Lithium Argentina - Q3 2024

Transcript

Joel Jackson (Senior Analyst)

Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lithium Argentina third quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise, and after the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. Thank you, and I would now like to turn the conference over to Kelly O'Brien, Vice President, Investor Relations and ESG. You may begin.

Kelly O'Brien (VP of Investor Relations and ESG)

Thank you, Abby. I want to welcome everyone to our earnings conference call this morning. Joining me on the call to discuss the third quarter results is Sam Pigott, President and CEO. Alex Shulga, VP and CFO, will also be available during the Q&A session. Before we begin, I would like to cover a few items. Our third quarter earnings press release was issued last evening, and the corresponding documents are available on our company website. I remind you that some of the statements made during this call, including any production guidance, expected company performance, John Kanellitsas' strategic investment in Pastos Grandes, the timing of our projects, and market conditions, may be considered forward-looking statements. Please note the cautionary language about forward-looking statements in our MD&A and news release that was filed last night. I will now turn the call over to Sam.

Sam Pigott (President and CEO)

Thanks, Kelly. Good morning, everyone, and thank you for joining us today. We appreciate your interest in our company and your ongoing support as we progress Cauchari-Olaroz and navigate the evolving landscape of the lithium market. We are cautiously optimistic on the future of lithium, particularly as we assess market conditions, our operational capabilities, and positive changes we are seeing in Argentina. Last night, we published our third quarter results, and we're pleased to announce that during the third quarter, Cauchari-Olaroz produced approximately 6,800 tons of lithium carbonate, a 21% increase from the second quarter of the year. The plant is currently operating at 75%-80% of nameplate capacity, and while we expect this level to be maintained into 2025, we are confident that we will be able to reach 40,000 tons in the future.

Given production year-to-date and targets for the fourth quarter, we are well-positioned to meet our production guidance of 20,000-25,000 tons of lithium carbonate this year. As mentioned in the earnings release last night, the additional processing cost to achieve battery-quality lithium carbonate has been reduced from $2,000-$1,500 per ton. While this change had a positive impact on margins, market prices of lithium continued to see downward pressure during the third quarter. The most recent realized prices for Cauchari-Olaroz fell to approximately $7,000 per ton following the decline in lithium prices. Looking forward, we continue to work closely with our partner, Ganfeng, to determine the optimal product mix and quality to address the evolving needs of lithium battery customers and to maximize our overall operating margin. We expect to provide clarity on our 2025 production plans and product quality targets early in the new year.

We are pleased with the work being done to advance Stage 2 at Cauchari-Olaroz and the regional development plan around Pastos Grandes Basin in Salta Province. The work on the regional development plan is ongoing and should be completed in the coming months. We believe that the newly passed RIGI regime will provide a number of very attractive fiscal incentives to support large-scale investments in the country and will help support the development of our comprehensive growth pipeline. We expect to release more information related to the regional development plan in early 2025. In closing, we remain optimistic about our strategic positioning in the lithium market and the long-term demand driven by the ongoing energy transition. Our operations in Argentina continue to demonstrate strong production capabilities, and we are committed to enhancing our efficiency and sustainability practices.

As we move forward, we believe our investments in technology and partnerships will further solidify our role as a key player in the global supply chain. We look forward to updating you on our progress in the coming quarters, and with that, we'll open the floor to questions.

Operator (participant)

Thank you. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one a second time. If you're called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. To be able to take as many questions as possible, we ask that you please limit yourself to one question and one follow-up. Again, it is star one if you would like to join the queue, and your first question comes from the line of Ben Isaacson with Scotiabank. Your line is open.

Apurva Kilambi (Senior Equity Research Associoate)

Good morning, everyone. Thanks for taking my question. This is Apurva on for Ben. So my question is that in prior quarters, you've disclosed that Cauchari-Olaroz would be cash flow positive even at current spot levels. You mentioned that both spot prices have come down, as have some of your additional processing costs. So is this still the case? Will Cauchari-Olaroz still be cash flow positive except working capital at spot?

Sam Pigott (President and CEO)

Thanks for the question. So during the third quarter, we were operating cash flow when adjusted for working capital. As you point out, and we pointed out in our press release, prices have declined. There is about an 18% decline from the second quarter averaged carbonate price to the third quarter. Most recent realized sales price from Exar was about $7,000. I would say that while the prices have declined, we've also seen costs come down as we reach higher levels of production and also aim to optimize operations. So for the fourth quarter, we expect to be around break-even at close to current prices. We're working with Ganfeng on our production plan for next year as well as additional disclosures on cost, and we'll have that available for investors early in the new year.

Apurva Kilambi (Senior Equity Research Associoate)

Understood. Thank you. And my kind of follow-up question: at what point in 2025 are you folks expecting production levels to increase meaningfully? I know you mentioned you're still kind of having those conversations with Ganfeng, but are there challenges still in sustaining that quality at the higher production levels right now?

Sam Pigott (President and CEO)

No, I think we're genuinely pleased with how volumes have progressed throughout this year, so currently at 75%-80%, what we've said is that we expect to exit the year around those run rates and into early 2025. Again, we are working with Ganfeng on the production plan for next year, and we'll have that available to all investors early in the new year.

Apurva Kilambi (Senior Equity Research Associoate)

Thank you.

Operator (participant)

Your next question comes from the line of Corinne Blanchard with Deutsche Bank. Your line is open.

Corinne Blanchard (Director)

Hey, good morning, Sam and Team. Just maybe the first question on pricing. So you got about $8,000 per ton for this quarter, and then you mentioned $7,000 as you put that's what you saw in October. Can you just give a little bit more detail because I think the average price in China was about $10,005 since early October? Is that the price that you are referencing minus the VAT and minus the $1,500 for the impurities, or how should we think about that?

Sam Pigott (President and CEO)

No, that's correct. So the China price, the reference price that most people see in China, is inclusive of VAT, so that needs to be stripped out as well as the additional processing fee.

Corinne Blanchard (Director)

Okay. And then, on the processing fee, do you think should we model out further the $1,500, or is there a good chance that maybe you drop to zero the $1,000 through 2025?

Sam Pigott (President and CEO)

I mean, I think it's something that we're evaluating just in terms of how the quality has progressed. Obviously, this year, the focus has very much been on volumes, and there, I think we've certainly achieved our expectations. And so as quality becomes more of a focus next year, certainly, we'll kind of continue to update the market and investors on what that means in terms of our realized pricing. I think carrying on through the rest of the year, using $1,500 is probably the right number to use. But going into next year, when we come out with our production guidance on volumes, we're also going to come out with guidance on product mix.

Corinne Blanchard (Director)

Okay. That makes sense. Maybe just as a follow-up, so can you talk about the convert and what you're thinking about doing with them? It's a big topic of conversation with investors, so I just wanted to get clarity on this.

Sam Pigott (President and CEO)

Sure. I mean, for us, the focus is really on the Cauchari Stage 1 and refinancing Exar's short-term debt. I think the convert that's due in January 2027 has a very attractive interest rate of 1.75%. So we're in contact with the convert holders, and we're very confident we'll be able to refinance when the time is right, but certainly closer to maturity. I don't know, Alex, if you have anything further to add on that point.

Alex Shulga (VP and CFO)

Hey, Sam. No, I think you hit the response. I think at the current interest rates, 1.75% looks very attractive. We feel confident we'll be able to refinance this, but we don't want to jump ahead, and we will deal with this when we are kind of closer to its maturity. We still have a little less than two years. We'll focus on this next year.

Corinne Blanchard (Director)

Okay. Great. Thank you.

Operator (participant)

And your next question comes from the line of Joel Jackson with BMO Capital Markets. Your line is open.

Joel Jackson (Senior Analyst)

Good morning, everyone. I look at your financials and Exar's financials. It looks like you ended the quarter around $90 million of cash, the JV around $14 million. You put in $65 million to the JV across the quarter. If we're kind of break-even here, can you talk about what are you thinking about for your cash needs, the JV's cash needs, and if you've got to maybe think about getting some buffer or cushion in the near future?

Sam Pigott (President and CEO)

So we've brought down Exar's debt level to approximately $200 million, and we are actively engaged along with Ganfeng on replacing that with longer-term debt. So I think from the joint venture level, I think we're in a very good position. I'd say at the project, where prices are today, and we've kind of taken the look, there's some improved sentiment in China, but we're really building this business and planning for this business based on lower-for-longer pricing. And what we're seeing today is this business does not draw a lot of capital to sustain operating needs. And I think that's going to be continually supported by what we're seeing in terms of where operating costs are headed.

So I think we're in a very strong position today, not just from what we've been able to achieve delevering the joint venture and efforts to kind of term out some of the short-term debt there. I think our cash balance is sustained in a healthy position today. And in terms of what we see needing to support this business under a lower-for-longer scenario, we have no immediate needs to kind of create a buffer.

Joel Jackson (Senior Analyst)

Okay. And then can you help us, Sam, with some sensitivity around costs? So if the JV can do 25,000 tons, 30,000 tons, 35,000 tons, 40,000 tons over time, how might cost scale down? Is it just simply linear? Is it better than linear? Can you give us a bit of mile markers and granularity on how to think about it?

Sam Pigott (President and CEO)

I mean, certainly, volumes help. They don't tell the entire story. As we've carried on advancing this operation, hitting higher production levels, once we reach a more steady state of production, there are going to be ways to optimize our cost structure in Argentina. And so you can take kind of two obvious buckets of cost: one, kind of reagents, so price and specific consumption, so price times volume. And I think as we better understand the plant and it's operating more consistently, I think we'll be able to improve, certainly, in terms of the specific consumption. And then the other bucket of cost is labor. And certainly, there will be areas to kind of improve our cost structure there. And it's really just a function of kind of getting into this steady-state operation. So it's a combination of both.

Joel Jackson (Senior Analyst)

Thank you.

Operator (participant)

And your next question comes from the line of David Deckelbaum with TD Cowen. Your line is open.

David Deckelbaum (Managing Director)

Thanks for taking my question, Sam, and for the update today. I'm hoping that maybe as you look into next year, given in the context that we're expecting this regional development plan update, what should investors expect to learn from that update? and I guess put it in the context of how you're thinking about Lithium Argentina's capital needs for next year, once you're at the point now where Cauchari phase I is relatively ramping towards capacity, but how much incremental sort of capital calls will there be for next year?

Sam Pigott (President and CEO)

I mean, I think we understand very well that the market conditions today are putting a lot of focus on companies' balance sheets. Our approach from the beginning has been to advance our two attractive growth plans, the regional development plan, as well as kind of doing some preparation work around a potential expansion without spending much money. And so the regional development plan really benefits from a tremendous amount of work, money, and resources that went into both a feasibility study on Pastos Grandes and then, obviously, Ganfeng has spent a lot of time and money developing Pozuelos. These assets will all be put into a regional development plan. We certainly are cognizant of being able to advance these projects only when there is a rationale that benefits our shareholders. And so today, really, the focus is getting this plan advanced, finalized, delivering it to the market.

I think what it will show is a new way to think about how to incorporate new technologies that enhance recoveries and improve kind of the environmental impact. In terms of the financing strategy, listen, I think we're very aligned with shareholders here. We obviously don't want to overexpose ourselves to capital commitments that the current market wouldn't support.

Joel Jackson (Senior Analyst)

I appreciate that and helpful color. And then just as a follow-up, just on the clarification on next year and sort of thinking about running at 80% of capacity as we go into 2025, you talked about product mix selections with your partner, Ganfeng. How do we think about that evolving over time? I mean, are you seeing that there is a greater desire to kind of produce a technical grade longer term versus the original plan for the sake of efficiency, or is it more a case of is there more a desire on Ganfeng's part for you to be producing technical quantities for a longer period of time?

Sam Pigott (President and CEO)

I think it's in part just a reflection of how dynamic the market is. Specifications for certain segments of the battery market have tightened considerably, I would say, and so it's just looking at our operations and trying to optimize them to maximize the operating margin, so that is potentially producing a product at a lower cost, better efficiencies, and really just a trade-off calculation. Cauchari-Olaroz was designed to produce a battery-grade spec that will continue to be a potential target, but we're really working with Ganfeng to just ensure that we're optimizing the margin of the project. And so I'd say one further comment is both shareholders are very much aligned in maximizing margin. I don't think this is not a scenario where Ganfeng's telling us to produce a certain product, and we're going ahead with it.

Ultimately, this is a project that will produce a product that can either be sold into China or outside of China. And so that's the long-term view. And we'll have more to disclose around product mix with the production plan and guidance for 2025 early in the next year.

Joel Jackson (Senior Analyst)

Appreciate that, Sam. Thank you.

Operator (participant)

And your next question comes from the line of Seth Goldstein with Morningstar. Your line is open.

Seth Goldstein (Senior Equity Research Analyst)

Good morning. Thanks for taking my question. I wanted to follow up on an earlier question and ask about Cauchari phase II. What price makes sense to move forward? You said it could be a pretty low incremental investment, but how are you thinking about that in relation to prices?

Sam Pigott (President and CEO)

Yeah. I just say on Cauchari, obviously, the focus is Stage 1. We do have a separate team there working on phase II planning. I think part of that is obviously evaluating some advances that particularly Ganfeng has made around processing technology that can build off of what we've been able to demonstrate around Stage 1 in terms of enhancing recoveries, lowering the environmental impact. In terms of pushing the go button and advancing that plan, first, we have to finalize the plan. Second, I think we have to be able to assess where we are in the market, look at what the existing cash flow from Cauchari is, evaluate our financing options that would be available to support that growth, and then ensure, obviously, it integrates well into the RIGI program in Argentina. So I think that's all. That's that answer for now.

Seth Goldstein (Senior Equity Research Analyst)

Okay. Fair enough. And then in order to take the $1,500 extra processing fee down significantly to $1,500 or even eventually zero, would you need to make a material additional investment to improve the quality, or would it be not as much incremental CapEx?

Sam Pigott (President and CEO)

I mean, at this point, we have not identified the need for material incremental CapEx. Partly, it's a function of getting to more steady-state production. That will deliver two things. One, it'll allow us to hone in on the impurities that are currently outside of the acceptable spec sheet. The other big part, of course, of kind of maintaining more steady-state production is the variability within those impurities will be much easier to manage. So it's something that we're evaluating. Obviously, this year, the focus is very much on production volumes. At the same time, we have seen improvements that's been reflected in this lower reprocessing or additional processing cost in China. So it's really something that we continue to monitor, and going into next year, the focus will, as we've said before, pivot towards quality. But at this point, we don't see material investment associated with quality improvements.

Seth Goldstein (Senior Equity Research Analyst)

Okay. Great. Thanks for taking my questions.

Operator (participant)

Your next question comes from the line of Mohamed Sidibe with National Bank Financial. Your line is open.

Mohamed Sidibe (Equity Research Analyst)

Morning, guys, and thanks for taking my questions. First question would be just on the quarter-over-quarter increase in production. Sam, could you give us maybe some color on what drove that increase? Was it brine well availability? Was it on grade? Was it on recovery? Any color would be appreciated.

Sam Pigott (President and CEO)

I mean, I think it's a function of the team knowing how to operate the plant better, improving uptime, reliability. It's a large plant, somewhat complex, a lot of moving pieces. And so it's natural that it takes the team some time to understand how it operates. The user manuals are one thing. Operating it in real time is another. And so I think that's been a large contributor to the increase in production. I'd say going forward, that'll probably remain the case. It's about pushing into higher production levels and being able to sustain them. Maintenance is a big thing. Identifying preventative maintenance, being able to identify things before they break or risk creating any downtime. So I think that that's been kind of the most broad and significant contributor to the production levels increasing.

Mohamed Sidibe (Equity Research Analyst)

Okay. Great. Thank you. And then just a follow-up question on the cost front. You mentioned that, of course, as volume increases, that would benefit costs, but that you would look to optimize costs either on reagents and labor. Can you remind us of what percentage of your costs are coming from labor and reagents, if possible?

Sam Pigott (President and CEO)

I don't know, Alex, if you have rough numbers along those lines?

Alex Shulga (VP and CFO)

Sorry. Yeah, I think reagents would be the most substantial part of our costs. There is some kind of variability as the plant is kind of ramping up. I don't think we are ready to provide you kind of a guidance and sort of those percentages. That will come out next year as we provide full guidance. I just wanted to say, I guess if you refer to our technical report, that would give you an idea of those percentages. So reagents would be kind of 30%-40%ish or so. But again, it depends on the level of production. I think we'll be in a better position to provide this outlook early next year with our guidance. Sounds good. Thank you. And just my final question, Sam, if I may.

Mohamed Sidibe (Equity Research Analyst)

Just on the GM lockup that expired in October, do you have any color on that, or have you had any conversation with them in terms of their ownership?

Sam Pigott (President and CEO)

Yeah. Yeah. I mean, we've maintained a dialogue with GM since the separation. Yeah. I mean, the lockup is no longer in place. I think GM has, as you probably all know, been fairly focused on increasing their investments with Lithium Americas and Thacker Pass. But we have a good ongoing dialogue. I don't think we're in a position to speculate as to how they view their shares in Lithium Argentina from a strategic perspective. But we certainly have an ongoing and open dialogue with GM.

Operator (participant)

And ladies and gentlemen, that concludes our question and answer session. And this will conclude today's call. We thank you for your participation, and you may now disconnect.