Q1 2022 Livent Corp Earnings Call
Good afternoon.
And welcome to the first quarter 2022 earnings release Conference call for live in Corporation. This conference is being recorded phone lines will be placed on listen only mode throughout the conference.
After the speaker's 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 live incorporation. Mr. Rosen you may begin.
Okay.
Thank you Joelle and good evening, everyone and welcome to <unk> first quarter 2022 earnings call.
Joining me today are Paul Graves, President and Chief Executive Officer, and Hubert join Tony Otten, Chief Financial Officer.
A slide presentation that accompanies our assumptions along with our earnings release can be found in the Investor Relations section of our website.
Prepared remarks from today's discussion will be made available after the call.
Following our prepared remarks, Paul and Gilberto will be available to address your questions.
Given the number of participants on the call today, we will request a limit of one question and one follow up for call 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 are subject to various risks and uncertainties concerning.
Factors, including but not able to those factors identified in our release and in our filings with 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.
Yes.
Thank you Dan and good evening everyone.
Today's prepared remarks are going to be able to along with unusual given the large number of important and exciting developments, we want to cover today.
<unk> had a strong start to the year reporting first quarter 2022 results greatly exceeded expectations highlighted by adjusted EBITDA that was almost double the Q4 2021 results.
The company benefited from higher realized pricing supported by growing customer demand and increasingly tight lithium market conditions, while published lithium prices were higher in all regions and for all products quarter over quarter.
Most important feature of our Q1 performance with the ability to take advantage of it.
We realize these higher prices across our customer portfolio.
This reflects the benefits of our diversified offering and our business model, but the stability and predictability provided by our strategic customers long term contracts coupled.
Coupled with exposure to rising market prices provided by longstanding customer relationships across geographies product ranges.
With our expectations for pricing through the rest of 2022 remaining similar to today <unk> significantly raising its full year guidance ranges.
We now expect adjusted EBITDA to be in the range of $290 million to $350 million for the year, which at the midpoint, it's 78% higher than the prior forecast and approaching five times 2000 22021 reported results.
<unk> is always looking to meet the commitments asked of us by our customers.
And in particular to provide increased security of supply while at the same time significantly increasing total volumes.
As part of this ongoing process today <unk> is announcing multiple additional capacity expansion plans for both lithium carbonate and lithium hydroxide.
Conclusion of these expansions live and expects to reach 100000 metric tons of total carbonate capacity by the end of 2013.
Five times today's levels.
Additionally, <unk> expects to at least double its existing hydroxide capacity of 25000 metric tons by the end of 2025 executing Nebraska.
We announced yesterday that ligand has reached an agreement to double its stake in Nebraska, and integrated spodumene to hydroxide project in Quebec, Canada.
50% of <unk> when this transaction closes which is expected to quit a COVID-19 30 to 45 days <unk>.
<unk> is a highly attractive asset in its own right with a favorable projected cost position.
Well located in North America, and having access to low cost and sustainable Hydro electric power domestically.
<unk> brings a number of additional strategic advantages to ligand, but alignment can also bring significant advantages to the masco, which I will talk about shortly.
Yes.
Before passing the call over to Gilberto to discuss our first quarter results as well as a much improved 2020 to guidance I wanted to provide some market observations on slide four.
Given the public commentary on lithium lately discussion of higher prices and tight supply should not come as a surprise to why no. One should also come as no surprise that current price levels, both published indices and those disclosed by producers are exceeding the already bullish expectations heading into 2022.
Fundamental to this situation is not that some of the states had a failure of the lithium industry to expand but the fact that we have seen massive and rapid demand projections by automotive Oems and accelerated rollouts of electric vehicles as customer acceptance and regulatory pressures have far exceeded OEM expectations.
Of the three fundamental challenges to successful migration to evs from internal combustion engines, the best two namely acceptable technology and customer acceptance have largely been overcome.
The third challenge so Kevin the supply chain has however, like fall behind and the Oems priority list.
Put another way most Oems EV plans have been drawn up without addressing the fundamental challenges of securing long term supply at the same rate.
As a result, there has been a real rush to source batteries ebb in parallel a growing realization that there was a fundamental shortage of lithium available in the market for at least the next couple of years.
There are also some specific factors amplifying this tightness in the short term and driving lithium prices higher.
These include broader supply chain disruptions and challenges from COVID-19, shutdowns in China, which impacts both supply and the timeline of many expansion projects limb.
Limited an unpredictable shipping capacity trading short term disruptions to battery production and higher input cost and tight labor markets, especially in remote parts of the world, where most production and expansion activities taking place.
A final and very important factor is that the inherent weaknesses of the existing China based supply chain, which we've discussed previously are revealing themselves today non integrated producers of lithium chemicals in China are unable to secure reliable committed supply of sufficient feedstock.
Australian Spodumene producers have painful recent memories of the lack of reliability of previous fixed price supply contracts entered into with China based customers and they are understandably moving to uncommitted auction based pricing and supply mechanisms.
And as many Australia minus look to integrate into their own downstream conversion facilities, either directly or in partnership with others. This structural issue will not likely improve anytime soon.
We've seen published prices of all lithium products dramatically rise by the end of April the increases are largely China based on carbonate focused in the first couple of months of the year start to drive prices higher outside China and in other lithium products.
The reference price of hydroxide in China closed the gap with Carbonite by the end of Q1, while the price of metal exceeded that of Carbonite on an LTE basis.
And we also see reference prices outside of China, moving up quickly largely as historical supply contracts expire and are renegotiated.
These movements of otherwise unconnected products and regions make sense. When you look at the realities of the China supply chain today.
In the last few quarters, but converses faces scarce input availability the decision of how to maximize profit was very simple switch operations, where possible to make himself as much covenant as possible.
As a result production of hydroxide and lithium metal only makes economic sense to them. If the price of these products climbed to equal or higher pricing on an LTE equivalent basis.
But by rapidly shifting production to the highest margin products in this way Chinese convinced is amplifying supply trends and therefore price volatility.
The hydro upside price premium to Carbonite has now returned in some parts of the market and given the well known challenges in producing and getting qualified for battery grade hydroxide. We believe many producers both struggled to shift production back to hydro upside as easily as they moved into the Carbonite.
This is especially the case in higher end battery and auto OEM applications, where the time needed to qualify supply requires a commitment from the lithium producer to remain a supplier of long enough to justify that effort.
What is even more clear is up forecasted demand for lithium growth, which shows no signs of slowing down continues to outpace any reasonable projections of supply increases in our industry.
Given today's price levels. It is no surprise there has been a flurry of expansion announcements in activity.
However, given the well documented challenges of lithium expansion as well as the time and capital intensity required it's very hard to imagine a structural supply shift in the market over at least the next few years.
Some expansions are easier than others, particularly when it comes to existing hardware calculations.
It is the success of integrated Greenfield projects like Nebraska that will be critical to reestablishing supply box.
In this environment there is understandably, a highest focus from lithium consumers, particularly Oems on.
So Kevin battery grade lithium for proven suppliers.
Now this sounds easy, but it is in fact constrained by some other unusual features of the current battery supply chain.
What's most important is the fact that many Oems today are exposed to battery supply agreements, where the lithium is purchased by the cathode and battery partners and these partners control not only the price decision, but also through the qualification process. The supplier selection. However, they then pass these material cost direct.
On to that ultimate customer the OEM.
Now this is a situation that cannot continue indefinitely.
We do not expect supply tends to shift to a more logical OEM contract and structure inside the next two years given the battery supply commitments already in place, but we do see Oems, becoming much more involved in the battery materials procurement conversations and they are seeking to signed commitments directly with battery materials.
So it will become a far more important in the market in the 2024 or 2025 timeframe.
I'll now turn the call over to Joel <unk>.
Thanks, Paul and good evening everyone.
Turning to slide five.
We reported first quarter revenue of $144 million.
Adjusted EBITDA of $53 million.
Earnings of 21.
Our diluted share.
Versus the prior quarter revenue was up 17% with.
With slightly lower total LC volumes sold and a negative product mix more than offset by higher realized pricing across all of our products.
First quarter adjusted EBITDA was roughly double the result from just last quarter.
Was due to a meaningful step up in lithium prices from new contracts entered into for 2022 as well as our ability to take advantage of higher market prices.
Ceded expectations.
Into the year.
Okay.
Given the current environment <unk> has significantly improved.
The improved outlook as we look to the rest of 2022 as shown on slide six.
The market continues to move rapidly with respect to prices.
And while realized prices were higher in the first quarter, we're expecting them to be even higher in the remaining quarters.
For license this impact is largely on a smaller volume and contracted and market driven portion of our business.
Which has far exceeded our initial assumptions.
For the full year, we now project revenue to be in the range of $745 million to $845 million.
And adjusted EBITDA to be in the range of $290 million to $350 million.
At the midpoint this represents growth of 39% and 78% respectively versus the prior guidance range and growth of 89, and 360% respectively versus the prior year.
Our guidance range for the full year have also widened compared to last quarter.
This is due.
Just how quickly the market has moved with respect to lead to price.
And while we feel confident that average realized prices will be higher in the remaining quarters versus the first we also acknowledge the higher volatility and predictability the market today.
On slide seven.
Given the significant change in our guidance in just three months time.
We provide revenue and adjusted EBITDA bridges show highlight the drivers of our increase in 2022 guidance at the mid points.
As a reminder, we expect 2022 total volumes sold on an LTE basis to be flat versus 2021.
No meaningful volumes from our capacity expansions are expected to be commercially available until 2023.
The revised guidance does not assume any change in volumes compared to a loss guidance.
This means the improvement is driven by meaningfully higher expected market prices across all of the two products and in particular reflects confidence in our ability to navigate higher input costs, especially in lithium metal.
Yeah.
With respect to pricing reclassify the major increases into two categories.
Our micro market price influenced hydroxide and carbonate volumes.
And our butyl lithium and high purity metal businesses.
Roughly one quarter of our hydroxide sales volumes in all of our carbonate sales, albeit small volumes.
Our subject to periodic price reviews.
Now for more direct exposure to market prices.
On the subset of volumes, we're expecting around $130 million.
Price improvement versus prior expectations.
For the <unk> high purity metal, we've committed volumes to existing customers this year, but shifted price setting from annual to a more short term basis.
Recognize the difficulty in accurately predicting the lithium metal raw material prices to which beautiful region was exposed.
This price sudden change was driven by a different dynamic than hydroxide and carbonate.
This is where we are seeing significant and rapid cost increases.
Key inputs.
Our focus for our metal based businesses in 2022 has been on maintaining profitability.
This is expected to be stronger in the order of $95 million.
It's largely a pass through of rapidly rising cost of feedstock materials, particularly lithium metal.
As a fully integrated producer of lithium products with predictability around cost and security of supply.
It is able to be with its core business around long term supply agreements with firm commitments and predictability on pricing power.
However.
As you can see in our guidance, we still retain the ability to take advantage of higher market prices.
Sorted by our position in key strategic markets and regions.
Additionally, the nature of our operations and the ability to deliver both lithium carbonate and hydroxide to customers provide us with a differential position and greater operational flexibility.
Despite the wider guidance for this year.
End of the range <unk>, we will see a material increase in profitability and cash flow generation.
And as we look to the next few years this will be enhanced by additional production volumes coming online.
Additionally, as a result of our evolving business mix and external corporate structure as a standalone public company alive and expect a lower effective tax rate moving forward in the range of 16% to 20%.
I will now turn the call back to Bob.
Yes.
Thanks, Joe.
And we've had ongoing expansion projects in Argentina, and the U S for some time now but.
But we know that we must continue to grow our production capabilities, even further our customers tell us this sometimes privately sometimes publicly.
To be clear these private conversations with different to prior years, where lithium pricing may have been one of the first maybe only topics to be put on the table.
Existing customers and an increasing number of Oems are coming to us because they now realize they must take a more proactive role in securing long term supply and therefore want to partner in a way that goes beyond traditional purchase agreements.
Importantly, driven by multiple recent supply, let downs, especially from new entrants, who have yet to produce Oems are prioritizing new long term supply agreements with.
With quality proven and established producers like <unk>.
<unk> already hosted multiple existing and potential customers and our operations in the U S and Argentina in the first few months of this year something that very few have expressed interest in historically and we expect to host more throughout this year as we look to show them what it actually takes to expand on what they can do to help us accelerate these exceptions.
<unk>.
Before going into detail on all of our announced expansion plans for both lithium carbonate and hydroxide you can see how this translates into total capacity growth through the rest of this decade on slide eight.
The company, we plan to expand our existing resource in Argentina up to a 100000 metric tons of capacity by 2030, roughly five times today's levels.
Our questions if somebody wants so could you just for a long time and our data suggests we have many decades of resource life ahead.
Our unique proprietary process for lithium extraction results in a very competitive cost position and our leading sustainability profile.
Additionally, because we've been operating of the selloff of roughly 30 years.
Replicating the existing processes that we use today.
We believe our current expansion, they're carrying none of the process flow sheet risks that are inherent in many other projects globally.
The hydroxide, we expect to reach 45000 metric tons of capacity by the end of 2023 and at least 55000 metric tons by the end of 2025.
And our investment in domestic it provides exposure to up to an additional 34000 metric tons of lithium hydroxide, which means that on a 100% basis with potentially looking at 90000 metric tons of hydroxide capacity by the middle of this decade.
Beyond this we will continue to evaluate additional expansions globally when supported by specific customer commitments.
Still on slide eight you will notice that we characterized in our existing operations is one eight and one way, reflecting the fact that our carbonate and hydroxide operations today function as an integrated network rather than each standalone assets. As a reminder, you cannot add our carbonate and hydroxide capacity together.
Our projected sales volumes.
When netting 45000 metric tons of hydroxide capacity capacity.
The license carbonate with quite defeat it youll see that in the outer years, we expect to have a meaningful amount of available carbonate remaining for sale.
A key consequence of this integration is that a decision to make and sell hydro upside within this network is equally a decision to not sell carbonate.
Some point in the coming years, therefore, we will need to make decisions as to whether we wish to sell that carbonite directly or to invest in further hydroxide conversion.
We have been talking for a while now about our desire to have meaningful exposure to all forms of lithium.
Therefore, we do expect it to be a supplier greater carbonate volumes to the market over time than we have been historically.
Turning to slide nine you will see the three separate carbonate expansion stages, we haven't planned that are resource in Argentina.
<unk> remained on schedule with all previously announced timeline switch first expansion.
This can be viewed in two phases, both using the exact same direct lithium extraction process that we utilize today.
And the first of these two phases, leaving about 10000 metric tons of lithium carbonate capacity by the first quarter of 2023.
And the second phase and additional 10000 metric tons of lithium carbonate capacity will be in place by the end of 2023.
And in two Years' time live and expect to have effectively doubled its total carbonate capacity.
Theres meaningful onsite construction and installation currently under way for this expansion and we expect to complete key infrastructure over the next few months.
To complete these two phases.
<unk> anticipates roughly $450 million of total capital spend remaining between 2022 and 2023.
For the second expansion life.
Last quarter that have begun preliminary engineering work using the exact same direct lithium extraction process.
And doing this it became apparent that this expansion can provide an additional 30000 metric tons of carbonate capacity by the end of 2025 or 10000 metric tons higher than previously anticipated. This.
This incremental production is made possible by reengineering the content of our flow sheet with respect to how we manage fresh water as well as we thinking how we tackle the late stage brine evaporation step.
By doing this we will improve our overall lithium yields and reduced average water use intensity for our current and future operations, while freeing up our existing evaporation ponds.
To be clear the key DLA extraction.
Carbonate production processes will be unchanged from our existing operations.
But capital requirements, we anticipate spending to be in the range of $500 million to $700 million.
With an initial outlay beginning late this year on a ramp up of spending expected in 2024 and 2025.
Total spend is expected to be lower than the first expansion is alive and it takes advantage of the infrastructure built to support future expansions.
Some of this benefit is offset by additional investments, we will be making as part of this expansion to further improve the sustainability profile of our operations, particularly.
<unk> mechanical evaporation, and adding closed loops to increase water reuse.
As for further expansion of that resource in Argentina, <unk> is evaluating a third project that adds up to 30000 metric tons of additional lithium carbonate capacity.
Different from the prior expansions this would deploy more conventional evaporation based processes, which reduced both carbon intensity and freshwater use <unk>.
Additionally, it should require a significantly less capital versus prior expansions given the potential to repurpose our existing pumps that would no longer be needed to drive expanded operations.
Following this live and believes it can reach total capacity and it's all questions in Argentina of 100000 metric tonnes of before the end of 2013.
While we do not believe we would be constrained from additional expansion beyond this point from a resource standpoint. It is ultimately the necessary infrastructure and the remoteness of our location that will dictate where we go from that.
Turning now to slide 10 on hydroxide alive and is nearing completion of a 5000 ton expansion of its existing site investment sits in North Carolina.
Minimal capital remaining to complete this unit when commercial production will start in the second half of this year.
This will bring our total hydroxide capacity in the U S to about 15000 metric tons or equivalent to our current production capacity in China and <unk>.
Because this is a modular reputation of our existing carbonite fed process, we expect the qualification and the ramp up time line with customers to be fairly short.
We retained an ability to add further hydroxide capacity at our site investments city as needed.
We also announced that we are adding another 15000 metric tons of lithium hydroxide capacity at a new location in China by the end of 2023.
Given our proven track record of successful hydroxide expansion in the region, we have confidence in our ability to execute this expansion quickly and capital efficiently.
The decision to proceed with this expansion was straightforward given have concentrated cathode and battery production is in China today. It will allow us to serve our growing customer demand in the region as well as provide us with location diversification inside China.
<unk> is also evaluating building at 10000 metric ton plus recycling focused plant, which takes recycle lithium material likely in the form of crude lithium sulfate accrued lithium carbonate from third party recyclers and converts it into battery grade lithium hydroxide.
This would be an inherently different business model than what we operate today, we would not be providing the lithium feedstock as we do with the carbonate units. We operate today and we expect that it will be closely linked to our existing hydroxide customers as an additional service we provide.
Totally to those customers as they look to reuse where possible the lithium they already own that resides in end of life batteries.
While the location of this plan is still to be determined there was a highlight to head.
It would be in the U S or Europe .
The company is actively evaluating multiple partnerships and strategic funding opportunities and believes this could be in commercial production as early as the end of 2025 with land that well, where the timing of some of these streams will start to become more readily available.
Following these expansions live and expects to have total lithium hydroxide capacity of 55000 metric tons more than double its current capacity of 25000 metric tons.
There is plenty of work to be done over the coming quarters, and we look forward to keeping you updated on all of our progress.
And of course, this excludes Nebraska, which brings us to slide 11.
Yesterday, <unk> announced that it will double its ownership interest to 50% in Nebraska by issuing 17 5 million shares of its common stock in exchange for a 25% stake.
Investors won't Quebec and investment group owned by the government of Quebec with a mandate to provide strategic capital to facilitate investments in the province will remain hold of the other 50% ownership interest in Nebraska.
Following this transaction the total cost items, 50% ownership in Nebraska will be approximately $400 million.
<unk> is committed to the future success of Nebraska, and our increased ownership reflects this commitment.
As I mentioned earlier, Nebraska brings multiple benefits to ligand these into resource diversification further improvements to our green production credentials and then attractive location a location from which to serve growing regional demand in North America, and Europe , but the localization of supply chains becomes a bigger focus for.
Our industry.
But perhaps even more important is the benefit live and will be able to bring to Nebraska. Following the closing of this transaction.
We will be able to more easily support the masco by providing technology and operational knowhow, reducing the inherent risk that new entrant space and the battery quality hydroxide market.
This will help to ensure that Nebraska delivers the quality products that customers are demanding.
We will be able to support domestic commercial strategy, bringing <unk> to market intelligence to the master than they would otherwise have access to.
And we will be able to start to offer customers higher volumes and a further diversified supply chain with significantly lower sourcing risk for them as a result.
We look forward to helping the masker for pellets role as an integral part of the growing lithium battery supply chain in the western hemisphere.
And having worked closely with the domestic team. So it's engineering work, there's a lot to be excited about as we detailed on slide 12.
At this stage, we can share that it will be a large cost competitive asset with over 30 years of expected mine life.
The project is targeting 34000 metric tons of battery grade lithium hydroxide capacity produced in banking Corp, using conventional conversion flow sheets.
Solely using spodumene concentrate from web buchi, creating true integration of the operations of both sites to be clear. The masker has no plans to sell spodumene concentrate from a boutique.
First commercial production of lithium hydroxide is expected by the end of 2025.
It'll capex is currently estimated to be around $1 billion.
Which is consistent with the capital cost of similar integrated projects being developed for example in Australia in Korea today.
We believe that <unk> will be an important part of the supply of sustainable critical battery materials. It has access to low cost zero carbon hydro electric power and a strategically located postal regional shipping costs.
It is also clear that the industrial park being developed and backend coal will be a foundational part of Quebec's ambition to develop a global battery materials.
<unk> already been multiple enhancements to produce cathode active materials at the site alongside Nebraska, creating a real model for local localization that we believe is essential for the sustainable development of our industry.
There is also additional land available on the <unk> call, but the basket to potentially add future lithium capacity.
Concluding on slide 13 alignment has multiple attractive opportunities to increase production continue meeting the growing needs of its customers. This will undoubtedly come with a step up in required expansionary investments over the next few years.
Projections for 2022 capital spending have increased to $320 million at the midpoint or $20 million higher which is largely a timing effect as we look to accelerate work on our expansion projects.
As we look at 2023 through 2025, we estimate capital spending in the range of $1 billion.
Excluding any potential Nebraska pumping contribution required of items.
With respect to the Moscow, given a part of that and the interest from customers and lenders. We expect there will be plenty of attractive financing options available that will be put in place at the appropriate time.
Based on where we sit today, we expect to fund our investments with a combination of internally generated free cash flow third party debt and other sources of capital the major customer or government financing opportunities that are becoming more widely available.
However, most of our capital needs, we expect will be met by the increasing cash flow generation of our businesses.
This confidence in strong cash flow generation is the result of two primary factors.
This is a starting next year <unk> will begin adding meaningful incremental production volumes in 2023, and 2024 alone LIBOR is expected to add 6000, 16000 LTE of additional sales volumes, respectively compared to 2022.
We expect incremental volumes in 2025 to be even higher than this.
<unk> production to continue to grow through the rest of the decade.
The second is that the underlying economics of the lithium industry are fundamentally evolved with higher cost resources entering the supply picture and then acknowledgment from customers the pricing needs to support reinvestment.
While prices will inevitably come down from today's levels at some point it does not appear likely that they will be returned to the price levels seen prior to this year in the next few years.
And while we're not in a position to provide any financial guidance beyond 2022, because we do not pretend to have the ability to project market pricing over the next few years with any reasonable degree of accuracy, even under a wide range of potential price scenarios live on clearly has strong earnings power.
And as a proven and reliable operator, and commercial producer of lithium compounds, we have a differentiated value proposition that we bring to our customers our investors and all of our key stakeholders.
I'll now turn the call back to Dan for questions.
Thank you Paul.
You may now begin the Q&A session.
If you would like to ask a question at this time.
Please press Star then the number one on your telephone keypad.
Please limit yourself to one question and one follow up if you have additional questions you can jump back in the queue.
To withdraw your question press Star one pause for a moment to compile the Q&A roster.
Yes.
Your first question comes from the line of Steve Richardson from Evercore ISI.
Hello, Hi, this is keyshawn on for Steve So.
So quite an impressive quarter and updated guidance, but just one question in terms of guidance I think our rough math plus margins at about 40%, which is about a little bit higher for the quarter can you talk a bit more about your market assumptions in our guidance not just on pricing, but also on costs.
Sure.
Tim.
We Q.
Q1 saw some interesting pricing dynamics, we mentioned Carbonite was hired to start with that by the time, we ended Q1, which in hydroxide really gets up in line with Carbonite and metal prices on an equivalent basis, even higher than that in carbonate world. So.
Our guidance really reflects.
Nothing that we saw as we as we finished the quarter and into April is going to be maintaining two through the rest of the year on the cost of the same mind. So the biggest cost variable we have is lithium metal, but given our pricing assumptions on.
Butyl lithium and high purity metal simply reflects an attempt to pass those costs on sort of hedged. If you will in terms of those extra costs the agreements with customers.
We've been very transparent and as we pass those lithium metal cap cross sell and the customers pay for the lithium metal.
So we're not expecting any fundamental meaningful increase in costs and any other areas.
What I, what I'll call frictional costs, and supply chain, and logistics et cetera, but that will really pretty much reflected in the guidance already.
Got you. Thank you so much.
And for Masco. It seems like this is a natural progression of <unk> participation in the project. So this really quickly just wondering why is now the right time to increase the working interest.
How much Capex is remaining and then just a timing in terms of.
And other gating factors please sure.
Sure.
And on M&A deals. This is not a market trade right, where we just went in and bought the shares we had our partner and that have a partner in that arena.
As the private equity firm.
Probably has took this business largely from from bankruptcy to a <unk> process.
Turning to outlook today I don't there is any doubt that that was not alive and skill set and IQ <unk> IQ skill set but we're through that phase now and we're now into the final phases of engineering. This project the mining work, which is not our strategy is largely completed and we are in the final phase is now complete and the engineering work for the for the hydro.
Outside plant and it just felt like all of US a natural time for us to restructure the ownership alignment to take.
On a bigger role the timing is pretty straightforward by the end of this year, we will have what we require as an organization, which is a level of engineering certainty that we require to start construction and we would expect construction. Therefore stopped by the end of this year and continues really through 2020 forward into 2025 at which point production.
We will start up and we will start the ramp up process now it is it's a spodumene based process, so very different to our hydroxide carbonate processes, we do expect a slower ramp up to commercial production.
So we're not expecting unlike our hydroxide units, which we can get up and running within a month or two this is going to take longer which is why you'll see us talking about really meaningful commercial volumes coming at some point in 2026.
Your next question comes from the line of <unk>.
Well channel from Raymond James.
Thanks for taking the question.
Looking at the timetable of your carbon net expansion Youre looking for a plateau between 2025 and 2029 is there any scenario, where you would accelerate that third and final phase of expansion.
Look as possible I think we're trying to be realistic about everything we have going on because it lines up clearly one as an organization will be focused on Nebraska.
What's up and ramp up.
I think the short answer is if we can yes. It has to make sense from multiple different levels you have to understand how remote dislocation is and what it actually takes.
To do these projects it is not easy to do that.
Given we are moving to a different process.
While we have not used traditional conventional evaporation processes.
We expect to spend a lot of time looking about how we can optimize them. The reason we've never use them in the past for multiple reasons, but not least the yield is lower.
The.
The quality of the product you produce in that part of the world from that Brian is not going to be as high as it is using our existing process.
We're fine with that because it will it will certainly be good enough to use in our hydroxide processes. So we don't lose any value from that but it also takes some quite significant partnering with local communities with the local government et cetera. So if we can accelerate it if the market justifies it we will but I think what we've got there.
A reasonable maybe erring on the side of Conservative assessment of what that phase of the expansion will look like.
Okay.
Following up on the mask do you anticipate receiving any.
Federal or prevent show.
Funding Capex rebate.
To help pay for.
Development of our lithium industry in Quebec.
I think everybody is looking to see what support you get from the local provinces.
Multiple levels of support more than just provision of capital I mean, having IQ as co investors, one I think helping secure locations, helping with incentives for training labor, which is obviously a key concern when in areas expanding so quickly.
Certainly opportunities for us to get some tax advantages from doing that and sure. If there are some provincial capital.
Available that is cost competitive it makes sense, we'll take a look at that we certainly aren't doing it on the basis that it requires that.
We typically have not taken capital of that type.
Largely we have not seen provinces governments regions be strategic in terms of how they provide that capital, but clearly if it makes sense, we're certainly open to it.
I appreciate it.
Your next question comes from the line of Chris cap from loop capital markets.
Hi, Good your line is open.
Thank you.
Great that you can elaborate a bit more on your expansion activities and I assume this is a.
Tremendous interest to your downstream customers and policy you emphasized how just this accelerated EV transition and the bullish fundamental backdrop is inducing customers to get more proactive and creative relative to conventional supply agreements and I'm. Just wondering if you could elaborate on what that means with the with respect.
The agreements that you are considering is it a.
Sort of a duration of a supply agreement kind of clause and good pricing mechanisms.
This on their part.
Fund just what.
What sort of things are on the table at this point.
Yes.
It's an interesting one.
I mentioned on that I think I think I heard from one of the industry consultants recently that the lithium industry has expanded its output in the last three or four about Forex right and so we've added a lot of capacity and yet it's just not enough. It's not enough because the Oems are expanding even more quickly, but what the Oems are also recognized is that the kind of.
Not all of them by the way, but many of them have outsource this whole process of securing a batch of materials to the battery chain.
The Bachelor aspires to the cathode guys et cetera, and then I'll, let kind of asking okay. We need to change. This in order to change. This the biggest differential that they have frankly it number one they can provide the certainty by because they more than one way or the other they're going to need that and they may change cathode suppliers battery suppliers to maintain regions, where they manufacture.
But they know they need lithium so the ability to provide certainty is really resides with the Oems.
The second one is to provide price certainty I think nobody really knows what future pricing is but everybody knows that there is a price at which it just doesn't makes sense either too low for us to hide for them. So the ability to structure, what I'll call rational pricing mechanisms.
Equally shared rewards depending on what the supply balance looks like also resize lawsuit with the Oems.
Equally and this is important it's sharing in more detail the technology Roadmaps with US what are you asking need when would you want recycling streams available, which regions do you want to produce and what is your position your requirement attitude towards sustainability carbon content, how do you feel about investing in <unk>.
Sustainable lithium production to increase sustainability frankly, how do you feel about existing investing upfront and a contract to help secure supply all of these conversations frankly can only happen with an OEM and they are starting to happen with the more progressive more forward thinking Oems.
That's helpful. I appreciate that and then I also had a follow up on the Tabasco around the timeline.
You mentioned commercial production by the end of 2025.
That's further downstream conversion asset and I'm just curious yes.
You say in the slide that you are looking to match the spodumene production with the conversion facility being ramped is just curious if you have.
Where you are to that if there is any scenarios, where you would produce spodumene and sell that into the market ahead of the.
Yes.
The christening of the hydroxide facility.
I'm just wondering about the timeline more generally as well thanks.
Yes.
$1 a ton of spodumene concentrate you can certainly understand the temptation.
Im going to say never never never never say never if it makes sense.
The mine is clearly capable of coming online sooner.
But it's important to understand that one of the key.
A couple of key challenges we've seen with these with these projects in the past is either overbuilding.
A hydroxide plant.
<unk> Kop feed.
<unk> not thinking carefully enough about exactly what that spodumene concentrate treat looks like so we've been spending a huge amount of time.
Making sure we know exactly what the optimal spodumene concentrate feed coming out of that mine is concentration as well as volumes and the plant has been sized accordingly, it is quite likely during the ramp up phase we will be producing more spodumene concentrate then the pump can consume to start with.
However, we are also pretty confident that the mine won't run perfectly. It's some new mine you stopped so having some spodumene concentrate inventory in those early years to help manage that startup process is probably just as important with realizing a few extra dollars at that point in time.
The model certainly does not call for shipping spodumene concentrate from Quebec to China, let's be honest with you it does not.
Thank you.
Your next question comes from the line of Kevin Mccarthy from vertical research partners.
Good evening Paul.
What is the pricing assumption that's embedded in your 2022.
The adjusted EBITDA range of $2 90 to $3 50, and then related to that can you comment on the percent of your business for which prices fixture known this year and next year.
Yes, I think you know.
<unk> never given price guidance before so I don't want to break that.
History of ours, So I, certainly don't intend to do that and you could probably back into it with a bit of math, but when you look at what's your vessel told you about what proportion of our hydroxide is not contracted small carbonite, but no. We don't have a lot of carbonate volumes.
Cell.
Really though other than the contracted hydroxide volume nothing else has set everything else.
<unk> is going to be priced on a relatively short term basis, whether it's monthly some quarter that includes diamond type your switching portfolio and to Saar.
Drop size portfolio into both battery and non battery applications that it is not with strategic customers and everything else is exposed to market.
Okay.
Helpful. And then secondly, if I may.
All Youre issuing 17 5 million shares for the mask a deal.
And.
We have upsized expansions in Argentina, now candidates moving forward as well.
<unk>.
That context.
Would you intend to access either capital markets or perhaps partners.
Capital.
In addition to the much stronger free cash flow that you envision over the next several years.
If you look at the next three years.
Just assume today's environment stays in place whatever that means.
It is a range of outcomes, it's highly unlikely that over the next three years, we would need any outside capital other than growing down on existing credit agreements credit revolver, So and even then during a relatively small way because when you look at our EBITDA after the growth volume et cetera. It just does not seem.
It seemed like it's of course possible we've been here before.
Probably realistic up next one I think tapping into outside sources of capital.
And more likely to be customer partner capital much more likely we don't see a scenario frankly today.
We've run into where it looks likely or even possible that we run into a place where we need to issue.
Why do I say it bluntly, if we reach that point it probably means we are not generating as much cash flow, which means pricing is and what we thought which means the expansion will slowdown and capital slows then we have that lever that we are likely to pull first to be perfectly honest. So I think customer capital partner capital strategic invested capital and assets in small ways.
More likely than capital markets and the plastic equity.
Great. Thank you for that and congrats on the results.
Thank you.
Yeah.
Your next question comes from the line of Matthew deal.
From Bank of America.
Thanks.
How should we think about some of the fixed costs.
Flowing through from from the startups, particularly some of the carbon inside of the equation as we move into 2023.
Every time you start a new facility. If obviously you get that kind of drag on day one of <unk>.
Higher cost run into.
The difference, perhaps but I think maybe people are still struggling.
To understand is that a different.
Different ways of producing lithium.
With quite a different startups, we've already started in hydroxide plants up made some spodumene can be quite a slow ramp up so you do get some fixed.
Fixed cost inefficiencies style carbonate production from Brian when you're using 18 month periods, an evacuation pumps the same.
Our carbonate expansion in Argentina don't operate that way from the point of which we can kind of mechanically complete to siding production is is suddenly months, maybe quarters, but it's not much more than that so while you do get a bit of a drag during the ramp up it is not as noticeable as pronounced as you would see with some of the other.
Projects. So when we talk about starting production in 2023 per our first expansion, we expect to be mechanically complete some time in Q4.
And by the time, we then prime the pumps and that everything going it's probably another quarter to get going and then another quarter to ramp up.
Not a huge amount of time to be perfectly honest, so not huge drags.
Thanks, and look in the past.
You'd waited for some are firm or Austin will actually now I'm going to skip that one.
Lithium recycling plant is a bit of a new one.
Do you expect.
To tie in an agreement with somebody like lifecycle of Redwood or would it be from a battery plant and then how do you. How do you think about the economics shares is going to be kind of a tolling margin for you or would you.
How do you think you can structure the agreement.
Yes.
Recycling I think the one truth that people have yet to really kind of take a long hard look at it as the most of the lithium against recycled is already owned by somebody and so we're not looking to do is now solid at a deep discount to what they paid for it I think what they are looking to do is to pay somebody to recycled for them, which is a different business model. When you think about could it.
Lifecycle of Redwood, our semi absolutely, but I think it really depends on where the Oems got it.
Lithium is going to direct this however, the lithium.
And by the way. This may include cathode producers battery producers about scrap and waste June that processes. They are the ones that are in the end they're going to be.
Have some lithium and theyre going to look around the timeframe partners to help the reuse it into that into that to the systems.
I saw some data there is a day or had some data, which I thought was.
Really in line with how I think about things as well as recycling by 2030 it could be.
10% of total total lithium production.
Which doesn't sound a lot until you realize demand up there is probably 3 million tonnes and 300000 tons of lithium is going to need to be recycled. We expect largely this will be a partnership with customers. It will be part of this partnership approach.
We do not expect to put capital to work in any meaningful way in these facilities, which doesn't mean the economics of them will clearly be there'll be less profit coming from the number that will be I would expect no license capital tied up in them does that make it a tolling model or some other model probably in that direction, yes, but it is a very different business, but one that we just did it.
Just has to evolve and the truth is there are many out there that actually have that capability to actually China accrued lithium stream from recycling into battery grade lithium hydroxide, and we think that's a value that we bring to our customers.
Thank you for that.
Your next question comes from the line of Alexi <unk> for Marc from Keybanc capital markets.
Thanks, Good evening, everyone, maybe I'll try a <unk> question a different way could you just maybe correct or characterize.
This change in price that's embedded in your guidance or kind of the upper and the lower bound of this change.
Think is reasonable.
Hard to know what the percentage change in trump to be to be honest.
I think maybe the best way that I can describe this.
As we've certainly seen lithium realized lithium carbonate pricing in the first quarter was probably higher than some others have announced for us because we don't sell as much I think we may be for whatever reason that April .
Drive a higher price, maybe it's our customers' lithium carbonate pricing compared to the flows that we saw the really low prices that we weren't even selling probably about seven or eight times that price that we were seeing in <unk>.
Sometime in 2020.
In hydroxide.
<unk> caught up with it frankly, it's a couple of them going past it so.
Certainly up in the.
It's hard to be precise to be honest without giving a specific guidance, but just assume that it's meaningfully higher than we've ever seen in the past.
Okay fair enough. Thanks, Paul.
On the mask.
I guess, you've done a lot of work in understanding the economics of the project already do you have an idea of where cash costs could come in either for spodumene ore all in for the hydroxide.
And we do it and we've been involved in this project for a long time, there's a steroid committed domestically.
Basically some of that I'm pleased to welcome. So we do have just a huge amount of insights into the masco, we certainly not going into here with what I'll call Blind Hope I don't think there's ever been.
Bill, it's a more diligence investment that we've ever made.
We do know where the cash costs are likely to come out I think it's like anything there's so many different definitions of cash costs. We don't we do care about the spot can be cost clearly is the integrate customer.
<unk> been looking at and so.
When we look at it on the cost curve and we look at the cost curve in 2026, when the plant is going to be producing our best estimate of where it sits as pretty much bang in the middle of the cost curve with although the brine guys to the left.
The non integrated Chinese converters, all the way to the right on a few not many of US frankly, right now integrated spodumene converters cited that metal slug, that's where we expect it to be.
Thanks, a lot.
Your next question comes from the line of Joel Jackson from BMO capital markets.
Hey, Paul.
Joe.
First question two part looking at.
When you project on slide eight you are projecting your capacity yearend, we protect the capacity can you talk about in general.
Would you expect the qualification period that the various expansion and then.
What would you expect utilization rates to be at these operations like 90% and then what would be your kind of your Max battery grade, 90% like you can give us some color on all that.
That's one question Jodi than other parts of this.
Just one question, yes, Thats just one let.
Let me guess, even above the trend and the second question will be on domestic but anyway, let me try on that one.
These.
Today, if we lift that capacity and we look we list that production rates at capacity now production rates are pretty much 100% just because the nature of what they are we produced pretty much at nameplate in fact, most of our hydroxide plant we produce ahead of nameplate.
I slightly wonder that in the future because we moved the nameplate up as we as we build new ones.
Qualification process it really depends on what it is I think it's fair to say that if it's to an existing customer.
I'm talking of hydroxide now if it's to an existing customer and we've spent time with them knowing exactly what it is and what they use and what they need is months to get qualified provided they want us to be honest. This is never about how long does it take to qualify its about the risks of the consumer.
Willing to take on and Thats why we tend to do it more quickly because they look at that material. They like using it. They know it's a preferred lithium for them and so they tend to accelerate us in their qualification processes, because qualifications expensive for them covenants a little different.
All of our hydroxide will be battery grade, we pretty much won't make it if it's not battery, but there is no growth in non battery grade lithium hydroxide anybody who thinks they're going to sell into that market is either selling carbonite substitutes say LSP.
I was going to try and take market share in Greece, maybe but I.
I think in covenant is so much more complicated question.
The nature of brine based production and where we produce and how we produce we won't get to 90% battery grade lithium carbonate production, but as I mentioned earlier, we don't have to because we don't need battery grade carbonate to feed our hydroxide units. So as we cannot produce lithium carbonate and maybe a quarter or a third of it we're going to sell that will be the best quarter.
We can make that will go out to the battery customers and the lower quality stuff that inevitably comes out will go into our hydroxide units.
And then you talked about I.
I think 21 billion of Capex for growth here in 2022, the 'twenty 'twenty four for three years.
You should be able to internally funded can you talk about I mean are you assuming that prices lithium carbohydrates, if prices stay where they are are you seeing some moderation maybe you can.
Where would you under what pricing scenarios would you need to.
Good morning.
Three quarters of our hydroxide production today. The price is set for the next few years of today's production clearly we add more production that will decide what to do with we do expect to the pricing is going to be but it's going to be good.
Good for the next couple of years, the best way I can describe it will it be as high as it is today.
The prices we've seen some of these industries are not realized price is not by any stretch of the imagination, but we are seeing some equalization as other products, whether it's the metro products hydroxide, Japan Korea U S market.
To play catch up with the trends that you see in China, I don't think any of us expect them to get to the same prices that you see in some of those indices.
But I think what we actually have is a couple of years.
And that is going to be pretty healthy for our industry. So we do and as I said a wide range of different scenarios clearly, there's a big difference as to how much we would need to raise and third party financing under different price scenarios, but all of them are eminently manageable no matter, what even if we look at Q1 pricing and run that I look at Q2 pricing around that.
They're very different numbers.
So it's a pretty wide range that we modeled when we made that statement.
Again, we've been here before with no guarantees, but we feel pretty good that combined with adding 6000 tonnes and 23, another 10000 tons of product in <unk> and another.
10, plus 20, maybe 25, we've got a pretty good volume offset to make sure that even if we're a little bit up on that pricing, we've still got a pretty healthy.
Cash flow profile ahead of us.
Yes.
Thank you Sir.
Your next question comes from the line of P J, Jeff Carr from Citi.
Okay.
Yes, good evening Paul.
The lithium supply chain, you mentioned, it and tangled in China, which is causing price inflation.
How do you see that getting an entangled I guess, maybe Thats award and why not move aggressively more in Bessemer city in.
In the U S supply chain.
That 5000 ton flagged why not.
Go more aggressively here.
Hindsight is a wonderful thing we greenlight a project a couple of years ago, which I think you remember wasn't quite the market. We're in today and we wish with numbered plant labor.
No.
No.
Now, let's be realistic, though P. J there is no demand for lithium hydroxide and battery applications outside Asia today, right pretty much now and so well while capacity is being built.
Few that I've seen and I'm going to come online before 2025.
The challenge that you have as you say unintended the China supply chain is actually almost all of the lithium is being consumed over there today I mean, we have this weird disconnect. The massive brine based production in South America massive hardware production in Australia, you've got growing production in North America, and some alternative none.
They are in China.
And we're also seeing slowly, but surely biochemical conversion plants going in outside China Big one going on in Korea, We've got some Australia and what's being built some smaller ones going into Japan. The supply chain is slowly moving away from China, but the key is cathodes and precursors and largely still not only in.
But Chinese companies Chinese producers.
So I don't know, if we'll get untangle that and what you will get is growth.
Supply chain in the bathroom deals that doesn't touch China, but it will still be dwarfed by China in China will still be a pretty significant.
The most significant piece of the battery supply chain that needs to be fed.
Great. Thank you and then you guys did a good job on extending our contracts and how they are becoming shorter term.
My follow up question. There is what percent of your contracts are with large automotive customer.
And are these annual contracts or are they getting shorter as well. Thank you.
Yes, so another interesting one right because I think it's fair to say that contracts today are complicated there is no doubt about it and I think thats an attempt on the part of the Oems to simplify them, but they themselves that alone in the supply chain I would characterize by far the most important supplier arrangements for us into cathode makers.
May be that that caught cathode maker was not actually buying the lithium without quantifying is putting it in the material and the deciding who they use.
Increasingly.
Which leads into Oems I think we've said in the past.
She is scale amongst Oems.
Lithium companies out there that I believe we will be able to have meaningful contract agreements with Oems more than four or five Oems. So you'll have many many contracts of a much much smaller size outside that.
Oems are so large.
And I'm going to become so complicated in the way that they operate and I think most of those will have to make a choice as to which four or five Oems were going to partner with and I think the Oems start to realize that as well I mean, you want to buy 150000 tons of lithium hydroxide. The years I've had some people plan by 2025.
You better have a good procurement organization EBIT apps World class supply chain scale, if you want to do that.
Great. Thank you.
Your next question comes from David <unk>.
<unk> from Cowen and company.
Thanks for squeezing me in Paul and congrats on some pretty exciting announcements.
Thank you.
Sure.
I wanted to ask.
If you could clarify a little bit your comments earlier I think you were talking about this evolution of the industry to contracting directly with Oems.
One as this evolution that happens do you still see.
Incremental margin benefits on top of what we're seeing today.
With the updated pricing guide and then too.
You also mentioned that in some cases Oems are offering capital to perhaps accelerate expansion plans.
Is that a possibility for anything that you have planned is solar hombre in which a third party capital provider could actually accelerate your capacity expansions and do these capital infusions from Oems do they do they take the form of.
Of a carry sort of operation, where youre just to frame some of the upfront costs.
Yes.
I don't know because no one has done one yet that I'm aware of that doesn't mean, the conversations about moving pretty quickly.
What I've seen and what I've heard is really two different.
Two different models being thrown out there I think there are some believe that to really secure long term supply of battery materials, especially with it but you can see what's going on in nickel powder. Examples of this and maybe a more extreme vision.
But in lithium.
This idea that you have to invest in a project literally own equity in it and we see that tends to be planting more Asian battery guys think thats the way that they are most likely to secure supply.
That's what they're pushing for.
I think if you look at the automotive OEM I think with a lot less interest to invest directly extraction in mining and even in chemical conversion plants and you've got to invest through the flow you accomplished investment in chemical conversion and because you have much you've secured that raw material is not helping yourself and.
And so I think they are looking more towards what I'll loosely call prepayments I don't know a better way to describe them, but they were essentially providing capital upfront and return for security over a long term contract and probably that capital gets returned over the life of a contract so theres going to be lots of conversations with some interesting once about how they're structured.
But at the moment these all store ideas they will.
Offers the suggestions I do believe there's certainly opportunities for live and in that sense I think a direct investment in a resource.
In Argentina, not many people have a keen to do that today.
I think prepaid or providing capital that is backed by a true long term arrangement whatever that may mean, I think there's a lot more interesting to most of them and I suspect. That's what we will see more I think what's really interesting, though if I'm honest as we can.
To do it with because we've seen it right you can go and look at capital is provided contracts that have been signed money. That's on average people that are not only never produced a kilo of lithium don't even necessarily have credible closely.
And yet this capital flowing into them I don't think thats, helping anybody or anything or any one and so I'm really curious to know about ultimately.
How much despite all the talk despite all the public statements how much four youre going to get to those of us that actually have proven we can do this and that what we really want to watch.
Absolutely and looking forward to that coming to fruition in the coming years. So my follow up is just briefly on the Chinese hydroxyurea hydroxide conversion facility.
It looks like 15000 tonnes per annum capacity.
It looked like a $15 million build on that is that an all in cost or do you have a partner there or are you benefiting already from others. Some capital because it looked like it was just in the engineering stage.
As crazy as it sounds that pretty much the entire all in cost of building.
Are you in a bit more I think is 25% to 30 by I think 15, but still.
Phil relative to one that I will turn the world I don't even know how to explain and have had conversations with multiple multiple chemical companies both in and outside the battery materials, who see the same trend. It is in partnership there is always a partner you always tap into existing infrastructure that exists there.
And.
It's just a really it's a fascinating model for putting capital to work now.
Challenges right because once you build in China in <unk> and <unk>.
Carbonite into China lithium is going to stay in China. So you've got to be really comfortable as to what your business model looks like in China, when youre going to go and do that.
We are we've been through this we've left with the existing resource. We also saw the back end of last year, the danger of being concentrated in the sense that some single industrial Park in China one.
When you sometimes get some shutdowns energy of Covid or others. So this is going to help us diversify to a different province in a different a different.
Industrial Park. So it also helps us with that final point I'll make is most of our business in China is supporting customers in the past.
For whatever obvious reasons, having to produce in China, and so we offered them into what I'll call Western Oems Western supply chains from our China facilities on this one I expect to be no different.
Best of luck, Paul Thanks for the responses.
Thank you.
Okay.
There are no further questions at this time, Mr. Daniel Rosen I turn the call back over to you.
Great. Thank you that's all the time, we have for the call today, but we will be available following the call to address any additional questions. You may have thanks, everyone and have a good evening.
Okay.
This concludes.
Yes.
'twenty two.
Conference call. Thank you you may now disconnect.
Please wait the conference will begin shortly.
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