Q2 2022 Albemarle Corp Earnings Call
Hello, everyone and welcome to the Q2 2022 Albemarle Corporation earnings Conference call. My name is no idea and I will be coordinating the call today. If you would like to ask a question at the end of the presentation. Please press star one on your telephone keypad. Please note we will take one question and one follow up.
Now David you, Hi, Meredith Bandy, Vice President of Investor Relations and sustainability to begin Meredith. Please go ahead.
Thank you Nadia and welcome everyone to Albemarle second quarter 'twenty to 'twenty two earnings conference call. Our earnings were released after the close of market yesterday, and you'll find our press release and earnings presentation posted to our website under the investors section at Albemarle Dotcom.
Joining me on the call today are Kent Masters, Chief Executive Officer, and Scott Tozier, Chief Financial Officer.
Raphael Crawford President catalysts, NASA, Johnson, President bromine and Eric Norris President lithium are also available for Q&A.
As a reminder, some of the statements made during this call, including our outlook guidance expected company performance and timing of expansion projects may constitute forward looking statements within the meaning of federal Securities laws. Please note. The cautionary language about forward looking statements contained in our press release and earnings presentation that same language applies to this call.
Please also note that some of our comments today refer to non-GAAP financial measures a reconciliation to GAAP financial measures can be found in our earnings release and the appendix of the slides and now I'll turn the call over to cat.
Thanks, Meredith and thank you all for joining us today.
On today's call I will highlight our second quarter results and achievements.
Scott will provide more details on our financial results outlook and balance sheet and capital allocation.
I'll then close our prepared remarks with an update on our operating model and strategic growth projects aimed at further strengthening strengthening our long term financial performance and sustainable competitive advantages.
Albemarle has leadership positions in lithium and bromine coupled with our team's ability to execute through the current inflationary environment led to another quarter of strong results.
In the second quarter, we generated net sales of $1.5 billion nearly double the prior year.
Second quarter adjusted EBITDA of $610 million was over three times the prior year, continuing the trend of EBITDA significantly outpacing sales growth.
The supply demand balances remain tight in the markets we serve.
Strong market prices and our continued success in contract renegotiation drove the tremendous strength, we are experiencing in our lithium business.
As a result, we are again, raising our 2022 outlook and now expect to be free cash flow positive for the year.
Scott will review the key elements of that outlook later on in the call.
We are also successfully executing our growth strategy our COO.
Martin one lithium conversion plant in Western Australia achieved first product in July .
Want to especially congratulate our teams in western Australia for their hard work and dedication in achieving this goal.
And lastly, we made a major announcement regarding plans to build an integrated lithium mega site in the United States.
This will support our western expansion and the development of the battery materials supply chain in North America.
Now I'll turn the call over to Scott to walk through our financials.
Thanks, Ken and good morning, everyone I'll begin on slide five.
During the quarter, we generated net sales of approximately $1.5 billion a year over year increase of 91%.
This is due primarily to increased momentum and our pricing efforts as well as higher volumes driven by strong demand across our diverse end markets.
Especially for our lithium and bromine businesses.
We saw volumes and pricing grow in all three of our businesses.
For the second quarter net income attributable to Albemarle was $407 million compared to $425 million in the prior year.
As a reminder, the year ago quarterly results included a one time benefit of $332 million related to the sale of fine chemistry services.
EPS for the second quarter was $3.46 a year over year improvement of 300%, excluding the onetime benefit of the F. C S sale.
This overall performance was driven by strong net sales and margin improvement, partially offset by the ongoing inflationary pressures we were feeling across all three businesses.
Turning to slide six.
Second quarter, adjusted EBITDA was $610 million up 214% year over year.
The primary driver of the strong growth was higher lithium EBITDA.
Lithium was up nearly $400 million compared to the prior year driven by momentum in our contracting efforts and overall higher market prices.
That's an increase of 350%.
In fact, lithium second quarter EBITDA was greater than the EBITDA generated in the full year of 2021.
Bromine was also favorable year over year up nearly 50%, reflecting higher pricing driven by tight market conditions and an uptick in volumes.
Partially offset by raw material and for.
Rate inflation.
Catalysts was negative in the quarter as higher sales volumes and pricing were more than offset by cost pressures, particularly for natural gas in Europe and raw materials.
And finally, we also experienced an overall FX headwind of $14 million for the total company.
Moving to slide seven.
We are further increasing our 2022 outlook from our last announcement in late May primarily to reflect the expected continued strength in execution in our lithium business and further improvements in bromine.
We now expect 2022 total company net sales to be in the range of seven $1 billion to $7.5 billion up about 115% to 125% versus last year.
Adjusted EBITDA is expected to be between 3.2, and $3 $5 billion, reflecting a year over year improvement of up to 300%.
This implies EBITDA margins are expected to improve significantly to a range of 45% to 47% for the total company.
Together this translates to updated 2022, adjusted EPS guidance in the range of $19.25.
The $22.25.
That was about.
Five times more than 2021.
Additionally, we are increasing our net cash from operations guidance to a range of 1.4 to $1 $7 billion.
Driven by our updated sales and margin expectations.
We are maintaining guidance for capital expenditures of 1.3 to $1 $5 billion as we drive our lithium investments forward to meet increased customer demand.
Together, the midpoint of our guidance implies approximately $150 million in positive free cash flow for the full year.
And further if you assume our realized pricing remains relatively flat next year, we expect to continue to generate positive free cash flow in 2023, even with continued growth investments.
Security of supply remains the number one priority for our customers and we are continue to partner and work closely with them. We are pushing hard to meet those accelerating customer growth requirements.
Regarding the quarterly progression of sales and EBITDA on our last call. We indicated that we expect results to be relatively evenly split among quarters.
Given the underlying strength across our portfolio and continued momentum in our contracting efforts. We now expect second half adjusted EBITDA to be roughly 120% higher relative to the first half.
Turning to the next slide for more detail on our outlook by segment.
Our lithium businesses full year 2022, EBITDA is expected to be up more than 500% year over year.
Up from the previous outlook for growth of approximately 300%.
The improved outlook reflects renegotiations of pricing on legacy fixed price contracts and continued strong market pricing flowing through our indexed referenced variable price contracts.
We now expect our average realized selling price to be up more than 225% to 250% year over year.
This is the result of our successful efforts to renegotiate legacy contracts and implement more index referenced variable price contracts as well as a significant increase in index prices.
From the beginning of the year to today indices are up 60% to 130%.
And note that our outlook assumes Albemarle as expected Q3 realized selling price remains constant into the fourth quarter.
There's no change to our lithium volume outlook for the year, we continue to expect year over year volume growth in the range of 20% to 30% as we bring on new conversion assets plus some additional tolling.
There is potential upside to our outlook if market prices remain near current levels or with additional contract renegotiations or additional tolling volumes and.
And Conversely, there is potential downside with material declines in market pricing or volume shortfalls.
Okay.
For bromine, we are also raising our full year 2022, EBITDA expectations with year over year improvement in the range of 25% to 30% compared to the prior outlook of 15% to 20%.
This revised guidance reflects continued strong demand and pricing from end markets, such as fire safety solutions and oilfield services, plus other macro trends such as digitalization and electrification.
We expect higher volumes of 5% to 10% following our successful execution of growth projects last year.
For catalyst full year 2022, EBITDA is expected to be down 25% to 65% year over year. This is below our prior outlook due to significant cost pressures primarily related to natural gas in Europe , certain raw materials as well as freight.
Partially offset by higher sales volumes and pricing.
The large outlook range for catalyst reflects increased volatility and a lack of visibility, particularly related to the war in Ukraine.
Given the extraordinary circumstances, and the resulting changes in oil and gas markets. The business continues to aggressively seek cost pass throughs, particularly for higher natural gas costs.
The strategic review of the catalyst business is ongoing but it is taking longer than we anticipated as soon as we have any news we will provide an update.
Turning to slide nine for an update on our lithium pricing and contracts.
This slide reflects the expected split of our 2022 lithium revenues.
Battery grade revenues are now expected to make up approximately 85% compared to 70% to 80% in our prior guidance due to successful contract negotiations and higher market indices.
Of the total battery grade revenues, 15% is expected to be from short term spot purchase orders.
65% is expected to be from index referenced variable price contracts.
<unk> on these contracts generally reset with a three month lag.
And a number of these contracts do have floors and ceilings in place.
The remaining 20% comes from legacy fixed contracts with price re openers normally every six or 12 months.
And since we last updated the outlook in late May we are successfully repriced a portion of these contracts to better reflect the current market price environment.
This segmented approach to contracting gives more flexibility for our customers, while allowing albemarle to preserve upside and ensure returns on our growth investments.
Our operations and project teams are also delivering volumetric growth.
Slide 10 shows the expected lithium sales volumes, including technical grade spodumene and tolling sales.
In 2022 we expect volumes to improve 20% to 30% year over year. This growth is largely driven by our expansions at la Negra and Kemmerer 10, the acquisition of Kindjal as well as some additional tolling volumes.
Looking forward, we expect volumes to grow approximately 20% per year from 2022 to 'twenty 'twenty five driven primarily by the ramp up of new conversion assets.
We see room for further upside from additional conversion assets, such as our Greenfield and may Sean or additional tolling volumes.
Turning to slide 11, our strong net cash from operations and solid balance sheet give us ample financial flexibility to execute our growth strategy.
Our balance sheet is in great shape with $931 million of cash and available liquidity of $2 $6 billion.
Current net debt to adjusted EBITDA is approximately 1.7 times.
With rising EBITDA from higher pricing and volumes, we expect leverage to trend lower in the near term. This will this gives us plenty of capacity to accelerate our growth investments are value, creating M&A.
During the second quarter, we extended our debt maturity profile through a public offering of senior notes.
Proceeds totaled approximately $1.7 billion, a portion of which was used to redeem senior notes maturing in 2024.
92% of our debt position is at a fixed rate, which buffers us against the impacts of the rising interest rate environment.
Before I turn the call back over to Ken I wanted to briefly review, our capital allocation priorities and our ability to adapt to market changes, while building durable capacities to support growth.
Our capital allocation priorities are unchanged, we remain committed to strategically grow our lithium and bromine capacity in a disciplined manner.
Capacity growth will also be supported inorganically by continuously assessing our portfolio and pursuing bolt on acquisitions at attractive returns to strengthen our top tier resource base.
A perfect example of this strategy is the $200 million Jocks acquisition that is expected to close in the second half of the year.
Maintaining financial flexibility and shareholder returns are also key capital allocation priorities, we remain committed to maintaining an investment grade rating and a strong balance sheet provides significant optionality to fund future growth.
Finally, we also plan to continue to support our dividend.
We are laser focused on the durability of our business the management team and the board regularly review our capital allocation priorities and have identified levers, we can pull to quickly adapt to changing market conditions if needed.
These include slowing non growth capex, reducing discretionary spending and hiring.
Shifting production volumes to highest demand markets and accelerating partnering and tolling arrangements to support cash generation.
Additionally, a downturn may allow us to take advantage of lower priced acquisitions capitalizing on the strength of our balance sheet.
In summary, we believe Albemarle has the ability to maintain a focus on growth through all market conditions is strong thanks to our operating model that Kent is going to discuss next.
Thanks, Scott So, let's turn to slide 13 to discuss our cost structure and how we are managing inflation.
Our vertical integration and access to low cost resources for lithium and bromine allow us to avoid the worst impacts of inflation and control our cost strict structure. For example, while approximately 45% of our costs come from raw materials and services actually 20% of those costs relate to our owned spodumene.
<unk>.
The implementation of our operating model the Albemarle way of excellence is also helping manage cost.
In 2020, we identified our supply chain is a key area for improvement.
At that time, we reorganized to form a global supply chain function and implemented a new enhanced procurement strategy.
That team's efforts are now paying dividends.
Last year, our procurement team set a target to achieve $90 million in value creation by 2022 year end.
We are on track to meet or exceed that target by about 40%.
About half is from cost savings with lower year over year cost and about half is from cost avoidance, where procurement efficiencies have allowed us to realize below market increases.
An example of cost savings include logistics efficiencies minimizing material handling maximizing equipment capacity and shortening whole routes.
Cost avoidance includes using fewer suppliers and pooling buying for key raw materials and services to offset inflation.
In other cases, we've shortened supply chains to improve resilience and reduce total cost.
This success is driven by diverse teams, including supply chain procurement and production scheduling.
Thanks to everyone across the enterprise and around the globe.
It took commitment from every individual to make this happen.
Our operating model is also focused on building the structure capabilities disciplined and design approach to enable faster capacity growth.
As a leading lithium producer Albemarle is investing in lithium production around the world, including China, Australia and the Americas.
This year, we plan to deliver projects that more than double our annual capacity from 85000 tons to 200000 tons by year end.
We are also progressing a portfolio of projects that can grow our convergent capacity to as much as 500000 tons per year on a 100% basis.
As you can see the near term projects are largely in the Asia Pacific region.
Longer term, we expect to transition to a more localized supply chain in North America and Europe .
Turning to slide 15, our capacity additions in Australia, and Asia significantly enhance our ability to leverage our low cost resource base.
In terms of lithium conversion capacity.
We've made progress on our regulatory approvals for the acquisition of the Chin Zoe conversion facility.
We continue to expect that acquisition to close in the second half of 2022.
In the meantime, we continue to toll spodumene through this facility.
As I mentioned earlier Kim written one has achieved first product.
This important milestone signifies that the manufacturing processes and equipment can meet the projects design objectives.
Our focus now is on qualifying our product with our customers.
At our China Greenfield expansions construction of a 50000 ton per year lithium hydroxide conversion plant. It may Shawn is well underway.
Importantly, with our ownership stakes at the Wad dinner and Green bushes lithium mines, we already have access to low cost spodumene to feed these conversion facilities.
The restart of the wasn't a lithium mine by our JV partner mineral resources is going well, we continue to negotiate agreements to expand and restructure the marble joint venture and we'll update you when we have more information.
Okay.
We also have a 49% stake at Green bushes, one of the best lithium resources in the world.
The Towson joint venture is ramping up chemical grade plant two or C. G. P. Two and has approved construction of C. G. P three which has broken ground.
Our intention is to ramp up lithium resources in advance of conversion assets in which case in the near term we could be net long spodumene.
If that's the case, we will elect a toll spodumene ore sales spodumene into the market.
If it's economical to do so and if it allows us to bridge until new convergent assets ramp up.
Albemarle is the leading gloating global lithium producer with a significant U S presence and access to some of the world's best resources.
As such we are well positioned to established world class production of battery grade lithium that enables the localization of the battery supply chain in North America.
This would offer important benefits to U S based automotive Oems seeking a derisked local supply chain more reliable logistics and a reduced carbon footprint.
We plan to leverage our Kings Mountain lithium mine, a top tier resource and build a multi train convergence site in the southeast.
This site would be capable of handling mineral resources from Kings mountain as well as recycled feedstock.
Mega Flex site with leverage Albemarle is best in class Knowhow to design build and commission, both resource and conversion assets.
This creates significant competitive advantages for Albemarle and its customers. While also addressing the need for localized lithium supply to support growing demand in North America.
Yes.
In closing on slide 17.
We expect to achieve significant growth milestones. This year, thanks to strong end market demand as well as actions that we've taken.
To invest in profitable growth for lithium and bromine those investments are now paying off as we wrap up volumetric growth.
To maintain our financial flexibility to fund growth through cash and our balance sheet.
And to leverage our operating model to manage cost and execute our growth projects.
So this concludes our prepared remarks.
Now I'll ask not here to open the question open the call for questions.
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Please note we will take one question and one follow up.
Our first question today comes from.
P J.
P. J. Please go ahead your line is open.
Yes, good morning.
Okay and your volume growth has been very impressive.
Can you discuss your key steps, you're taking at Kings Mountain in terms of building the Mega site, what environmental permits do you need or are you engaging with the community today and the same question on silver peak when you expand that what kind of production ramp up can you see.
Right. So the two sides of a slightly different scale and so kings mountain as significant site silver peak is smaller but still being spansion is important I mean that is the only kind of lithium sourced in the U S. Today.
But at Kings Mountain, we're early in that process. We are still in pre feasibility. So we've gotta do permitting but we have done a lot of work already we've.
Don all of the drilling necessary when we continue to do some of the drilling to make it to understand the resorts at Kings Mountain, but we still got to do permitting we've engaged with the community we've been doing.
Community meet.
Meetings for.
Almost six months now maybe not quite six months early in the year.
We started that process with public meetings, we've opened an office in the town. So people can come in and ask questions. So we've really engaged with the community early on and we're working on the permitting processes that we have to go through but it's in a pre feasibility study.
We feel confident we'll be able to get there at kings mountain, but theres, a theres a lot of work to do including all of the permitting.
Great and then.
You have a strong balance sheet.
It will be free cash flow positive. This year, you talked about M&A can you give us some idea of what you would potentially be looking at would you look at technologies like DLA or what geographies would you look at thank you.
Yeah, well I think it's what we've really always talked about from an M&A standpoint. So we see conversion assets that we think are attractive. So we would do that consider that as a bolt on technologies that we'd see technology to help us sell direct lithium extraction could be could be part of that and then resources. So we.
Can you I mean, we are good on resources.
Pretty close to the end of the decade, but we need to be planning now to build out our resource base past that so I think those are the three primary categories.
Thank you.
Thank you. Our next question comes from Christopher Parkinson of Mizuho. Please go ahead. Your line is open.
Great. Thank you so much for taking my question just turning to slide 18.
The third and the fourth point.
Can you just give us a quick update in terms of.
The contract renegotiation on the additional polling.
The former.
What percent.
Still up for renewal.
That essentially giving you the momentum to raise guidance twice.
You know in the last quarter nine or so just any color you could offer and that would be very helpful. Thank you.
Glen.
Chris It's Eric here so.
What we've been able to do just to recap this year as we've been able to renegotiate contracts that have opportunities for re openers or with customers who are seeking additional volume commitments in the out years and in order to and entertain those discussions we will open up have been able to ask for higher prices on legacy contracts.
We don't have any contracts that are expiring anytime soon.
Most of our book of business as it is committed were very tight and the next year or two is as we anticipate bringing on new capacity from some of the projects Kent described.
But that doesn't mean, we won't have opportunity there might be still some contracts that that shift the big thing that's happened in the past year has been the movement to nearly having two thirds under our index.
Index referenced variable price, whereas before most of that was fixed now our movement is going to be very much driven by market prices and some potential changes on the margins, but a few contracts or potentially if prices remain where they are some resets on some of the fixed price contracts.
Got it and just a quick follow up you've also seen Oems make a very conscientious effort in <unk> been a little bit more decisive and attempting to lock in the incremental supply through let's say the middle and the balance of the of the decade. I mean has that been fully reflected in your negotiations in terms of just what you're willing to commit to them.
And you know as we progress over the next year or two as you know it seems like there is still a bit of a bottleneck in terms of the Oems versus what's available in lithium in terms of.
Battery grade hydroxide.
What else you are willing you willing to do to help facilitate their growth plans and how should we think about that just from a broader market perspective, you versus some of your peers. Thank you.
Well I look where we're working with our customers and we are being very aggressive about adding capacity I think you see that in our investment plans and theyre coming through now and we get better at that so the period when those come on we're able to we believe we are able to execute better from a conversion. We're good on resource for a number of years, but we still need to.
Add that and we work with our customers to do kind of unique arrangement, we're having conversations when those with our customers about those but they have to work for us and we're working towards some arrangements like that.
May or may not come to pass.
I can't say that because those are conversations and discussions that we're having but we're in those discussions and but but we're committed to build capacity to serve the customer base over the long term.
Yeah, I think what's also unique Chris just to add is that our we were speaking with Oems and battery companies on three different continents.
In the out years, you saw one of the charts, where we are.
Looking towards Europe . So that's the furthest out where we are established well now is in Asia, and where we've announced now next we're ahead. It is North America and you've got the resource base as Ken described to be able to do that so between that localization, which is very important to these Oems and battery producers.
The the sustainability and what principles in which we operate and then some of the new technology areas were focused in for next generation technology partnerships with Stryker Gonna look are gonna be it fall one of those dimensions and we're not in a position where we need to raise capital. So we can look at and have been discussing with.
Our producers.
Oems Upfronts and potentially all forms of investment, but that is not a requirement for us. We don't we don't need that capital. It would only be something we would do as part of a broader deal to advance our strategic agenda and help our customers win in the market.
Very helpful. Thank you.
Thank you and our next question comes from David Begleiter of Deutsche Bank. David. Please go ahead. Your line is open.
Thank you good morning, a question for Eric Eric just on your slide nine.
Can you talk to the different pricing between the index reference contract and spot prices in Q2 and that will compare versus Q1.
I'm sorry, David make sure I understand your question, you're wondering how they compare now the prices versus Bakken in Q2.
The price different <unk> index reference in spot prices and.
In Q2 versus the differential in Q1.
Oh, Okay, I'm, sorry, we don't give out enough detail to disclose that but I will say that you know that spot prices you would know by looking indices are are they vary but currently in the low sixty's and in China. There are actually some of the some contracting outside of China or even higher now at $70. We are not there yet.
On our index pricing, which is one of the reasons. Our guidance is if prices stay where they are we could continue to have a rising mix increase in our variable based contracts.
Understood and just on the southeast project have you given out any cost or timing indications of that project.
David we have not given out any costs yet since it's really in pre feed pre feasibility so timing wise, it's going to be later in the decade, when that would that would come on come online clearly it needs to have a feedstock.
With the mine and that's probably the long pole in the tent.
Understood. Thank you very much.
Thank you and the next question guys, Hey, Josh Spector of UBS. Josh. Please go ahead. Your line is open.
Yeah, Hey, guys. This is James on for Josh.
Just wondering why it seems like the sale of the <unk>.
Sales dropped through to EBITDA in this earnings upgrade is much higher than the last update through the year.
Can you give any color as to why that is and similarly on Fcs.
Anything in the underlying business change to improve that.
Yeah, James I think that the big difference is that this upgrade has been purely driven by price so you're seeing that drop through and we're not seeing the same impact from spodumene.
Which was.
A drag so the spodumene price increases was a drag on our earnings in the last.
The last guidance.
As you look at free cash flow, we continue to see improvements there driven by the the growth in EBITDA.
And we are because of some of the tolling efforts that we're doing we're actually absorbing some of the inventory that we didn't have before so seeing a better working capital profile as a result.
Okay, great. Thank you.
Yeah.
Thanks.
Thank you and our next question does your colon ratio of open Hi, Matt Colin. Please go ahead. Your line is open.
Thanks, so much.
Talk a little bit about the ramp up in Kemper tenant any surprises are saying at this point and concerns around labor or any equipment.
Youre concerned about.
We start moving forward.
Okay.
Yeah. So I mean look we're we've just we made first product.
Last month.
And we're just starting to ramp up so I think the key thing for us when we were able to make product.
We are comfortable with the quality it means that our process chemistry is right that were so there no surprises really around.
Uh huh.
Core process chemistry around that so that was a big milestone that's kind of the first big hurdle that you want to clear and then now it's just getting to everything run at scale and get purity.
Up to the two.
Two our specification so as you kind of run in a new plant.
Tenuously C that the spec on battery grade materials very high and so it just takes a little bit of time to get to that and it takes volume to do that so it's just about ramping up we feel very good about the process chemistry and that we that the plant will be a good operating plan. It's just that when you're a little bit of time to ramp it up and get to those of the purity.
We need and then we have to go through the qualification process with our customers. So that's on the now that's on the first train second train is still on schedule.
We've indicated in the past and the learnings we had on train one we stumbled a bit on train one with the issues in getting it there. We think we we as we saw those we've rectified that for train two Ah Theres still labor issues in Western Australia, but I think we're through the worst of that because we're past most of the big construction elements.
But for now where we're in the commissioning on one and just finishing up construction on two Ah Theres still labor issues in the operating facility or to some degree, but that's kind of business as usual in western Australia I would say.
Thanks, So much and then on the North America potential expansion can you just talk about philosophically, how youre thinking about contracting that out is that you know something where you would think about taking in prepayments to lock in volumes and our customers.
How far down the road, arguing in terms of the thought process and the discussions on an offtake for that facility.
Well, where we're having discussions with people, but we're not I would say, we're not very far down the road.
We're not locked anything and we have some ideas around some unique models and and we're having conversations with people about that.
Thanks, so much.
Thank you and our next question go to Vincent Andrews of Morgan Stanley . Please go ahead. Your line is open.
Thank you and good morning, everyone.
Ken I think when you discuss the megaproject you indicated an ability to take recycled feedstock. So I just was curious.
One just where that Mega project how much of.
Contributor you thought that would be and whether your customers are telling you are indicating that you know obviously, maybe more in the out years and anytime soon that they would like to have some percentage of recycled feedstock in the mix of lithium that they procure.
Yeah. So I mean, it's a big part of the conversation and it's about recycling you know, creating a recycled look through that through the system. It is in the years out, but we have to design it in <unk>.
And so we think we can build the peso will build it in phases, but and that ultimately will operate will operate a recycled facility be lower volumes of time, but we will have time to ramp that up and really learn how to use that optimize that and that would kind of be out there.
So that we would learn off of as well. So it's it's part we're trying to think ahead and design that and design that into our facilities. So we get scale with the other operating facilities and had the benefit of having a an operating plant next door.
Thanks very much.
Yeah.
Thank you and the next question go to Kevin Mccarthy of vertical Research partners. Kevin. Please go ahead. Your line is open.
Hi, Good morning. This is Corey on for Kevin going back to slide nine with the contract breakdown in lithium.
I'm curious.
Versus last quarter, you you have more index referenced variable price contracts are at 65% versus 50% and the fixed contract pieces down to 20% from 30% of your battery grade revenues do you have a number in mind for how low you can go on in terms of having fixed contracts like are you trying to get.
Two all index referenced priced contracts.
Yeah. So I think I mean, we we've talked about this for a while and we've always said, we're not sure where this where this ends up as a little bit about how our customers want a contract and then the direction that we're trying to go so I mean, what you're what you're seeing in that it's just how the math is evolving. So we've had we've upgrade we've changed contract from those fixed but remember that.
Prices adjust over time, so they're not really fixed and we're trying to shorten up period that we as they adjust so I'm not I don't really want to call. The mix I mean, we had a one time said we thought it might be a third a third a third between those categories and it's turned out to be quite different we do want to have some on the spot category that gives us flexibility.
But I don't know.
Hard to say, where it where it goes we're not we're not necessarily absolutely driving it to that variable priced, but we kind of like that model, where its index referenced and variable and I think our customers are getting comfortable with it as well.
The other moving piece that as you look at the that chart between different presentation does of course, where the market indices are.
So that can drive some some mixed shift in those percentages as you go forward.
Got it and then I guess sticking with that slide are you know similar.
Similar question in terms of change quarter over quarter last quarter mentioned product offering this quarter mentioned partnership offering it in the context of <unk>.
One of your competitors, receiving a large upfront payment for future.
Capacities have you approached anybody about similar.
Front payments for future.
Lithium capacity or maybe you could talk to sort of the fault sorry philosophical approach to how you want to contract future volumes.
Yeah, well I think we we've migrated our philosophy around pricing contracting over time, and we've talked about that quite a bit not that's coming to fruition.
Our unique model, we've been having we've had discussions for years with people about prepayments and investment and things like that we've not done that yet.
It's not that we're opposed to it but it has to fit in our philosophy in and it has to work for us and that and it was probably more relevant in a few years ago. When we needed more cash for our investments at school, it's less important for us today, but we're still open for those investment, but we consider them strategic as part of our relationship and not just because we.
Need the cash.
Mr. <unk>. Thank you.
Thank you and the next question Alexia from off of Keybanc Capital markets. Please go ahead. Your line is open.
Thank you and good morning, everyone.
Have you refined the lithium contracts.
What's your philosophy towards the floor and the ceiling and those contracts are you widening that range are you narrowing it kind of staying the same versus what you held in general last year.
Yeah, well I would.
Philosophy, but they are widening and going up.
So there.
It is a step.
Definitely not narrowing so widening and Theyre moving up I guess, that's our philosophy.
I guess.
I shouldn't assume that the floor is also moving up is it fair.
Absolutely.
And the follow up question was is the restart contributing.
Meaningful way to your second half results this year or is it mostly a 2023 and thereafter story.
So they'll they'll probably be some volume coming through one tonight in the second half, but it's not I don't think it's material.
So that that will start impacting in 'twenty three.
Great. Thanks, a lot.
Thank you. Our next question comes from Joel Jackson.
So market Joe. Please go ahead your line is open.
Hi, Thanks, Good morning on Slide 10, you gave your volume guidance again per year, so you're guiding to something like 180000 tons or something else.
23 could you maybe risk adjust that how much of that incremental for next year is in the bag. How much maybe you have to work for a bit harder and kind of give the ranges of how you get up to that number.
So I think that I mean, if I understand your question from a volume standpoint, right. So there'll be it's ramping up at La Negra and Kim Martin and some tolling volumes. So it's we'll be producing a tolling from what <unk> and ramping up at the facilities at <unk>.
Allison.
Pretty much within our control so that you can put the risk color when you categorize each one of those but Oh, it's probably we don't have to do anything extraordinary to get that we have the plants that we built and now starting up have to run and produce at volume and then we just continue to ramp.
But negra and we're going to have some toll volume to handle some of the ones in a product before we're able to build conversion so that that might be.
But the told US we're using we use before its new product for them. So there's a little bit of risk in that but not it's not extraordinary.
And Ken I would just add the other component is just the jinzhou acquisition. So we still have to close that so it's progressing well but.
Again, the potential risk that that just doesn't close yeah. No. That's right. So that's the that's probably the bigger that's probably the bigger risk in it.
Yeah.
Okay. Then my second question would be you know the D. O E seems to be throwing around a lot of money to battery metals to a lot of smaller companies. These days grant and loan and things like that you could probably qualify for a bunch of this money, it's not a massive amount of money from where you guys sit but it's probably a nice little kicker can you talk about that.
Yeah, I mean look at it it's money that's available strategically it fits in right and we're working on that so nothing that we can nothing we can announce today, but we're working on it.
Thank you.
Yeah.
Yeah.
Thank you. The next question guys see Steve Richardson of Evercore. Steve. Please go ahead. Your line is open.
Yeah.
Hello, Hi, this is Sean on for Steve.
Just in terms of just returning back to Raj and I can watch in production can you just please walk through.
How the volumes are flowing through there and then also in terms of green bushes and the Cogs.
Cogs and the costs are.
<unk> Mato ranked at the year.
So, let's just I mean, why do not I mean, why do you know where we're running we're watching AR today, we're ramping up but we will and will eventually told that we'll pull that volume until we get plants on that.
We can.
Process through that Kim written is just it's a matter of ramping we've and we've kind of we've said historically, we bring our plant on and we kind of our planning as we give it two years to ramp to full capacity now we would hope to beat that but that's kind of what we built and that's what we built into our planning processes.
And the other was about Palisson, so that Oh, that's that's the expansion CGP to his operating and CGP three which is the next one is we broken ground on that so well.
We're ramping up.
C. G. B two were commissioning and ramping up and we've just broken ground on C. G. P. Three I think that's the right. That's correct. That's Greg CGP trade would come on it would be available on several years and it would support some of the capacity expansions that are in one of our charts to talk about.
Further China expansion and compression three four and then and then and then of course as you already pointed out Kent the marble joint venture some of those China plants.
At least one would be a part of the joint venture.
Potentially it would take that material.
Okay. Thank you.
Thank you and our next question David that coupon of Cowen David. Please go ahead. Your line is open.
Yeah.
Thank you thanks for taking my questions today.
Yeah.
Can I just wanted to follow up on the conversation around the the Mega Flex site and I believe the target was 100000 tonnes per annum of conversion capacity.
I just wanted to confirm whether you all felt that kings mountain and recycled feedstock would be enough to speed up to that capacity as a resource eventually.
It sounded like earlier, perhaps Eric was discussing perhaps another need for another asset to support that.
Yes, I mean, I I'm thinking and again its pre feasibility and there's still we're trying to make sure we understand exactly the resource at Kings Mountain. So we're doing more work on that but we think that we could we could feed.
That megaplex facility with Kings Mountain plus resigned ultimately at steady state with recycled material.
That they get to the scale that you're that you referenced 100000 tons a year.
Okay.
And then I just want to follow up earlier on some of the conversations around upside volumes.
It looks like in the current chart that you all are.
Sort of are still assuming this 10 to 20000 tonnes per annum of told volumes.
Which is I guess basically the levels that you're at in 2022.
How significant.
Or how much available capacity is out there that you could theoretically toll into cars.
Because I guess there is also the strategy of selling spot spodumene into the market, which seems like a a pivot from from sort of previous Skus that you all had but just wondering volume metrically how much how much capacity upside do you think that there is in the market.
Well, so I'll, let Eric talk about the tolling, but just on the spodumene I mean look we're just being a little more flexible that's a bridging strategy that we've not changed strategy long term about selling spodumene, we want to convert and so to our end customers the products that they use.
The lithium salts, so, but if we have if we ramp up plant you can't do all of this perfectly right between conversion in the mine and we've decided to push the resources in advance of the minds because they have longer lead times, typically and we get them up and operating in that we've got resources available before we have conversion capacity will either toll it or.
We will sell spodumene, rather than let it can sit on the ground.
Okay. So that's the answer to the question here.
From a strategy.
Good.
That's right Yeah, there's no deviation from this strategy as to your question about.
The availability of tolling volume, there's still a healthy market of conversion capacity being built or operating in China without available spodumene to source against that so.
It varies by year and China is in a lot of these projects it can be opaque sometimes to get the exact numbers, it's a big market.
But it can be sometimes 60% to 70% utilized so that implies that there is capacity out there in fact, we know that through our totally network, that's available or coming on.
So that we can take advantage of but that is a bridging strategy to our own conversion assets and and one which would prefer to do as opposed to selling spodumene directly into the market.
Okay.
Thanks, Eric Thanks, Kevin.
Thank you. Our next question comes from Aaron.
<unk> of RBC capital markets. Please go ahead your line is open.
Yeah.
Great. Thanks for taking my question.
Yes, I guess I just wanted to ask a more high level question. So you noted that obviously your contracts have.
Your your results or guidance has some upside if market prices stay where they are.
But also some downside if if we do receive from these present levels. So what would it take for the market to kind of go back to prior.
Prior levels, obviously 60 to $70 60 $70.
<unk> is is a new normal so is it really a new normal do we ever go back down into the the the lower twenties or our 13th or 14th you know.
There have been any demand destruction or changes to the adoption curves that you've been observing especially as the cost of lithium rises in the in the battery and in the vehicle.
Okay.
So that I mean look we're not going to call. It a long term price because we don't we don't know that and and I think it will move up and down it is not going to just go it's not going to sit where it is forever, that's probably pretty confident in saying that it.
It will move around over time, but we see we see the market being tight on lithium for pretty long period of time, and then there might be periods like periods of oversupply.
And that we see that several a number of years out, but then that disappears pretty quickly so.
So we model that I'm sure all of you guys model that everybody has their own opinion on it but.
Prices are going to move they're going to move around and we're not we can't call. It we do know that the the cost to produce to get to the volumes the market needs goes up quite a bit from what we see the cost curve today out over time could it move into the Twenty's and Thirty's at some point.
Absolutely could.
But we still we see the market being tight for a pretty long period of time.
Great and then.
And I'd just add on your question on that.
Mhm, sorry got it.
You had another question that had to do with cost in the vehicle and technology.
I mean as you know lithium is a is a small part of the cost of the battery, but it has seen a significant as you pointed out escalation and its costs over the past year I think the other phenomenon. That's important to note is the technology phenomenon phenomenon around innovation and driving out.
But longer range of energy density and penetration doesn't come from lower cost raw materials that comes from innovation and energy density and more dense materials. That's the movement towards higher nickel, that's moving towards more elaborate chemistries on the anode side and maybe potentially someday solid state. So those those innovations are well and continue down that that experience curve.
Not notwithstanding the price of lithium which again, it's a fairly small part of the cost of the battery.
Yeah.
Okay. That's helpful. And then maybe if I could just elaborate on that stat earlier, what you said you.
The cost curve now I guess are you seeing most of the additions at the upper end of the cost curve outside of yourselves and you know what would you kind of say is is kind of a good range to think of us as.
As the cost curve, maybe the upper end.
Should we just take kind of spot spodumene prices and use that and convert that into battery grade or how should we think about where the scrap where the cost curve has moved to now.
Well I think well what were thinking and we think about it as a longer term to get to the volumes the market needs over time, so new capacity coming on and some of that is kind of is about the quality of the resource where it is the technology that you need or even to develop in order to bring that to market. So.
We don't publish what we our view of the cost curve. So we're not I'm not going to talk about those particular numbers, but I think from our view, it's moved up over the last several years and as the market requires more and more volume it will continue to move up.
Okay. Thanks.
Thank you and the next question.
Alexander of Jefferies. Please go ahead your line is open.
Hello, Good morning, how much could you flex the tolling.
Side of the business.
No the margin significantly different from your segment average.
And secondly.
As you look at the opportunities around recycling is there any incentive to shift here center gravity downstream into more the processing.
You are the way to integrate your knowledge of the chemistry with the downstream processing.
And capture more margin that way.
Yes, so first of all Lawrence on the tolling I would say were.
We're evaluating that now there is as per the earlier question. There is capacity in the marketplace and we will have spodumene coming from MRI out are they marble joint venture and our partner with M. R. L and we can put into the market. So.
It could flex upwards from from the guidance that we have here that that that is possible or margins are slightly less because you're paying up a several dollars a kilogram so to see over what our normal cost would be.
But but I would say at current pricing.
That's fairly immaterial in the scheme of things.
And then your second question Lawrence was around recycling going downstream and I think we are looking at this now that we believe if you look at what it takes to process black mask to various mineral components and many of the unit operation in fact, more and believe we know that many of the unit operations are very similar to what we do throughout our company and certainly in <unk>.
Hum many of the technologies are practiced in our existing operations to process mineral resource and mineral resources, we do and so other than just that last step processing to battery grade lithium we're evaluating just how we partner invest and develop that supply chain, which will be a regional effort.
From from region to region, because it's very regionalized business recycling is so we're in that and well as we develop that strategy. Further we'll obviously share more details of that in the future.
Thank you.
Thank you that is all the questions. We have time for today I will now hand back to <unk> for.
For any closing remarks.
Okay. Thank you Nadia and thank you all for participation on our call today.
The momentum we were experiencing in 'twenty to combine with our pipeline of projects.
<unk> positions us to execute on profitable and sustainable growth for the longer term.
I'm confident in our team's ability to drive value for all stakeholders by accelerating our growth in a sustainable way and to lead by example.
You for joining us.
Thank you that concludes today's call. Thank you all for joining you may now disconnect your lines.
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