked about.
Having to make sure you meet your customer commitments in 2020, you talk about how much of the 25000 ton.
Maybe talk about how much of that is walking by customers how much room and.
I'm not sure on take or pays if any kind of how you can give on how much is sort of locked in versus.
Maybe not taken.
Yeah, I think 2019, and maybe even 2018 should have told everybody that lupton doesn't necessarily mean locked in.
I think the key to us is to build relationships with customers, where we both understand what commitments were making them. We both live up to them I think we sit that with some very important a credible very long standing customers as well as some very important new customers I have a high degree of confidence that no matter, how the market unfolds, we will be having.
A degree of predictability and 2020 that I think we've felt was in summer lacking from us in 2019.
I think I would mislead either your cellphone myself, if I attempted to put a percentage today on how much of that I think you guys can take to the banking your models I would suggest that we have we would not putting that volume out there unless we had a high degree of confidence in our ability to deliver that volume and Ann and I personally believe.
The way we sit today in the business is a far stronger position and why we came into 2019 with read out to customer relationships customer conversations with regard to the the nature of our commitments on the commitments that have been made towards by customers.
Thank you for that and finally on your hydroxide made from third party carbonate.
The margin profile looking like right now for those those.
It's a well first of all the customer doesn't see a difference right. Meanwhile, some of them separately qualify and now we use a different carbonite in the end at the same hydroxide at the end of it so we don't shots at different price.
The only difference in the margin profile is the cost of the third party carbonate relative to what we produce in house and.
No surprise, it's much more expensive to buy carbonate for us than it was to make.
Are you, making money on those third party on those hydroxide produced from third party happening right now I would hope we haven't reached the point where.
Charitable organization that actually losing money and if we keep though that we sell so yes, we are making money on it.
Okay.
I now turn the call back to Mr., Daniel Please closing remark.
Thank you that is all the time, we after the call today will be available following the call to address any additional questions. You may have thanks and have a good day.
And that is all the time airport today. This concludes the Libin Corporation third quarter 2019 earnings release Conference call. Thank you and you may now disconnect.