Q1 2023 Livent Corporation Earnings Call
Good afternoon, and welcome to the first quarter 2023 earnings release Conference call for Life Corporation.
Phone lines will be placed on listen only mode throughout the conference. After the Speakers' presentation. There will be a question and answer period I will now turn the conference over to Mr. Daniel Rosen Investor Relations and strategy for <unk> Corporation. Mr. Rosen you may begin.
Great. Thank you, Rob and good evening, everyone and welcome to <unk> first quarter 2023 earnings call. Joining me today are Paul Graves, President and Chief Executive Officer, and Roberto and Tony <unk>, 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, Hollinger Burke, who will be available to address your questions.
Given the number of participants on the call today, we request a limit of one question and one follow up for color, we will 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 Form 10-K.
Billings with the Securities and Exchange Commission.
Information presented represents our best judgment based on today's information actual results may vary based upon these risks and uncertainties.
Today's discussion will include references to various non-GAAP financial metrics definitions of these terms as well as a reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP are provided on our Investor relations website and with that I'll turn the call over to Paul.
Sure.
Thank you Dan and good evening everyone.
<unk> had a strong start to 2023 reporting record financial results in the first quarter of this year.
Adjusted EBITDA of $157 million was nearly 50% higher than the fourth quarter of 2022.
With this improvement being the result of higher average realized prices across all lithium products.
The development of Nebraska, lithium and with live into the 50% shareholder continues to progress as expected and the project reached several important milestones in the quarter. The detailed engineering phase of the project is now complete.
The domestic lithium board has approved the start of construction of the 34000 metric ton lithium hydroxide facility at Beck and call on the earlier commencement of mining operations that will be true.
A feasibility study is planned to be released by Nebraska lithium in the second quarter.
This study will outline an expected pathway to initial production and sale of spodumene in 2025.
Which will then be replaced by the production and sale of lithium hydroxide commencing in the second half of 2026.
<unk> has raised its full year financial guidance for 2023 and continues to expect meaningful improvement following record 2022 results.
This is highlighted by a midpoint for adjusted EBITDA of $565 million or 54% year over year increase.
As we discussed last quarter.
The way, we structured pricing for 2023 across our portfolio of customer contracts Sprint's two benefits to us.
Provides greater earnings visibility for the year.
For the year ahead than a purely market price approach.
So retaining some exposure to market prices and allowing flexibility to take advantage of commercial opportunities.
We have also announced that we amended and extended our supply agreement with BMW.
In greater volumes and additional years to this relationship.
Which will help bring greater visibility to our operations in the coming years.
Before I provide some market observations and highlight key focus areas for ligand I will turn the call over to Joe <unk> to discuss our first quarter performance as well as a revised full year 2023 financial guidance.
Thanks, Paul and good evening everyone.
Turning to slide four.
<unk> reported first quarter revenue of $264 million.
Adjusted EBITDA of $167 million and adjusted earnings of 60.
Fully diluted share.
These financial metrics were all up considerably versus the fourth quarter.
Yes.
This was the first quarter of 2022.
<unk> average realized price across all lithium products in the quarter.
As we continue to see strong demand.
Total volumes sold were flat versus the first quarter of 'twenty two.
And were down slightly versus the prior quarter due.
Due to a higher portion of our committed volumes being delivered to customers in the fourth quarter over last year.
As discussed on our last earning calls.
Adjusted EBITDA was three times, the same quarter, a year ago as meaningful price improvements across all leaching products more than offset higher operating costs compared to a year ago quarter.
On a sequential basis, adjusted EBITDA was nearly 60% higher versus the fourth quarter.
This performance was driven primarily by price improvement coupled with lower costs.
Let me provide a bit more color on our improved pricing performance.
While observed higher prices across all product lines, we achieved realized prices for a drop site.
46% higher on average than in the fourth quarter.
This improvement is consistent with the commentary we provided on our last earnings call.
Regarding last year's negotiated price increases across our contract volumes.
The cost reductions we saw in the quarter are mostly timing related.
Royalties were due to timing of export shipments out of Argentina, coupled with higher production of lithium chloride.
Our downstream Richard region lithium metal products.
Thus the lane third party lithium metal purchases.
For the full year the quarters ahead.
We expect to see higher costs in our results.
We expect this increase this to increase over the remainder of the year as.
As we reached target year end completion of our second 10000 metric tons of lithium carbonate expansion in Argentina.
As well as the 15000 metric ton regional draw.
<unk> site expansion in China.
As a reminder.
2023 capital expenditures are anticipated to be $325 million to $375 million.
Slightly higher than in 2022.
And will be supported by adjusted cash from operations projected in the range of 362 $440 million.
Our balance sheet and overall liquidity remains very strong we ended the quarter with $194 million in cash and no draw under our 500 million revolving credit facility.
The combination of our current cash position or ability to draw on the credit facility and a strong level of cash generation.
Give us continued confidence in our ability to internally fund our capacity expansions.
On slide five you will see that we have raised license full year.
'twenty three guidance.
And we continue to expect a substantial improvement in financial performance compared to 2022.
Leading to record results.
For the full year, we now project revenue to be $25 million higher.
110, 25 billion to one $1 25 billion.
And adjusted EBITDA to be $20 million higher.
At $530 million to $600 million.
This implies revenue growth of 32% and adjusted EBITDA growth of 54%.
<unk> points versus 2022.
Our guidance continues to be based on higher volumes sold and higher average.
Realized pricing across all of the two products.
We offset by higher anticipated costs.
We expect sales volumes to be 20% higher or roughly 4000 metric tons on a <unk> basis.
As 2022.
We've seen this increase is driven by our initial phases of expansion Communalize.
This includes our first 10000 metric ton expansion of lithium carbonate in Argentina, which is now complete and start up process.
And startup process. This carbonate will feed a new 5000 metric ton lithium hydroxide line investment received North Carolina, Yes.
That was completed at the end of last year.
We expect most of this incremental sales volumes to be realized in the second half of this year.
Looking ahead, we continue to expect alive, and we will see meaningful average realized price improvements in 2023.
Recognizing that many prices forecast for the remaining of D. R.
Lower than our lower now than they were three months ago there.
There are a few key points, we want to reemphasize with respect to Ivan.
We previously disclosed the restaurant, 70% of our 2022 volumes.
Fixed price terms.
Prior to our last earnings call in February .
Many of these are under firm take or pay commitments.
As a result, we have a high degree of confidence around a 40% average expected price increase across these volumes.
While the remaining 30% of unconstructed volumes, our guidance has always assume the lithium market prices in 2023 will be lower on average than the prices we saw at.
At the end of 2022.
And so the forecast of lower market price are entirely consistent with how we have been dealing in 2023.
This 70, 230% volume of location between firm fixed price commitments.
Market price exposed opportunities allows us to strike a balance of locking higher prices for 'twenty.
While retaining flexibility <unk>, which product line to focus on.
Carbonate or hydroxide, and even chloride or metal versus virtually chip.
Therefore, we still expect a continued increase in our average realized price in 2023 on a wide range of market scenarios.
Everything in addition, upside as we move into 'twenty 'twenty four.
To conclude and as mentioned earlier, we continue to expect higher costs in 2023.
Though not enough to offset our anticipated margin improvement.
The biggest drivers of this increase.
The biggest drivers of this are increased royalty payments in Argentina that youll higher average expected lithium prices and temporary higher costs incurred to commissioning our new production units.
We also continue to see higher costs for raw materials, such as soda ash and for energy and labor.
No not in the same magnitude as experienced last year.
I'll now turn the call back to Paul.
Thanks, you bet so a.
A lot of attention on the lithium industry in the first quarter was focused on lower than expected lithium demand, particularly in China and the impact it had on spot market prices in the country.
It became clear that many cell produces built inventory in the fourth quarter of last year, especially in China in anticipation of elevated demand prior to expiring subsidies.
In the first quarter, we saw the usual seasonal lithium demand slowdown consistent with package we've experienced over the last few years.
However, the magnitude this year was certainly greater than we expected.
The higher inventory built in the fourth quarter was worked through and sell producers reduce their production and therefore procurement accordingly.
We also saw continued weakness in consumer electronics applications, which like LSP batteries is largely a carbonate based business.
It's important to note that demand for energy storage applications did not decrease during the first quarter and battery installations in both electric vehicles and stationary storage applications continued to show significant year over year growth.
LSP cathode production was most notably down in the first quarter with the average monthly output in China down about 40% versus fourth quarter levels.
This helps to explain why carbonate demand and therefore carbonate prices in China were most severely impacted.
We saw much greater resiliency in hydroxide prices and in some non China international pricing benchmarks.
Battery cathode and lithium demand outside of China, most notably in Japan, and Korea continues to be healthy.
This is supported by recent positive commentary from leading producers in these regions.
Outside of China factory use quality standards and access to IRA compliant production continue to be key areas of focus for leading global energy storage supply chains, resulting in greater emphasis on maintaining existing supplier relationships.
These are factors that contribute to our continued view that while important the spot market in China is not reflective of the entire market.
Coming out of the first quarter, we have already begun to see notable improvements in demand globally.
Specifically in China, both EV Assembly and sales have increased on a month over month and a year over year basis every month to begin the year. Despite the end of central government subsidies at the end of 2022.
While the very near term implications for lithium prices are challenging to predict there are a few data points that give us comfort that pricing is not retreating back to historical levels.
We have already seen the impact of current price levels on high cost lithium converters in China.
The cost of spodumene for non integrated producers not declining at the same pace.
China market lithium prices, we've seen negative economics for many converters.
Surprisingly this resulted in convert to shutdowns in the last few months.
Additionally, the first quarter reduction in production levels.
Cathode and sell produces appears to have already brought inventory levels back to more normalized ranges when compared to overall aggregate demand.
Therefore as activity resumes and demand growth continues on expected production levels and therefore lithium demand are expected to increase again.
And for those of you that continue to believe that spot carbonate prices on all the matters. You will know that we are pleased to have seen that last week several price reporting agencies reported increases in lithium spot prices inside and outside China.
We have not reduced our lithium demand expectations for 2023, consistent with many other industry analysts and participants.
Bear in mind that historically, almost two thirds of the annual global passenger EV demand because in the second half of the year.
<unk> for lithium ion batteries is also becoming much more broad based.
Battery demand from EV applications in the U S Europe and rest of the World combined is growing at a faster year over year rate than in China.
Additionally, stationary storage demand is increasing at faster rates today than all EV applications growing close to 200% year over year in the first quarter in China, Despite the broader slowdown.
Despite the massive battery demand for electric vehicles passenger evs are expected to be only 60% of total lithium ion battery demand in 2023.
This increased geographic and application diversification.
Further resiliency to the overall growth forecasts.
As we've said in the past demand growth is unlikely to always be linear and prices could certainly move around a lot over shorter periods, but we don't see any new data points that would suggest that long term fundamentals are meaningfully different than our recent commentary.
On the supply side, we continue to see broad expansion delays and disruptions further challenging any view that we are approaching a meaningful sustained oversupply of lithium.
While there is new supply slated to come online in 2023, there have been multiple announcements of delays and cost increases.
In China, we continue to see periodic challenges around energy supply rationing as well as crackdowns on illegal or environmentally unfriendly mining activities.
As prices fall for carbonate in China high cost Lepidolite non integrated converters curtailed around.
Globally skilled local labor has been flagged repeatedly as a bottleneck to meeting current production targets and expansion goals.
Additionally, we've seen the impact of political uncertainty in several regions and the effect. It has on confidence in making very large multi year capital investments.
Finally, the cost of building and operating lithium assets continues to climb higher.
Demonstrated by recent updates across our industry ranging from established producers to the more marginal all speculative projects.
These higher costs are being amplified further as the desire for localized supply chains grows.
Given the unprecedented volume expansion that industry over the foreseeable future.
Expected economic returns will need to be high enough to support the investment required to keep up with growing demand.
On slide seven I'd like to focus on life and specifically what you should expect from the company as we move through the rest of this year.
As reflected by the increase of our guidance expectations for 2023 financial performance over the full year remains strong and we.
Dissipate significant improvement in profitability and cash flow generation.
<unk> average realized pricing in the first quarter was higher than our expectations. When we set our guidance range three months ago.
And it was these higher realized prices that underpinned our decision to increase guidance today.
While we have also seen a greater than anticipated decline in certain lithium reference prices, particularly carbonate in China.
And the markets that we participate in were actually better than our forecast had assumed and to be clear we did not sell any lithium carbonate in China in the first quarter and do not expect to do so in the second quarter.
We have seen no signs of reduced demand from our customers for the full year. In fact, the focus for them remains on incentivizing continued expansion of investment and seeking to lock in larger volume commitments from us over a longer period of time, especially given our multi regional current and future.
In hydroxide capabilities.
With respect to volumes 2023 will be the first of a sequence of years the life and we will see the benefit from incremental production as a result of multiple years of expansion reinvestment.
We remain on schedule to deliver all of our announced capacity expansions.
Completing our first 10000 metric ton expansion of lithium carbonate in Argentina in the first quarter, we expect to complete our second 10000 metric ton phase in Argentina by the end of 2023.
This will result in a nameplate lithium carbonate capacity being double that of 2022 approaching 40000 metric tons.
Outside of Argentina construction is progressing on a 15000 metric tons of lithium hydroxide facility and a new location in the provinces in China.
First commercial volumes from this unit are expected in 2024, and it will increase our total global lithium hydroxide capacity to 45000 metric tons.
Together, we believe total production in 2024 on an LTE basis can be roughly 10000 metric tons higher or four 2% increase versus 2023.
Beyond 2024 alignment continues to progress engineering and evaluation work on additional planned carbonate expansions in Argentina as.
As well as additional hydroxide expansions that include the ability to use lower grade recycled lithium as a feedstock.
We expect to share further details on all of these fronts later this year.
Increased production will be a significant driver of future financial growth for ligand, which will result in meaningfully higher cash flow generation for the company that is much more balanced around a wider range of pricing assumptions.
The development of Nebraska, lithium and <unk>.
Integrated lithium hydroxide project located in Quebec, Canada in which <unk> is a 50% shareholder continues to advance as I mentioned earlier the board of Nebraska lithium approved the start of construction of the 34000 metric ton hydroxide facility back in coal and the acceleration of mining operations that will Gucci.
Commercial sales of spodumene concentrate are expected to begin in 2025 and continue until the hydroxide facility comes into full production.
First production of lithium hydroxide is expected in the second half of 2026.
Further details regarding the project along with supporting cost information will be provided by net Mexico lithium and a feasibility study expected to be released in the second quarter of this year.
<unk> continues to provide significant technical and commercial expertise can the masco lithium and has been appointed to engage sales and marketing efforts on its behalf.
<unk> expects that the masco lithium will be in a position to announce initial customer agreements in the second quarter.
The Mexican lithium continues to be a highly attractive project with strategic location in North America and ability to take advantage of various customer and government incentives for localization.
Access to low cost Green hydroelectric energy and a critical first mover advantage in the region.
So all of these reasons live and remains fully committed to helping bring it into production.
<unk> success will be determined by our ability to deliver on expansions and to continue to be a reliable supply of high quality lithium materials to our customers.
As I mentioned at the start of this call <unk> and BMW group agreed to an amendment and extension of the existing supply agreement.
As part of this total lithium hydroxide volumes delivered per year will increase on the contract was extended in duration.
<unk> and BMW continue to work closely together in multiple areas, including various sustainability and technology initiatives, while also providing mutual regional support and resources for expansion projects.
We believe these additional capabilities that <unk> can provide to customers.
Unreliable lithium supply is a true differentiator for our business this should become a growing model for our industry.
Need for closer relationships between Oems and battery materials suppliers only becomes more important.
Finally live and will be delivering his latest annual corporate sustainability report in the second quarter, we look forward to highlighting the dedication and hard work of our employees and our ongoing commitment to corporate citizenship transparency and continuous improvement in all aspects of our operations I will now turn the call back to Dan for <unk>.
Questions.
Thank you Paul Rob you May now begin the Q&A session.
If you would like to ask a question at this time. Please press Star then the number one on your telephone keypad. Please limit yourself to one question and one follow up if you have additional questions you can jump back in the queue to withdraw your question again press Star one.
Pause for a moment to compile the Q&A roster.
And your first question comes from the line of Chris <unk> from Loop capital. Your line is open.
Hi, Good afternoon, you mentioned no sales of carbon in the quarter I was just curious if that was a function more of the trajectory of spot prices in China or was it more reflective of just continued steady demand maybe even increased demand from your customers for hydroxide and then just.
To complement that question Jeff.
If you look at the divergence I guess somewhat backward looking for feed demand thats carbonate.
And what you your commentary about.
Demand for hydroxide pricing holding steady.
Is your guidance currently based on the notion of selling.
No opportunistic carbonate tonnage into China. Thank you.
Yeah. Thanks, Chris we didn't sell any covenant in Q1, we didn't have any to sell.
What we did sell galvanized very small volumes and was to customers outside China.
Frankly, the second half is hard to tell but we have this covenant coming online and the objective is to clearly utilize that full lithium hydroxide capacity, which is not being fully utilized today, because we don't have enough confidence to feed it.
But of course those levels.
Clients need to be qualified we need to get customers.
Qualified you cant quantify these plants until they're actually running at commercial levels and so we sort of need the carbonate carbonate to hydroxide plant and because it's a new platform. We will then finish the qualification processes that are already started.
Tell you what I'd like to say it sort of depends our objective is to sell hydroxide carbonate at this point in time.
But if in the second half of the year qualification is either delayed or any other issues with that we reserve the right to sell lithium carbonate.
Im not entirely sure whether it would be into China. This deep enough markets with its small volumes, we're talking about here outside China.
So again, it's hard to be purely predictive today I'm not ruling out that we sell company in China, Although that's not our base plan.
We retain that Optionality, our guidance is absolutely based upon our assumptions to wattup predominantly lithium hydroxide pricing will be plus plus other products don't forget we have a butyl lithium business.
Other bits and pieces as well, but it's not predicated on a large carbonate style in any region 79 in China.
Got it thanks, and then just if you could.
With some more details having emerged in the IRS around.
IRA could you just comment on your anticipation of compliance for your hydroxide from Bessemer City, that's where the feedstock is coming from Argentina. Thank you.
I would be standing.
Has always been and remains the Bessemer city hydroxide is fully IRA compliant.
And your next question comes from the line of Christopher Parkinson from Mizuho. Your line is open.
Great. Thank you so much so you've had a nice benefit in terms of license Asps has been rolling off some lower price, let's say legacy contracts and that's it should.
It should be ongoing throughout 2023.
What do you think investors will get a better sense of kind of one that ends and when theres going to be a little bit more fluidity versus spot in terms of just how we should think about your contractual balances.
How youre thinking about that strategically on a go forward basis. Thank you.
Hey, Chris.
Chris is that the way first.
Look I think our objective remains has always been to be largely contracted sales, but I think what that contract looks like is changing as we've talked about before I don't see multiyear fixed price contracts anymore. I, just don't think that's going to happen.
But that doesn't mean, we won't have multiyear contracts and then within those contracts.
We'll always reserve the flexibility to sit down with the customer solve a year fixed pricing for any given year, if both of us want to do it.
I can't really predict how much of that will happen, but I think it will I think some customers will be happy to have the contract that gives them the commitment that they need.
Recognize that that contract cannot fixed prices because if it does.
<unk> be a multi year contract and so they'll be willing to have market referencing contract. So that's what we're seeing everybody is really quite comfortable doing that.
Not everybody wants to price them. The same like some really do long short term price resets based on market indices, others want the ability to revisit the market on an annual basis.
But I think as you go into the future, we're going to have an increasing capability to move our prices with the market.
And that's pretty much what we started to do in 2023.
Got it and just in your prepared remarks, you mentioned, just obviously some ongoing geopolitical considerations could you just give us a very simplistic updated thought process and how you think about your own asset base.
No mask as Optionality means to live and any further thoughts you could add on the matter. Thank you so much.
So we're certainly not expecting the government of Quebec to nationalize the lithium industry anytime soon so we feel reasonably comfortable that that's not a threat on the horizon.
We've always viewed ourselves as.
Is it predominantly Americas base business in that South American North America, Canada, right. So we are very comfortable with that footprint, we have a long experience of operating in Argentina.
<unk> of Argentina are well known but they are not the same as the challenges of Chile, they're not the same as the challenge is frankly have been in China on Australia.
We continue to view, Argentina, the resources world classes as anybody would be better, but a resource report will will understand.
And our expertise and experience in relationships down there, but also our deepest I think we will absolutely expect to diversify particularly in hydroxide capacity in the northern hemisphere in the U S.
With <unk> in Canada, and potentially others.
But having single resource and single country risk.
Nobody really wants that but the truth is we're always going to have concentration in Argentina.
We're going to still have concentration even when Canada comes online.
Got it thank you.
Yes.
And your next question comes from the line of Matthew Deyoe from Bank of America. Your line is open.
Good afternoon, everyone. Thanks.
Can you help frame a little bit the size of the margin decrement as we move from <unk> to the second half.
As we think about the fixed cost absorption from starting up the asset.
In Argentina.
Im not sure I can help you with the margin point.
Sure.
I have not really looked at the direct percentage margin impact of those costs.
I think youre going to see the first hit of startup cost coming in Q2, and clearly more of them coming Q3 and Q4. Once we are producing we're still ramping up production. So you get those cost inefficiencies.
But I don't know, whether you want to add any more specifics to that.
But you're spot on we will start having more impact of cost starting Q2, but more even in Q3 and Q3 as we ramp up productions, both in VC investment Chile.
In Argentina.
And we actually as we start exploring more and more in Argentina right.
We expect to be more royalties, there as well, which also has an impact on our costs.
Understood and then I guess on the mask side of the equation.
When will we hear more about funding the commitments may be what Canada is willing to offer.
And what what this might look like out of pocket.
Ask that <unk>.
Yeah look I think it's two Q3, Q, but I would hope in <unk>.
The government, it's not really the government of Canada, all even up Quebec is providing funding its investment corps backwards is obviously an arm of the government, but there was still processes. They need to go to in order to be able to deliver on that funding commitments in that funding commitments are significant they've made some very significant funding commitments to us I think beyond there.
In terms of other government.
Funds et cetera, we're still in conversations around that and I think you'll you should certainly see it becomes easier when domestic lithium file that.
And today when we pull that 43 101 report in Canada at that point in all of this data will be out there and it's much easier for them to have that conversation and it is no masco lithium as information to release not ours.
Clearly as we get clarity on.
Understood.
Thanks, Bob.
Your next question comes from the line of cream Blanchard from Deutsche Bank. Your line is open.
Hey, good afternoon, Thanks for taking my question.
The first one would be on the D&S.
<unk> group.
I think it's everything you mentioned.
And Mitch I skipped thoughtful expansion project.
Could you share a little bit Wendell that's mean could that mean that mechanically to steak with BMW on your phone you I say it that way.
Sure.
Yeah, no. It's certainly not certainly not financial commitment what we're really talking about is.
BMW.
BMW have large operations down there in Argentina, they have large operations here in the U S and so a.
A lot of practical help frankly with conversations with local authorities helping us.
Describe what we're doing how we're doing it and validating many of our statements with regard to sustainability in particular.
So really it's another some technology pieces as you know we do have some lithium technologies that we think could be helping the transition between current state lithium batteries and the next state solid state.
And we have some ongoing conversations with BMW technology am about about those technologies. So it's really quite wide ranging compensations I certainly would not want you to interpret this as being some kind of capital investment financial investment co investment that's certainly not what we're talking about here.
Okay. Thank you.
And then the other question was on the guidance. So over here I think very glad that youre able to raise our guidance.
So if you look at the <unk> 11, 30%.
Trade so trying to think about the earnings cadence for the rest of the year.
Yeah look I think one of the hottest messages, we've tried to get across to people is we never assumed pricing was going to stay where it was so Q1 pricing stayed higher for longer than we thought it would and so the first four months of the year, we have been pleasantly surprised but I will fundamental analysis is the same with the pricing assumptions.
That that we saw the pricing levels that we saw in Q4 and that people are thinking will going to achieve have never been part of our guidance and so.
While we still expect average realized prices for the full year to be much higher than last year with certainly not expecting to continue to.
Realized prices on our <unk>.
Non fixed price sales now just getting to because it's not a large amount and the key to remember that in the first half of this year, we really don't have a huge amount of volume available to sell into what you guys might call. The spot markets. So we're basically being cautious with the back half of the year and saying we know prices are not going to be up in the stratosphere as they were.
In Q4.
It's really difficult to predict on a quarter by quarter basis, exactly where prices are going to be in and given the way. We go to market, it's even more difficult to directly predict what our realized prices will be but I think it's probably fair to say that a combination of lower market prices in the second half of the year than we saw in Q1 or in Q4 last year.
Combined with some of the higher costs that we're talking about.
Do you think about why our full year guidance is what it is relative to Q1 performance.
Alright, thank you.
Your next question comes from the line of Kevin Mccarthy from vertical Research partners. Your line is open.
Yes, good evening.
Paul as you formulate the annual guidance do you have in your mind, a particular level.
EV demand growth that's required to get there or is it the case that your volume has been so constrained that you feel you can hit the guidance, regardless of how EV demand fluctuates within reason.
Yeah look I think that the first thing I would say that you can't always as you've seen in Q1 drove direct short term linear relationship between EV demand in lithium prices. They certainly drive long term analysis of ours.
For ourselves as I said, we could sell two X what we make today, if we had if we had the capacity.
Absolutely not demand constrained, but we are absolutely supply constrained and so in the short term bluntly EV demand is not a major driver of our business. It does factor into our investment decisions of packages into a long term price estimates and forecasts.
Factored into our product mix, whether we want to have more hydroxide more carbonite.
And our customer targeting on customer mix, but.
Now frankly, Kevin a big driver at all of how we calculate guidance guidance is we know in any given year. When we started the year what I've told the mandates who our customers are going to be what what surplus material, we have to place into the market and what is already firm committed.
Okay, and then coming back to price trajectory.
Would you expect your second quarter average realized selling prices to trend flat up or down relative to the first quarter. Given the 70 30 construct that she'll bertoia outlined yes.
Yes, we don't we don't guide on a quarterly basis as you know and I don't really want to get into that habit because.
It can make a difference as to timing between quarters because of customer mix because of product mix.
It can change our average realized price in any given quarter. It all evens out through the year. So we tend to focus on.
Full year.
Thoughts on that.
Quarterly thoughts.
Thank you.
Your next question comes from the line of David Long from TD Cowen Your line is open.
Thanks, Paul and Gilberto I appreciate the time this afternoon.
I was hoping to just touch a bit on the guidance and the pricing in the first quarter.
I guess just to put in context last quarter I think you said expectations. This year in 'twenty three.
Fixed priced contracts that roughly I guess 17 to 18000 tons LTE.
The pricing on that would be up 40%. This year I guess when you beat in the first quarter.
Did that reflect conservative guidance or the fact that some of those negotiations came in higher for fixed price agreements and then I guess when do you think overall is that 40% still the expectation on pricing for fixed prices for fixed contracts and 23 versus 22.
Yes. It is.
<unk> came in at give or take the 40% there was no change to that as we said.
Pretty predictable pillows, and again mix between customers and that can change at 38%, 42%, but it's kind of locked in at 40% year over year, because the volumes are committed on a take or pay and the prices are set so it's not going to any variability in that number and so the beat in Q.
Q1 was a little bit of favorable costs that went in our favor that we didn't expect but it was really more achieving realized price in Iowa.
Fixed priced book of business, which is not just hydroxide, it's other products to it there's a whole.
A bunch of other lithium products, we sell as well.
Higher than we expected and so the the outperformance in Q1 was really driven by higher market prices than we'd expected again just to be clear.
We didn't expect Q4 prices in Q1, we just didn't we thought Q4 was a complete anomaly and we never factored that in.
Or are we too conservative or not Q1 estimates as we were.
I don't know whether were too conservative for the rest of the year time will tell.
But it was really in that space plus as I said, some some sort of timing on costs the benefits of that really helped us in Q1.
I appreciate the further color Paul.
The second one from me is just to ask more on the BMW side and congrats on extending that contract.
I guess are you able to indicate percentage wise how much the volumes increased through 28 did the pricing mechanism has changed at all and then lastly with that.
As BMW agnostic on the geography that you're delivering hydroxide from in this contract or is it going to be specifically tied to.
Specific conversion outlets.
So I Unfortunately cannot comment on the first part of your question on the second part I wouldn't describe BMW diagnostic the contract that we have with them is explicitly designed to evolve with them as their supply chain changes right. This is not a hard contract where we have Sam stone today rules for the next several years, it's actually designed to allow.
Now that supply chain to change and evolve and as our manufacturing capability evolves to also have that evolved like I think everybody wants our U S. Based production when they kept not everybody is able to use it and Nio a compliant way today, but over the next few years everybody absolutely once U S production from us.
I appreciate the color.
Your next question comes from the line of Joel Jackson from BMO capital markets. Your line is open.
Actually the last question was what I wanted to peruse a bit more to the BMW deal because.
I know youre not going to be able to disclose specific terms, but I would think here in this environment, you've been able to negotiate with a key customer.
Yeah pricing mechanism.
Yeah.
Hi, reopening period lags any other things that you can talk about index is different indices group within disease like how have things changed since the last time, you signed that contract can you just give as much color as possible.
What's happened differently now please Paul thanks.
It's an interesting one to hear you ask it because our focus has been the focus has never been really on any of the points. You just mentioned right. What we actually have here is that almost the entire industry, one or two exceptions are relatively immature supply chain and where the procurement mechanisms, particularly for lithium hydroxide that really would never been fit for <unk>.
And so what we've sat down with BMW who are.
Truly a fantastic partner for us when we sit down and we openly share challenges. They have challenges, we have and we jointly try and solve the whole purpose of amending and extending as to reinforce what we believe will be a long term multi year partnership and so it's actually been much more about how do we build.
Starting with him hydroxide into a lot of constraints to it doesn't have a long shelf life.
The specifications are very precise packaging is very precise right. There is a lot to it that didn't actually constrained the supply chain of the automotive Oems and if we're going to work with them to help free up that supply chain and help them get more flexibility in the supply chain, we ask for from them longer term commitments.
And some other commitments and so what we've really done here is what I consider to be sort of creates a supply relationship that is fit for tomorrow's market not just with todays market and allows us to evolve it really hasnt been about.
Reising, our indices are any of those types of topics.
Really not particularly large parts of the conversation.
Yeah.
Okay.
Okay.
So.
You made a point earlier in the call rates at some of the pricing indices that we all follow there's lots of them and they're all.
Have different.
Data points every week have started to turn up some of the PGM exchange price had been turning out for several weeks.
What prices matter for you Paul like when you're falling prices I know you have a contract book.
<unk> got different pricing, but what do you follow that actually matters that informs for you the types of pricing decisions, you're going to have to make in the coming weeks.
Yes, Joe I wanted to give you a really unsatisfactory answer which is I'm not sure I'm actually still not really sure.
I think the China spot carbonate prices.
And important price, but it is not directly impact our business. We have seen as we saw in the last couple of years, they sort of bleeding effect from.
Any single index, I guess out of whack with everything else right when China carbonate went through the roof a few years ago.
Surprised me was how quickly other people moved into carbonate and what that did for pricing in other spaces, whether it's lithium metal out whether it was.
It was hydroxide at the time.
And so it's not really we sort of try and look at it in its entirety, we try and we do price some of our customer contract of specific industries that tend to be hydroxide based indices mesh carbonite indices. So we do look at them. It's a relatively small part of our volume today I think it will become more important I was interested as you are and understanding how <unk>.
These indices actually move and how much they start to really reflect what I'll call market prices, because they don't today, but they're moving more in that direction. I think we're still a couple of years away from really being in what you might see as a truly accurate reflection of what average realized prices off of those of us that are actually in the business.
So I think what I'd answer your question is sort of watching them, all and I'm trying to figure out at what point do they actually start to have enough substance to them that they really do reflect the level of activity and the pricing activity, that's going on in whatever products and whatever market. They reference.
Paul if I may sneak one more in.
Go on that Joe.
<unk> been surprised so you know my lovely Prime Minister came out and talk about the investment tax credit the other month, and it's 30%, but for exploration only which doesn't help you I believe have you been surprised about the lack of funding the Canada's offer just considering all the spodumene. It has in turn go back and really its investment in Quebec.
As an investor and I know, what they have pockets of money, making a decision what they want to do as your partner, but have you been surprised the lack of government funding inside Canada.
I think there's a lot of ambition in Canada, and I'm not entirely sure yet that they have lined it up with actual direct support I think they find a good way to support the solid industry.
Certainly in Quebec, they have certainly plenty of money going to you from the government if you're willing to about the battery supply chain.
They quite understand my own view is I don't quite understand yet how to maximize the natural resources to their advantage.
So the vast majority of the spodumene mines and the vast majority of people looking to develop them in Canada, but no intention of building a hydroxide plant. So that's only ever going to get exported and so I think I'm asking lithium is a bit of a trial space for them.
I think they see us today as an opportunity to help them learn how important is lithium hydroxide in the context of a direct attracting a broader battery chain into Canada.
My view has always been not Barry, but thats not necessarily that view today, and I think as they're thinking evolves and as the market evolves and how they provide support is going to evolve as well.
Thank you.
Your next question comes from the line of Alexia <unk> from Keybanc capital markets. Your line is open.
Thanks, Good evening, everyone Paul.
Mentioned, you expect tight market tight lithium market. This year do you have a lithium demand growth number that's kind of this this.
This assumption or this year depends on like how much.
Much lithium demand should grow this year to keep the market tight.
Yeah, I think it depends.
I've said it for what I don't think its changed yet I think demand is limited by supply still.
And I think the specific explicitly the case in lithium hydroxide, maybe a little bit less so than some other products. Some other applications, but certainly for the more demanding high nickel battery applications for lithium lithium hydroxide, where we play.
Demand is so far ahead of what supply is going to be for the next year or two I don't really get too hung up on.
Demand number to be perfectly honest it certainly.
It's not out of line on a percentage basis with what we've seen in the last few years in terms of in terms of demand and some of the secular about two other sort of fundamental drivers of demand the move over to <unk>.
<unk>, just just keeps keeps getting stronger and stronger.
You reach a tipping point pretty quickly where people are not really buying E vehicles.
And so everything is migrating really really quickly.
That means I mean, some of the numbers being thrown out there by lightning.
I think.
Okay, I'm out with them.
Any thought on why they were coming out with this data, but basically the same hospital.
So by 2025 globally will be even a little bit getting a little carried away because it doesn't mean, there's not many causes it being sold which certainly kind of a whole bunch of battery metals, but we don't know about but I think generally speaking demand is constrained by supply.
Got it thanks, Paul and then on pricing I think I heard Joe Burton Meshing.
Can you expect higher prices next year is that correct and if so could you expand on that perhaps.
Yes, I can clarify that I didn't hear that and I hope, we didn't say that we certainly not making price forecast for 2024 I think what we said is we expect volumes for us to be up significantly in 2024.
Great. Thanks, a lot.
And your next question comes from the line of Pavel <unk> from Raymond James Your line is open.
Thanks for taking the question you alluded.
Rather a gently I suppose to political risk in some jurisdictions. So let me just ask you about the elephant in the room.
Chile do you think the industry's response to the proposed nationalization in Chile will encourage other governments to consider the same or discourage now if in fact, they have been considering something similar.
I don't think it'll do either I think.
I think anybody who's willing to go down the path of nationalization doesn't necessarily care too much about what the industry participants say thank God do in response to that I think you've really got to look more closely about what are the risks to a country. When it comes to taking that approach. It's one thing to nationalize a huge.
Stablish industry with only two players where you can actually look at and say I'm going to own a piece of that on a piece of that.
Not the same as looking at the countries that either has no production, but larger resources like in Bolivia, Mexico for example, suddenly Bolivia.
Somebody like Argentina that has just many many development projects all of which require private expertise in private capital private funding to be brought online and so I don't think when you really get into the detail that we can all get into how Argentina is a completely different federal system, the impact of the provinces et cetera, et cetera, but even go.
Beyond that I think this what nationalize the maximization means when you have a relatively young book very.
Diverse number of participants like Argentina has probably it's probably a big a barrier than what we all think of what we will do.
Right Okay.
Follow up about the mask.
Given that you're at 50% holder.
Can you remind us what will be the accounting for for this asset once it starts up in 2025.
Yeah, it'll be good old fashioned accounting, where it will be accounted for as Eva if we control it and prostate cancer test for control.
Then we will consolidate it if not it will be held at the equity accounting just because we have no off take agreement with them, it's not like there'll be supplying anything to live there will be no trade between domestic and <unk>.
We own 50% of Nebraska, lithium and we will get 50% of the economics and it will be accounted for accordingly.
Alright, thanks very much.
Your next question comes from the line of Ben Isaacson from Scotiabank. Your line is open.
Thank you very much two questions for you Paul.
First is a macro question and then a portfolio question. So just sticking with this nationalization or increased protectionism that we're seeing.
We've heard about this.
Latam lithium OPEC or cartel with Argentina's named <unk>.
Mentioned as well can you just give an update in terms of is that still going on in terms of discussion and what is your personal view.
Some kind of.
Cartel.
Okay.
<unk> is a strong it's a strong word.
Sure.
Connotations with it.
On a persons you've clearly operating a cocktail of being part of our capital is not something that I think we would be particularly support to Bob.
I wouldn't overstate the degree of development of any kind of multi country cooperation with regard to lithium or any other of the battery metals, though any other vessels to be perfectly honest.
I, just think that quite well and this is a perfectly valid process every country with a large lithium resources looking around and saying what is the right way for us as a country to responsibly develop these resources and make sure that we as a country that owns these resources is appropriately rewarded for them and in most cases, the general strategy that they all want to go down.
Is to bring more value in country, Quebec is doing this we just mentioned it earlier, Australia has been trying to do it with some hydroxide plants being built there but.
But what Argentina, Chile, and others have talked about for a while is building a domestic battery industry, that's incredibly difficult to do and so in the meantime, they're much more focused particularly in Argentina.
How do we make sure that the.
These resources are developed.
<unk> start to export start to bring dollars into the country. They bring dollars into capital to actually develop the resource. So that's a lot of dollars coming into the future they'll break dollars it from export duties and taxes et cetera and.
So I tend to think that that form of development I'm thinking carefully about the balance between how much of the value is captured in country and how much is not is really the biggest debate that we do have the dividend and I think it's important that it's done in an open and transparent manner between investor.
As operators and government and is done in a way that is seen by all parties as being fat.
That's helpful that makes sense and then just on the portfolio can you remind us.
What percentage of the portfolio or maybe there's a better way of describing it is up for <unk>.
<unk> negotiation this year and next year.
And so as a potent so up for what negotiation.
For for contracts to be renewed or yes.
Yes.
It's a tough one to answer because we only contract today's volumes and so as new volume comes online. We now say, okay. What are we going to do with this volume are we going to keep it open and sell it so sort of short term market. So are we going to find customers under long term contracts. So you're going to find is in most years for the next few years talking to existing or new customers about.
Whether it makes sense to enter into a multiyear contract with them and so I would expect certainly for each of the next few years to be that has to be activity on our behalf doing that.
Can I just ask that in a different way what is the tenure of your portfolio right now I mean is it on.
A weighted average basis as a one and a half years or two years in terms of the length of the uptake of the contract terms.
It's much longer than that it's much longer than two years.
In the past you never got a long way out of whack, but you just can't do that anymore, but once customers move to market based pricing and therefore, you don't have to really think too much about am I getting the price right or wrong and then you start to think about how much sense. It makes to sort of partner with each other for operating efficiency for qualification processes for visibility into demand.
Patents these contracts get longer and longer but I think it's probably safe to say.
That's helpful. Thanks, so much.
And that is all the time, we have today for questions. Mr. Daniel Rosen I'll turn the call back over to you for some final closing remarks.
Great. Thank you 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.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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