Q1 2020 Earnings Call
Good day and welcome to the first quarter Twentytwenty earnings release Conference calls for the Liven Corporation.
Phone lines will be placed on English and only most throughout the conference. After the speakers presentation, there will be a question and answers period.
We'll now turn your conference over to Mr., Daniel Rosen manager Investor Relations for Lyman Corporation Mr. resin you may begin.
Thank you Tina good evening, everyone and welcome to Livens first quarter 2020, <unk> earnings call.
Joining me today or Paul grades, President and Chief Executive Officer, NGL barrel, and Tony Allen Chief Financial Officer.
Slide presentation that accompanies our results along with our earnings release can be found in the Investor Relations section of our website.
The prepared remarks from today's discussion will be made available after the call.
Following our prepared remarks, Poland, Roberto will be available to address your questions.
Yes, the any question the limited to two for color.
We'd be happy to address any additional questions 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 release and in our filings with the Securities and Exchange Commission.
Information presented represents our best judgment based on based on todays information.
Actual results May vary based upon these uncertainties.
Today's discussion will include references to various non-GAAP financial metrics definitions of these terms as well as are reconciliations to the most directly comparable financial measures calculated and presented in accordance with gap are provided on our Investor Relations website.
And with that I'll turn the call vertical.
[noise], Thank you Dan and good evening everyone.
Key topics, we want to dress today.
Which will be discussed in the context open novel antibody pandemic.
Current and potential future impact on Livant.
Before doing so I would like to give a special fine.
Why don't I am pleased around the world.
I would work and resilience of allowed us to maintaining safe and healthy working environment, while continuing to operate and serve our customers.
Me about lots of them I'm truly appreciate that focus and commitment during these challenging times result.
To begin we're pleased to state that all about production facilities around the world a fully operational.
Two weeks stoppage in Argentina, due to a mandatory national Florentine [laughter] not extend to the lunar new year break in China at the beginning of the Cobot 19 outbreak.
Well the bus sites have continued to operate albeit with additional health and safety protocols.
Ability to operate through the pandemic that's been a testament to the strong dedicated teams we have in place around the world.
Second as the Corona by this began to spread outside of China, It became clear to us.
Pension impact on our business as well as the brought to market would require us to me to take more disciplined approach to cash flow management on liquidity.
In March we made the decision to suspend all capital expansion what globally.
This action allows us to cut our forecasted capital spending and twentytwenty by herself to approximately $115 million.
While we remain fully committed to our long term capacity expansion plans.
Globally suspending old capital projects with a prudent decision to take in Mcallen environment.
In addition, we work closely with my relationship lenders to amend that credit facility and increase our maximum allowed no leverage to six times EBITDA through Twentytwenty. This was three and a half times previously.
We believe this amendment try with Volvo will provide ample liquidity to the challenging near term environment, you feel better we'll provide more details in his comments.
And third we will show a latest views on lithium market specifically, what the Corona Vivus pandemic has done so far what with what we expect the impact to be in Twentytwenty and potential long term implications.
Starting on slide three about prepared slides [laughter], given livens presence in China and Asia more broadly we've been addressing the Corona virus outbreak since early February when we formed a regional pandemic response team unimplemented various actions to keep our employees safe.
Taking decisive early stats and diligently monitoring the situation, we were able to safely resume operations in China. Following the extended lunar new year holiday.
This early stop also meant we could react quickly I'm confidently <unk> outside of China. Once it became clear that we needed to do so.
We maintained the same safety protocols today, and I've been able to run without any major issues in China. Since then.
Even during the period when they were significant logistical challenges in moving people products across provincial board of in China, We were able to leverage our global supply chain to minimize disruption in delivering products to customers.
Informed by our expansion Angel Liven was able to quickly form a global pandemic response team in early March when the world wide spread in September two of the Vivus became clear.
Since then we continue to prioritize the safety and well being about employees customers and communities around the world.
We also took actions to safely keep hold on manufacturing sites running.
Many of the lithium products, we make of essential not only in energy storage, but in critical applications at the world needs not more than ever from pharmaceutical ingredients and industrial disinfectants to components used in vital medical equipment.
I'm sure that we could continue operations without compromising on health and safety, we worked closely with local national authorities and our employees to develop an institute strict procedures on a site by site basis. These include visitor medical screenings central person designations.
But shifts and social distance and measures.
A collaboration with the provincial and federal officials in Argentina Jones, a mandatory countrywide contain reflects license level of preparedness <unk> commitment to responsible operations.
We worked closely with the Argentine government to develop an administer a safe and practical set to protocols tourism local operations. After only two weeks of downtime. Since then we've been operating out the slot that processing facilities without incident.
We've also use this pandemic as an opportunity to further engage with I'm support our local communities.
Don't make to personal protective equipment in the UK to providing support for medical personnel, an ambulance services and essential transportation in Argentina, we are grateful to be in a position to help those in our communities.
And I went to the combined impact of Cobot 19 on the lithium industry I will attempt not to speculate too much but what instead focus on what weve actually seen today.
First there was reduced visibility.
And our ability to forecast near term lithium demand by this I mean, the remainder of Twentytwenty.
A large parts of this can be attributed to the broad disruption to the auto market and the implications are prolonged OEM plant shutdowns will passenger vehicle sales declined by 24% into first quarter Hawaiian electric vehicle penetration rates have been notably higher total volumes were negatively impacted.
The timing duration, an overall impact to the Corona Vivus has also pay would greatly by region.
For example, and the final week of April Chinese retail auto sales improved to roughly flat year over year after being down as much as 40% even much.
Further chinas new energy vehicle sales sits just over 300% month over month to 53000 units in March despite being down roughly 55% yet today versus last year.
Meanwhile, many OEM plants in Europe, and the U.S. remain shut down due to government restrictions with the second quarter expected to be the most impacted.
Just as important the average consumer it's clearly not spending at anything like a pre cobot levels and this is especially true for larger items such as Altos [laughter].
It is difficult to predict how quickly consumer spending will rebound.
Oh, when manufacturing and supply chain for would tend to prior levels of activity.
Well, we remain in close contact with customers regarding volume needs for the remainder of this year. It is still unclear what the some demand will be recovered in the second half of Twentytwenty all pushed out further.
This is amplified in an environment, where there was understandably more focus on managing working capital than building inventory at our customers.
Delays in restarting manufacturing plants may result in upcoming electric vehicle launches being delayed by several months.
However from a fundamental standpoint, we have not seen any evidence of Oems pulling back from that electrification objectives or substantially all trends that lineup of each piece for launch.
In fact, we've seen system Oems use this as an opportunity to engage more directly on key aspects of the electric vehicle supply chain from taking a great interest in the location of sourcing and manufacturing sites to something more stringent standards for quality and sustainability.
With a heightened focus on managing capital in R&D spend we are seeing OEM development efforts go towards platforms that will be attractive and sustainable over a long period of time put another way, we see Oems allocating their own scarce resources towards future E V platform forms rather than historical I see.
<unk> technologies or project with them, so commercial models such as autonomous driving.
Moving to the lithium market, we entered the she having a general state of oversupply, albeit with a wide range of quality capabilities on the supply side.
The near term slowdown in demand driven by the Corona Vivus put additional downward pressure on pricing.
This was particularly evident in shorter term uncontracted market, such as China, which was fed by a continued oversupply of spodumene concentrate especially that shipped in prior quarters, which has been sitting in China waiting to be processed.
There was also little urgency from customers to take their share of annual volume commitments in the first quarter or into an all entry into new agreements given the broader market uncertainty.
We expect this dynamic to continue through the middle of this year as customers resumed production.
Look to assess the impact on their own it near to medium term end market demand.
Last quarter, we discussed industrywide postponed or canceled lithium capacity expansion projects as well as announced output reductions as a result of weaker pricing.
This trend continues with sustained lithium pricing pressure near term demand weakness due to the Corona Vivus production declines to date have still been relatively modest reflecting the incentive for many higher cost producers to continue covering that cash costs in the hopes of remaining in operation until the market improves.
However, we believe this is not feasible over an extended period and we expect to see further reductions in production in the coming months.
Additionally, they have been challenges the lithium products already in development with Corona Vivus related supply chain and government restrictions further delaying the time expected to bring them into production.
More importantly, though the growing number cancelled or postponed expansion projects will have broader implications for the industry as we move beyond twentytwenty.
These announcements have come from old geography, and resource types as well as new and established industry players.
In aggregate, we've seen over 400000 tons with of expansion delays or cancellations in both lithium carbonate and hydroxide over the last few quarters.
Colin lithium prices have severely challenged any reasonable investment return hurdles and several notable distressed lithium assets as illustrated the limited the non existing financing options in today's market.
Well near term lithium demand forecast up significantly widened due to the tenant uncertainty in the market.
Positioning from governments globally Oems continues to support demand levels, and Twentytwenty, two and beyond that I'm not materially changed from private expectations.
So as demand picks up as the global business environment Normalizes and electric vehicle production accelerates. We believe they will be a much more rapid tightening of the supply demand balance than we would have predicted just a few months ago.
I'll now turn the call over digital Battle.
Thank you Paul good evening everyone.
Turning now to Livens first quarter performance.
For the first quarter of 2020 reported revenue of $69 million adjusted EBITA of 9 million.
Adjusted earnings per share of two cents.
Our results reflect a challenging operating environment for both lighting and the leasing industry as a whole.
The declining revenue was driven by lower sold volumes.
Most notably China.
Lower average pricing.
There were some defer purchases from customers as they work to limit even sort of view about why we're assessing the impact of the crises <unk> end market demand.
Margins were impacted by lower pricing and hydroxide sales using third party purchase would be some carbonate.
We expect the margin impact from hydroxide sales using third party purchase carbonate.
To be notably high into first half of this year.
As you walk through the roughly 4000 metric tons of hydroxide inventory carry forward from 2019.
Moving now to widens liquidity position.
As Paul mentioned earlier.
Well the grew up virus began to spread outside of China.
Lighten recognized the heron circling back to the global economy and they need.
For an increased focus on liquidity and cash flow management.
Our first public action was in March when we announced the suspension off all cops expansion work globally.
We could projected captive spanning 420 20 in half to approximate $150 million.
Reflecting the decision to Paul's expansion will work in both Argentina.
And Bessemer CD North Carolina.
Quarterly spending for the rest of the or we will come down significantly from the first quarter.
Did you see Central Hall expansion was not need until well into the first quarter.
Since then we have before it was on stopping key project items interest to TG points that will allow us to resume work as quickly and cost effectively as possible.
We remain confident you continue to feel orders.
From our customers the three and remain committed to a long term capacity expansion goals.
Well I mean, we cannot you only provide I specifically for when we thatcherism expansion work, it's unlikely we will be before the industry's returns to more normal ice conditions.
Moving to isn't like he.
With respect to our balance sheet.
We work closely with our relationship lenders to rock band licensee because you see facility to provide sufficient liquidity to support operations. During this time Oh from certainty.
We have increased the net leverage covenant limit on our revolver.
Thank you for up to six times EBITDA through 2021.
Versus 3.5 times previously.
It's higher leverage limits provides a safe guard against Cobiz 19 stress case scenarios that we had before <unk>.
We will also we'd be foolish, reducing spending all non essential areas, while diligently managing working capital.
Looking beyond 2020.
We continue to work with our lenders sure probably alternative that structures beyond our existing 400 million dollar revolver maturing 2023.
The data supports life its long term capital requirements.
To conclude my remarks, I want to address this topic off guidance.
Well I don't evolving in fact, screwing up fiber spend and make the broader uncertainty in the global comedy.
I would tell you its previous issue full years 2020 guidance in early April.
Following the two weeks off stoppage in Argentina, We now expect me to cover the production volumes to be flat in 2020 year over year.
We plan to sell all 4000 tons of hydroxide inventory.
We carried to 2020 and we run on alright drunk cyber operations. This year, we think fashion for meeting all customers you Matt.
While minimizing for parties carbonate purchases.
We will not contribute and even for you speak leases for revolving demand.
We tend to provide an updated financial smoke once we have a greater visibility.
With that I'll turn the call back to Paul.
Thank you so bad so.
I want to conclude by looking beyond the near term challenges to focus on some of the longer term themes that continue to hold true in our industry.
Well there was uncertainty about a near term lithium demand on the implications of a corona vivus like downtime on electric vehicles failed, there's no indication that the longer term push to electrification has meaningfully changed.
We do not believe the key fundamentals the driving the shift to electric vehicles have changed these fundamental driver troops strong regulatory support around the world Bettina area and to fight climate change.
Well as advancements in battery technology, but increased manufacturing scale that will bring even towards cost parity with internal combustion engine vehicles.
And another display of commitment to the industry. The Chinese government recently announced that new energy vehicles bought in Twentytwenty won or Twentytwenty, two will be exempt from federal purchase Texas.
The government also extended the any be subsidy program through twentytwenty too from its previous Twentytwenty exploration, although it is stepping down subsidies over that timeframe.
And in Europe, Despite auto sales being down significantly year to date.
You'd be penetration rates at all time highs as we move closer to C. O two admission compliance dates.
The shifts to increased use of lithium hydroxide also continues and got the capitals of electric vehicles and energy storage more broadly.
With respect to high nickel TESSCO technologies, which require lithium hydroxide that has been an increased focus on chemistries beyond NCM anyone want.
Tunnel development. Some success have come from the use of and see a and C. M. A C and other blends incorporating higher nickel comment.
There have been recent announcements of several new electric vehicle models in China, using LSP based cathodes.
However, higher use of this legacy cathode, which can use company. All hydroxide is in no way contradictory to the trend of higher hydroxide demand. We have always stated the not all energy storage applications will have performance specifications requiring high nickel cathodes.
Coming from short range, and commercial vehicles mobile devices or stationary storage applications to name a few.
As battery technology.
Continues to improve and Premier global Oems rollout larger electric vehicle platforms, we still projected that hydroxide demand will grow at a higher year on year rate than carbonite and make a bit increasing share with energy storage market with that said, we continue to operate unplanned under the assumption the both products.
We'll be of critical importance for long term energy storage solutions.
Finally, given the significant significant reduction in a master development and expansion plans. There it's great to 'em sent to you, but where the supply of lithium to meet future demand will come from over the medium to long term.
While near term demand uncertainties account issue that most industry players are focused on the debate will ultimately drawn back to supply.
And this period of depressed lithium pricing over the last few quarters has made clear that challenges. The current industry wide business model is creating for the future about industry.
As an auto Oems have become more directly involved in the electric vehicle supply chain, there's been a heightened focus on ensuring that not only our supply pause fully integrated between lithium chemicals on resource, but that was a path to increasing capacity to meet high a qualified demand needs over time.
However, current average monkey prices and by that I mean, the blend the prices across all geographies not just the unsustainably low prices, we've seen the China market.
So a little to no lithium development projects out there that can be considered economically viable when looking for a reasonable return on invested capital.
At these prices the majority of lithium products do not even cover the cost of capital.
In order to ensure that lithium supply continues to grow and keep up with accelerates in future demand there must be greater predictability in pricing afirma long term commitments from customers before our industry can start to invest for growth again.
In addition, Oems have placed greater importance on whether the team is being produced for a number of reasons.
The disruption to global supply chains from the spread of the Corona Vivus has reinforced the importance of not being relying on a single region to meet supply needs and the benefits of localizing Pops of production.
China Greater Asia represent a significant portion of the energy storage supply chain today. So the impact on the lithium industry has been more visible from the outside of the pandemic.
[noise] livens ability to serve customers will lift in products from a global manufacturing network with hydroxide from both the U.S. I'm, China as well as the security of supply that comes from our ability to use third party materially not hydroxide production has been particularly valuable to our customers.
And while most recent let him compound production capacity has people been built in China due to lower capital cost the importance of alternate he be supply change that do not want to China is growing.
The localization elements of OEM focus it's also rooted in sustainability objectives, and we expect this to be magnified as he be models are rolled out on a larger scale and especially as the number of electric vehicles sold in Europe increases.
And with carbon conscious principles and Paul behind the transition to electric vehicles, we believe they will be a bigger pushed to reduce the carbon intense practice of shipping I'm finished raw materials or intermediate products to multiple locations around the world.
Well I haven't has been sharply focused on its own global footprint as a standalone company since the time of its IPO.
As part of these efforts, we will be launching our revised sustainability program as well as outlined in our broader BSG framework as part of a super leases to be provided throughout this year.
In closing.
As liven looks beyond the current market conditions, we believe that our cooladvantage is the low cost and sustainable nature about Brian based operations, our partnerships with leading battery produces an automotive Oems and I've continued investment in developing next generation engineered lithium products positioned us to be a prime beneficiary.
I'll do tend to improve lithium market dynamics.
I'll now turn the call back to them the questions.
Thank you Paul Tina you May now begin mcewen any session.
If you would like to ask a question at this time.
If you would like to ask a question. It's 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 humans.
To withdraw your question first Sebaski, we'll pause from all the Q1 day roster.
And your first question is from Bob <unk> with Goldman Sachs. Please go ahead.
Good morning, This is Don Campbell on for Bob.
Last week one of your competitors you noted that second quarter as battery manufacturers catch up on backlog backlog air orders that would be somewhat insulated and most of them back from the shutdown of Oems would hit the second half of 2020 using something similar.
[noise].
It's a complicated question because I was just not it's not an industry where all the dynamics are the same amongst all customers. There has certainly been an issue now industry of a shortness of.
Finished materials in the supply chain I mean, we've seen many conversation if I'm not enough battery cells being available, but it's not a simple it's just simply using this downtime to build mall capability, we've seen certainly battery factories closed down because of the.
On the virus in the U.S. and lots parts of Asia times, as well and that certainly had an impact. We've also seen some tension between the ultimate consumer the OEM or buying these products, who start to look at their own cash flows bumping, particularly willing to fund a buildup of inventory back through the supply chain. So while yes, we have seen that trend up.
Well, we've certainly seen battery produces take the opportunity to build some some inventory I'm not sure that it's particularly sustainable practice that will continue for a much more than a couple of months in the current environment.
Got it.
I mean could you talk a little bit about the options regarding your valuation of alternative debt structures and then I guess is there a pathway.
For some type of agreement.
Something of a downstream player.
I'm willing to talk about the debt piece first with the very early stage at this but but it's clear using eight using a revolver with with covenant restrictions that really wasn't designed for long term capital projects, but frankly was never designed to be the permanent capital structure that we wanted to put in place I think what we're seeing now is lumpy just gonna have to accelerate the pace.
That's a putting in a debt structure. This makes more sense for business, where the capital and financial profile of I was I will focus much more on longer duration and greater certainty around less liquidity challenges to what we do.
From the debt profile.
Second part of your question, maybe you could just clarify what you're asking me though.
Yeah, and I guess is there any type of pathway for repurchase.
Here in product or some type of agreement.
Downstream easier or battery producer given kind of.
Emphasis of securing supply for the future you are referencing.
Yeah look you know it's an interesting question you know the challenge you have without is if your downstream consumer downstream could you see you got some pretty significant significant calls on your capital yourself right, whether that's to expand whether that's to fund new technologies, whether it's to build new battery pension. So while you can certainly look around and see the logic to.
And we can look look at some very large consumers of lithium. It's also sometimes a little difficult to to understand whether the right thing for them is to deploy capital in this way in order to take the price of the lithium down.
Or is it back to frankly, just allow the lithium industry to finance itself by offering great to price certainty and an mall investable economics at those prices and I think the Joe is still out on that and while we keep having these demand. This drop disruptions one other things like cobot nineteena going on and whatever our industry is is.
Over building on the supply side, it's a conversation that that can be pushed further down the street at some point, there's gonna have to be a reckoning for anybody who wants growth in the lithium industry you either didn't have to provide capital to an industry such as I was so you're going to have to provide prices that a high enough to it to enable us to go out and get that.
She financing and I think I'm not show in a place yet where either of those is quite ready to under one of them well for sure.
Thank you.
Our next question comes from Chris Cats with.
Capital markets. Please go ahead.
Chris If you that we currently.
Well I move onto the next question.
Your next question is from Chris Parkinson with credit Suisse.
Good.
Hey, Chris you that.
They do you know we I'll leave it some technical challenges on your side I was this just lines of the question I Skus that we have a problem with.
Yes.
Yes.
<unk>.
Hi.
Chris.
Hi speaking yes.
Yeah, Hi, it's Chris Chris we were going to you know great Oh.
Sorry about that I don't know, what's going on so I don't I was that blanked out for like 15 minutes apologies if somebody's addresses for anybody so one of your larger integrated lithium competitors characterize the you industry demand herbicides, having pushed to the right. You you mentioned like you'd see the fundamental drivers is very.
Much in place so maybe there were just talking about.
Antics here, maybe focus a little bit just more on near term disruption could you.
Would you concur that.
Near term that.
The demand curve it sort of right or you feel based on your insights with your relationships that business as usual.
You know I wouldn't I would never disagree with such a loved an eminent competitive mine on such matters.
I think there's the shape of the code is different today for sure I don't know what this pushed out a year eight months 60 months out I just don't have enough data to point to that you know I've characterized 2022, sometimes I've heard characterized by other than I think it's a valid one as you know will twentytwenty turned out to be bit of a last year and it'll kind of skippy you have growth and twentytwenty.
I think that's it that's an absolutely plausible scenario, although again, it's just too early to really see because it's hard to know because the backend of that she was going to largely driven by how people feel bad about the first half of 2021 and maybe even the second half of 2021, what we have to though is generally speaking quite quite vocal come.
<unk> Mint 20 to 23 and beyond volume commitments by some of our customers. So while they send that we maybe a little delayed in taking material you should not assume that we will want any less material by the time, we went to 2022, because I think most of them think that they are just going to be into just as much pressure to launch. These E. V is you know it's an interesting.
Dynamic the when they are capital constrained they look down all of their own projects and see where do we deployed this capital and it becomes increasingly clear to us that they're saying like electrification has to happen foot for whatever reason, then and I was changing our spending a reinvesting in internal combustion engines or putting a lot of capital towards maybe lesson revenue January.
Just like autonomous driving maybe on the right things to do right now when we should be doubling down on where the future inevitably lives, which is electric vehicles and I think that's what probably well they're looking to the near term patents. Obviously the plants opposed in many cases I think that's starting to realize that it probably accelerate that portfolio transition even more.
Rapidly towards a predominantly electric fleet.
Got it and then the curtailment of your the whole thing or suspension of your Capex expansion did.
How do you feel about fulfilling.
Demand requirements. We can you just mentioned, albeit you know more pushed out maybe a little bit in terms of yeah. The the a the ramping up their demand assuming it happens you know generally and magnitude that you're referencing and sort of 2022 timeframe.
Yeah, you know, it's it's a it's maybe the single largest question, we ask us I'm I'm going to put the capital piece and the ability to finance piece to one side, one moment, but from appeal construction engineering perspective.
Just two elements to what we've been trying to do build a more carbonite minimal company in Argentina, and then lineup the hydroxide expansions with that either either you know at the same level, maybe a little bit behind to go a little bit lumber carbonite.
I think one thing that we're looking very closely at right now is while phase one in Argentina, clearly is now delayed although opportunities for us to combine phases, one and two sort of so that we still get instead of 9000 tons and then they give us to lay another 9000 10000 tons, we try to bring it all on a once in so that we have a big a step up in a single.
Oh than trying to do it in smaller increments and we're taking a long hard look at the practicality of that it's difficult today frankly, because we're doing this in Argentina, Argentina isn't enlarging the complete locked down there's no movement between provinces, it's very difficult to move people around your comp certainly can't fly in and meet people. So we have to sort of get through this short term.
Restriction on activities. So that we can start to ramp up and then we can start to answer. The question now what does the shape of the expansion look like we will suddenly expanded our plans haven't changed but again just like the demand curve, it's quite likely to take on a different shape.
And our next question is from Chris Parkinson with credit Suisse.
Great. Thank you, yes, you hit on this a little but can you said a little bit more about just kind of the net effect on that the cost curve just given the magnitude of the extension deferrals.
Honestly thing going on for quite some time now yeah, basically almost three years. They feel a lot of things you have kind of keeps it down to the right.
And if you could hit on that in the context about carbonate and hydroxide and just how you believe you know regard.
Our beliefs enough product quality should also played your estimates it where do you see the current cost or yeah. Forget 2020, that's what kind of had 122 how is your thought process change around that thank you yeah.
Thanks, Chris.
I'm not sure thoughts on the Costco, but really changed that much if I'm completely honest I think you've really got continued to have in both carbonate and hydroxide. Two very different produces you have a fully integrated producer and then you haven't done integrate to produce the nonintegrated could you sit today.
It is able to take advantage of some very little bit my view, what he's made a little spodumene prices. When you look at spotted wing prices, a 400 $450 a ton and you look at some of the minus out that with the Ics with the exception probably doing because nobody can produce a close to that level continuously as they move to different parts of their minds and so really the the to profit pressure has been on.
A woman to Ellen and as there's no reinvestment economics at these prices at the spot you mean mine.
Personally finding fascinating that in an environment, where nonintegrated future has had its single biggest input cost for by 50% from about $800 to $400 a ton. They both so a lot that profitability. The fall at the same time, because there's been a desired to bring on conversion capacity in China, but what you find if that's a heavily.
We leveraged play on the spodumene cost on the other frictional costs. We also found because of the way that they are operating they they found increasingly difficult to me tightly tied to quality standards that are being imposed upon them as we move through these next generation of batteries and so we found it become more.
And more clear as we've been through the last six on nine months that.
Really the usual COO of two or three maybe four people actually getting qualified remains okay. So a very few customers that we've seen new entrants come in and successfully qualifying that material, whether that's in carbonite, but especially in hydroxide second point that I think people have to understand I mean, we see lots of common to an <unk> on a on a on a cost curve, but the cost curve.
It's always a marginal cash cost of the people look too, but if you look through the commentary from various producers will you frankly, just sit down and do the math yourself. The breakeven price of production is typically about 50% <unk> when I say breakeven I mean to reported operating profit of zero because by the time you put in depreciation by the time you brought in.
The distribution logistics and U.T. freight as well as corporate costs that we all Barry we feel bad you need about 50% higher to breakeven at an operating profit level, which may sound. Okay. That's still a low price you called financed with zero operating profit. So that's fine if you just kind of ammonia assets and nothing more nothing.
I would not expand now you need to and more than that a couple of interest expense et cetera. So when we looked at the other because we're trying to define a curve that's appropriate for reinvestment reinvestment level. That's in line with the demand patterns that our customers and independent observe is keep telling us we going to need and I think what you find his view.
You you've sort of got an all in cost.
The marginal produce it needs to hit that is well into double digit per kilo I'll be the covenant, especially of hydroxide. That's again, assuming they can meet the quality requirements. So it's not so easy as maybe you know and I know all comp of just building a simple cost cut because it's a very very fluid market and at multiple steps in it.
The can distort it depending on the conditions of any one of those steps.
Got it does very helpful color just understanding obviously you can't give you guys did hit a little on your thought process regarding combined to fit the project to.
From the top down just given current scenario what would you kind of you as you kind of your base case scenario in terms of your expectations for getting back on track and what would be kind of a disappointing scenario from your perspective, just very broadly and what that would need for your your own cassoulet projections. Thank you.
So when you start because when you see getting back on track back on track you talking about with the Argentina expansion all.
Correct.
Okay, Yes, well look you know I know you know with a long way through the first phase of expense in Argentina, and the first thing I would say is we we cannot do anything in Argentina went up mid to do any construction went up permit to to have people out that working and so we have not only stopped but we've actually start the process of de mobile.
Additional projects when there's a lot. So when we do start up it's not just gonna be flicking a switch we're gonna have to go through the whole process of Remobilizing, it's clearly not going to happen in the southern hemisphere winter and frankly until we get greater clarity about 2021, and what I love a profitability in 2021 is gonna be you spend not gonna be how to come.
Vince anybody to extend capital to us on a normal commercial terms in order to allow us to stop that backup. So I expect that the that that the decision is more likely to be made in the back half of Twentytwenty. Nearly 2021, then it then it isn't the next couple of months.
If we can successfully reengineer the product I or the project I would expect though it will still take has.
More than the well more than a year, possibly you know a double that to bring the extra volume online that will mean that will bring a lot more on when we do it but but right now it's a highly uncertain environment I think approximately what what where I'd be disappointed, but I'm disappointed already I'm disappointed that we're in this place I'm disappointed.
We're not able to continue Argentina operations remain one of the lowest cost would use of lithium product in the world. Then it's a disappointing to me that we've had so many external factors that have created these problems for us without expansion.
Thank you.
Our next question is from the line has Kevin Mccarthy with vertical research partners.
That's a good evening Paul's wondering if you could run through your portfolio lithium products and comment on what you're seeing your today with regard to demand for you know a hydroxide, the butyl lithium and and see lithium metal one of this.
Similarities and differences and the patterns there.
Show, what I mean listen Mickey mantle stellar by small business today, it's used in a couple of small applications that are just fundamentally different right. The most of the IPO to metal that we salvage going into non rechargeable lithium ion batteries and again, it's a small business. The butyllithium business as I'm sure. You know is a much more diverse application business, but it is largely a.
GDP, but driven business, it's largely a general industrial business.
But it's also a product the fancy customers don't hold any inventory off a very good reasons and so there's not a lot of slack in the system nobody ever people continue to produce and when people are producing pharmaceuticals in a producing rubber products for for medical devices and other areas. We've certainly not seen major major issues or major major.
Indications that the demand is going to below what the Shimon the butyllithium business, we have seen some noise and the automotive tie a space driven by plant closures, but even that they've really been relatively small so that's a business. That's frankly, so far and I stress so far because it feels to me still very early in 2020 what.
Well lithium hydroxide.
I think it's a function more complicated business, what we've seen is.
10, you'd commitment towards many of the battery platforms. The with the we're talking to our customers around but frankly, what I might call a reluctance on the part of the battery producers to pull the trigger and get on with the building process and placed the orders for the product because I think they themselves are still waiting for guidance and.
Some leadership from the automotive Oems about how aggressively they should go would that build outs. It's certainly not it's not it's not a market today, where you look at it and see a tightening of supply and demand, but again, that's probably as much because the demand side feel so distorted right now and especially because we have some.
Such a big drop off in January February time, with the cobot in Asia, and notwithstanding to see a pick up again, while the rest of the well slows down it's very difficult to read the hydroxide no energy storage hydroxide market at the moment.
Thank you for that my second question relates to potential for industry consolidation, you've probably seen press reports out of Australia.
Indicating that Yankee may divest or stake in Talison.
You know if you look out over the next few years do you think that the industry needs to consolidate and if you do.
What does that have look like as I look at it the incumbents aren't exactly swimming pools of excess capital you know energy producer Constrains do you do you think new entrants will commenting catalyze the process or how do you think it'll play out.
[noise], how long we got left on the call. Okay [laughter] good up reasonably quickly, but I think one thing I would say is when you have a single company that is in financial distress in a big important company in financial distress.
If that is as a result for very specific factors related to that but that company that I can imagine that a stronger competitor comes along but frankly I'm not sure. That's entirely the case I think there are some company specific but also some pretty significant industry headwinds the drives challenges that we all faced them right now we all face them I don't think anybody in this.
Industry, who is subject to normal commercial.
Precious feels that they have access to anyone new enough capital that they need to take advantage of the opportunities in front of them I don't think another consolidations solves that problem too much. You know you know you can maybe see an argument that if you have consolidation and that will you take out excess supply as a result, but that's not really the issue in our industry.
Could you see a new engine with baby deep pockets coming into this industry, possibly I would say that out as a difficult industry to predict it's a difficult industry to understand and I have a lot of sympathy for anybody who wants to go to their board and say I want to turn up Homebuyer lithium company, let me present, the financial model to you and talk you through what.
Been happening in this business over the last 567 years.
The needs, it's going to sell and and it's still a very immature early stage business, where maybe waiting two or three more years and see how the industry shapes out might be a a more effective M&A strategy for new entrant I felt that say no I don't really see a lot of consolidation I frankly see the opposite more I think I said, we'll have.
So far fewer new entrants being able to being willing to take the with the jump into the market I think he's just gonna be financially almost impossible for anybody regardless of the quality of your resource and the next few years to easily entry into this market.
I appreciate the thoughts thanks.
Our next question is from the line of Mike Harrison with Seaport Global.
HM.
Hi, good evening or am I was wondering I understand the difficulty in forecasting the pace of electric vehicle demand or OEM demand from here or macro recovery.
And obviously the consumer situation, all very difficult to figure out what I was wondering if you can shed a little bit more light on on what you're seeing in terms of inventory levels and maybe dig on that inventory a question a little bit more oh, it really just trying to get a sense of how are these.
Talk or restock cycle could play out and maybe when we get back to a sales number volume numbers that track demand a little bit more accurately versus having that inventory component there.
Sure well, let me, let me try and do that again, it's difficult to talk about inventory levels without a clear view a future demand because what may have been excess inventory one day with a rebound in demand doesn't feel like excess inventory, but I would say generally speaking we have seen lithium hydroxide inventory levels at pretty low levels.
Multiple reasons that just does not does not appear to be a lot of finished lithium hydroxide <unk> customers or the supply aside lithium carbonate we've seen a buildup of lithium carbonate industry at certain customers, who had over contracted as well as that some suppliers who have built inventory because company sits for quite a long time clearly.
On a built inventory ahead of the future largely because it's just the most efficient way to run your operations. So if you can then you can afford it you know why not.
See suddenly a an excess inventories spodumene concentrate site in China waiting to be processed it probably haven't moved that much because of the lack of activity in China in the last three or four months and we've seen a continued shipping of spodumene concentrate on a couple of supplies in Australia to China, but that has largely been from their own inventory levels. So some of the spot.
You mean produces.
Don't inventory levels, it sounds like fallen down when you compare their production to that to the shipments it's clearly been the case.
I think throughout the lithium chain generally speaking, it's a bit of a mixed story I think if you do get any kind of pickup in demand.
I think that most of that inventory will disappear frankly pretty quickly in the only question then we'll be which pieces of that supply chain can actually increase that production quickly enough, it's probably not the carbonate guys.
Probably not the spodumene side of a rapid pace a piece of time.
But I'm not back to predict that that's going to happen anytime soon.
All right understood and then I'm also wondering about the thought process on getting the additional covenant flexibility was there something special about the six times EBITDA number or was that are the largest number they were willing to give you.
You know the lots of the number of them, especially this when it comes to Covenant relief as you know.
No I I think frankly, it's all it's all part of the sense of like nobody wants to run close to covenants, we don't want it the banks don't want to it doesn't create create anything any good dynamic and so the number one objective on our side and on the bank side is to make sure the covenants and not even the slightest issue and so that was really the the questionable.
James on target for what the right amount of of of Covenant relief was gonna before us.
Understood Thanks very much.
Our next question it's from Steve.
Bank of America.
Yes, Thank you I'd like to follow up on that.
Covenant relief question.
Or is the EBIT saw a in that ratio a trailing 12 months and.
Given 2020 can be a tough year is there not a need for relief in 2021 is that three and a half times limits essentially a challenge for you in the first quarter of 21.
Yeah, you're right 2020, there's a trailing EBITDA number I, there's always the case, where these bank covenants went up quite the same as we report extend it is always tweak some adjustments some changes to them, but but but yes. It is a trailing EBITDA number, but frankly I have expectation is that that facility that has those covenants and it will be taken out by a different that piece of debt before the end of.
Yeah, one that's more appropriate to weigh weeks, we odds she'll battle mentioned, we vote to start the process of conversation without banks to say look but structure something that makes more sense to live in and what I'm investment profile is what I readings profile is because but man. This is a facility that we inherited from from FMC. It was designed to be a temporary facilities such the.
I mean, you've got us through the first phases of liquidity and it was always the intent to put in place. It along the time type capital structure than than this and so we would expect to get that done at some point this year.
Yes.
Thank you for that Paul and wanted to ask you about.
This deferral of phase one and in Argentina does that lead you down a path of at least looking over the menu of of other technologies in development that might help you increase productivity of your existing brine management down there.
I understand there's some membrane technologies that can help extract out lithium.
And lead the less waste is there anything on the technology front that that is looking more interesting as an alternative to building another set of.
Operation bonds.
No just to be CLIA waiver decommissioning I worry about pension plans not building new ones I think it's an important different we we don't have a great deal of waste our yield from the on the Brian as it comes out in lithium times as well north of 90% without existing technology. We put out again, we have for him for now evaporation ponds and part of our plans for the expense.
It was actually to decommission them, because frankly, we don't need them, we don't really use them, they're expensive to maintain the certainly expensive to build and they as I said I don't really needed travel process. So.
When you talk about you hear a lot of people talk about direct lithium extraction and some people have different definitions of it we've been fraction direct lithium extraction. Since we started this facility into late eighties early nineties, and we'll continue to use that technology. So no I don't see a technology change, making a yield on operating difference was in Argentina.
Thank you.
Our next question is from Joel Jackson with BMO capital markets.
Hi, Good afternoon pop you don't challenges right now no challenges right now I do appreciate the commentary about wanting to stop the projects expansion project at a good state sales were picking up down the road, but why not just stop right now save the money and try to really.
Protect the company in the balance sheet, if that's impossible here.
So I.
When you say stopped the <unk> I'm not showing still I understand we we've stopped all sharply focused <unk> well well you say stopping you got a 59 you want to Capex left in the last three quarters of the year 40 million is going to be growth capital right.
Right right. So it's almost like let's just because the vast majority of that it's painful stuff. We already spent before we stopped I because as I'm sure you know the timing of the cash going out the Doe is not the same as the contracting other commitment all the work getting done we don't we don't pay in advance and so what you're seeing that is the run off all the capital commitments on the project for work.
Already done so frankly, there is no work being done there's a small amount still being done in China to complete, but the carbonate and hydroxide units because that modular units that largely complete so there's some capital going to go into the into completing them, but it's not a huge amount to be perfectly honest, but there will be known you cracks known you see.
Pending initiate an hasn't been since the start much now and so this is just the normal timing like of frankly paying our suppliers outcome tractors are engineers for what they've already done.
That's helpful. Thanks, and then if you're going to bring on the two phases for carbonate together, that's a pretty good chunk of.
Capacity and 90000 tons in one slug, we've seen SQM challenge really ramp up their operating rates I'm, sorry to sell building inventory. So what are the when you think about that stride cancel strategies, where the concerns that trying to be that much on a one time could be too much for that year.
You know, it's it's a great question. The reason that we actually did the expansions the way we did it was to try and phase it from a technical perspective, and an engineering risk perspective more than a supply perspective, you know bear in mind as I said, it's not likely to be 2022 before any of that material comes along we have I I would actually be quite happy if.
We could do that and bring it all online not bring hydroxide on at the same level simply because it gives me that bottoms that I've been speaking for a few years now to try and get longer and Carbonite and you know we all one of the was lowest cost producers of Carbonite down there and so bringing it all in on in one go from a from a what will I do suspect.
To a prospective doesn't concern me really that much I think given everything that weve that we've learned in the confidence with bill success in the project today.
I personally believe that the technical risks of doing two phases at one for probably not as great as that we might otherwise have thought that's not to say, it's the same it isn't as different execution and its different risks and it certainly does take the risk that maybe the lithium market isn't where we think it's going to be in 2020 to 2023 when it does come on line.
Thank you.
Our next question comes from TJ.
He's car with Citigroup.
Hey, Paul how are you good to hear from L.P.J. It was well continue PJ I got one question, but it's a bit comprehensive question.
So you talk about localizing the live Tim supply chain into supply chains away from its heavy reliance on Asia and what does that mean does that mean, you see more hydroxide appliance built and being built in Europe and your wife.
Who sort of spends that money that you guys are the auto industry and when do you think that will happen do you have a timeframe in mind when these plans or supply chains can move because it's really important for the let Tim industry.
But it's a good to go it's a critical question PJ lets just stepped back a little them I don't understand what what you kinda count doing and show order and what the challenges out the first and single biggest factors whether resources like if you really want to localize supply you should frankly put as much of the production was close to the resource that you can but I think we've we know that Argentina, and Chile, I'm not going to somebody.
Catherine material businesses, and we've seen the challenges in Argentina in Australia salary of building spodumene conversion plant the mines in terms of capital cost an operating success or otherwise [noise].
So the first thing you have to stop ship I can think about can we actually come to a different business model that allows us to stop shipping spodumene concentrated around the world and that's clearly shipping carbonite into other anti drug side is one way to do it but that's a limited there's only so many of us I've actually got the capability to do that and there's only so many low cost lithium carbonate brine basis income.
<unk> resources available to do that and so it's not easy to see how you localized to put the production of Oh, you the hydroxide or Carbonite I didn't affect them challenge, which is maybe a bigger one to be perfectly honest is what are you localizing again, if you're localizing against the ultimate if you count localize with the mine noted.
Resource that maybe you can look lies with the consumer but there's a step along the way, which is you have you cathode active materials and there's very few cathode acted material plants being built outside Asia at the moment, there's a big lump going in and in Europe, or maybe a second one so I think Europe is trying to get there.
But still your challenges this is a supply chain the hazard remote resources concentrated geographic cathode material plans, but then a very diverse seven markets, whether it's the U.S. you Oh various Asian markets. So the real question, what does what does localization really really Mena and the short answer that is that.
Every environmentally sensitive consume a sensitive carbon conscious cielo vehicles is wrestling with that question and trying to understand how far can we localizing how long will it take I.
I don't have an easy answer for you PJ. It is a key question.
Great. Thank you very much for that explanation.
And I'll now hand, the call back over to Dan Rosen for closing remarks.
Thank you you know that's all the time after the call today, we will be available following the call to address any additional questions that you may have thanks and have a good evening everyone.
Thank you again for joining US today. This does concludes today's conference call you may now disconnect.
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