Q4 2022 Livent Corp Earnings Call
Please standby we're about to begin.
Good afternoon, everyone and welcome to the fourth quarter of 2022 earnings release Conference call for <unk> Corporation.
Lines will be placed on listen only mode throughout the conference. After the Speakers' presentation. There will be a question and answer period I would now turn the conference over to Mr. Daniel Rosen Investor Relations and strategy provided Corporation. Mr. <unk> you may begin.
Thank you Bob good.
The evening, everyone and welcome to <unk> fourth quarter and full year 2022 earnings call. Joining me today are Paul Graves, President and Chief Executive Officer, and Roberto Antonio IV, Chief Financial Officer.
The slide presentation that accompanies our results along with our earnings release can be found in the Investor Relations section of our website.
Prepared remarks from today's discussion will be made available after the call.
Following our prepared remarks, Cogs, Rebecca 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 per caller, we'd be happy to address any additional questions. After the call.
Before we begin let me remind you that today's discussion will include forward looking statements that are subject to various risks and uncertainties concerning specific factors, including but not limited to those factors identified in our lease and in our filings with the Securities and Exchange Commission.
Information presented represents our best judgment based on today's information.
Actual results May vary based upon these risks and uncertainties.
Today's discussion will include references to various non-GAAP financial metrics.
In addition to these terms as well as a reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP are provided on our Investor Relations website.
And with that I'll turn the call over to Paul.
Thank you Dan and good evening everyone.
<unk> continued its strong performance in the fourth quarter and finished the full year 2022 with record financial results.
Adjusted EBITDA of $306 million to $7 million in 2022 was over five times higher than in 2021.
This significant improvement was the result of higher average realized prices across all of our lithium products.
We expect to generate higher profitability in 2023 as we build on this performance. This was driven by further increases in average realized prices across our portfolio of lithium products as well as higher sales volumes with the first phase of our Argentina expansion coming online during the year.
We are expecting roughly 20% higher sales volumes in 2023, starting in the second half of the year.
This translates to an adjusted EBITDA guidance range of $510 million to $582 million.
50% year over year increase at the midpoint.
We expect further enhancements to license revenue growth profitability and cash flow as we bring additional volumes online in 2024 and in the following years.
Before I get into more detail regarding 2023, and other focus areas I'll turn the call over to Joe <unk> to discuss our fourth quarter and full year 2022 performance as well as our announced 2023 financial guidance.
Thanks, Paul and good evening everyone.
Turning to slide four.
<unk> reported fourth quarter revenue of $219 million adjusted EBITDA of $108 million and adjusted earnings of <unk> 40 per diluted share.
While up considerably versus the same quarter in 2021 results were roughly flat versus the third quarter.
As highlighted in our last earnings call a larger portion of sales were delivered to customers on the older contracts with price set a lower fixed prices.
Resulting in a negative mix impact.
For the full year 2022, we reported revenue of $830 million.
EBITDA of $367 million.
$1 40 of adjusted earnings per diluted share all.
All records for the company.
Revenue was up 93% versus the prior year.
Higher average realized prices across all leach and products more than offset slightly lower volumes sold versus 2021.
The volume differential was primarily driven by lower lithium chloride sales as well as the building of inventory to support the startup of our new carbonate and hydroxide production units in 2023.
Adjusted EBITDA, which came in at the upper end of our guidance range was over five times higher year over year.
Higher average realized prices easily offset an increase in operating costs.
While pricing was higher across all full suite of lithium products. The improvements were most notable in there.
Im contracted portion of our lithium hydroxide and carbonate volumes.
The pricing benefit that was also a notable butyl lithium and high purity metal businesses, where were successfully shifted from annual to monthly price setting arrangements with most of our customers.
Our beauty lithium business grew to roughly one third of our total revenue for the year.
It will continue to be an important and profitable business for the company.
<unk> total capital spending in 2022 was $327 million in.
In line with our guidance.
This was a step up from 2021, reflecting our progress from multiple expansion projects.
Our balance sheet and overall liquidity remains very strong.
We ended 2022 with $189 million in cash and no draw on our $500 million revolving credit facility.
This revolver was upsized by $100 million during 2022 and renewed for an additional five years through 2027.
The combination of our current cash position.
Our ability to draw on the credit facility and a strong outlook for cash generation from higher volumes and sustained pricing.
US continued confidence in our ability to internally fund our capacity expansions.
Let me now comment on our financial guidance for 2023 on slide five.
Well I don't expect another substantial improvement in financial performance driving record results in 2023.
For the full year lagging project revenues to be in the range of 1 billion to $1 1 billion.
And adjusted EBITDA to be 510 million to $580 million.
This represents growth of roughly 30% and 50% respectively.
Mid points versus 2022.
Our guidance is based on higher volumes sold and a higher average realized pricing across our portfolio of lithium products.
Partially offset by higher anticipated costs.
Yeah.
We further highlight some of these key drivers on slide six.
<unk> expects to sell 20% higher sales volumes were roughly 4000 metric tons on our LTE basis versus 2022.
This increase will largely be in the form of lithium hydroxide sales.
And is driven by our initial phases of expansion Camila lie.
Our first 10000 metric ton expansion of lithium carbonate in Argentina.
Is substantially complete and is in the process of starting up.
We expect commercial volumes from this expansion to be available for sale in the second half of 2023.
Incremental production this year will largely feed our new 5000 metric ton lithium hydroxide line invest in receipt of North Carolina.
Which was completed at the end of last year.
With this new unit library remains the largest producer of lithium hydroxide in United States with 15000 metric tons of domestic capacity.
And one of the few producing lithium hydroxide companies outside of China today.
We're also expecting meaningful pricing improvement in 2023.
Higher average realized prices across our portfolio of nature products.
Paul will go into more detail shortly on specific components related to our lead to projects and our customers.
However, it is important to emphasize that our guidance does not rely on an increase in the lithium market price from current levels as.
As we have said in the past.
Given the nature of license contracts, we expect to continue increase in our average realized price in 2023.
Wide range of market scenarios.
At the same time, we expect some higher costs in 2023.
Although not enough to offset further anticipated margin improvement.
The biggest drivers of higher cost our royalty payments in Argentina.
The cost incurred and commissioned a new production units.
And broad inflationary pressures.
For royalties the increase is due to a higher average expected vtsiom reference price.
Which royalties our base in 2023 versus the prior year.
And to be clear the underlying percentage paid for our royalty calculation has not changed and the reference price is based on an average export price out of Argentina and Chile.
For startup costs, there are inefficiencies that come with initial operating new plants.
At lower production rates.
And we would expect this impact to be temporary in nature.
We also continue to see higher costs for raw materials, such as soda ash.
For energy and for Labor.
In the same magnitude as experienced in 2022.
I want to conclude by providing 2023 guidance range for other financial metrics alignment.
Well I havent expect depreciation and amortization to be in the range of $46 million to $52 million.
This is a step up from 2022.
Due to the start of depreciating capital investment related to the new production as we bring it online.
We expect <unk> adjusted tax rate to be 16% to 19%.
This reflects our continued improvement as a result of our evolving business mix and adjustment to internal corporate structure cease being spun off as a standalone public company.
<unk> 2023 capital expenditure.
Are anticipated to be $325 million to $375 million.
Slightly higher than 2022.
And it will be supported by an adjusted cash from operations projecting the range of 362 $440 million.
I will now turn the call back to Paul to provide some additional context for our 'twenty three guidance and how we are positioned ourselves for the year ahead.
Yeah.
Thank you Gilberto on slide seven we want to provide a framework for how to think about license expectations or average realized prices in 2020.
As mentioned earlier, we are expecting roughly 4000 metric tons and LTE or additional sales.
Most of which will be in the form of lithium hydroxide.
You can see the roughly 70% of our volumes have fixed pricing terms that have already been set a 2023.
There are a number of customers that fall into this group some of which is still being supported under legacy contracts and others that were agreed to around the end of 2022 with pricing more reflective of current market conditions.
We've agreed to a set fixed price for each customer for all of 2023 and these are take or pay commitments, we have very high confidence regarding the roughly 40% average expected price increase across these volumes.
This allows us to strike a balance between locking in attractive prices for 2023, and retaining upside as we move through the year.
The clarity we have only one fixed volume contract in place today, where pricing is already set for 2024 with the rest of our volumes subject to either a price escalation or market based price structures.
Annual fixed prices continue to be preferred by a subset of our customers looking for cost predictability, particularly to manage their own budgeting processes. We approach each one independently and are willing to engage with our strategic customers to balance in both of our needs in these volatile and unpredictable price environments.
Therefore, if market prices continue to remain above our average realized price, we would expect that to be fair the pricing upside on these volumes next year.
The smaller remaining hydroxide and carbonate volumes roughly 20% of our expected LTE is the sale in 2023 under a few different variable pricing structures with adjustments typically made on a monthly basis.
It is in the variable pricing segment, where we maintain the greatest exposure to market prices.
We are expecting average realized prices for these volumes to be slightly up in 2023.
Largely due to the much lower price levels, we saw in Q1 last year, which dragged down our 2022 average realized price.
Given this and the fact that in Q4 market based pricing was a lower portion of our overall sales from prior quarters.
This group could still achieve higher average realized prices year over year for ligand, even if market prices pullback from current levels.
Additionally, while there's a lot of attention paid to movements in the China spot market. This is not reflective of the entire market as you can see when you study various export and import statistics for countries, such as Chile, Argentina, Japan and Korea.
Lastly, we will have variable pricing in our other specialty segment.
Which is largely comprised of our butyl lithium and high purity metal business.
But 2023 weapons that represents about 3000 metric tons of unexpected LTE, but as much as 30% to about total revenues.
We expect average realized pricing to be roughly flat in 2023 year over year for this group.
While these volumes are also exposed to monthly changes in pricing. It is largely structured as a pass through of changes in lithium metal input cost, meaning the operating margin is more stable than changes in revenue might suggest.
On slide eight I wanted to highlight what you can expect from <unk> in 2023.
First continued strong financial performance following a record year in 'twenty two.
Trying to see what was the first of an upcoming sequence of us that live on we will see the benefit of incremental production volumes as a result of multiple years of expansionary investments.
As Youll better mentioned, we're expecting a 50% increase in adjusted EBITDA in 2020.
At the midpoint of our guidance at a time, where a lot of investor focus is on the potential implications of a near term pullback in China spot prices increased.
Production at <unk> will continue in 2024 and the years to follow as we progress on our various expansion plans and will be a significant driver of future financial growth.
This will result in meaningfully higher cash flow generation for the company.
That is much more balanced around a wider range of pricing assumptions.
Secondly, we remain on schedule to deliver all of our announced capacity expansions, we expect to complete our second 10000 metric ton expansion of lithium carbonate in Argentina by the end of 2023 with first production from this expansion expected in early 2024.
As at year end 2023, we expect nameplate lithium carbonate capacity capacity to be double that of 2022 approaching 40000 metric tons.
Outside of Argentina, construction began on a 15000 metric ton lithium hydroxide facilitated a new location in the province of CGI in China first.
First commercial volumes from the expected 2024, and it will increase.
Total global lithium hydroxide capacity to 45000 metric tons.
Beyond 2020 for <unk> continues to progress engineering and evaluation work on additional planned carbonite expansion phases in Argentina as well as additional hydroxide expansions that include lower grade lithium recycling capabilities, we expect to share further details on all of these translate to this year.
Third.
Yes.
Licensed plans to release, our resources and reserve.
Recall at the end of this month without 10-K filing.
This will be license first published resources and reserves report, but it is supported by decades of historical operating data.
Paul will give investors stakeholders and other interested parties and ability to evaluate the size scale and cost structure of our offer.
Questions Thats allowed the Lombardy west as.
As well as how we can support our expense expansion plans in a sustainable manner.
Finally, we want to provide an update on the masco lithium a fully integrated lithium hydroxide project located in Quebec, Canada in which <unk> is a 50% owner.
Turning to slide nine we.
Provides a timeline with key milestones leading to commercial production of <unk> lithium.
Project is reaching the conclusion of its detailed engineering phase and you can expect a number of key updates in the first half of this year.
Feasibility study is being finalized and is expected to be published in the coming months.
It will demonstrate wildlife and remains as committed as ever to helping bring the project into production and widen the masco lithium will be critical to our future North American supply chain.
Shortly thereafter project construction is expected to formally begin although the team has already begun ordering important long lead equipment and is commencing on site preparations as we speak.
As part of the construction decision, Nebraska lithium will outline preliminary sources of financing, which are expected to be comprised of a number of attractive options.
The structure will likely include a combination of third party debt financing, including potential low cost government funding prepayments from customers and funding from domestic of lithium to current shareholders and invest them in Quebec.
<unk> continues to provide technical and commercial expertise to Nebraska, lithium and has been appointed to engage in sales and marketing efforts on its behalf.
We expect no masco lithium to announce its first customer commitments in the first half of 2023, including any project funding contributions from these customers.
With respect to timing, we expect the masco lithium to begin generating revenues in the first half of 2025 initial.
Initial sales are expected to be in the form of spodumene concentrate <unk> lithium will look to bring the <unk> mine and concentrator to online as quickly as feasible.
Which is anticipated to be before the end of 2024.
<unk> spodumene sales will be a temporary source of additional cash flow until the downstream hydroxide facility at Beck and call comes into production in Damascus lithium is operating as a fully integrated project.
We expect first hydroxide production by 2026 on a 34000 metric ton nameplate battery grade hydroxide facility.
Low cost Green hydroelectric energy.
Nebraska lithium continues to be a highly attractive project its strategic location to a strong interest from potential North American and European customers, who are becoming increasingly focused on localization is well positioned to take advantage of various government incentives in <unk>.
Reduction in the U S.
To promote domestic energy storage supply chains. Additionally, Nebraska lithium has a critical first mover advantage in the region, having already secured space at an industrial part being developed in backroom costs at a time when access to infrastructure and proximity to shipping ports are key challenges for many development projects.
I want to conclude on slide 10, with some commentary on market conditions.
Before turning to 2023 expectations and some of the short term data points. Many are focused on in China. We should take a step back can acknowledge that <unk> two was another exceptional year for lithium demand.
Broader electric vehicle supply chain.
For the full year 2022, global EV sales I believe to have exceeded 10 million units growing well over 50% versus 2021 within China EV sales are expected to have nearly doubled to roughly six 5 million vehicles on the battery side total global installations across all applications were up roughly 60%.
<unk> year over year.
Lithium demand remained very strong throughout 2022, it was a year with lithium prices steadily climbs higher on the back of a widening supply deficit.
Underscoring yet again, the challenges for battery grade supply to keep up with compounding demand growth.
And despite concerns of higher lithium prices potentially being demand destructive, but we have not seen any evidence of this to date in fact, despite facing higher input costs, we saw encouraging performance and commentary.
A number of leading EV battery producers in 'twenty two.
There is understandably a lot of focus on China today, given a number of combined near term factors, including the impact of moving away from zero Covid policies. The removal of subsidies that have previously been extended for a few years running and the first declines in spot prices after unprecedented ramp to levels well above what most people would consider rational.
While it will take some time to assess how things progress as we come out of this seasonally quiet period around Spring Festival, a few points I want to highlight.
While many have referenced substantial inventory builds within the EBIT supply chain. This is something that we simply have not seen to date, particularly upstream of the lithium consumer level.
Recent data from <unk> provides a clear example of this when looking at monthly China carbonate demand, which continues to grow as expected.
As the amount of downstream lithium carbonate inventory available the ratio hit new lows approaching year end 2022.
This makes sense as lithium consumers look to destock throughout the year in the face of higher prices.
There appears to have been some inventory increase to begin 2023, it is likely related to lower consumption levels during the lunar holiday slowdown in China.
Clear is that continued destocking similar to last year will be very challenging given the difficulty in maintaining historically low inventory levels for next extended period of time restock.
Restocking should naturally be expected at some point.
This is especially the case if demand continues to be strong which is still very much the base case, but most in the industry.
Benchmark minerals, among others is expecting total LTE demand growth of around 40% in 2023.
Some of the largest lithium companies have also taken their own demand estimates up considerably in 2000, and even higher in the following years.
Demand growth does not need to be linear and prices could certainly move around quite a bit in the interim but the point remains that we don't see long term fundamentals being meaningfully different based on any recent data points. So speculation.
Additionally, there were no indications that we're on the verge of a meaningful oversupply of lithium anytime soon.
While new supply is slated to come online in 2023, they have already been multiple announcements of delays and meaningful cost increases globally.
Others have announced they will prioritize bringing volumes online as quickly as possible at the expense of producing qualified battery grade materials.
Finally, there was not enough discussion about structural increases in the cost of both building and operating lithium assets. These higher costs are only being amplified as the desire for localized supply chains grow and this isn't a trend that we expect to reverse anytime soon.
Cost curve continues to push upward it will become clearer that lithium prices need to remain higher for longer and the reinvestment economics in our industry have fundamentally reset.
When putting all this together, it's hard to envision a probable scenario, where the lithium market does not remain structurally tied to varying degrees over the coming years.
Before concluding I want to thank are alive and employees and partners around the world with great year in 2022. They continue to work tirelessly to meet our expansion milestones in 2023. These are all big undertakings and Theyre doing all of this work while staying focused on advancing license core operating priorities of safety quality and reliability.
Making positive contributions that communities working closely with customers to advance innovation and sustainability.
<unk> a great work experience for all together I'm confident that we will make 2023, a landmark year for ligand and our customers I will now turn the call back to Dan for questions. Thank you. Paul you May now begin the Q&A session.
Thank you Ms Rosen, ladies and gentlemen, 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 do have additional questions you can jump back in the queue and to withdraw your question press the pound key we'll pause for just a moment to compile the Q&A roster.
Sure.
And we'll take our first question. This afternoon from Steve Richardson of Evercore ISI.
Hi, good afternoon.
Paul first question on <unk>, and I think you hit on it I'm talking about the structurally higher costs in the industry, but we've seen some updates from some other comparable integrated projects in North America of late and I was wondering I know you don't want to front run the PFS here, but.
If you could just talk about what youre seeing in terms of.
Uh huh.
Costs and trends and then more importantly, like why would this project be advantageously positioned relative to some others in the North American context.
Yes, it's a difficult question to answer in a way that I think is going to fully satisfy you, but let me.
So to make a few observations.
First and to really understand is that every project is different and that's especially the case as this industry develops there is a big difference between for example, expanding an established Brian project.
And a brand new Brian project in South America, one has a lot of infrastructure what doesn't.
So the predictability of cost is different new projects than it is for existing projects that are being expanded.
Very different on a technology by technology basis, it's very different using a conventional mining in the conventional conversion process relative to maybe some other nonconventional sources of lithium that we have out there that people are running projects.
I think this degree of predictability and certainty I think people maybe overestimated.
How much visibility we have on projects and nobody has really taken off in any scale before we definitely see meaningful change is driven by a few factors for all projects they take longer.
Secondly, there is a lot of competition for labor qualified labor is scarce.
Certain parts of the world, we've seen competition from non lithium projects oil and gas projects. For example, what's your ramping back up in certain parts of the world.
And we see competition for.
Basically the fab yards, where some of the major long lead items are being made and so you either wait longer which has implications for Costco U.
I have to pay more for these some of these specific items.
You're also seeing some some issues with scaling people are trying to go bigger quite go as we said and I think it's not always linear always cost savings in the initial expansionary phase.
There's no doubt that when you look at predictable cost curves predictable capital expenditure cabs, a project like Nebraska, which is frankly, not earth breaking our groundbreaking any new technology new processes. Okay. It isn't a part of the world that is frankly, a little bit more expensive to build in and some others.
That's largely offset by the fact that it will have a low operating cost and many others given its low cost energy its proximity to.
The key markets. It is clearly advantageous with regard to IRA qualified materials will be advantageous.
Easy to see many other projects in North America with the same certainty so.
The industry needs a whole wide range of projects. So this is not resource competition. This is not me, saying <unk>.
Domestic lithium is a far better project in project XL bet a project why therefore project XL why shouldnt be developed they're all going to be they will need to be developed to meet demand levels, but I think it's pretty important.
If you look at each project really in great detail in its own right. When you sort of form the question as to how credible some of the forecast of capital spend that you have credible some other future operating costs.
I appreciate the color we look forward to the update later in the year.
Perhaps a quick follow up just.
Could you help US bridge the four K T. LTE growth this year implied by guidance versus what was talked about last quarter in terms of I believe six I think they are probably not the same basis and we're talking.
Just wondering if you could just confirm has any schedule changed in Argentina or is this inventory or in my counting LTE is wrong.
No no it is pretty straightforward.
Months late in Argentina.
Grand scheme of things two or three months doesn't make a big difference, but in the calendar year, when you're adding 10000 tenants. Obviously it means we sure a thousand tonnes up to compared to what we said before the reason we like is really linked to the to your first question.
There are challenges to every single project and I think we've seen some of the other projects in Argentina are similar phases make similar comments.
It's difficult to get that final, 5% done and Theres a lot of local content requirements to the model local labor requirements and that as well and it doesn't take much. If you have a few pieces of piping all few electrical connectors relatively basic stuff.
Arriving that are held up at the call it.
Some customers disputes.
So they really sort of the classic blocking and tackling thats needed at the very end of a project has slowed us down in the first part of the year not.
Nothing major it's really just.
By Engineers will hate me for saying that.
It's probably in the last few pieces of pipe and making the last few connectors in place, but we are a couple of months late relative to what we would hope.
Great. Thanks very much.
Okay.
Thank you. We'll go next now team Chris cash at loop capital market.
Yes. Good afternoon. So one follow up on that question about the couple of months delay.
For vs six does that.
Sort of just challenges at Cascade into the next expansion that was slated for late calendar 'twenty three.
24, so I'm just wondering if.
Youre going to get I guess ex by pushing out the volumes this year, you're going to get extra volume increments next year, but I'm just wondering if the delay is if youre seeing that cascade into your further expansions.
Completely separate and distinct work streams, Chris completely for this very reason they run a separate and independent parallel processes. I ask you would hope that we learn from these last mile challenges that we haven't got ahead of them.
The team understand better now what this will look this is the first time, we've been through the last five.
5% of our project, we know we have another one coming out the back end of this year. So I would expect that the learnings from this will give us more certainty of delivering that second phase on time.
Got it and then.
Thank you for the page seven which sort of frames.
The fixed versus variable versus butyl. That's helpful. A question on that would be just on the <unk>.
The portion of hydroxide and carbonate fixed price is.
While fixed right now and you see that up the realized pricing up 40%.
Is it fair to say that.
Some of those.
Customers are still ongoing contract negotiations.
Become perpetual those conversations or are those fixed absolutely fixture for calendar 'twenty three.
Yes.
It's a mix honestly, Chris without getting too far into the details.
None of them are willing negotiated still in 2023.
95% plus of those those numbers with regard to 2020, but they really make up I think it's probably fair to say three different types of pricing structure. There are some that were agreed in the past it will just flow through this year.
There was some prices and that our new prices that were fixed for 2023, but we'll either be rediscovered at the end of the year or we've already we've already agreed a step up for 2024 or they will move to market based pricing in 2024, so they'll migrate to that point.
They are sort of market based prices that we don't have.
Ceilings in them and we are already over the savings. So the pricing is bouncing at the ceiling and the agreements so that technically market based but.
We're pretty confident the market price is going to be above the ceiling. So they'll stay up there. We only we only have as a customer we have every one of them today has either moved to market based pricing or has made a commitment to move to market based pricing in the next year or two.
We have frankly, a one customer that is not made that commitment they are still buying volumes from us outside the contract on market based structure. So they've sort of implicitly agree to and accept that this is where the world is going to so we will see this transition continue as we get to 'twenty three into 24 by the time, we get into 'twenty five.
26, certainly by 'twenty five I don't expect to see really any of our volumes not being linked to market prices by that point.
Thanks for the color Paul.
Thank you Kevin.
Kevin Mccarthy of vertical research partners.
Yes, good evening.
Alan I appreciate your updated views on prospects for growth in China in light of the challenges that you mentioned in your prepared remarks in other words COVID-19 transition.
Because subsidy renewal in the spot dynamics, and then I guess related to that on slide 10 I. Appreciate this inventory chart just as a clarification is that meant to include producer inventory or inventory.
All the way through the chain certainly welcome any any thoughts on your end as to those levels downstream yes.
Yes, let me answer that one first because it's easy that is lithium inventory held at either a consumer of lithium so capital equipment you saw.
Cathode producers and that the lithium producers themselves.
So it's a lithium inventory, it's not designed to speak to.
Obviously lithium in the form of capital, which is just pure based significant carbonate held either lithium producer.
Or at the customer themselves.
We understand the data from SMA.
And in terms of growth in China first of all we have not yet yet, but hopefully we will see in a post.
Spring Festival Covid rebound, so we don't see a lot of implications today at least from Covid in the market I think in terms of removal of subsidies I mean this is a market.
I think it's kind of reached exit velocity frankly, when you're when you're doubling your total number of vehicles in a year.
Sales at this level when there are frankly fewer and fewer non E. B alternatives in China, We don't really see from EV vehicles sold in China.
Massive impact to demand from the removal of subsidies there will be some but this is a market that continues to grow anywhere any way, perhaps more importantly in China you have to understand most of the lift in today as you know.
Battery applications is in fact going into <unk>.
Into China anyway process into cathodes to sell significant leaves the country again afterwards, so so I think China itself is going to continue to be a source of growth just a final point for you.
A data point that maybe is lost to a lot of people today about 40% or maybe a little bit more of the demand is that evs in months. So we look at subsidies for Evs et cetera.
Storage and a whole bunch of other applications.
EV related and they are actually growing quicker today, we believed in EBIT applications on an installed capacity basis. When you look at total gigawatt hours of demand.
<unk>.
A larger growth in the non EV applications in any of the applications, so subsidies and regulations et cetera, while important I'm not the only part of what's driving demand growth for battery materials.
And as a follow up to a prior line of questioning.
Paul how do you see the global cost curve evolving over the next let's.
Let's say three or four years, where do you think fourth quartile production economics will migrate to given the need to exploit.
Higher cost resources moving forward.
I think if you look at let's take Chinese Lepidolite processes. For example, today I mean, it's not that easy to get to get really reliable data in there and the same is true over some of the Chinese recycling streams that we see with.
But it feels like you've got a sort of a module pricing out of the 25% to $30 a kilo. So as that remains the marginal producer and the fourth quarter I don't see that cost falling under any circumstance sort of structural as to the challenges of processing that particular type of oil and the energy, we have and the seasonality of that business as well, it's hard to sort of assess the rest of the market.
To be perfectly honest there is no doubt.
If you saw $3 per kilo cost, that's probably five or six today with higher operating costs energy costs third party costs. If you saw a seven or eight.
Cash cost at the gate by the way so they don't need donut totaling two capital costs.
<unk> probably into well into double digits today, and then I'll fourth quartile I mean thats all of the sort of first second quartile production assets by any historical cost curve. So it's definitely moving up or moving up quickly and I think as you look at some of the ore bodies that have been going on that are hardware I'll keep you look at the model. The model remains develop the mine and ship it somewhere else.
Else to ship the product to a third party toller is just the most expensive way to do it and it will just as more of the business has produced that way move the material that's produced that way rather than as integrated production and the cost is going to keep going higher I think for most people given the technical challenges and the increased capital required are producing say a hydroxide plant.
Most people who own a lithium asset today and not going to go to the trouble of developing in lithium hydroxide assets. So it doesn't matter what the resource cost is fundamentally producing lithium on that model on a higher cost structure on non integrated structure. So.
These are all pressures that are just going to keep pushing keep push.
<unk>.
The module cost higher.
Thanks very much.
Okay.
Thank you we'll go next to David Decal, Dan at Cowen and company.
Thanks, Pollinger, both Joe I appreciate all the color today.
I did just wanted to follow up a little bit on the pricing conversation to confirm a couple of things one the.
The 40% increase year over year.
Does that reflect contracts.
Alright, yes does that does that reflect a contract negotiations that occurred.
For 2023, where these earlier than expected and then the latter part as you highlighted that you only have one remaining fixed contracts for 2024, what does that currently represent as a percentage of your contract exposure or sales.
When you think about how we contract business, let me just step back before I answer the specifics of that and just sort of remind you have may be we are a little different to pretty.
Pretty much anybody else in the industry, just remember we sell largely hydroxide.
We sell largely hydroxide into high nickel battery applications, we do have others increases for example, and other applications, but we're largely selling into that space the characteristics of that a little bit different to what you might see elsewhere first and foremost.
You have to develop long standing relationships with customers because the process of qualification.
The sheer complexity of that supply chain the cost.
Quantifying your material et cetera.
Frankly, the fact that for many of our customers almost all of them.
When a specific grade for that customer specific packaging for that customer you sort of always in a bit of a dance with your customer about these commitments is why you see us talk about take or pay in hydroxide, which we don't carbonite now to most others.
Let's talk about selling quote under contracts on the hydroxide, which we don't do.
That won't do in carbonate it really is a very different business. So the conversations with the customers are.
One of a better description perpetual.
I think the easiest solution many customers seek to this especially as the Oems are increasingly becoming the customers, but even with the battery producers who themselves are trying to make sure that they're not caught with a price that isn't reflective of market conditions is to move to market based pricing and so in most cases.
<unk> are trying to do is figure out what that means what is a market price. Although indices, we come up to does it involve annual renegotiations, but of a blast from the past 510 years ago, when everything was negotiated that way.
These are all perpetual negotiations they are the volumes you see that are largely done under contractual commitments.
I believe frankly, we will continue to change over the next two to three years as the market evolves.
Customers get a better view of where they want material shipped to how much. The IRA is going to change their supply chain and how much premium if any they are willing to put on U S source material.
Which battery technology as they followed the they don't stay high nickel to some of them get pushed towards carbonate based technologies given challenges in getting enough hydroxide.
When we sit down and when we look at these negotiations I think it's going to be different every single year I wouldn't expect the customers to change, we'll put more volumes to some customers will add one or two new customers, but what I would expect to happen as this market evolves is that we get.
Closer to market economics in any given year.
I'm not going to unfortunately be able to answer your question as to how much of the volume is under that one fixed price contract, but you can imagine that as we go forward as we add more volume again there'll be less of this compensation necessary because more and more of our volume is going to be whether to continue.
Actual agreements that last multiple years or whether because of annual compensation essentially with whatever the market conditions.
One two times.
I appreciate that Paul.
My second question was just on Nebraska.
Zubair, though is there is there a contingency in the Capex guidance for 'twenty three for <unk> or what would the TSS that comes out in the first half.
Would that would that presents potentially incremental cost to that capex guidance.
It will not.
Because their capex that we have there is predominantly.
For our growth projects at <unk> and in a market. If we do anything will be a capital infusion, which is going to be honestly not material at this stage okay.
Okay.
I appreciate that thank you.
We'll go next 19, Christopher Parkinson Amazon.
So on and so forth just trying to get a better sense of if that changes your exposure to spot.
Over the next 18 to 24 months. Thank you so much.
Hey, Chris Yeah, I think.
As we've said before all of that volume is is going to find its way into pricing structures that reflect the market conditions at the time some of them frankly with some of those volumes, we need to meet contractual commitments that we've already signed but those contractual commitments are market based pricing.
Market basis.
<unk> et cetera, so yes, that's spoken for but then they're not priced yet there'll be priced in the market at the time some of the rest of that volume will be committed closer to the time and it won't be on a fixed it won't be in a multiyear fixed price I think we've demonstrated this year, we're willing to take a look out into the world and say is there a price at which we're willing to set the pricing for the next.
Coming year and the answer is yes, and the answer is no.
<unk> will answer every single use how much of my portfolio am I willing to fix on that basis.
Frankly, even many of the contractual structures were going to with customers I'm not going to be a monthly resets the public quarterly resets in most cases. So yes, I think it is all designed to sort of bring a little bit more predictability. So some of these customers as they look at the.
Annual pricing structures.
All of that volume as it comes on as I said I, just I think the fixed price contract is a dinosaur that's dying out and I think that there won't be any renewals extensions expansions of contracts.
Our multiyear fixed price contracts that all going to have a reference to the market at some in some way shape or form embedded in them.
That's very helpful and just you hit on it a few times regarding the IRA.
Your exposure.
Obviously, it would be in the basket, but could you just hit on obviously one of your competitors is fairly vocal on this can you sit on how youre thinking about it in terms of your U S assets the relationship with Argentina, obviously, theres been a lot of notoriety with chili's relationship.
The EU regarding some trade relationships over the last year within the last couple of months can you just hit on your overall thought process there what youre hearing from your customers and how we should be thinking about that in the context of a ligand story. Thank you.
Or was the easy questions Chris.
Okay. Thank you probably fair to say, it's fair to say that.
It's difficult for anybody US included automotive companies antibody to build a 10 15 20 year investment thesis on the basis of the IRA or any other individual government incentive program was put in place you have to be comfortable.
Asset can stand alone without a short term government support infrastructure in place, there's a lot still to be resolved with the IRA theres a lot of debates conversations going on.
Lobbying clearly as to as to what is and what is not.
I mean clearly this.
<unk> the country idea of free trade agreement idea is important but the same is true of customers or users, who maybe are not selling vehicles that qualify or they don't sell to customers that are in income bracket that qualifies and so I don't think its going to be a simple case of.
A U S asset producing lithium product is going to be hugely valuable I mean, an example is today at least the awful lot of plans out there of scale to build.
U S based battery capacity that uses lithium carbonate.
Bringing online lithium carbonate from the U S, but somewhere somehow it is going to have to be turned into lithium hydroxide now that could change right. We could see a shift in carbonate based battery technologies building supply chains in the U S. The IRA doesn't necessarily incentivize that so theres a lot of complexity around lithium assets I think that the truth.
You've got to be able to produce a quality product that is battery grade I mean, you have to have a reasonable cost position otherwise no amount. Okay. If they are going to help you out with that position.
Thank you for the thoughts thank you.
Yeah.
Thank you the next now to Matthew deal at Bank of America.
Thanks.
So youre going to 40000 metric tons at Homeaway, Martha and I think in the past you said you could do 100, alright, perhaps that's possible.
Do you get there from here I mean peers.
Appears being a bit more aggressive with scaled expansions than I guess, you've historically taken so.
Can you get to 60000 tons over two stages or should we expect more incremental adds.
So.
I mean, we can go the resource can go big right and you'll see that when the resource report comes out. This is not a resource constraint issue. So let's take that to one side its infrastructure frankly.
The single biggest issue for sure is infrastructure.
If you guys ever get the chance to visit.
Realize it's not a place that you can suddenly filled with partners like you can comment so you need a different technology to scale for US is we have one.
<unk> cost as we use is eminently scalable scalable to add 1000 tons.
And if the energy supply in the fresh water supply is available.
All we can develop technologies like like.
Water et cetera.
Paul.
I think our expectation today, though it's based on what we can see is we're not willing to commit to more than 60000 down there without some developments in those areas. We're working on them and this is not a static decision, but we certainly have plans to go to 60000 tons in the next few years and they've been actively engineered pursuit.
Planned right now I think we talked about getting to under 1000, when you take into account the mascot lithium exposure that we have as well.
Hope that we can move Argentina to 100000, why because I think it's really difficult for the industry as a whole to supply the lithium that people need without Argentina, Chile stepping up with much higher volumes than people are producing today.
The the biggest resources.
Frankly, the most environmentally friendly way to produce lithium it's not perfect, but it's certainly better than many of the sort of hardware based processes that are non integrated that involve moving rock halfway around the world.
And it's reasonably low cost.
And it's that both countries, but largely speaking of supporting the development of the lithium industry with their own personal flavors. So we certainly hope to get there, but we're realistic.
Biggs infrastructure questions that need to be answered before.
That jumped from 60000 to 100 and even beyond that.
Alright.
And just stick with Argentina.
No.
Kind of whack, a mole on headlines down there, but I'll kind of discuss the removal of a one 5% to 4% export tax shelter for Argentina lithium can you talk to that in central applications is it real is it not what.
That you have from that.
It is real.
It's a reasonably small impact on us I think the rebate, we got last year that was single digit millions so.
So about $10 million.
So the impact on us is not meaningful or significant.
It's just part of the development down there that we'll see continuing I think the whole the whole.
Sensations in Argentina is a complicated place as you know.
And there's a lot of politics, instead whack a mole on headlines there's a lot of politics with a small pizza to work your way through but we've been doing it for 25 30 years now.
No different tayo, it's always been.
Understood. Thanks.
The next announcing Joel Jackson BMO capital markets.
Hi, good morning.
Hey, John .
Paul on the mascot.
Usability study.
Did it slip a little bit I thought maybe it was going to come end of 'twenty, two and I thought you did orders on long lead time items. So I was wondering.
Did you delay that because you want the fees done before you start ordering equipment or maybe you can talk about that.
Sure I'm not sure when that will go off to give us a good morning, Joe.
Did I say good night.
Hey, good morning.
Alright.
Toronto Happy Valentine's Day, Paul.
It's always morning in Toronto.
But it was never on the Cogs right I think the original numbers, we were looking at for the hydroxide plant was plenty of 28, 2025, and notwithstanding will be producing and finally 26.
On a different topic.
No change at all that I think what has changed is the fact that we know we will.
Our original intent was.
Given given that timing.
Could you spot concentrate but not selling the spot concentrate but now we frankly have just changed that plan and so it makes sense just for a couple of years sell spot concentrate because we can get with boots, you up and running much quicker they won't get back and caught up and running.
So is it really <unk> change is not a construction plan change I think it's a slightly different commercial unchanged, but in terms of the asset development plan on progress Hasnt changed.
Okay, and then we've obviously seen sauce excuse me I really big equity stake by GM recently have another mining project and then on the continent and you've got.
Our prepayments.
The situation with GM.
And I think you talked about before that maybe you're getting them ask advance a bit maybe jim or others could be involved here.
Think about how you're going to finance the masking junior partner IQ you spoke about little bit earlier.
Kind of the most likely scenario is a paid for capital.
Government subsidy does obviously seem to be way more bucket of much larger bucket of money available in the states right now some projects and it seems like candidates behind the bank.
Yes.
That's a hard one to answer I think I think though you're hitting on the right points.
There's no doubt that the more progressive forward thinking customers are definitely the ones that have got most scared by the realization that won't be enough lithium to go around to trying to figure out how they can use their capabilities to help develop assets. It isn't just money money money is helpful of course.
You can frankly solve that by committing to a really high price some wiggle financing themselves, but I think providing money upfront providing help with whatever it might be you know.
Construction resources engineering resources, not everybody needs it but some people do.
So I think I think there are definitely auto companies out there willing to provide help governments. The same governments are trying to incentivize investments that align with the broader.
Policies with regards to what they want the industry has to be seen in the U S. Government of course give out some pretty significant grants largely technology or resource development focused which which is the first wave of it we'll see where we go after that kind of there is a long way behind the strength is always everywhere else in the world. So I wouldn't be up on Canada and Canada's.
Right that its willingness either the federal or the provincial level to provide meaningful support to these projects in terms of financing from multiple pockets.
But also in other ways, whether it's helping with <unk>.
Another area so.
I think.
There will be continued evolution of the question of who provides the financing what it looks like and what do if its customers are government what do they get back and return, but I think there'll be important.
The development of our industry, particularly as you said in North America.
Thank you.
Thank you and the next 19 Pablo <unk> at Raymond James.
Thanks for taking the question lots of interest obviously.
Hydroxide demand can I ask about butyl lithium.
Smaller slice of your revenue mix.
Probably not as growth, but what are you seeing in terms of demand these days.
<unk> is a good business, let's be honest, it's it's a business we have a leadership position in globally and that counts for a lot. We have long relationships with customers. It's also got some great characteristics with regard to its really replace avoid most processes that is Houston and it's not a big part of the cost structure. So it's a really good business for us it's not an easy business.
Product to make.
It's very much a regional business in terms of our historic has been a regional business as well. Its biggest issue is the pool is basically produced from lithium metal lithium metal largely today is produced from lithium carbonate. So as covenant prices go up metal prices go up what we've seen in the business in terms of growth is.
The business would not have made economic sense, if we haven't been able to pass on this massive increase in lithium metal prices, so with which we are exposed to as we buy lithium metal and converted into bewley.
And everybody in the industry is by the way is the same exposure to lithium metal.
And so we've been up to pass that on and so what <unk> been able to do it looks like a much larger part of the revenue today, because it is because pricing plan.
Planned 2022 and that in that business.
Much of it is cost platform. So the margin impact is not may be as great. As you would think is the revenue pieces.
It's a good business.
Just a little bit of background one of the reasons that we used to be in this business historically as the metrics all right. We're the only producer in the world.
Then largely still now there's basic and chloride.
We had this reason to be there today you find yourself in a place, though that you can divert that correlate to make carbonate you can divert carbonate to make metal if you choose bewley pricing has to be price competitive with other uses of those LTE today, which wasn't the case in the past. It's why there's been I think a fundamental step up in the scale.
The nature of that business.
Growth is not it's not really growth the business no. Most of the applications are GDP type grower.
Particularly muscle growth is in Asia. So you've got to have a decent Asia footprint in that business as well, but it's a as you can see it's 30% of our revenue last year and this year. So it's not a business to be dismissed.
Touching on the Asia angle.
So far as China, and Asia more broadly become less dominant.
In battery production than they have historically the changes in logistics around that does that.
Good bad or neutral for ligand.
Look I think this idea of less dominant is an interesting one but I think you have to be more clear less dominant can still be very dominant banks. They clearly are today I don't think the supply chain is going to be.
That's still going be massively weighted towards towards Asia as a whole for sure when you take Japan and Korea are into account, but even to China, but I do think that is.
Supply chain is being built outside China there'll be bigger right you could have a supply chain, that's ex China that might be bigger than the entire supply chain is today by 2030.
So you could have a European and a U S. Canada supply chain lithium cathode materials cell manufacturer that huge still a lot smaller than Asia, but he is going to be huge so it creates opportunities for companies like <unk>, we have assets in China will continue to operate in China, but clearly we are positioning ourselves much more to service non China markets as they grow.
Thanks very much.
Thank you and ladies and gentlemen that is all the time, we have for questions. This afternoon, Mr. Rosen I'll turn things back to you for any closing comments.
Thanks, that's all the time, we after 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.
Thank you Mr. Rosen again, ladies and gentlemen that will conclude today's lighting Corporation conference call, we'd like to thank you all so much for joining us and wish you all a great E Goodbye.
Please wait the conference will begin shortly.
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