Sigma Lithium - Q4 2023

Transcript

Operator (participant)

Good morning, everyone. My name is Dennis, and I will be your operator today. Welcome to the Sigma Lithium fourth quarter and full year 2023 earnings conference call. Today's call is being recorded and is broadcast live on Sigma's website. On the call today is company CEO, Ana Cabral-Gardner, and Company Executive Vice President, Matthew DeYoe. We will now turn the call over to Matthew.

Matthew DeYoe (EVP)

Thank you, Dennis. This morning, before market open, we announced a final investment decision for our phase II expansion, as well as preliminary unaudited Q4 and full year 2023 financial results. Before we begin, I would like to cover a few items. First, during the presentation, you'll hear certain forward-looking statements concerning our plans and expectations. Do note that actual events or results may differ materially, given changes in market conditions and/or our operations. Additionally, earnings referenced in this presentation may exclude certain non-core and non-recurring items and have been based on unaudited financial statements. Reconciliations to the most direct comparable IFRS financial measures and other associated disclosures will be made available. The slides will be posted on our website, and following the call, we'll post additional slides with added financial and performance information. With that, I will pass the call over to Ana.

Ana Cabral (CEO)

Well, hi, everyone. Good morning. We are absolutely delighted that we are announcing the final investment decision and the initiation of construction to double our production capacity from 270,000 tons of lithium concentrate per year to 520,000 tons of lithium concentrate per year. 2023 was just a transformational year for us. We became a major lithium producer, and as an investor operating team, we own more than 50% of Sigma, so we are all in together with, with all of you, our shareholders. I am gonna walk you through the key items, the five key competitive advantages that gives us so much confidence to make this investment decision. First, we're large scale, so we became the fourth largest mineral industrial lithium complex globally. Secondly, we are the sixth largest global producer.

That includes brine and rock, so we got scale. More importantly, we have low cost. We have achieved the second lowest cost in the industry amongst our peers. In parallel, we are producing a premiumizable material we call Lithium 5.0, which is the Quintuple Zero. It is irrespectively of environmental and social sustainability, physically and chemically, is the best chemical grade and most sustainable lithium in the world. It has unique metallurgical properties. So as a result, we made the final investment decision to build double scale to deliver more of that material. So the phase II is gonna be the same build team of phase I, which delivered phase I successfully on budget and on time.

More importantly, and I think lastly, a key point in this confidence behind the investment decision was that as a result of the very successful drilling campaign of 2023, we managed to increase the project life to over 25 years. So we have now permanence and longevity at 109 million tons of Mineral Resource. We've forecasted 150 million tons of Mineral Resource. On the next slide, if you can see, we want to demonstrate quantitatively that we've surpassed every lithium industry record, and we've achieved full production capacity just at the beginning, just at our second quarter of operations.

We reached 270,000 tons of material from September 2023 to September 2024, meaning on an annualized basis, we have 12 months, we have reached 12-month capacity, and again, within just 6 months of commissioning. We have managed to produce and deliver, in those 6 months of 2023, 105,000 tons of this material. We caught quite a lot still of the very great market of last year, and as a result of the superior properties of the material, we achieved a $1,333 per ton average price, premium price for the material. At net net, we're getting a $1,160 per ton of this material.

Again, result solely of the outstanding metallurgical and chemical properties of the product.... We have managed to reach a cash cost at plant, which is the second lowest among the hard rock lithium producers. And these cash costs get lower as we get bigger, because we dilute our fixed costs by a larger production. More importantly, we've done all of this while generating and conserving cash in our typical Sigma discipline. In other words, we have a cash position of $109.4 million sitting in our balance sheet. So theoretically, we have an entire phase II plant right there in our balance sheet, ready to be deployed. So as a result, we're initiating phase II to increase our scale in 100%.

We started with all the construction activities, mobilization, contracting Promon, and we'll double capacity to 520,000 tons. So it is more of the same because it is working, and it's working extremely well, irrespectively of lithium price cycles. And I think lastly, again, we got to 109 million tons of audited Mineral Resource, with an exceptional high grade of lithium oxide. Which means that we have over 25 years of life of the project, but our resource lasts longer because it has higher lithium oxide. So we are 100% owned, four largest producing industrial lithium complex in the world, and the only one to produce this 5X, 5.0 carbon lithium.

Which makes us all very proud, because for us, in our team, investor operators, it wouldn't be any point in getting here without being able to be in consistency with the supply chain that we are honored to be part of, this green supply chain that delivers these green electric vehicles. So here's a picture of this industrial plant that kind of makes this magic. This is the Greentech innovation. What you see in dotted red is this third module of the plant. This was a lot of work to put together, but that is actually the great responsibility to deliver the Quintuple Zero lithium, the low cost and green lithium for green cars. And again, it's green lithium for green cars, not brown lithium for green cars. Why is that? We have zero toxic chemicals, it's Dense Media Separation, centrifugation technology.

We achieved zero carbon, we use zero drinking water. We've been using sewage grade quality water. We produced the lithium with zero tailings dams, and we use zero dirty power. Our power is clean and renewable. On the next page is an illustration of us in the lithium world in general, and you can clearly see numbers. Numbers are quite straightforward. We have our starting point at 85 million tons, which is equivalent to 2.7 million tons of LCE resources. Then we deliver the first leg of the Mineral Resource update, which got us to 3.3 million tons of LCE resources. And then we have the expected further increase at 4.8 million tons of LCE equivalent resources. On this page, you can clearly see where we are in scale.

In brown, you see our peers, all of them in Australia, all of them lithium industrial mineral complexes in production. In purple are the non-producing. So we basically are the four largest lithium industrial mineral complex in production. We are of that scale, and this is just our first year of operation. So it shows that we have permanence, because we are as large as the greatest projects in the world sitting in Australia. We joined that club. Here is when we stack us up against all producers, including brine producers. And again, the chart is pretty self-explanatory. We became the sixth largest producer globally, but, because we commissioned our operations with the headwinds of the lithium cycle reaching bottom, we never got the opportunity to be repriced as the large scale producer that we are. And here we're gonna demonstrate visually the disconnect.

When you see in dark green is the volume in LCE equivalent of 2024 production. In purple, in gray, you can see the market cap current of these companies. Clearly, when you look at Sigma at 37,000 tons of LCE equivalent of production for 2024, like right now, you look at our market cap. We're really priced like a developer, so the discrepancy speaks for itself. And the plan for this year, and our number one mission, is to close that gap, basically doing what we're doing, demonstrating that we're here to stay as a large supplier. And this next slide proves it. We're going into our ninth shipment. We have demonstrated resilience and the sheer metallurgical product quality of this material. We established shipment cadence basically on month five after commissioning, by reaching capacity, annualized capacity.

We've done all of that against terrible headwinds. So we now have a track record of being a reliable, large-scale supplier to the EV battery chain. And in a spirit of transparency, we're showing every shipment and every implied price per ton of every shipment. So we've achieved this on merit, slightly premiumizing over our peers because the product has what we call value in use, superior metallurgical properties that deliver measurable, quantifiable cost savings to the customers. So we're here to stay. We're a large scale producer. We're a force for good in the industry. On this next slide, a bit more on premium pricing. We've been achieving a meaningful final premium price. This month, we were able to close the gap completely and eliminated provisional pricing. So that, once again, validates this outstanding metallurgical and chemical properties of the product.

The product is better. It delivers savings. So we're not capturing all of those savings, we're capturing some of it. That becomes our premium pricing. So just now, for its eight shipment, we've achieved 1,333 nameplate price, which included VAT. Net of VAT is a $1,160 per ton. So that's a very decent premium for, you know, the new producer on the block. This price, again, is final and non-provisional, so it's a meaningful increase over the previous premium prices we already achieved, we showed you on the previous pages. And if you translate that into a variable price or into a reference, that's equivalent to 8.75% of the London Metal Exchange lithium hydroxide CIF quote. So it shows that we're grabbing a significant portion of the value of the supply chain.

The price discovery was transparent. It was driven through closed private bidding, and the purpose of it is working partnership with Glencore, our marketing and commercial partner, to maximize the value of this superior product for Sigma. On this next slide, again, more of why do we have value in use? What are these chemical and physical properties that allow us to premiumize even against headwinds? First, it's because the product is high purity. High purity means low iron oxide, low potassium oxide, low sodium oxide. These are three, let's say, impediments to achieving ultrahigh pure lithium chemicals at a low cost for our clients. It also has low mica, which again, is another stumbling block in the refining process. What's interesting, though, is that when you look at the physical properties of the product, we have a dry coarse.

The dry coarse behaves in the calcination stage at the kiln beautifully, as it heats up, and it becomes beta-spodumene. So there are efficiency savings right there in the form of saved energy. So this whole combination delivers a saving that's measurable. How so? The downstreamers just need 7 tons of our product to produce an ultra-high purity lithium hydroxide. When you look at the comparable product, 9-10 tons of that comparable product is needed. So there's 3,000 tons of savings for our client per ton of lithium hydroxide, which could technically translate as about $330 per ton of savings for us, if you look at just 7 tons. And again, it's visual. You can look at the pictures, and you can see the difference.

Ours is this very light, greenish, which means purity, coarse material versus the muddy talc type of wet materials from our competitors. Again, here's the Quintuple Zero. I'll be brief, but we are very proud to say that we've done all of that, staying true to purpose. Whether it matters or not, whether we get a green premium or not, that is not why we do it. We do this because 12 years ago we started on this journey of being investor operators in Sigma to deliver just that, to be at the leading edge of sustainability. Zero carbon, zero chemical, zero toxic chemicals, no tailings dams, no cannibalization of the community potable drinking water, with clean power. So we did exactly what we said we did.

We didn't increase our production costs as a result, but unfortunately, we do not get a green premium. But again, our product is better. So, a bit about the numbers, right? We're built to last. I mean, we built this company with draconian financial discipline over 12 years. So ironically, this is probably one of our best moments because it's the first year we have revenues. And more importantly, we're able to quantifiably demonstrate that we are low cost. So we have revenues, we have low cost, we have cash flow, and the consistency of delivery and production of our Greentech plant keeps on driving revenues, keeps on achieving that at very low cost, creating what we call commodity cycle resilience. So irrespective of commodity cycles, we're generating cash, and we have a very robust business.

As Jim Collins used to say, "We're built to last." So in 2023, our full year dollar revenues were $135 million. We shipped 102,000 tons of material. We produced 105,000, but the average realized price per ton of material was $1,321 dollars per ton. Our FOB adjusted cost at plant was $427 a ton. FOB adjusted cost at Port of Vitória, meaning taking from the Vale do Jequitinhonha to the Port of Vitória, was $485 per ton. So in China, all the way in a Chinese port, is $565 per ton.

So very, very close to the guidance we provided to the market as to expect for the full year, as we keep on decluttering, or as our friend Joe said, "Removing the noise out of our financials," given that this was a hybrid year, part commissioning, part production. So in margins, the margins are pretty spectacular. Our FOB plant margin is 67%, port margin 63%, cash cost CIF China margin 57%, at what some people consider to be the bottom of the cycle. This is mathematics, the mathematics of commodity cycle resilience. And as we say, mathematics has no opinion. Mathematics is just a fact. So on the next page is, again, more mathematics. For full year, we've already given you the revenues, the shipped amount, and the price per ton. Now let's move on to EBITDA.

We posted an adjusted EBITDA, cluttered with the noise of commissioning, of $24 million from July to December, because that's when we earned it, less than half a year. Now, we adjusted for non-recurring items, which include things such as RSU expenses and commissioning costs. So the pure EBITDA margin at FOB revenues was 18%, but the adjusted EBITDA margin for the non-recurring items and non-cash items, such as stock compensation, is 36%. So again, a very robust EBITDA margin to be expected from us in our very first year. So it is... And it is this low, the low production cost that drives our ability to generate free cash flow. As I said earlier, we are draconian when it comes to cost. We always do more with less. Why? Well, we're all owners.

We're all investor operators. It's not somebody else's money. It's our money. Every employee, every senior manager is a shareholder. So we look after our, our, our money. We look after our expenditures like you look after, you know, the money that goes into our wallets. So full quarter cash unit operating costs at Vitória is $442 a ton. Non-recurring commissioning expenses amount to about $94 a ton. So the pro forma fourth quarter cash unit operating cost of concentrate amounts to $455 a ton. My partner, Matt, is gonna give you a bridge in a lot more detail in a second. So we're targeting for the third quarter 2024 an average, you know, very close to the guidance, $420 a ton, FOB Vitória, $370 a ton, plant gate.

These cost initiatives include a number of things: diversifying suppliers and service providers, we are onboarding contract labor, which was important when we commissioned, and that was one of the expenses we adjusted out, meaning the engineers of the construction companies, the engineering companies that stayed behind to help us operate the plant and commission the plant, they are no longer with us. We now have our own teams, and we've optimized maintenance schedules, and we're running this like a clock. We have predictability and umbrella maintenance contracts with our main parts manufacturers. So now I'm passing it on to Matt De Yoe, my partner, to go over the bridge for the cost. Matt, you got it.

Matthew DeYoe (EVP)

Thank you, Ana. So, our reported FOB costs in the fourth quarter, as we had highlighted in the release, was $549 per ton. Within Q4 were a number of costs associated with commissioning expenses that were more of a Q3 phenomena, but, but booked within the October-November timeframe. The real cost, and, and we incurred them, but on a pro forma basis, they didn't recur in December or January or, or February. So we feel very confident that those are, as you say, non-recurring. That would drive a pro forma FOB Vitória cost of about $455. If we strip out the seventy-ish dollars per ton in high-grade freight, we end up with a Q4 pro forma plant gate cost of about $385 within the fourth quarter.

That's not very far, as we said, from the $370 that we were highlighting for the 3Q average. And again, we haven't even really begun to benefit from the transition of contract labor to salaried domestic labor, some of the diversification of our suppliers or the optimized maintenance schedule. So we think we have plenty of room or good line of sight, again, to hitting that $370 number. Obviously, as you build this back up to get to what we hope is a recurring reported COGS all-in, you add back that spodumene freight, royalties, and D&A, and you should get to a rough ballpark of where we hope to be, at least on a pro forma basis, if you were to think about 4Q. Other items that impacted the fourth quarter: low-grade trucking and warehousing.

We're not trucking our tailings to port anymore at the moment, given market conditions, so we don't expect those costs to continue. As we mentioned, those commissioning expenses are in there, and we got some tailwinds from equipment tax and credit. So that kind of bridges, perhaps, the other line items just from a quarterly impact perspective. So again, I think we feel pretty good with the direction we're headed. And I'll pass it back to you.

Ana Cabral (CEO)

Yes, sir. So here we go. Next page. Again, this is the bridge to EBITDA, and again, it's a very straightforward bridge. We start with sales, and we go all the way to the adjusted EBITDA. And I wanna make it clear, we're adjusting for non-cash items and for commissioning costs. So we delivered what we call an adjusted EBITDA of $49 million. So we ended our very first year of production with positive cash-adjusted EBITDA and cash operating profit. I mean, considering the downfall in lithium prices, we are all very proud of this accomplishment. So here it is. We start with sales in US dollars of $135 million. Then we have operating costs, non-recurring, transfer and warehousing. We get to the gross profit, right?

So at the gross profit, then we have SG&A, ESG and others, and then we cash EBIT. So then we start moving back into the items for adjustment, meaning stock-based compensation gets added back, because it's a non-cash item, it's an IFRS accounting item. Then we get the D&A added back, and then we get the EBITDA. So all of this is accounting straight from our non-audited financial information. So then we get to the $25 million of EBITDA, which I just showed you on the previous page. And then we add back the non-recurring SG&A, which is part mingled with the operating costs there. It's mostly related to commissioning costs. For instance, in commissioning engineering costs alone, we have something around $6 million.

We have a series of these one-off items, they're not going to repeat, to be repeated on an ongoing basis, and as a result, shouldn't be part of your modeling of the company. So then we get to what we call adjusted EBITDA of $49 million. So here, a bit of kind of the breakdown of these non-recurring general and administrative expenses that we discussed before. What are these items? What's in there? It's a mix of things. For example, as you can see, 25% of these numbers are related to the commissioning team on phase I construction. 29% is legal. I mean, we had litigation, we had a strategic review. We were very well advised and very well guided by excellent lawyers, but they are one-off.

So, more important, we had quite a lot of consulting work, which we're calling audit and accounting services, which were basically helping us put our SAP back on track, classify costs properly. I mean, we were supported by the folks at various consulting firms to get our back office in order. So that's again, an investment, a one-off investment in that part of the business. We had no recoverable VAT taxes of 7.4%. And then transaction costs and commercial development. Achieving the premium price costs travel, costs money. We spent quite a lot of time in Asia working with clients, working with refineries, working with battery makers, working with end users to test product and establish ourselves. Again, remember, we started from zero. We did not have a book of clients.

So we built an incredible book of clients that premiumizes our product because we worked with them to understand and to test and to demonstrate value in use. That's the 28% non-recurring. So we kinda, kinda gave you a glance of what are these we call investment items. This is us investing in the resilience of our business for the next couple of quarters. And on the previous slide, so just to recap then, number by number. So, next. So this breakdown is that if you look at this $24 million, that bridge, the 25 accounting EBITDA to the $49 million of adjusted EBITDA, the next page basically shows you the breakdown of that 24.5 non-recurring G&A expenses.

We try to give you as much clarity and insight as possible into a number that is an adjustment that is non-recurring. So now we go on to how are we gonna look like steady state? Well, we started with the current prices, with the guidance we provided, which we stick to it. So again, the estimated, well, the net concentrate price we just obtained is 1,160. Whatever it is on a cycle, it doesn't matter, because our CIF costs in China are $510. We believe the recurring SG&A to be about $48 and the maintenance CapEx to be about $18. So the estimated run rate, cash operating margin per ton is $584, which means we make money with every single ship, right?

So deduct, you know, $1,160 -$510, -$48, -$18. There you have it. It's a substantial gross margin. Sorry, it's a substantial net operating margin, cash margin. So then when we go to mid-cycle, this number gets even bigger because we achieve an even bigger run rate, cash operating margin per ton. So we gave you the per ton numbers so that you can actually model in whichever cut-offs you choose. So we generate cash at the trough of the cycle. At mid-cycle, we generate quite a lot of cash. So that's just a demonstration of our unique operational efficiency. And I must say that on this aspect as well, we are in full tandem with where the electric vehicles industry is going.

It's now all about producing cheaper batteries, cheaper cars, lower priced cars. So we are the low cost producers, so we're here to stay. And, these low costs are basically mainly due actually, to our lower Greentech plant processing costs. It is a dense media separation, uses centrifugation, uses less electricity. Yes, our electricity is clean and cheaper, but our process just have basically seven, six main DMSs, seven main steps, plus the crusher. So we don't even crush the powder. So it is a lower cost industrial process, period. That's where we gain competitive advantage. We decided to invest in this technology. We took a contrarian view in 2019, and we proved that dense media separation technology is not only greener, but it's also more cost effective.

So it is in tandem with the future of the industry in its two core characteristics. Batteries have to be cheap, and we believe materials in these batteries have to be green. So this is us. So when you perform 2024 estimated cash flow, assuming 270,000 tons per year produced, we have the equivalent of $158 million of estimated run rate cash operations generated at current prices. Mid-cycle will be $249 million. So pretty robust cash generation. When you go to 2025, with doubling the capacity, we can dilute down a bit the obvious fixed costs, such as recurring SG&A. So that number goes a bit higher. It, it, it goes higher than double.

It becomes $304 million. So again, as we've shown on the bridge that my partner presented, you can clearly see that as actual costs, we're there. We're delivering actual costs that are closer to guidance, because we built the guidance bottom up, supplier by supplier, before providing it to the market. And so with all of that, I think I might have given you comfort that we got a very resilient business. We have solid cash generation, so we're building. Our board green lighted final investment decision, and we are initiating the construction to double production capacity to 520,000 tons per year. On the next page, the picture, a thousand words. You can clearly see that all we got to do is build another Greentech line.

That will cost about $100 million, and it will add 250,000 tons of lithium concentrate production capacity. Given our cash at hand, meaning cash at hand of $109 million, in theory, we could actually build a plant right now just drawing down from our cash position. Now, why is that? And that's what our next slide is going to show. This comes, and we, we haven't explained it as clearly. We have trade finance, yes, we do. It's revolving because it's linked to our ability to deliver what we just showed you, cadence. Every month, every ton produced generates permanence of trade finance. In Brazil, it's called advancements of export contracts, ACEs. They last about 180 days, but they are linked to our ability to produce, cadence of production.

The thing, though, is that we did not draw down these lines. So, meaning, we drew it down, but we did not use it for trade finance. So to make it clear, we have the trade finance, we drew down the lines, but we did not use it to finance the working capital until the client pays us. Why? Because this is where Glencore steps in. In addition to being a fantastic commercial and trade partner, they are also our financing backstop. As you noticed in the previous shipment, they advanced on a final and non-provisional basis now, 85% of our boats, of our shipments. So we rely on Glencore, not only for their incredible marketing and commercial expertise, but also for providing us with the actual trade finance.

So the trade finance lines we have in the banking system here are sitting untouched in our balance sheet. So they're drawn and they are untouched. And what are we gonna do with them? Are we gonna build a whole plant with them? No, we're not. But they are going to be the cash that will advance the funds for construction as it progresses, because the development bank lines of BNDES are on a reimbursement basis. So we pay, we get reimbursed, and the cash position is the demonstration that we have the ability to green light this entire construction, right now, today, with the snapshot you got in front of you. So as we keep on generating more cash with every shipment, we're extremely comfortable financially.

So again, we approved the initiation of construction of phase II because, well, we have a track record of building on schedule, on budget. We actually broke the record of this industry of getting there fast. So, with a total CapEx of $100 million for the 250,000 tons of increased capacity, essentially, we're gonna have on, with P2, enough lithium for 850,000 tons of EV. So we like to say that Sigma belongs to the world. I mean, we can deliver this to many markets, well beyond our borders. We are a global force for good in the industry. The EPCM is mobilizing the fleet for earthworks. We are in active construction, mobilization, preparation. The phase II flow sheet is consistent with the processing sheet.

The technology to process the material just becomes improved, so its consistency, it's consistent with all the lessons we learned with phase I. So we have quite a lot of technological advancements and improvements and lessons learned that we are building or we built into the engineering of phase II. So phase II is a better version of phase I. And this comes from savings in engineering, optimized design, offsetting material costs. Well, the Dry Stacking for once, which didn't work in June, so we figure out how to make it work. We're now gonna build a Dry Stacking that's gonna work immediately together with the module two, the Dense Media Separation plant. So we got technological improvements all along, and this is why we were eligible for the Brazilian Development Bank Innovation Line, because there's innovation all around, this...

flow sheet. And again, innovation, as all of you innovators know, is not an eureka thing. It's a sum of various optimizations in industrials like we are throughout a processing plant. So the sum of all these innovations, the sum of all these optimizations, leads us to the incredible consistent production cadence and consistency that we were able to reach. So the next slide, well, it has a lot of meat, huh? This slide has a lot of information, a lot of detail, but we wanted it to be just that. We wanted to do a side-by-side of what was phase I and what is phase II, and where are the savings. This is public information, so you can refer back to it. I'm not gonna spend that much time on it, but essentially, where are we saving? It's a bit of everything really, right?

We're saving on spare parts because we're an operating entity, so we don't need to build an inventory of spare parts. We're saving 50% of engineering because we have a plant that works, so we're basically doing the designs of a plant that we already have with the improvements. There's a bit of environmental savings to the extent that, for example, we do not need to build an entire sewage treatment station like we did before, given that we use sewage water from the Jequitinhonha River. So it's a sum of various savings that leads us to a plant that is gonna cost about 20% less than phase I.

On a total construction CapEx basis, it's kind of roughly 10% less, which is 10% less of a very inexpensive plant. So given the track record, given that we've done this before, given that the team is exactly the same, everyone that built this is here. Keith, Keith Prentice is leading it. I'm here. Felipe, which was chief controller of procurement, is back here. So it's putting the same team back on the field to do what they do best, build on time, on budgets. And we're hiring Promon again, which done a spectacular job for us in a previous project. And we're hiring Primero again, which done a spectacular project assembling this in record time. The next slide is a bit more meat.

We'll put labels on this, but the purpose here is just to illustrate that when you start construction, you don't really have all the costs on month one. It's a crescendo, right? So you start with earthwork, civils, foundations, which cost about $10 million, but it's not 100, which means it's back-loaded costs. The disbursements start to increase as equipment gets order, prepaid or intermediate payments, and then later on, delivered to site. So this slide kind of illustrates that construction of a plant is backloaded. Even though we have the cash sitting in a balance sheet, we could do all of it front loaded in theory. That's not how it really works, and this is why we're so relaxed. On the other hand, in typical financial prudence, we're gonna build one plant at a time.

So that's an important point to leave you with. We're building a plant this year, and then next year we'll build another one. So the next step, more on the construction process. So construction activities are starting this month for earth civil works, foundation, infrastructure installation, mobilization of equipment. We're gonna have about 200 extra workers in Vale do Jequitinhonha. So more of the prosperity that we brought to the region, we're gonna probably lodge them in Itinga, which is a city closer to us. So the first step, the very first step, was licensing. So we were already awarded a license, so we're fully licensed to build and to operate. That's an incredible accomplishment. We have the LO, the operating license for this plant already. Why? Because of the track record.

We demonstrated that we are impeccable, so we got something that is typically granted to industry in Brazil, but rarely to industry connected to mining. So we got the same industrial cloud as a high-tech industry because we demonstrated to be good protagonists of mineral transformation. Our plant is innovative, it's Greentech, it changed the conversation in the sector. So we got the operating license right at the get-go, so we're fully licensed. As soon as we're done building, we can start selling product. Then we got the financing. As we've shown you, we got the cash balance. It's linked to trade lines. Trade lines exist based on production, 180 days revolver, so we're good to go. Then we've done the engineering work. We are FEL3 quoted, Promon led it. So we have the number to precision.

It's $100.5 million. BNDES honored us with an innovation line. We're very proud to be part of this club of companies that has been extended development bank financing in this country. We are planning to honor the taxpayer money that's been given to us by, again, delivering this on time and on budget. And this is a backstop financing because, again, it's a reimbursement line, so we need the cash at hand in order to submit the reimbursement that then BNDES covers. So we made the FID. This is kind of what led us to do final investment decision. There's been months of work, months of work, going into the ninth month of work that led us to this moment of starting mobilization. It wasn't overnight. The next page is, again, completed detailed engineering, CapEx with FEL-3 accuracy.

This is how we keep it on schedule, this is how we keep it on budget. This is the secret sauce of building responsibly. We don't get it wrong because we quote suppliers. We are licensed. We have a permanent mining license for the, for the area, so we updated project execution plan. We're doing procurement, we're doing port logistics, final investment decision for phase II. Our board couldn't be more comfortable. Remember, last time we green lighted final investment decision, it was in 2020. It was in the middle of COVID, and we did not have cash generation. So this is kind of why we sound so relaxed. On the next page, we're relaxed, but we're vigilant. We're relaxed, but we didn't lose discipline. So we're gonna do Sigma style, one step at a time.

So this chart has a lot of information, but it's a modified chart that you already know. Year by year, we're showing in dark green sources of cash flow. What are the industrial capacity modules we got running, right? So 2023, we produced 105,000 tons of lithium concentrate cash flow, right? We finished building it. We're done. In 2024, in orange, we're showing what we're building. In the greenish here is what's being green lighted to build. So we're almost doubling capacity. We go from 270-520. And we're putting this because that's nameplate, right? We probably can go higher, but it's nameplate. We're gonna have the benefit of the cash flow off phase I. So cash flow from one module of the industrial plant, construction of another module.

That's been green lighted. In brown, it's what hasn't been green lighted, but this is where we're going. This is the industrial plan that we submitted to BNDES with the whole, you know, development, development strategy for the Lithium Valley when it comes to Sigma. In 2025, we're gonna have the benefit of phase I, running cash flow. Phase II, running cash flow. Depending on where we are, we may or may not even deliver a dividend. Let's see. But phase III is going to be green lighted to be built, most likely integrated with a lithium sulfate plant. Why? Well, because of that meaningful gain, the value in use that we are currently providing to the clients for very little premium.

So if you recall, at today's prices of $14,000 per ton of lithium hydroxide, if you quote it for technical grade, it doesn't matter, because our $3,000 are intact. One needs 7 tons of our material to do a ton of, let's say, lithium sulfate or intermediates or full chemicals. We need less units, less quantity of our material. So what's the rationale? If I can calciner and do the acid wash ourselves, which is what's called intermediate chemicals, lithium sulfate, we're capturing that $3,000 for ourselves, so that becomes extra cash flow. So the decision will be made in 2025, because we got a whole year to see if we can premiumize to that value in use. If we can't, we're just gonna do it ourselves, because calcination is a kiln, an acid wash is an acid wash.

These are intermediate chemicals. It's basic chemistry. Brazil is an industrial country, so the human capital and the capabilities are here. We are not going to do specialty chemicals. What we'll be doing then is shipping less volume to specialty chemical refineries all over the world, including to our dearest Chinese customers, who already agreed to buy this material from us. So we'll ship Lithium Sulfate intermediates to China, to Texas, to Europe, to Japan, to South Korea, to all over the world. So that's the 2025 plan. And then in 2026, we're gonna sit and we're gonna enjoy the industrial site we built. So these are our plans for the next two years. So we're gonna be quite busy.

What I also wanna share with you is that none of the activities related to the strategic review has impacted at all our ability to think, to make a strategic plan, to execute, to deliver, to continue to do what we do best, which is to execute. And that leads us to our concluding remarks. I mean, we have completely transformed Sigma from and you can see the picture. It's a thousand words. It was a construction site in March 2023. You can look at the left. What we have now is the sixth global largest producer of lithium across the board, brines, hard rock, and the four largest mining industrial complex in the world. We delivered everything that was under our control, completed the DMS commissioning, initiated production in April 2023, hit nameplate capacity by fourth quarter.

We delivered a dry stacking, so we have zero tailing dams, not a drop of water to spare. We reuse the water. We reach net zero, which again, has been four years in the making, and we also deliver this Quintuple Zero lithium that we all love here. We increase mineral resources significant to give longevity to our ambitious industrial plans. So those industrial plans now are backed by 104 million tons of reserve resources, mineral resources, 43-101 audited, and an expanded expected Mineral Resource of 150 million tons. And we're quickly in the process of converting part of the 109 into additional reserves. And we got to consistent monthly shipments. What to expect from us this year? Well, mobilization. We're beginning construction. We're gonna deliver the Mineral Reserves.

We're expecting to increase it by 40%. We got 54 million tons of Mineral Reserves. We're gonna increase those in 40%. And again, it's just to add longevity, solidity and permanence to our industrial plans. We're gonna audit further the 150 million ton Mineral Resource, and we're gonna commission phase II. So, we're very, very, very enthusiastic about 2024. And again, a lot less worried than when we did this the first time, because we have the first execution under our belts. So we know what we got right, we know what we got wrong, and we're gonna try not to make the same mistakes. Making mistakes is human. We're not gonna make the same mistakes twice. So here we go.

Twice experienced a producer with cash in hand, marching into doubling the size of this company and hopefully, hopefully being able to getting priced at least in tandem with what we produce today. I'll go back to this slide. If the market could only give us the credit for the producer we are today, we would be quite happy, because right now, we're kind of priced cheaper than a developer. So that's kind of what gives us so much confidence to be, you know, more than 50% owners of this company here in the management team and work all hours to deliver this 2024 milestones to our investors. And to all of you, I wanna close this with a huge thank you for supporting us, encouraging us, sticking with us and believing in us.

This is my accountability to you. We're delivering exactly as we promised on every element that we can control. Now we're moving on to the Q&A. Matt?

Matthew DeYoe (EVP)

Thanks, yeah. I'll pass it to Dennis to open up the Q&A.

Operator (participant)

Thank you. If you would like to ask a question, simply press star, then the number one on your telephone keypad. Once again, to ask a question, please press star one on your telephone keypad. Now we have a question from the phone line. It comes from the line of Steve Byrne with Bank of America. Please go ahead.

Steve Byrne (Managing Director and Senior Equity Research Analyst)

Yes, thank you. Is it fair to assess your net cash position in the first quarter as dropping by $30 million? Is that a fair assessment? And if not, what unusuals might have led to the cash drain? I'm asking because you're moving forward with an outlook of generating, you know, free cash flow in these subsequent quarters. I just wanna make sure that squares with what the results were in the first quarter.

Ana Cabral (CEO)

Matt, do you wanna take the question or should I take it?

Matthew DeYoe (EVP)

You can grab it if you want. Yeah.

Ana Cabral (CEO)

Yeah. So, Steve, well, we give, we're giving you the snapshot of the cash for now. So $109 million is March 30 cash position, right? So that's an important point. What happened between then and now? Well, we drew down, and this is why we wanted to give you clarity on the trade lines, right? We drew down the trade lines, but we did not use it. So, so what we have there is a combination of drawn trade lines, but unused trade lines. And then, if you take, you know, the cash page here, you're gonna see that we got. There you go. Can you see this page? Yeah. So we got $88 million of these trade lines that were drawn but unused, right? And then the balance is just cash generated.

Now, when you look at the back of the year-end cash, there was a $12 billion advance interest payment that was made on the long-term loan we have from a shareholder in our balance sheet. So maybe that's probably the we call the clutter, when you look at the cash position in December. Not sure if I answered your question.

Steve Byrne (Managing Director and Senior Equity Research Analyst)

When you say that the trade line-

Matthew DeYoe (EVP)

We can take it offline, sir.

Steve Byrne (Managing Director and Senior Equity Research Analyst)

Okay.

Matthew DeYoe (EVP)

I think your math is a little off.

Steve Byrne (Managing Director and Senior Equity Research Analyst)

Okay. So maybe just-

Matthew DeYoe (EVP)

The net debt, our net debt would have increased only modestly between year-end 2023 and March. And then, obviously, as we've been able to kind of articulate more recently in our press releases, we're now locking in price at pretty good economics. So we would expect cash to accrue quite considerably should markets kind of sustain these levels, which we, for now, seem that they are doing. But we can, we can talk a little bit more offline, so.

Ana Cabral (CEO)

Exactly.

Steve Byrne (Managing Director and Senior Equity Research Analyst)

Okay, and then-

Ana Cabral (CEO)

Because, because-

Steve Byrne (Managing Director and Senior Equity Research Analyst)

Maybe just-

Ana Cabral (CEO)

If you look at the total, like. Yeah, if you take a snapshot of like today, and that's an easy snapshot, right? We got $100 million of long-term debt from shareholders. We got all US dollars, $10 million from BDMG. So that's long-term debt, non-amortizable. But, you know, the interest on the long-term debt has to be paid upfront, so it was decreased from the cash position in December thirty-first. It wasn't paid then. It was paid in January. Then what we've done, we drew all the trade finance lines, but we didn't use it. We got $90 million, we got $88 million unused.

So when you think about the overall position of net debt, we got roughly $110 million sitting long term, and that's very benign shareholder plus development bank. And we got these trade finance lines, which are in Brazil, kind of a unique animal. They're kind of a revolver, which are so functional of our ability to produce. So we wanted to show that when you look at the cash position, if you deduct 109 minus the trade finance, it's actually generated cash, right? And if you try to kind of triangulate that with the cash in December, probably the big item that's missing is the payment of about $12 billion of advanced 2024 interest for the long-term shareholder line.

Steve Byrne (Managing Director and Senior Equity Research Analyst)

Okay, thank you for that. And maybe one follow-up on the idea of at least considering going downstream into lithium sulfate. Do you have any preliminary cost estimates of what that project might cost? And would you do that at the mine, where you would operate a calciner at the site and some of that material would then be put back into the excavated areas?

Ana Cabral (CEO)

Well, that is the centerpiece of BNDES industrial strategy. We will put it wherever natural gas is gonna be made available to us at the lowest cost per BTUs. Most likely, I mean, Brazil is a very large oil and gas producer offshore. The gas is available in what we call the pre-salt ports, of which the Port of Vitória, where we are, is one of them. So if we can get the affordable dollar per BTU of natural gas at the port where we are already, most likely we're gonna put it at the port, which is where it makes most sense. One of our partner clients has basically announced to do exactly what we're going to do with one of our peer companies in Australia.

It's the obvious thing to do, and we were the first to talk about this. To do lithium sulfate is the natural evolution for a lithium concentrate producer, and we demonstrated why. Now, what's the advantage of Brazil? Clean, cheap power. I mean, electricity costs $0.02 of a US dollar per kWh. We can obtain a very, very favorable $1 per BTU gas contract at a pre-salt port at the shore. And we do have a study, which in fact, you know, is very similar to what our peer is gonna announce in Australia, of how much this plant is gonna cost. I can't divulge it now, but this was one of the centerpieces of the conversation with BNDES. This is the ambition, and it's pretty straightforward because it's basic chemistry.

An intermediate plant is a kiln and an acid wash. The kiln makes spodumene into beta-spodumene, and the acid wash produces the sulfate. Now, what is the real key? And that's a key competitive advantage we, we, we built into this company. Residues, the tailings. What do you do with 12 tons of toxic sulfuric acid tailings generated per ton of lithium sulfate? That is the question that very few places can answer sustainably. And here in Brazil, we have an answer to that. Why? These materials can be recycled in the construction industry because it is a cement-based construction industry we have in Brazil. These materials become concrete binding, number one, and number two, they are aluminum sulfate, so they're used by the cleaning products industry, which in Brazil is of massive scale. We have 230 million people obsessed with cleaning.

So we have one of the largest cleaning products industries in the world. So we can absorb all of the tailings, so we can do this zero tailings. And there are very few places in the world that can do the zero tailings. Most plans involve shipping these toxic sulfuric acid tailings by boat elsewhere to a developing country with a lot of people, where you got a cement-based construction industry and a large cleaning products industry. But we have this market right here. We are here. So that is also a key competitive advantage to doing intermediate chemicals, because we solve a key piece of the puzzle for everyone, even for China. For China, we can deliver what we call intermediate negative. We can deliver carbon credits that allows China to do zero carbon chemicals.

For the West, we're gonna deliver a chemical-to-chemical supply chain with zero carbon and zero tailings. So the West doesn't have to worry about licensing or worry about storing or doing what have you, with 12 tons of toxic sulfuric acid-loaded tailings generated in the intermediate chemical process. Waste is the key to where these industries are gonna be located, how to actually recycle and reuse the waste responsibly from an environmental perspective. And in fact, that's what China does very well today. That's what we can do because of these reasons. You need a large cement-based construction industry, and you need a large cleaning products industry to take all the aluminum sulfate.

Steve Byrne (Managing Director and Senior Equity Research Analyst)

Very good. Thank you.

Ana Cabral (CEO)

You're welcome.

Operator (participant)

Your next question is from the line of Joel Jackson with BMO. Please go ahead.

Joel Jackson (Senior Equity Research Analyst)

Good morning, Ana, Matt, everyone. I have a few questions. I'm gonna ask them one by one. So can we talk about SG&A? You had talked about earlier this year about trying to get SG&A down to, I think about an $11 million run rate annualized. I think you did about a CAD 10 million run rate in Q4, so getting there or CAD 10 million, excuse me, in the fourth quarter. Can you talk about what you think SG&A will look like in Q1 and Q2 of this year, Q1 of this year, what it was? How much of that—how much of the burn rate might be in SG&A if it's the strategic review?

Ana Cabral (CEO)

Yeah, well, if you look at this slide, Matt, you can take it as well, and please help me here, okay? You see that we posted $42 million, right? When you look to the right, you see the $24 million. So if you deduct $24 million from $42 million, you-- we're still at double the guidance we gave you. We try to give you guys a reason of why is that, and we do believe that this cluttering of SG&A will not be here in all its entirety in Q1, but some of it's still gonna be here, such as the legal. We still have, you know, the teams working on our SAP. So the Q1 is still gonna be work in progress. We're still gonna be getting there.

Matt, when we look at the bridge, though, and that goes back to your point, Joel, on the operating costs, we're almost hitting it, right? So the SG&A becomes a work in progress of actually decluttering and evolving into what we call steady state SG&A. But on the operating side, we're almost at the guidance we gave at BMO's conference for what we call a run rate operating cost. Matt, do you wanna comment?

Matthew DeYoe (EVP)

Sure. I mean, Joel, some of this is gonna be tightening the belt where we need to and where we can. Obviously, this is kind of a recurring number. So to the extent we have litigation or, the strategic review, those will be additive. But from a bottoms-up perspective, if you think about the costs that really take to run the corporation, it's a pretty lean, back office. Now, we hope we'll get additional scale as we ramp phase II, because we won't have to add nearly as many heads as we would when we double capacity, right? We'll get key operating leverage through SG&A and port traffic, primarily as we double. But from our perspective, if we take a more stringent approach to spending, and perhaps spending us more in line with the...

I would say, where the economics of the market are, versus if you rewind to really the first half of the year, when price expectations were much higher and we were spending to ramp the facility, we think we've got a pretty credible path to getting there. But it, it's a little bit more of a lift perhaps than the operating cost side, but, you know, numbers all the same that, you know, Ana and team feel pretty comfortable about.

Joel Jackson (Senior Equity Research Analyst)

... Okay, and so what's the monthly burn rate on this strategic review?

Ana Cabral (CEO)

It varies. That's the problem, and this is what's called shooting a moving target, you know? It really varies, and that's one of the items we don't control. That's one of the reasons why we can't fully declutter this. It's one of the non-predictable elements. It totally varies on the flow of drafting documents and structuring and things that come our way. But I would say it's much alleviated this year. It's much, much alleviated because we don't have to do structuring. We don't have to do the heavy lifting of what a transaction is gonna look like. Documents already being, you know, overly marked, so it's different. It's a lot easier, but it's still here, right? Still cluttering the numbers. But it's one of the non-predictable items. It's totally outside of our control.

Joel Jackson (Senior Equity Research Analyst)

Okay. You said Q1 spodumene production was 63,000 tons. It was sixty-nine thousand tons in Q4, so you're down about 7,000 tons in the quarter sequentially. Talk about why you had lower utilization in the first quarter?

Ana Cabral (CEO)

Well, it's a funny quarter in Brazil. It's kind of we have our own version of the Chinese Lunar New Year. There's something called Carnival, where it's pretty hard to get people to operate at capacity. So we kind of lose. Most companies lose 10 days. If we whipped up our team, as we did, we lost about five, six days, where people kind of show up, not exactly sober, not fully productive, and it happens. It's cultural. These people have been working, you know, like crazy, right? So Carnival is a problem, and then it, we also caught the, you know, what we call the pressure valve of the first week of the year. Because we put all systems go to deliver the 2023 last shipment, which sailed. I'm not sure if you remember this, but it literally sailed on the 30th, right?

So the first week of January was like, "Oh, yeah, we're gonna relax." No, we won't, because we're gonna have to make first quarter. So it was a combination of what we call collective vacations, where we're working with down shifts in the first week of the year, plus the Carnival. And it's kind of always like that. This is the Brazil version of, you know, the Lunar New Year. You might want to build into your calendar. First quarter has Carnival, and first quarter has the hangover of New Year. And in our case, it was a hard hangover, because let me tell you, to make that shipment, we made people work 24/7, crazy hard. Our general manager for the plant didn't spend Christmas nor New Year with his family and his new granddaughter in South Africa.

That man stayed here, he didn't meet his granddaughter, to make that shipment. So that was the level of commitment of this team. They were, like, really all out to ship that boat in December and make the cutoff for the year, right?

Joel Jackson (Senior Equity Research Analyst)

Okay. And just finally, you gave color around... So you've obviously given Q4 pricing. You talk about what the April shipment is gonna be, final. For the two shipments in Q1, can you give an idea of what pricing looks like and how much is provisional on that?

Ana Cabral (CEO)

Yeah. Well, I think what you see on the screen is a pretty good indication of where we sit on the Q1, with fluctuations. But we're kind of averaging the industry. A little bit of a premium, but not really. Q1 was a tough quarter from an industry perspective, because you see what happened in Q1, clients were stocked, but they were still buying our product. Why was that? Because of this slide. Given that, life was so difficult for the clients, they were putting other products aside and processing our product just to bank that margin that we are literally giving to them. And we were told this much.

So, just the fact we had people buying full boats and paying us, I mean, not the full premium, but a tiny bit of a premium, meant something for us. But what they were really doing is that they were banking this much, you know, extra margins that's provided by the metallurgy of the product, that's kind of we're delivering for free. So it was a fascinating quarter. We learned quite a lot, and we just got a team coming back from China. Like, they were there for 32 days, and we... they were told just that.

So part of this enormous premium we were able to obtain in this very, we call, price discovery process, where we got 18 clients to Dutch auction bid this boat, was a result of, you know, the clients having experienced this for now, six shipments, seven shipments, and ascertaining for themselves that they do need, 2 tons less, sometimes 3 tons less of our product versus the comparable. So they're banking that difference, right? Which kind of ties back to the question, Steve was asking us about why lithium sulfate. Well, we want this money, too. So that's... This is, this is value in use, floating around. We're either gonna get it through a premium or we're gonna just bank it ourselves in a, in a lithium sulfate plant. We're not gonna let it hang for that long, but one thing at a time.

Now, it's to double.

Joel Jackson (Senior Equity Research Analyst)

Sorry, so Q1 pricing would be similar to Q4 pricing, or like, average your actual average delivered price? Similar, a little higher or lower?

Ana Cabral (CEO)

You can use.

Matthew DeYoe (EVP)

We're not going to explicitly guide Q1, Q2 yet, Joel.

Ana Cabral (CEO)

Yeah.

Matthew DeYoe (EVP)

So-

Ana Cabral (CEO)

You can use what's here.

Joel Jackson (Senior Equity Research Analyst)

That's here.

Ana Cabral (CEO)

It's okay. It's indic-

Joel Jackson (Senior Equity Research Analyst)

That's why I was asking, because you're, you're giving Q4, and you're giving kind of April, but you're not giving the Mar-- the February, March-

Ana Cabral (CEO)

Yeah, it's—there's about $100 of a difference, right? So there's $100 floating.... So you can just take a pick, but it's—we don't have the finals, right? Because they were still on provisional, but it's gonna be between this number and the number we achieved for this last auction, somewhere in between.

Joel Jackson (Senior Equity Research Analyst)

Okay, thank you. That's good. Thank you very much.

Operator (participant)

At this time, there are no further questions. I will now turn the call over for any closing remarks.

Ana Cabral (CEO)

Well, I just want to thank everyone for the support, for the patience, and for sticking to us. I mean, I think we are on to build probably one of the most resilient lithium businesses in the industry. We're building the next major. The mathematics show, shows this, numbers talk for themselves. Math has no opinion, and we're here to stay. So and you look at—when you look at this picture, we now have the longevity, which was the missing link of the sustainability when it comes to project years of Sigma. Given that we have prioritized cash flow, and now it's, it's clearly demonstrated why it was so important, 'cause we were able to hit the tail end of the bull market, and we earned quite a bit of cash.

Then this year, we reprioritized lengthening the project life. We're one of the greatest forces of the industry. The fourth complex, when you attribute the names of the projects to the owners, we're the third largest lithium industrial mining complex in hard rock. We're quickly closing in on the, you know, number five producer. By next year, we're gonna probably be on top of number four and number three. It's a force for good. Here we are, aiming to be number three very soon, with a product that is clearly metallurgically better from a physical and chemical scientific standpoint. It's the mathematics of savings for our clients, the mathematics of value we use, numbers are numbers.

So thank you so much for, you know, being here with us, for supporting us, for encouraging us, and for being partners with our team. I can only close by saying, we're in this together. I have never sold a single share of this company, so we're here to stay, and we're here to, you know, follow this journey with you.

Operator (participant)

This concludes the Sigma Lithium fourth quarter and full year 2023 earnings conference call. Thank you for participating. You may now disconnect.