Li-Cycle Q3 2024 Earnings Call Transcript

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November 7, 2024

There are 3 speakers on the call.

Operator

Hello, everyone, and welcome to the Lifecycle Holdings Corp. Q3 2024 Financial Results. My name is Charlie, and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. I I'll now hand over to our host, Louis Diaz of Lifecycle to begin.

Operator

Louis, please go ahead.

Speaker 1

Thank you, operator. Good afternoon, and thank you, everyone, for joining us for Lifecycle's business update and review of unaudited financial results for the 3 month period ended September 30, 2024. We will start today with formal remarks from Ajay Kochar, President and Chief Executive Officer and Craig Cunningham, Chief Financial Officer. We will then follow with a Q and A session. Ahead of this call, Life Cycle issued a press release and a presentation, which can be found in the Investor Relations section of our website at investors.

Speaker 1

Lifecycle.com. On this call, management will be making statements based on current expectations, plans, estimates and assumptions, which are subject to significant risks and uncertainties, most of which are difficult to predict and many of which are beyond the control of life cycle. Actual results could differ materially from our forward looking statements if any of our key assumptions are incorrect, including because of the factors discussed in today's press release, during this conference call or in our past reports and filings, the U. S. Securities and Exchange Commission and the Ontario Securities Commission in Canada.

Speaker 1

These documents can be found on our website at investors. Lifecycle.com. We do not undertake any duty to update any forward looking statements, whether written or oral, made during this call or from time to time, to reflect new information, future events or otherwise, except as required. These forward looking statements should not be relied upon as representing Lifecycle's assessment as of any date subsequent to the date of this call. With that, I'm pleased to turn the call over to A.

Speaker 1

J.

Speaker 2

J. Rice:] Thank you, Louis, and good afternoon. Starting on Slide 3, we are excited to announce that we have closed an agreement with the U. S. Department of Energy for a loan of up to $475,000,000 following detailed technical, market, financial and legal due diligence.

Speaker 2

This loan value is an increase of $100,000,000 over the previously announced initial commitment of $375,000,000 and is expected to support the development of our flagship Rochester Hunt project in Upstate New York. This is the first DOE loan to be finalized for a sustainable lithium ion battery materials company and a significant milestone for life cycle. We are only the 5th company in recent years to close a loan under the DOE's ACDIF program, which is indicative of the significant amount of diligence and work needed to finalize a direct loan. Our loan agreement is a strong vote of confidence for our patented recycling technology and underscores the importance of our role as a critical battery material supplier in the U. S.

Speaker 2

Battery supply chain. The Rochester Hub is expected to be North America's 1st commercial scale hydrometallurgical resource recovery facility and a significant domestic source of recycled critical materials for producing lithium ion batteries including aggregate lithium carbonate and mixed hydroxide precipitate or NHT, which is an intermediate product containing nickel, cobalt and manganese metals. This strategic financing achieves our goal of executing on low cost, long term debt financing, which will help optimize our capital structure. We'd like to sincerely thank the DOE for their continued support of Lifecycle and the Rochester Hub project. And we're pleased to partner with them as we work to build a sustainable domestic supply chain for critical battery materials in North America.

Speaker 2

We're also grateful for the bipartisan support for battery recycling and how it can underpin the development of a strong domestic battery supply chain. Turn to Slide 4 for some additional details on the loan. The loan facility offers attractive terms relative to other third party financing alternatives available to us and is a critical step towards our goal of restarting construction at the Rochester Hub project. The $475,000,000 loan facility includes a principal amount of up to $445,000,000 and capitalized interest of up to $30,000,000 during the construction period. Final maturity is on March 15, 2040 for an approximately 15 year term.

Speaker 2

Principal and the interest rate construction period will not be payable for approximately 2 years after first advance. The interest rate is fixed from the date of each advance to the maturity date of the loan and the applicable long dated U. S. Treasury rate and more importantly with no spread. The first advantage from the loan is subject to satisfaction or waiver of certain conditions and requirements, including completing our base equity contribution to the project.

Speaker 2

The base equity contribution includes settling commitments related to the project for costs incurred by NYAT paid, which is approximately $92,000,000 as of September 30, 2024. Additionally, we also need to obtain financing of approximately $173,000,000 to fund our reserve account requirements for First Advance. Of note, approximately $97,000,000 of these reserves can be satisfied by letters of credit. These amounts represent a significant portion of the remaining base equity contribution and they're based on current estimates which may change prior to first advance. They're also among other components of base equity contribution that will need to be satisfied prior to first advance.

Speaker 2

For some added detail, the loan reserve account requirements include reserves for construction, ramp up and spoke capital expenditures. Funding of these reserve accounts is not part of the CapEx of the project due to mechanical completion. The majority of the reserves are also expected to be released back to the company on or before the completion of the project. We are actively evaluating financing and strategic alternatives for a full funding package needed to restart construction of the Rochester ramp. Turning to Slide 5.

Speaker 2

We continue to make strong progress on our key objectives. Today, we completed a priority for the year, closing the U. S. DOE loan. Our next steps for our key objectives are, 1st, to secure a full funding package needed for the restart of construction at the Rochester Hub project, of which the DOE loan is a key component.

Speaker 2

The full funding package will also assist in the funding of the base equity contribution needed to access 1st advance under the DOE loan. 2nd, complete our comprehensive review of the Hub project, which includes a technical and economic analysis for the go forward decision on the industry scope. We've made great progress in this effort, including completing the technical review of the industry scope and establishing a strong commercial framework for end products. Parallel with these objectives, we are continuing our ongoing work on optimizing our spoke network. We are just finding ways to extract more value from these assets to build a self sufficient and financially accretive spoke business.

Speaker 2

We are focused on our Gen 3 Spokes in Arizona, Alabama and Germany. And as part of the optimization work, we have curtailed operations at our nearest Spoke and are continuing closure activity at our Ontario Spoke as previously indicated. Turning to Slide 6 for a recap of the MSG process. Black mass will be processed at the hub to produce MHP, a combination of nickel, cobalt and manganese metals. MHP could be sold to refiner ahead of supplying to the battery cathode precursor service room.

Speaker 2

In our case, we have secured an optic agreement with Glencore covering all of our MHP production. We also have existing optic agreements to lithium carbonate produced at the Rochester Hub with Traxis and Glencore. In the long term, we retain the optionality of the project to produce nickel and cobalt sulfates. For clarity, the production of lithium carbon remains as originally planned. The MHP process is not new for the company and it was actually part of our large scale pilot program completed in 2019 to 2020 and is included in our patented technology portfolio.

Speaker 2

Turning to Slide 7 for an update on the Rochester Hub project and the MHP scope. As mentioned, we are excited to have completed the technical review of the Rochester Hub project. We also continue to advance the go forward project execution plan. The estimated total capital cost of the project to mechanical completion is unchanged at approximately $960,000,000 Our current estimated cost to complete the project is approximately $487,000,000 which is inclusive of commitments for costs incurred that not yet paid of approximately $92,000,000 The total capital cost for the project through the mechanical completion does not include commissioning, working capital, ramp up and financing related costs. We expect an annual production of up to approximately 8,250 tons of battery and lithium carbonate and up to approximately 72,000 tons of MHP.

Speaker 2

The expected nameplate processing capacity remains at 35,000 tons of black mass annually. As we announced last week, we've entered into an agreement with Landcor covering the offtake of 100% of the MHP we produce at the Rochester Hub. I'd like to note that Glencore and Traxis' existing offtake rights covering lithium carbonate production from the hub are not affected by these amendments. With these amended agreements, we have established a commercial framework that provides a strong market foundation for the project. We're pleased to have strong industry partners as we continue to work towards our goal of restarting construction of the Rochester Hound.

Speaker 2

Turning to Slide 8, we'll take a look at the evolution of Lifecycle's expected revenue and financial profile. We currently provide services with corresponding revenue for the recycling of liquefied batteries. And in some cases, we pay for battery materials based on discount to metal prices. And this is all from a diverse pool of suppliers to produce and sell biomass under contractual arrangements. This results in black mass revenues that are based on current metal prices at the point of sale.

Speaker 2

A goal of our Spok Optimization initiative is to make this part of our business financially creative and self sufficient. Our mid to long term goal is to utilize our Blackmauch production as feedstock for the hub, which will produce battery grade lithium carbon in MHP, unlocking significant incremental value. The operationalization of our Rochester hub will represent a key step change in lifecycle evolution. Utilizing the forecasted underlying up price at the bottom of the chart with the expected production of these critical battery materials should give you a sense of the inflection point we anticipate in our revenue profile. It is worth highlighting that under the MHP scope, the metal equivalents for nickel and cobalt are consistent with the previous sulfates plan.

Speaker 2

Turn to Slide 9 for an overview of life cycle's commercial updates. We've established a broad and diversified global base of battery supply customers, including a leading U. S. Headquarter, Fertig based rated EV and battery manufacturer, which is our largest customer source of revenue for the 1st 9 months of the year and in Q3. We continue to demonstrate our expertise in processing all types of alloysnide batteries, independent of form factor and chemistry and are particularly leveraging our Gen 3 technology to support our customers.

Speaker 2

As shown on the bar chart, manufacturing scrap continues to make up a large part of our battery input feed. The manufacturing scrapping process includes large battery pack formats, which we focus on to leverage the value concentrators provided by our Gen 3 spoke capabilities in processing this material. We continue to see broad based support for our differentiated technologies reflected in our position as a preferred recycling partner for leading global battery, EV and energy storage units. Notably, 4 of our top 5 partners for Feed and Save during Q3 were amongst the largest global EV OEMs. Turn to Slide 10 for highlights in our black box production and spoke optimization initiatives.

Speaker 2

During the quarter, our spokes produced 1459 tons of black mass and equivalents, progressively higher each quarter this year. Our goal is to take near term steps towards creating a financially accretive spoke business. Building a self sufficient spoke business will also support our work on securing further financing. As noted, we are prioritizing our Gen 3 spokes, which can process full battery packs without the need for dismantling. We are optimizing our spoke facilities to maximize and sustain throughput rates and recoveries, reduce costs and enhance the quality of our block downs.

Speaker 2

In addition, as you've seen in the last few quarters, recycling services are a growing share of our revenue. We will continue working these initiatives and focus on our Gen 3 spokes to build a self sufficient spoke business. In line with this strategy, we have curtailed operations at New York Spoke and are continuing closure activities in Ontario Spoke as previously indicated. With that, I'll now turn it over to Craig to provide a review of the financials. Thank you, Anjay.

Speaker 2

Turning to Slide London for a review of our 2024 Q3 financial results. Highlights include strong year over year revenue growth and lower SG and A for the Q3 of 2024 versus 2023. Although the year to date production is lower than in the prior year, we were pleased to see that the quarterly production of black mines and equivalents increased compared to the same period last year. Black mines sold also increased with almost 2,000 tons sold in the quarter versus 892 tons sold in 2023. Total revenue increased 79% to $8,400,000 This increase reflects higher recycling service revenue, higher metal prices and favorable mix of constituent metals and lower unfavorable non cash fair value pricing adjustments.

Speaker 2

We'd like to highlight that our $8,400,000 in revenue for Q3 was consistent with our record revenue from Q2 2024, demonstrating continued positive momentum this year. Moving to cost of sales, which were slightly lower at $20,000,000 Cost of sales attributable to product revenue decreased approximately 3% compared to last year as a result of lower production levels. This was offset by an increase of $600,000 in cost of sales attributable to service revenue compared to last year due to new service contracts entered. We are pleased to note that SG and A has decreased 50% to $12,900,000 versus $25,900,000 in 2023, primarily driven by lower recurring personnel costs, resulting from restructuring initiatives implemented since the positive construction of the Rochester Hub. Adjusted EBITDA improved year over year, largely driven by a decrease in SG and A and higher revenue.

Speaker 2

This quarter, our net cash outflows were $27,000,000 less than the previous quarter, driven by lower expenditures from our cash conservation initiatives and $1,100,000 raised through our ATM program. I will now turn it back to Akshay. Thanks, Quinn. Turning to Slide 12. I want to provide an update on market dynamics in today's Foundry expansion.

Speaker 2

While this year has been dynamic, we believe the long term fundamentals remain strong for life cycle due to two factors. First, the increasing supply of recycling materials and the lack of domestic post processing capacity. And second, the continued support for building a localized battery and critical materials flattening. The chart on the left shows the rising sales of EVs in North America with a CAGR of approximately 20% from 2025 to 2030 despite current industry headwinds. As shown on the right, the widespread adoption of EVs supports the increase in battery materials available for recycling.

Speaker 2

The increase in recycling materials near to midterm is largely driven by manufacturing scrap, which currently makes a large part of our current feedstock. By 2,030, the supply of recycling materials is projected to increase by up to 3 times versus 2025 as more end of life battery feedstock becomes available. To summarize, the long term fundamentals for the battery recycling industry remains strong with Lifecycle well positioned to help bridge the large gap in domestic post processing recycling capacity with the Rogers to help. Turn to Slide 13. We believe the current trends towards energy and critical material independence will also continue to be a positive for the battery supply chain industry and our company.

Speaker 2

Another example includes the recently finalized guidance on the U. S. 45X tax credit, which provides direct financial incentives to the hub and supports the development of a domestic circular U. S. Battery supply chain.

Speaker 2

Specifically, it includes a 10% production tax credit on the lithium carbon expected to be produced through Rochester Hub, including certain direct and indirect production costs and is available through 2,032. In the U. S, battery cyclical recycling continues to be a strong bipartisan topic as there is a clear understanding that building a battery supply chain domestically is in both the economic and national security interests of the country. We believe these are positive trends that will help create forward momentum for Lifecycle and the Rasha's round and help create value for our investors and stakeholders. Turn to Slide 14 and reiterate our go forward strategy and key objectives.

Speaker 2

First, we've completed today a key priority by finalizing the DOE loan. 2nd, we are actively evaluating financing and strategic options for a full funding package needed to restart construction of the Rochester project, which includes meeting requirements for the 1st advance of the Dewey's loan. 3rd, we've made significant advancements on our review of the Rochester Hub and the next step once ready will be a formal updated final investment decision or FID, which will be underpinned by the full financing package we're looking to secure and this will mark the completion of the comprehensive review. And finally, we have continued to maximize value across our Spok network by working to build a financially accretive Spok business that focuses on our Gen 3 technology. Before we get to Q and A, I wanted to thank our employees and our partners for their continuing support.

Speaker 2

While the last 12 months have been very dynamic for our company, we have been able to work through challenges and achieve significant milestones because of support and dedication of these groups. Lifecycle has clear objectives going forward and we're focused on capitalizing on these opportunities. Operator, we're now ready for questions.

Operator

Of course. Thank We have no calls registered on today's call. So I'll hand back over to the management team for any further or final remarks.

Speaker 2

Thank you. So as discussed, we continue to believe strongly in this market and the role that we'll play as Lifecycle in securing energy and critical material independence. And as discussed strongly by part of the topic and with great fundamental secular tailwinds even in the long term, of course, the dynamic period we've been going through near term. So we look forward to providing everyone with further updates as we continue to progress. Thank you.

Operator

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.

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