Q4 2020 Livent Corp Earnings Call
[music].
Okay.
Good evening and welcome to the fourth quarter 2020 earnings release Conference call for <unk> Corporation.
All lines will be placed on listen only mode throughout the conference. After the Speakers' presentation, there will be a question and answer period.
I'll now turn the conference over to Mr. Daniel Rosen Investor Relations and strategy for life <unk> Corporation. Mr. Rosen you may begin.
Thank you Rob.
Good evening, everyone and welcome to <unk> fourth quarter 2020 earnings call.
Joining me today are Paul Graves, President and Chief Executive Officer, and Roberto Antonio IV, Chief Financial Officer.
The 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, Paul and Joe Burke, who will be available to address your questions. We would ask that any questions be limited to two per caller, we would 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 today's information actual results may vary based upon these risks and uncertainties.
Today's discussion will include references to various non-GAAP financial metrics definitions of these terms as well as a reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP are provided on our Investor relations website and with that I'll turn the call over to Paul.
Thank you Dan.
The evening, everyone before I begin it's been a year now since we just.
Having put that type of operations from practices as a result of COVID-19, and there's no doubt it's had a major impact from life and its employees at many levels. So once again I would like to take a moment to thank all of our employees globally for the way they've adapted they've be teams and practices both personally and professionally.
To ensure that we keep operating safely in this environment.
To meet our customers' needs. These challenges are not easy and we truly appreciate your commitment and assets.
We have a number of important topics to discuss today, including what we saw in the fourth quarter relative to the rest of 2020 and what it might mean for 2021.
The recent positive signs as seen in the lithium market and how we expect them to evolve.
Our outlook for 'twenty 'twenty, one below the line them, specifically and for the industry as a whole.
A discussion of how we see 2022 and beyond unfolding.
But first I'd like to highlight the announcement, we made today regarding our supply agreement with BMW group. This is a multi year agreement under which <unk> will deliver both lithium hydroxide and lithium carbonate for use in the batches that will power BMW <unk> electric vehicle fleet license.
<unk> already begun delivering material from qualification and <unk>.
Volumes will commence in 2022.
Multi year multi product agreements with premier Oems such as BMW group.
A core part of license business model, we believe they reflect license position as a global leader in the lithium industry.
The differentiated product offering a proven track record and a unique sustainability profile.
We also believe that the operational flexibility that allows life and to deliver multiple lithium products from and to various geographic locations is an important focus for our global customers as they look to build more resiliency into the supply chain and an increasingly complex world.
I'd also like to quickly address our recent announcements regarding sustainability last week <unk> announced its new sustainability goals.
We are five years ahead of schedule in reaching almost all of our previous targets.
New goals would not set in isolation, but in fact reflect the highest priorities of license customers communities investors employees and other stakeholders based on extensive and ongoing dialogue, we have with all of these groups on this topic.
The builds are highlighted by a commitment to carbon neutrality by 2040.
With significant carbon intensity reductions across our global operations much sooner than that.
They include a path to 100% renewable energy use.
The focus of our R&D efforts on supporting new and improved green technologies processes and products.
Additionally, they support and ongoing focus on sustainable water use with a commitment to further water intensity reductions and continued monitoring non disclosure.
And of course, we will maintain our focus on the uplift in communities and advancing social progress and human rights across our operations and then our own supply chain.
We will be sharing further details in our sustainability report to be released later this year and look forward to providing updates on our progress from an annual basis, using leading ESG reporting frameworks.
In the coming weeks, we will be publishing our first allocation impact report under the Green Bond framework, we established as part of our Green convertible issuance in the second quarter of last year.
While ambitious we believe our sustainability goals are both achievable and unnecessary.
We believe that we have the credibility to set these new goals and be a leader in the process of setting standards that our entire industry is held accountable to.
This is something our current and potential customers truly value and are demanding from their own suppliers.
Increasingly and appropriately there is a growing focus in the bathroom material supply chains on greater transparency from all parties increased standardization of methodologies and data reporting and requirements for independent verification of data disclosure methodologies.
And have you begun the certification process puts operations in Argentina under the initiative for responsible mining assurance so.
Starting with a self assessment and progressive to independent third party verification against stringent comprehensive standards from mined materials.
<unk> provides a credible solution for the growing demand from more socially and environmentally responsible mining standards.
Many of the leading automotive Oems, including BMW, Mercedes and most recently Ford have now publicly announced their intention to accelerate the adoption of the standard across their supply chains.
We expect similar demand spread throughout the energy storage supply chain over time.
I'll now turn the call over to Gilberto to discuss our Q4 and 2020 financial results and 2021 outlook.
Thank you Paul and good evening everyone.
On slide five we discuss license Q4 financial results and our sequential improvements in.
In the fourth quarter of 2020, we reported revenue of $82 million adjusted EBITDA of $6 million.02, adjusted loss per diluted share.
Revenue increased 13% sequentially.
Driven by higher volume sold and better average realized pricing.
As previously discussed we expected volumes to be higher in the fourth quarter across our lithium products to.
Or your customer order push outs, even by COVID-19 related to disruption and uncertainty.
Profitability also improved from the prior quarter due to higher prices and lower costs from reduced third party carbonate usage.
Although this was partially offset by a nearly 3 million dollar impact from the pause of lithium hydroxide production at our Bessemer City facility in North Carolina for two months.
The Apple grades that we undertook to meet increasingly tighter specification requirements from our customers were implemented successfully and we are currently back up and running at pre upgrade volumes.
For the full year 'twenty 'twenty, we reported revenue of $288 million adjusted EBITDA of $22 million.05, adjusted loss per diluted share.
The year over year declines were due to a combination of.
Lower volumes low.
Your average pricing.
Higher costs.
Resulted from third party carbonate usage low.
Lower volumes produced an increase in spending in order to implement the necessary COVID-19 safety protocols at all of our operating sites.
Our total lead to hydroxide sales volumes were lower in 2020 by roughly 2000 metric tons.
And we sold limited carbonate volumes.
We also carried 4000 tons of hydroxide inventory largely produced from third party source carboni into 'twenty 'twenty to meet higher expected customer demand.
While much of this higher cost material has now been worked through we are carrying a slightly higher amount of inventory between hydroxide and carbonate into 2021.
Largely due to COVID-19 related demand disruption.
Average price on an L C basis across the portfolio was down mid teens percent in 2020 year over year.
This was in line with our initial expectations heading into the year.
Spike lithium market price largely being lower than expected.
And he is a reflection of light and typical contracting terms, which set the price is on an annual basis.
We ended the year with $114 million in total capital spending of 22 million was for general maintenance and would expect the spending to remain at.
Smaller levels moving forward.
The remaining 92 million went towards growth investments.
It was primarily related to our expansions in Argentina in Bessemer City.
Prior to the decision in March to suspend construction work.
Moving now to our 2021 outlook on slide six where we have provided revenue guidance range of $335 million to $365 million.
On an adjusted EBITDA range of $40 million to $60 million.
Both of which are meaningful improvement versus 2020.
Okay.
With respect to volumes, we do not expect to have any additional capacity available. This year. However, we do expect to produce an additional 2000 tons of carbonate in Argentina compared to 'twenty 'twenty.
Due to the volumes lost last year from Covid related shutdowns.
Additionally, we have over 4000 tonnes of combined carbonate hydroxide inventory that we're carrying forward and expect to selling 2021.
Although we saw the beginning of an improvement in published prices.
At the end of 'twenty, 'twenty and into 'twenty, 'twenty, one, particularly on lithium carbonate.
Do you expect the license average pricing across its fleet to products to be slightly down on a year over year basis in 2021.
This reflects the pricing terms already agreed to for the 'twenty one on a large portion of outstanding contracts.
Which were mostly executed in the latter part of 'twenty 'twenty.
There is also a lag on the portion of license contracts that incorporate periodic market link price adjustments.
Which means the price changes see the second half of 'twenty 'twenty.
In fact, our realized price on those contracts in the first half of 2021.
And finally, given the nature of license qualified products sales.
Some of most notable moves and published market prices, while directionally important or not a true reflection of realized pricing in our core markets.
As can be seen when looking at the Aldridge.
Realized price in 2020 compared to the some to some of the reported prices.
That time.
While we do have some upside to 'twenty and 'twenty one earnings from higher prices, we do not have any additional volume was available to sell.
Many of the upside is primarily price related.
Even here this is largely limited to the second half of the year and only on a portion of our contract volumes as Paul will explain in more detail.
From a cost standpoint in addition to lower third party carbonate usage Leiden expects to benefit from lower general operating cost due to a steadier and less disrupted running of its global manufacturing network.
Lastly, <unk>.
<unk> continues to evaluate the potential timing and scope.
The restart of its capital expansion plans.
While also working diligently through the shorter term practical constraints in Argentina as a result of COVID-19 related restrictions.
With that I will turn the call back to Paul.
Yeah.
Thanks, Bette Jo.
Before discussing market conditions, and further detail I want to expand on some of them you'll battles comments with respect to the impact of prices on our 'twenty and 'twenty one outlook.
As many of you know life and seeks to contract as much of its volumes as possible on an annual basis.
This is critical because it allows us to manage I would production from supply change more efficiently and helps us to justify the cost and complexity of qualification processes.
In addition, we have historically look to contract with annual fixed pricing.
Not have large parts of our contracted volume is exposed to intra year price movements based on indices or core play out even monthly renegotiations.
For 2021, the bulk of our contracted volumes are on the same basis with volume and price commitments.
However, compared to prior years, we have a larger portion of our contracted volumes subject to price adjustments during the year.
Some of this is subject to index based price adjustments, which will mean that prices are adjusted on a formulate basis relative to reported price indices.
Given these indices are published on a lagging basis. It typically takes a quarter or two from movements in reference to indices to impact how our realized prices.
In addition, we have also elected to enter into some volumes that are subject to monthly or quarterly renegotiation of prices primarily relating to the second half of the year. This was done intentionally on our part, allowing us the opportunity to take advantage of any price increases.
We don't see any evidence that this represents a meaningful shift in customer contracting preferences, which continue to vary and evolve. This industry undergoes rapid transition, we still have many customers that want price certainty over constantly changing lithium prices. However, we were not willing to commit volumes at price levels.
<unk> seen late last year.
We viewed at the time and today is fundamentally unsustainable.
Moving on to slide seven I'd like to provide some additional context to the recent industry dynamics, we've seen play out in lithium and the broader electric vehicle supply chain.
Why it was driven so much interest and excitement in recent months.
First it's important to understand what led us to the current situation from what.
Some of the longer term implications will be from industry.
COVID-19 was certainly not the sole cause of challenges in lithium, but it amplified near term pressure by temporarily delaying the strong rebound in demand that was expected in 2020.
A lack of visibility and supply chains.
Competence as the ultimate consumer demand quite a dramatic decline in the oldest for lithium and this led pricing to levels that will even further below the marginal cost of production.
Surprisingly this reinforces the decision of many highest cost non integrated converters to curtail operations as well as further delay many proposed expansion projects.
Following the reopening of automotive production plants in the second half of 2020, the resiliency of electric vehicle sales it became increasingly clear.
Supported by renewed focus and commitment from governments and leading Oems EV sales climbed at year end on.
This growth was not limited to China, which was earlier than its COVID-19 recovery, but in fact, it was led by Europe, which ultimately surpassed China in total EV sales for the first time in 2020.
And the final month of December Global EV sales grew over 100% year over year and set record penetration rates of around 7%.
The total of over 3 million Evs sold globally in 2020 was an increase of over 40% from the prior year, which is even more impressive given the decline in the overall low til market.
As a result, we believe total demand for lithium chemicals on an LTE basis likely ended modestly higher in 2020 versus 2019.
Lithium demand increased in the second half of 2020 supply also began to tighten and we saw notable lithium price movements in December as a result, this started with published carbonate pricing in China, which will very quickly in a few short weeks.
And now appears to be spreading across lithium products and into overseas markets.
We expect this type of supply and higher pricing trend to continue through 2021 day.
<unk> continues to accelerate a non integrated spodumene converters are impacted by highest spodumene prices on a constrained by more limited near term spodumene feedstock availability as a result of drawing down inventory.
We do not expect this trend to be linear, especially as I was typically production seasonality in various parts of the world, but we do expect the trend towards higher prices to be a theme throughout the year.
It's important to recognize that even though lithium prices have moved off of our recent floor. The published prices that we see today and indeed, our expected realized prices in 2021 are still not at reinvestment levels. The pricing loans of 2020 were well below the all in cost necessary to produce reliable.
High quality material, particularly in an industry growth as rapidly as lithium.
We continue to believe that we need a sustained period of higher prices in our industry in order to ensure that expansion projects and an acceptable return on capital.
From a lot of the focus has turned towards how high lithium prices can go in 2021 on one important in the context of short term decision, making it needs to be viewed in the context of a decade plus growth opportunity.
So electrification policies being implemented by major governments around the world go beyond near term subsidies and incentives that will fundamentally transform the way future economies of power in September China pledged the C. O two emissions in absolute terms will peak by 2030 and several weeks ago implemented the first phase of its carbon trading.
Program.
In Europe, the new circular economy action plan under which green deal will require carbon footprint declarations on rechargeable batteries beginning in 2024, followed by maximum carbon footprint thresholds by 2027.
And in the U S. There's renewed focus on electrification under the new administration.
The most recent announcement to replace over 645000 vehicles in the U S. Federal fleet with domestically produced T vs appears to be just the beginning and.
Those of you that are in New York City frequently it will start to notice that even that venerable institution that yellow taxi cab.
So long ago was still running a free of 19 nineties designed crown Victorias is now starting to build a fleet of Tesla model. Please.
Bold announcements from Premier Oems also continued to come with general Motors, just releasing its new targets to offer electric vehicles excuse simply by 2035 additional board announced its EBIT spending through 2022 will increase to $22 billion versus an 11 and a half billion dollars price target.
It's always been a challenge to forecast demand for the lithium industry, particularly as it relates to specific timing and the impact of shorter term market developments. However, we have long talked about the continuous multiyear growth in lithium demand that will soon result in 1 million tons of demand or over three times today's levels.
Whether that is 2025 as we previously forecasted always now likely to occur earlier.
The growth won't stop at that point and the need to continuously expand available lithium capacity won't EPS.
This escalating demand is now becoming more sudden and electric vehicles and energy storage all further ingrained with the global consumer.
In fact, if anything most long term demand forecast for lithium are proven to be more conservative.
Like the peso publish their own ambitious growth projections.
And on the supply side there was several months several multiple challenges to meet these increasingly high lithium demand forecast.
First of all some lithium chemical conversion plants can be brought online quickly numerous human resources required to feed those conversion plans take many more years to bring into production even under the unrealistic assumption the longterm capital Availabilities unconstrained.
Additionally, the module and of the cost curve will continue to increase overtime as new higher cost resources, a force to be brought on line.
On the sustained low lithium prices, we experienced over the last two years, we will have ramifications for years into the future, especially if the capital providers and put developers of marginal cost assets.
Second as we've discussed the increased scrutiny on the sustainability impacts of the lithium supply chain.
If the industry is pushed to localize and improve its environmental footprint decisions from west to build additional production facilities cannot be solely determined based on the cheapest capital or operating costs.
Regulations, such as the carbon content line, it's being proposed by the European Commission, maybe some types of lithium production being unacceptable or simply not committed in certain key markets.
And finally as battery producers shift of investments further towards high nickel cathodes theyre somewhat constrained by day requirement to only use qualified lithium hydroxide in their production processes.
We can attest to the longer and more complex qualification processes battery makers are demanding for the highest nickel content applications.
These greater demands cannot hire cost of production reduce the flexibility for our customers to switch between suppliers at short notice and increase the importance of having long term commitments from reliable suppliers that can provide volumes at scale and grow it.
If customers are serious about building, a more secure sustainable and localized supply chain.
Kevin battery materials solely from one supplier or even from supplies and only one geography, using a singles conversion process or even relying on short term market to meet the needs will just not be possible.
As more Oems start to better understand the lithium market is active purchasers of material. We expect they will have to align themselves with the most incredible existing producers under long term arrangements.
Given <unk> longstanding track with track record and differentiated position highlighted by its low cost profile strong sustainability footprint from global capabilities. We believe we will continue to be a partner of choice on a well positioned to take advantage of this opportunity for years to come.
I will now turn the call back to Dan for questions.
Thank you Paul Rob you May now begin the Q&A session.
Thank you if you'd 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 may jump back in the queue.
To withdraw your question you May press, the pound key well pause for a moment to compile our Q&A roster.
And your first question comes from the line of Chris Katz from Loop capital markets. Your line is open.
Yeah, Hi, good afternoon, just had a follow up question on the discussion around the BMW contract.
And against the context of your comments about pricing that arent really sufficient to support reinvestment. So I'm wondering if.
Without providing too much detail the does the pricing in that contract would that be sufficient to for reinvestment economics, I'm asking because you said multi year. It's a multiyear agreement. So I'm wondering if you have.
If that agreement portends.
Supplying out of an expanded resource or out of your existing resource and I had one follow up.
Yes sure.
Because you can imagine that.
I'm, probably not going to answer that question.
Let me try and do.
Do the best that I can win which will essentially tell you. This is part of a longer term partnership that were constructed with BMW.
We think it's really important to the.
We set the framework for what our supply chain and our supply relationship actually looks like and does it sustainability piece to that is a flexibility to that.
Does it affect the diversification piece to that as well. So it's more this contract has a lot of.
In my view a lot of the progressive aspects to it that we think are really important to where the industry needs to go in the future. Both in terms of outside I'm from the OEM side.
When it comes to reinvestment I think it really it all boils down in the and some of the prices that we believe will be available in the future across our entire portfolio of it isn't that every single contract needs to have.
Typically price settle before we can enter into it but across our entire portfolio, we need to have enough visibility into the price levels to justify putting that capital to work.
Okay, Let me on the follow up would be you.
You mentioned that youre supplying both carbonate and hydroxide and that youre in the process.
Of qualifying some products so that I think it implies that this is.
Carbonate from origin.
Not using third party carbonate, but product from your.
<unk> asset in Argentina.
<unk>.
The.
There's been like a narrative from some that suggests western Oes prefer.
Theyre hydroxide from from hard rock assets in this case clearly.
Since its implied that they're sourcing from a brine assets, that's not not the case and so I'm just wondering.
How much of a how important with sustainability.
And then sort of knowing that they'd be sourcing effectively from a brine assets how did that play into the conversation then and and its ultimate agreement that was forged strength.
You know I think it's I think it's fair to say it was a critical part of the conversations but it is never an easy it's never an easy compensation to answer because I think that remains a degree of confusion and you've seen some public statements from some European Oems the printed.
A little misguided in various places about the difference between spodumene or brine based.
Resources, it's probably fair to say that if you're a primary concern as carbon content.
Then you tend to prefer brine based lithium and then you know attention tends to water usage and local community issues and when you do that then it becomes a technology conversation and there are of course different technologies being used in different brine resources and I think you've heard us say in the past that we think we will have pretty balanced line in terms of.
Being sort of.
On the positive end, but not the best carbon.
And on the positive and.
Probably amongst the best in terms of water usage and so it really sort of frames I think the complexity of that compensation that says.
You can never have everything and if you really do care about carbon content, you really are forced to take a long hard look at brine resources and you really need to start thinking very carefully about an integrated producer who can actually make a commitment all the way if you're all going to go to hardware all the way back to the mine, it's not really.
Accretable, if you're putting sustainability and those factors at the forefront to just pick a non integrated converter, it's just too difficult for them to to.
Bill.
Qualify the production processes with you.
Hey, Paul is it right to conclude that it's contract skewed more heavily towards hydroxide VW carbonate or can.
Can you share any any detail there. Thank you.
Yeah.
Does it skews towards hydroxide is really based upon hydroxide, but with that flexibility and optionality to take Carbonite I think we've all realistic that the technology roadmap. It's fluid I think we all know the trend is towards hydroxide, but predicting it on a one or two year basis, it's just as difficult some of the car companies as it is for us.
So putting that flexibility and I think it was really attractive to them and I'm frankly to us of course, because we do produce both like we don't have to make a decision what to produce we always start with the carbonite. So we are structurally.
Capable of offering that flexibility.
Yeah.
Thanks.
Yes.
Your next question comes from a line of Bob Court from Goldman Sachs. Your line is open.
Thanks very much.
Well I think Joe Burke.
Comments about some challenges in resuming the construction efforts in Argentina, or some some some things that may get in the way of that.
I'm curious the <unk>.
<unk> now has something like a better than 50 times EBITDA valuation on your equity and we've seen many of your competitors raise funds is that an avenue to jumpstart the and resume the expansion program. If you consider that should we look for that in the coming days.
First of all Bob I Hope she goes from power down there.
Using all your cell phone battery I'm honest I hope, but.
The expansion in Argentina.
We stopped them, there's never been a capital availability question in the first instance, it's really about the complexities of operating in Argentina today, and there's no doubt those complexities all wheel, but not insurmountable you can assume that we are talking quite quite extensively to the local authorities about what it would mean for us to restart what we would be looking for from them.
And equally by the way what they are looking for from US with regard to our.
Safety, we saw a expansion.
In a COVID-19.
Goodwill.
So look I think we're taking a long hard look at it you know.
It has to progress at its own pace, Argentina has its own challenges and issues. They have their own objectives I think the dialogue that we have by the way down that is probably the best that we've had.
But certainly the best we've had in the.
Six or seven years that I've been involved in this business. So.
At the moment I feel that we.
We will soon have an answer as to what a restart looks like.
Timing of it won't look like clearly at that point, we will then have to answer some other questions.
With regard to financing funding etcetera, but that's more of a long term question then intermediate low.
Gotcha and then.
I mean, it sounds like maybe a little opening that.
Not in all hydroxide future in light of your comments around the BMW purchase.
It's possible you might go deeper into carbonate or is there something about a low nickel chemistries that has changed your opinion or how.
How should we interpret the.
The notion that as a broader portfolio.
Yeah, I've been I've been pushing for a while I mean as long as I can.
Remember to say I would love to have more balanced between carbonate and hydroxide I continue to believe that carbonite not only it's not going away, but we will continue to grow I continue to believe that we have are.
And advantaged positioning it from a cost perspective, even though the technology advantage and the process capability I think because we have in hydroxide is maybe not as pronounced in carbonate.
It's just good business for us to diversify into more carbonate and we really are not.
Not had enough to be relevant at incredible we would like to have more balanced between carbonate and hydroxide, but we are first and foremost going to be a hydroxide could you say.
So I think yes.
This is not driven by a view on technologies like I think if he if he took the view out a few years and you look at carbonate demand today the week that the.
The least aggressive forecast that I've seen have demand for carbonate timing by about two to two five times between now and 2025 in absolute terms more than hydroxide will grow over that same period of time, even though the percentage is the highest of hydroxide.
And so I think having some exposure to that kind of diversification is something that I think would just be good business for us to be honest Bob.
Perfect. Thank you well.
Yes.
Your next question comes from the line of Chris Parkinson from Credit Suisse. Your line is open.
Great. Thanks, guys and Paul I'm trying to make sure I answer this in a way you can hopefully answer just.
Outside of Asia.
Our pricing just can you just hit on a few of the other factors that may have changed in the recent weeks or months that didn't able to supply agreement I mean, presumably you've been in talks for a while and then if you could kind of extend that commentary.
To what gaps elsewhere still need to be bridged with other Oems given their ongoing initiatives that.
You haven't really locked in yet so just any additional framework on how we should be thinking about these going forward from what to the extent of which you can share. Thank you.
Yeah sure because I think you need to talk to your colleagues in the auto analyst side.
The shop, because this really is down to how much how quickly an OEM themselves can get confidence around their own EV platforms. I think we've certainly seen in Europe.
The action of the regulator is not force more European Oems to stop to act and start to take action and that involves making a decision on battery technology at least for this generation of launches. It also forces them to think hard about who they're going to source the batteries from and I know that was a little bit more complicated for some companies in the last few weeks and it's causing them to think a little.
More about what that supply chain looks like.
Where are they going to go in that supply chain and then of course look even further out and say well what differentiate my EV versus somebody else's, if it's not a powertrain any ball and so questions like sustainability and environmental friendly selling points start to come to the forefront until the Oems actually start to get confidence about what that position is what steps to take.
And how they're going to define their EV platforms, it's pretty difficult for them to then start to go back down the supply chain and put the supply agreements in place I think it's also difficult for them because this intermediate step of battery production.
Still incredibly fluid right, it's incredibly fluid.
And I don't just mean the battery producers I mean, the cathode production line, if you want to produce cathodes.
You want to buy back shares the catherines today are largely being produced in China, and so if you're trying to diversify away from that you start to scratch your head and say how do I localized cathode production.
That's not really happening that quickly either so there's a bunch of big pieces that need to be put into place.
Think the more forward thinking companies are therefore, saying look I need to start developing the relationships not just with lithium, but maybe with nickel and other producers today and put in place agreements that are fluid and flexible enough. So this is somebody that can partner with over the next three or four or five years wildly starts to evolve and that's not frankly, a typical way.
On automotive OEM has operated right. We know how they are typically all created as they drive maximum profitability out of their operations. So many of them just have to make some meaningful cultural changes I think before they can make those decisions.
Yeah, I'd say being a 100% in certain regions as a pretty aggressive target, but so we'll see how they are we will see all day bridge that.
The other question I had is just kind of going back to the expansion on Bob's question just wanted.
Wanted to let the near to intermediate term pieces of the thesis it just being what's everybody is seeing on the ground in China in terms of stockpiles. It definitely appears the situation is beginning to ease if not improve materially just can you just hit on how that situation as it what is it kind of started off in 2020 is impacting your current con.
Braxton discussions and then just what needs to happen for you to fully detached from.
I'm trying to spot prices.
On a go forward basis. Thank you.
Yes.
China spot prices have always been an interesting interest in beach to non industry because you know.
I think we had one of our competitor say earlier today that they don't sell really anything to speak of at China spot prices and we certainly don't participate in the China spot market, just just the nature of our product portfolio. It doesn't lend itself to that being mainly hydroxide and mainly qualified material not just technical grade.
And so I think what China spot does is create an unfortunate conversation with some customers about what their price expectations are.
You know that there's always some people out there who are willing to take the risk of unquantified material, but some people always willing to take a risk on reprocessing material and the willingness to do that grows when you see an oversupply into a market like we saw in China.
So it makes contract negotiations more difficult I mean, let's say timing is everything you know most of our contracts with customers for 'twenty 'twenty, one on the pricing and that was put in place lousy in sort of September October window, maybe November window of last year.
You know it was just too too.
Too soon relative to what was happening out of them. So.
I think that the disconnect from China spot prices I think will only happen when the market matures materials matures when more people are engaged in the market with more ultimate consumers the automotive companies become.
Active purchasers of lithium or at least become actively engaged with the challenges of securing lithium.
Battery suppliers are willing to use once they get to that point I think they will understand the complexity and that maybe just having a.
Price that is hard to verify that is publicly not directly comparable in terms of product quality terms et cetera appear in China is not really the right basis.
Conversations and I think that'll become especially.
Acute when the inevitable price spike desktop when people look around and say I really don't want to expose myself to something that can go down as low as $7.
Up as high as $27 I think that's a pretty scary place given the margins and the E V industries from any of these car companies to put to place themselves.
That's very helpful color. Thank you as always.
Your next question comes from the lineup Pebble multi channel from Raymond James Your line is open.
Thanks for taking the question.
First kind of conceptually you said youre still contemplating whether to resume.
Pasadena expansion what are the specific variable factors that you're tracking in in making that decision on the timetable.
Yeah, I would probably change the wording would not went up still debating whether to restart. It's a question of when we start and how we staff and frankly, what we saw as I'm sure. You know we have a program in Argentina to expand capacity by 40000 tons.
And to do that and probably full phases full stacks.
There's really nothing to stop us doing that more quickly doing it in two steps or somebody would do it in a single stack, but doing it in two steps that does bring some other challenges.
From that commitment would require some strong commitments back from us, particularly from the province of capital market, where we operate as well as from the Argentine Federal government, we're not looking frankly from much of them certainty and a path to making sure that we get this done on time and on budget and you can imagine those conversations are pretty well.
Advanced I think the second thing that we touched upon it earlier was it's going to be a function of where we choose to make long term commitments to customers and what we choose to do because the sooner that people start to step up and are willing to make the commitments to us and it's not just about price it's about a true commitment.
True certainty that what we have is a multi year agreement net of course will be a big factor in how quickly we start those expansions. It will also plan to shape, how much downstream capacity would take on if if more and more customers like the idea of a flexible supply agreements, where they switch between carbonate and hydroxide, we may not add as much downstream hydroxide capacity.
As we otherwise would have planned but that will largely become more clear based upon conversations with our customers.
That's helpful.
You mentioned that Europe is now at the forefront of light duty electrification.
You have a plant in England and I'm curious does that.
What role does that facility play.
In battery grade hydroxide, and if it doesn't is there a logic for perhaps converting.
Converting at or Repurposing it for.
The European battery market.
Yes, a couple of couple of points that that is a butyl lithium plant. It's a small footprint. We shouldn't we don't do any lithium hydroxide that today and we certainly don't have the space till the capacity at that location to a lithium hydroxide facility.
We wouldn't use in existing facilities in Europe.
I think maybe people could mean in the past talk about I do believe it will be an important market in the future for that to happen. It comes a little bit back to some of the comments I made earlier, which is even if people are assembling Baptist and European if you have the largest market the lithium dose into the cathode materials and all of that is being processed outside yet so until that all mean.
<unk> full catalog plants being built in Europe, and there are couple being talked about but until those plants go in there's nowhere to sell the lithium to India. So even if you make it that you're just exporting it out at that point in time, so it's a bit chicken and egg. We are fortunate that we can build quickly and if somebody wanted to.
Have a lithium hydroxide plant put in place we co locate very well we use common infrastructure, we do not produce waste really are toiling on lithium hydroxide processing line spodumene based processes. So it's actually a pretty attractive option for many people to talk to them about locating hydroxide plants.
I think Europe is still a little bit of way off of actually developing its battery industry and the supply chain from the battery industry, though to the point that those kinds of decisions are likely certainly not in 2021 I don't expect.
Right good point thanks.
Thanks very much.
Your next question comes from the line of Joel Jackson from BMO capital markets. Your line is open.
Good afternoon Paul.
A couple of questions I'll do one by one.
Going back to the BMO BMO BMW.
Deal.
BMW as much from BMO for Ya.
I was going to say.
Can you maybe talk about who those tons would have gone to so you would have sold these times to a customer in China, you were talking to an OEM as our cathode maker like just just charge a battery maker cathode maker can you just give me a sense give us a sense of you know.
How you're shifting your portfolio here in who you're selling now versus when you were selling day before if that makes any sense.
Yeah look it's hard to specifically answer that because I I.
I don't know what it would've gone.
The industry is evolving and you've heard me talk about this I think first and foremost a historical sale of lithium materials directly to cathode producers is not quite the same today as it was a year or two ago I think while we do still sell to them and they all still active purchases from most oh.
Western OEM platforms, the cathode producer who is no longer in charge of the buying decision, but they are by the way from any non OEM applications and so I wouldn't say that has a customer base is not important or not I'm not going to be poor and it isn't it will be I think the battery producer themselves are trying to insert themselves into that space with mixed success.
I'm not entirely always consistently and so if I was to if that was to really predict.
I would expect in the future most of our volumes will go to OEM.
Tracked or to direct you to the cathode producers from non OEM applications, and I would probably guess and I'm only guessing now.
The amount of sold under contracts held with the battery producers themselves maybe won't be as great. As we might have thought we gave it to ago.
That's helpful. If we can look into 2022, a little bit just on just general volume how would you see having more volume in 2022, right now carb Harvard drug side carbonate.
Just give it maybe order of magnitude of what we can see that.
For the market.
Oh, sorry for line again.
The 11th.
Again, it's a hard one to line so I mean.
Our challenge remains but the demand is there for hydroxide I just don't have the carbonate to feed it.
And so the couple of things that I would look to I think first and foremost it will depend on how quickly and how confident I am that I can bring on board.
The Argentina production I think as we've said in the past we're willing to be short carbonate for a period of time, but we know that our own companies coming and so it may be that we do at hydroxide capacity for 2022.
In order to be able to meet customer demand at that point in time, and when and if we do make that decision we have no choice, but to add the.
The covenant capacity it may be that we just do this through Nebraska, you are pretty familiar with them and that's an asset as we work through what the right decision is for Nebraska.
Certainly be both carbonate and hydroxide produced there depending on the decisions we make so it was a little bit hard for me today to tell you exactly what it will be I would just say if you give me another quarter or two I suspect topic, just to give you a bit more visibility as to one 2022 volumes look like for us how much lead time would you need to get more.
<unk> volume for at some point in 2020.
We.
You bet to mentioned earlier some of that capital spending that we stopped once.
Once a year ago now was on our new hydroxide line full Bessemer city. So much of the spending on the capital has actually been done.
Without massively over simplifying as my team loves it when I do this we kind of have all the steel we have all the plant gets all ready to be installed it just needs to be installed. So we could actually get on the hydroxide plant investment sits today at least up and running pretty quickly if we felt that we needed to.
That's perfect. Thanks.
Your next question comes from the line of P. J <unk> from Citigroup. Your line is open.
Hey, Paul.
I need a little clarification, when you say annual contracts does that mean that they start on January one.
Or do you have some contracts rolling through the year and if that's the case then the contract expiring second half could you see better pricing there.
Most contracts are annual P. J vast majority of them. So we do have some by the way that do expire off annual but they tend not to be in the hydroxide market they tend to be in the butyl lithium.
Sometimes in the grease applicant industrial applications, but very few of them in beta from volume.
We actually.
Half is contractual again, just when we negotiate the contract there's two pieces to a contract that we care about how much and what price, we always try and fix that how much piece first and foremost because that's what our production plans for the following day. It could then be put in place and it's much more efficient to have an annual volume commitment from your customers that you can then Clinton.
Historically, both we and our customers wanted to know the price and so you tend to put them all down at the beginning of the year.
What has evolved over the last couple of years has been an attempt led by customers to follow indices to a census, I am happy to my price to change as long as it follows market prices.
There is no clarity, though amongst these customers about which industries. They like they don't really want to follow up China total so China prices are almost always completely excluded from our bench from an from an index that they look to.
They also get a little bit nervous about moving the price every month. So they like to have a smoothing effect in that so they have a lag on it for example, and that's why we talked about in the second half of the year. The contracts, we have with customers look to some form of market price whatever it may be and they're all different.
Likely anything that happens in January doesn't actually hit pricing until July which is why we took more of a second half of the year opt.
Opportunity now we do have some volumes, where we've agreed with the customer look we'll just sit down every month to see what we think the prevailing prices.
Well, we'll negotiate a price at that point in time, we have historically not done that much. Unlike some of our competitors.
We do have some of those contracts in place for this year as well.
Great Great. Thank you for that color and then can you talk about Argentina, FX peso has been volatile how do you plan to handle that volatility.
And in the future how do you plan to take cash out of Argentina. Thank you.
So the second question is the easiest which is we probably wont be taking cash out of Argentina in my lifetime, we're putting cash into Argentina right. When you think about the expansion. So it's no no cash is getting trapped in Argentina anytime soon because there's plenty of local investment that needs to be done to bring capacity on line. So I'm not too concerned about that piece.
The FX the FX piece is just less and less relevant in that business, you know more and more of our business is conducted in U S dollars, we each lumpy local salaries and so we do.
Just local salaries on local inflation based season, so our cost benefit is always when inflation and currency.
<unk> I'm not in line with each other salary inflation, particularly what we tried to do is keep them as close as possible and so we.
We tried to overhead we do work without employees down there to treat them clearly fairly and make sure the standards of living to maintain but but but also not just look at local inflation, but also tie in as much as we can touch a piece to it it's never perfect and there are times when we benefit in times, when we don't but as I said the bulk of.
<unk> costs down there all whether those energy costs and other input costs and not peso denominated set anymore.
Thank you.
Your next question comes from the line of Mike Harrison from Seaport Global Securities. Your line is open.
Hi, good evening.
A couple of questions on the guidance.
Can you maybe walk through some of the key variables that could drive you towards the high end or the low end of EBITDA as it is at all pricing are there is there are some other components and maybe talk about the.
Cadence of earnings.
Best to assume that most of your earnings are going to be weighted towards the second half of this year.
So.
I'm sure you can speak to say no we're not going to give we're not giving quarterly guidance and so I'm not going to I'm not going to.
Try and do that I don't know that it's all back half of the year, but I can answer you that it is.
Upsides and downsides are pretty much price driven I mean, we know what our cost structure looks like we know what volumes. We have now clearly if we had a massive reverse split in the market and the demand wasn't there volume happened in 2020. The bonds you may not be as high I think that's always possible, but 2021 not very likely.
So it really comes down to a what happens to price and also just as importantly, where does it happen to price. So as I mentioned about the contracts that we have if there's a price change that is not reflected in the indices that in some cases with price enough. Then we won't get any benefit equally if those indices moved more than what we see in other places we'll get more benefit.
But you should assume that the variability in 2021 is massively dependent on what our average realized price turns out to be.
Yes.
Alright, and then I wanted to ask about your comment on increasing quality and qualification requirements.
How do you think your capabilities stack up against competitors there.
And would you say that there is a growing number of suppliers out there that can meet more stringent requirements or what are the requirements getting more stringent.
More quickly than the capabilities.
Yeah, I would today say that they are.
Three companies in the lithium industry globally I have confidence can produce lithium hydroxide that kind of specifications.
I think there are maybe two or three more that get close.
And essentially we will require that material to maybe be treated little differently, maybe they work in certain applications, but not all.
But that those numbers haven't changed they haven't changed in two or three years in fact, I might even argue that the probably the three that I said might have been four or five at one point.
The specifications from tightened enormously they just haven't.
It's a really interesting process because.
All it does is limiting the number of people that can actually supply into certain applications and it makes it harder for customers to switch. It also frankly in some cases can cause challenges about way you social lithium from because some of the impurities are specific to a particular, Brian based we saw particular spodumene resource.
It's just not cost effective for you to meet spec if theyre picking on a particular appeal to the specific to your resource. So it's all just making the landscape more difficult frankly for the battery producer that will discontinue.
No we actually have many conversations with our customers, let's say look if you were willing to relax the spec. It allows me to produce higher volume because essentially meeting the spike slows my production rates down and we can have a conversation then about prices et cetera, but they're just so nervous about product quality. They have so many challenges producing these next generation of batteries that day.
Absolutely appropriately focused on every piece of the supply chain and reducing net tolerance for variability and pull impurities.
Again, I think frankly from my perspective.
It's a trend that we've been talking about for several years and I think it's another reason that it supports and give sort of an incumbency advantages advances to those of us that can actually demonstrate not only that we can do it but we can do it from multiple locations in multiple plants.
Yes.
Alright, thanks very much.
We have now reached the allotted time for questions I will now turn the call over to Daniel Rosen for brief closing remarks.
That is all the time that we have for the for the call today, we will be available following the call to address any additional questions. You may have thanks, everyone and have a good evening.
This concludes the <unk> Corporation fourth quarter 2020 earnings release conference call. Thank you.
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