Arcadium Lithium Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

There are 11 speakers on the call.

Operator

Good afternoon, and welcome to the 4th Quarter 2023 Earnings Release Conference Call for Arcadium Lithium. Phone lines will be placed on listen only mode throughout the conference.

Operator

After the speakers' presentation, there will be a question and answer period. I will now turn the conference over to Mr. Daniel Rosen, Investor Relations and Strategy for Arcadium Lithium. Mr. Rosen, you may begin.

Speaker 1

Great. Thank you, John, and thanks to everyone for joining. Joining me today are Paul Graves, President and Chief Executive Officer and Gilberto Antoniazzi, Chief Financial Officer. The slide presentation that accompanies our results along with our earnings release can be found in the Investor Relations section of our website. Prepared remarks from today's discussion will be made available after the call.

Speaker 1

Following our prepared remarks, Paul and Roberto will be available to address your questions. Given the number of participants on the call today, we will request a limit of 1 question and one follow-up per caller. We will be happy to address any additional questions after the call. Before we begin, let me remind you that today's discussion will include forward looking statements that are subject to various risks and uncertainties concerning specific factors, including but not limited to those factors identified in our Form 10 ks and other filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today's information.

Speaker 1

Actual results may vary based upon these risks and uncertainties. Today's discussion will include references to various non GAAP financial metrics. Definitions of these terms, as well as a reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP are provided on our Investor Relations website. And with that, I'll turn the call over to Paul.

Speaker 2

Thank you, Dan, and hello, everyone. This is the first earnings call for Arcadium Lithium following the official close of the merger between Livent and OrCam on January 4th this year. We're excited to begin operating as Arcadium Lithium, building on the strengths of 2 highly complementary organizations with a focus on continuing to grow as one of the leading global producers of lithium chemicals. While lithium and energy storage market dynamics have been somewhat volatile since our merger announcement in May of last year, the underlying strategic merits of the transaction remain as strong as ever. For the larger, more diversified, vertically integrated company, we are better positioned than either of the companies alone to meet the growing needs of our customers, and we have even greater flexibility to take advantage of opportunities available to a diversified, integrated lithium chemicals producer across all market cycles.

Speaker 2

Arcadium Lithium is growing its volumes significantly as a result of multiple years of expansionary investment. And 2024 is highlighted by an expected 40% increase in lithium carbonate and hydroxide volumes compared to 2023 as a combined company. In addition, Arcadium is expecting to realize $60,000,000 to $80,000,000 of total synergies and cost savings in 2024. We will go into further detail on the major components of these cost reductions, but the savings are driven by a combination of positive developments in our initial integration efforts and from accelerating certain actions as a result of the current lithium price environment. These higher volumes and cost savings are reflected in the outlook scenarios we are providing for our Cadium Lithium's 1st full year, which we are providing in a different format than that provided historically by either Livent or OrCam.

Speaker 2

The lower price environment is also leading Arcadium to slow the pace of its growth capital spending in 2024 and to extend the timelines for some of its ongoing expansion projects as we will discuss further. This reduction will not impact our ability to deliver volumes under existing customer commitments. It will provide us with an opportunity to undertake a comprehensive review of the existing expansion plans from Livent and Orkam in order to maximize the capital synergies available from our co located projects in Argentina and Canada, as well as optimize the operational flexibility of future production. I will now turn the call to Gilberto.

Speaker 3

Thank you, Paul. Turning to Slide 4. Our merger closed earlier this year following votes of approval from both Livent and Allkem shareholders. Arcadian Lithium ordinary shares are trading on the New York Stock Exchange under the ticker ALGM. In our foreign exempt listing via CHESS Depositary Instruments or CDIs is trading on the ASX under the ticker LTM.

Speaker 3

Because the merger closed after year end 2023, the 2023 10 ks to be released by Arcadium Lithium will all include historical results of Livent's operations. At this time, we can share that for the full year 2023, Arcadia had combined revenue of approximately $2,000,000,000 and a combined consolidated cash balance of $892,000,000 with combined cash net of that of roughly $297,000,000 as of December 31, 2023. We expect to provide calendar year 2023 pro form a financials early in the Q2 of 2024. And we released combined results for the new company beginning with the Q1 of 2024. For this reason, we will discuss the 4th quarter and full year 2023 performance for both companies on a standalone basis and in formats consistent with previous disclosures.

Speaker 3

Starting on Slide 5, Livent reported 4th quarter revenue of $182,000,000 adjusted EBITDA of $91,000,000 and adjusted earnings of $0.34 per diluted share. Volume sold were roughly flat with lower average realized prices across all lithium products in addition to slightly higher costs. Despite a challenging lithium market environment in the Q4, Livent achieved an adjusted EBITDA margin of 50%. For the full year 2023, Livent reported revenue of $883,000,000 adjusted EBITDA of $503,000,000 and $0.0189 of adjusted earnings per diluted share. These were all meaningful improvement versus the prior year and record results for Livent.

Speaker 3

This was a result of higher average pricing and lower overall costs and is highlighted by full year 2023 net income growth of 21%, an adjusted EBITDA increase of 37% and an improved adjusted EBITDA margins of over 10% versus 2022. Turning to WildChem on Slide 6. On a 100% ownership basis, the Olaroz Carbonate facility achieved calendar year 4th quarter total revenue of $96,000,000 with just under 7,000 metric tons of carbonate sold compared to production of just over 4,100 metric tons at an average realized price of $13,564 per metric ton. For the full year 2023, total revenue was 511,000,000 dollars with 17,879 metric tons of carbonate sold at an average realized price of $27,000 $788 per metric ton. Sales and production were broadly in line for the full year.

Speaker 3

For the Mt. Kaplan spudgy mill operation, 4th quarter spudgy mill revenue was $46,000,000 with roughly 60,000 dry metric tons sold with 5.3 percent average grade at a 6% spodumenequivalent price of approximately $8.50 per dry metric ton. The realized spodumene price decline in the 4th quarter was amplified by 2 specific factors, a shift to forward looking reference price mechanism with customers consistent with the shifts seen across the industry and the timing of shipments all occurring in the second half of the quarter when the market was particularly challenged. From an operations perspective, production grade and recovery rates both improved slightly versus the prior quarter. For the full year 2023, spodumene revenue was $571,000,000 with just over I'm sorry, with just under 205,000 dry metric tons sold with 5.3 average grade at a 6% spodumene equivalent price of roughly 3,100 dollars per dry metric ton.

Speaker 3

Full year production was roughly 34,000 dry metric tons higher than volume sold, which we're carrying into this year and brings our spodumene inventory to more normalized levels. The notable decline in 4th quarter spodumene and lithium carbonate prices was especially notable at Alchem, given its practice of selling volumes largely on a market price reference basis. The resulting swings in profitability reveal the challenges of making significant discretionary capital investments over multiyear periods, especially when it comes to having access to the cash needed to support these investments commitments. This will be one of the key focus areas for Acadian as we look to implement an integrated commercial strategy that provides greater predictability while also allowing the company to take advantage of attractive market opportunities. I will now turn the call back to Paul to provide some market commentary.

Speaker 2

Thanks, Gilberto. On Slide 7, I'd like to provide some perspective on what we saw in the lithium market in 2023. In hindsight, the year was heavily influenced by inventory build in the energy storage supply chain. The more meaningful inventory increases were seen downstream of lithium, most notably in battery cells. We came clear that many battery cell producers had aggressively increased production in the Q4 of 2020 2, especially in China, in anticipation of elevated demand and prior to expiring subsidies.

Speaker 2

As a result, both cell and cathode producers reduced production rates as 2023 progressed and spot lithium purchase activity beyond base volume contracts declined significantly. This drove a sharp decline in lithium market prices, starting in late Q3 and accelerating in the Q4. Given the price decline as well as some negative headlines from OEMs who were perhaps overly optimistic with their earlier EV forecasts, especially in U. S. Markets, The year ended with a notably bearish sentiment around lithium and energy storage.

Speaker 2

However, taking a step back, it's important to recognize that underlying end market demand was actually very strong last year. 2023 global EV sales were up 33% for the year, approaching 14,000,000 units on a roughly 17% penetration. China hit an all time monthly high of around 1,000,000 units in December, which was up 49% year over year and 10% month over month. Additionally, stationary energy storage demand continues to surprise to the upside and growth in this segment should be stronger in a lower lithium ion battery cost environment. And while incremental lithium supply did enter the market in 2023, it did not come mainly from lower cost brine expansions.

Speaker 2

The new supply was predominantly higher cost material from spodumene out of Africa and lepidolite in China. The development of these assets was incentivized by the high lithium prices seen in the last market run up, and they're some of the first to be economically challenged in the current lower price environment. And while it is known that a number of these higher cost assets are still operating, They're doing so in a price environment that is at or even below their cash cost of production. And it remains to be seen how long they can continue to operate in this way. We also see these assets as the most challenged when it comes to expanding output further in the future.

Speaker 2

Moving into the first half of twenty twenty four, there are a number of reasons to be optimistic about the direction of our industry. However, we like others in our industry need to take into account the current environment when making capital allocation decisions. We have to look at the sustainable prices needed to support multi year investment decisions. And when there are prolonged periods of market prices that are lower than these reinvestment prices, it reduces confidence in whether expansions will in fact be economically viable. We believe that prices will move higher in the future, which they need to do in order to incentivize sufficient supply expansion to meet our customers' future needs.

Speaker 2

However, it is much more challenging to manage these capital intensive projects through such volatile price environments given the direct impact on our earnings and cash flow. When we have prices for extended periods at the levels we see today, we have to be very cautious in how we use our balance sheet to fund expansions. It is clear that very few lithium expansion projects, including most groundfield expansions in brine, make economic sense at current market prices. And the longer the prices stay near these levels, the greater the impact will be on future supply shortfalls. As we saw in 2022, this will increase the likelihood of a rapid increase in lithium prices at some point in the future.

Speaker 2

Although the complexity of the global battery supply chain makes both the timing and extent of such an increase difficult to predict. We are seeing a response from both existing operators and project developers alike. Some higher cost production has started to come out of the market and we expect this trend to continue. Additionally, we have seen more discipline being applied towards expansion projects as lower prices challenge the return hurdles on these multiyear investments. Heightened price volatility is reducing the appetite for financing development assets from sources, especially lenders, the many single assets preproduction companies have come to rely on.

Speaker 2

There is typically a slowdown in demand in the 1st few months of the year, coming off the seasonally strong Q4. This year, many regional cathode and self producers are expected to use the Lunar New Year holiday period for extended downtime, which should help to support continued destocking at the battery cell level. As far as 2024 demand is concerned, growth expectations are still strong. We're seeing a growing number of more affordable EV models entering the market. Bloomberg NEF projects annual global battery demand to reach 1.25 terawatt hours, up 30% versus 2023.

Speaker 2

Additionally, longer term investment commitments continue to be made downstream with additional support in North America and the U. S. Driven by the Inflation Reduction Act. This is highlighted most recently by GM agreeing to a $19,000,000,000 deal to secure cathode active material supply in Tennessee and Toyota investing $1,300,000,000 to support its own EV plan in Kentucky, bringing its total investment commitment at the site to $10,000,000,000 It's also important to emphasize that reduced percentage growth rates, which will undoubtedly occur over time, do not necessarily mean reduced volume demand growth. With year over year demand for lithium chemicals in terms of total tons of lithium chemicals continuing to increase meaningfully, The long term trajectory for electrification has not fundamentally changed, even if, as we've been saying for a while now, that growth is not necessarily linear and predictable.

Speaker 2

As long as China continues to be the predominant source of demand and the location of the bulk of the supply chain for energy storage, there will be volatility and periods of aggressive production followed by destocking. Turning to Slide 9, Arcadium Lithium will be growing its sales volumes significantly in 2024 as a result of multiple years of expansionary investments. We are expecting to increase our combined lithium carbonate and hydroxide delivered to customers by roughly 40% in 2024 or to 52,000 metric tonnes at the midpoint on an LCE basis. With respect to lithium carbonate, this is the result of the ramp up of expansions at Fenics, which is our existing operation at the Salar de Lambre Muerta and at Olaroz, both in Argentina. At Fenics, the 10,000 metric ton Phase 1A expansion is complete and the production ramp up process is well underway.

Speaker 2

We expect to achieve production of up to 7,500 metric tonnes in 2024 from this expansion and to finish the year at run rate operating volumes. This means we will have total nameplate capacity of 28 1,000 metric tonnes per year of Fenics. I will address the status of the Phase 1b additional 10,000 metric tonne expansion shortly. For Olaroz, we are in the process of ramping up a 25,000 metric tonne Stage 2 expansion, where construction was completed in late 2023. As a conventional pond based process, this ramp up will take longer than Fenext's DLE based production.

Speaker 2

We expect to produce up to 40% of capacity or 10,000 metric tons of carbonate from Stage 2 and expect to reach run rate production by the end of 2025. This will bring total stated capacity at Olaroz to over 40,000 metric tons. Arcadian will also benefit from the completion of multiple hydroxide production lines, which use carbonate from Argentina's feedstock. We expect to deliver commercial volumes in 2024 from a 5,000 metric ton expansion at our U. S.-based operations in Bessemer City, North Carolina, bringing our total U.

Speaker 2

S. Hydroxide capacity to 15,000 metric tonnes. Additionally, at the end of 2023, we completed a 50,000 metric tonne unit at a new location in the province of Zhejiang in China, which will go through qualification and ramp up in 2024. This brings our total hydroxide capacity in China to 30,000 metric tons. Turning to our spodumene operations at Mount Catlin in Western Australia.

Speaker 2

We are expecting 2024 production to be lower versus calendar year 2023. This is a result of pursuing a reduced mining and production plan as part of cost optimization efforts in light of the current low price environment of spodumene. Will now turn the call back to Gilberto to discuss our full year 2024 outlook.

Speaker 3

Thanks, Paul. On Slide 10, you can see our volume growth in 2024 translate into sales volume expectations by major products. Combining hydroxide and carbonate sales, we expect to increase our volume growth by a range of 12,000 to 17,000 metric tons or around 40% higher than 2023 on a LCE basis at the midpoint. Most of the incremental carbonate sales are expected to come from Olaroz Stage 2 production, while the additional hydroxide sales will be fed from the Fenix expansion. Within lithium hydroxide, we have opted to enter into multi year agreements with a select group of core customers, roughly 2 thirds of our total product volumes.

Speaker 3

These agreements have firm volume commitments and a variety of pricing mechanisms, including some fixed prices for 2024 only as well as floors and ceilings over the life of the agreements. The subset of our volumes will help to reduce overall volatility by limiting potential downsides or upside on our total revenue. As of today, the remaining portion of hydroxide volumes as well as our lithium carbonate sales are expected to be under short term pricing structures, typically set on a monthly basis that move with the agreed market references. We are expecting flat volumes in other specialty business, which is comprised mainly of butyllithium and high current lithium metal. Pricing is based on customer relationships typically spanning many years and is negotiated monthly or quarterly taking into account movements in the broader lead to market.

Speaker 3

Lastly, our spodumene concentrate sales out of Mount Catharine today are largely being sold directly into China at prevailing market prices. Because of the lack of longer term commitments, particularly given the limited remaining mine life today, we can be more flexible with respect to production plants as demonstrated this year. On Slide 11, we have provided some other modeling considerations. We will address SG and A and capital spending shortly. Depreciation and amortization is expected to be higher than what has been seen historically.

Speaker 3

This is a result of 2024 being the 1st year of production for multiple expansion assets and therefore when capitalized spending will begin to depreciate. The adjusted tax rate for 2024 is expected to be between historical levels of the 2 standalone businesses and will be an important point of focus as we further integrate our operating model as a global business. The provider range is wider than we would expect moving forward in order to reflect the earlier stage of this work. Lastly, our higher estimated fully diluted shares outstanding of 1,150,000,000 is a function of the merger exchange ratios and is inclusive of 67,700,000 of assumed dilution on the company's convertible notes outstanding. On Slide 12, we provide an update on the expected synergy and cost reductions for Acadian Lithium.

Speaker 3

In 2024, the company is expecting to realize a combined $60,000,000 to $80,000,000 total cost savings. These benefits will be driven by a combination of lower SG and A expenses and reduced cost of production. Within SG and A savings will come predominantly from headcount reduction, the elimination of overlapping services and lower T and E and 3rd party consultants. For cost of sales, we have identified a number of ways to drive efficiencies from immediate to longer term across all major aspects of production for all multiple production assets globally. This includes lower input costs on key procurement items, streamlining our manufacturing footprint, particularly at closely located operating sites and improving our global supply chain network.

Speaker 3

We expect to continue to drive efficiency for a number of years going forward. Our expectations for 2024 cost savings are higher than they were at the time of merger announcement. Some of this has been brought forward by the changing conditions in our markets. But we also see more opportunities from our initial integration work than what we expected at the time of the merger announcement. And there are a number of immediate cost reductions available.

Speaker 3

Longer term, we remain confident in the scope of synergies previously outlined and we will look to accelerate and grow them wherever possible. I will now pass the call back to Paul to discuss the outlook scenarios.

Speaker 2

Thanks Gilberto. On Slide 13, we are providing a framework to understand how changes in market prices may impact the financial performance of since so much of the outcome is now dependent on where market prices go during the year. We also recognize that simply multiplying volumes by market price does not work for Arcadium Lithium, given the nature of our multiyear contracts and the impact our other specialties business has on our performance. For this reason, we have shown 2 scenarios using lithium market price assumptions that are consistent with how our peers have presented recently, namely $15 per kilo $25 per kilo on an LCE basis. We keep constant the midpoints of expected sales volumes, synergy and cost savings and SG and A for 2024, while overlaying existing commercial agreements as applicable.

Speaker 2

These scenarios should not be interpreted as a forecast by Arcadium Lithium as to the likely range of 2024 lithium prices, which they absolutely are not. They were selected solely to allow investors to assess our potential earnings at a range of prices. With that said, you will see that even in a lower case where Arcadium Lithium achieved a $15 a kilo average price per LCE on its market based volumes, Arcadium Lithium's business remains highly resilient, supported by our quality and low cost production assets, while offering significant upside should a price rebound in fact take place. Moving to Slide 14, Arcadium Lithium expects to spend $450,000,000 to $625,000,000 in growth capital spending in 2024, with an additional $100,000,000 to $125,000,000 of maintenance capital spending. For growth spending, this is lower than what Livent and Allkem separately projected last year.

Speaker 2

We are still investing with conviction in the superior quality of our asset portfolio and believe we have a pipeline of attractive growth projects that is unmatched in our industry. However, in this lower lithium pricing environment, our cash flow generation and returns on capital investment are quite different, and we must adjust our pace of spending accordingly in order to maintain financial discipline. While we do not believe today's price environment is representative of long term prices, we have to run the business based on the conditions we are in today, and that means being far more cautious with our spending while this environment persists. As we previously discussed, one of the major benefits of the merger between Livent and OrCam is the opportunity to both optimize and de risk projects that have natural overlaps. And by slowing capital spending, we believe we will be better off longer term.

Speaker 2

Over the next few quarters, we will focus on accelerating the work needed to drive capital efficiencies and ultimately lower our overall capital spending across the expansions in both Argentina and Quebec. Additionally, we expect to improve the future operating flexibility of these closely located assets, supporting our focus on strengthening a globally integrated production network. The expansion projects in our portfolio in closest proximity to each other are the FENICS and Sal de Vida projects at the same Salado del Ambueno in Argentina, located within 10 kilometers of each other and the James Bay and Namaska lithium projects in Quebec, Canada, with the Wabuchi mine located roughly 100 kilometers from James Bay. We expect to deploy $325,000,000 of growth capital into Argentina in 2024. This is lower than what would have been spent to bring the Phase 1b 10,000 metric ton carbonate expansion of PENEX online by the second half of twenty twenty four and to achieve 1st production of Sal de Vida in 2025.

Speaker 2

Based on what we know today, we expect this to delay production from these projects by up to 9 months. We expect to deploy $225,000,000 to $300,000,000 of in Canada in 2024, which will primarily be going towards construction of the Namaska lithium hydroxide facility being developed at Beckenpore. James Bay permit approvals have been received and the resource definition and engineering has been well progressed. However, we want to take the time to explore potential development efficiencies and future operational flexibility with Gucci, given our expectations for both to be vertically integrated with downstream lithium chemical production over time. Any potential delay at Wabuchi should not impact the expected timeline for Bekken core hydroxide production, which was not expected to require feedstock until 2026.

Speaker 2

With that said, it means we would like to sell minimal merchant spodumene volumes compared to our prior expectations. We are focused on the optimization and rephasing of our expansions over the next few months and intend to provide to investors a comprehensive plan for Arcadium Lithium later this year. Additionally, we will look to introduce new sustainability targets for the business, building on the strong profiles of the 2 legacy companies and our shared commitment to responsible growth. While this is a difficult and unpredictable period in which to go through the integration process, the long term strategic merits of the transaction have not changed, and we believe will ultimately be proven out over time and through whatever future market cycles we go through. I'll now turn the call back to Dan for questions.

Speaker 1

Great. Thanks, Paul. John, you may now begin the Q and A session.

Operator

Your first question comes from the line of Steve Richardson from Evercore ISI. Please go ahead.

Speaker 4

In the script in terms of going to $130,000,000 relative to $205,000,000 last year and you mentioned kind of optimization of costs. Obviously, high fixed cost mining asset. Could you just talk about that evaluation and why an even lower number wasn't the right answer, considering the remaining mine life and the nature of the asset?

Speaker 2

Sure, Steve. We missed the first 10 seconds. I think you're talking about Catlin. So I think I got the gist of what you're asking. Yes, look, mine Catlin is an interesting mine, right?

Speaker 2

I mean, it's very much toward the end of its mine life. It's in a phase today that is frankly hugely benefiting from historical investment in the mine plan. Essentially, if you go back and look at the data, it went through a period of very low production as it was in a very unproductive scene. And today, it's in a very productive scene. And in fact, while the remaining life of mine average cost of production is reasonably high on any cost curve.

Speaker 2

Today, that's not the case. It's actually able to produce a pretty low marginal cost of production. Now, it's not sustainable forever. And at some point, a decision will have to be made as to whether to reinvest in that might essentially stripping to get to the next phase of low cost, highly productive ore body. Frankly, we slowed it down in order to give ourselves time to see how the market develops.

Speaker 2

I think we all know that this is a mine that if a decision is ever made to stop it before it reaches end of mine of life, it's unlikely to restart again. And so we're very sensitive to that. I mean, we're not in the business of running assets at a negative operating margin. We don't expect that to be the case this year. There is an optimal production level and we taken the production down.

Speaker 2

We could, of course, take it much lower, but it does become much less efficient once we get below a sound point. So today, at least, that's what we've optimized for. We reserve the right to revisit it either to ramp back up production if prices recover or if prices do fall further and look like they're not going to recover any further, then we'll revisit again what the right plan is for Macao.

Speaker 4

Helpful. Thank you. I wonder if just as a follow-up, we could talk a little bit about this optimization around sales volumes. Slide 10 is really helpful in terms of breaking out the nature of your contracts and your expected volumes. One from a contracting philosophy, do you envision moving, for example, more of those new carbonate volumes towards the type of multiyear agreements that you have in the hydroxide business and more of which you had legacy Livent over time?

Speaker 4

And is that a function of and is that something that needs to wait for a better market environment to happen? Or is that something that you're actively working with your customers? And then just if I could sneak in one more, if you could just talk about your confidence on your floors and exercising those floors in your contracts with your customers because it's one question we do get from investors from time to time.

Speaker 2

Yes. Look, I think Joe was going to be a confidence in the flows question. I have very, very high confidence in those flows, so a whole bunch of reasons. And I'm seeing no sign at all of the flows being underspursed in today's market environment. In terms of where we go going forward, look, I think it's an interesting question.

Speaker 2

What we're seeing is actually quite an expected evolution of contract constructors. And I think for 2 years at least now, what we've seen with Enlivant is a desire on the part of customers who are contracting for hydroxide to have more product flexibility. And what we expect to happen and what we do see happening today are hydroxide based contracts that also allow customers to have similar terms around carbonate. My own view has been for a while that I don't think lithium carbonate lends itself on its own to the same contract structures for a bunch of reasons. But when done in conjunction with a long term higher size lithium hydroxide contract, it does make sense.

Speaker 2

And so what we would expect to do is to see more of the carbonate that we produce from Phoenix today at least, go into the hydroxide network just as it would have done before. And then to have that supported by contracts that allow a degree a portion at least of that contract to be met in lithium covenant terms. So there's a lot of the conversations to why customers are moving there. And clearly, part of this is the battery technologies, greater mid nickel and LFP adoption by the automotive customers. The desire to contract in that way with sensible floors, with ceilings, probably just as strong, if not stronger today than it was a year or 2 ago.

Speaker 2

And frankly, the conversations that are happening are not at different today than they were a year or 2 ago. I think one thing that we found is that most of the customers that we've engaged with and maybe self selecting a little here, tend to have a longer term view of the market. And so they are more comfortable making longer term commitments based on what they consider to be the fundamentals over the cycles of lithium pricing. And just as nobody thought $60 was the right price, nobody thinks $10 is the right price either.

Speaker 4

Really helpful. Thank you.

Operator

Your next question comes from the line of Glenn from Barrene Chauvin.

Speaker 5

Paul, good afternoon to you. Paul, I could just ask a little bit about if you could put some more color around what you're thinking with Canada and the 2 spodumene operations. Are you talking from a physical perspective that you could maybe combine them more physically? Or is it just how you're thinking about that? Thanks.

Speaker 2

Good morning, Glenn. Multiple, multiple areas. I think as you know, the Masculitium is not 100% owned by Arcadium, so we have a partner to take into account. But we both agree that it makes as much sense as possible to optimize how we develop an integrated model. And so, it's a longer term question of what are the benefits of having 2 feeds into a single hydroxide plant, consistency of feed, reliability of feed.

Speaker 2

And so we're certainly looking in the longer term about what can we do with the book of the Wabuchi mine and the James Bay mine, such that we're taking concentrate from both of those and feeding them in the most efficient manner possible and to the ultimate downstream hydroxide footprint. That's a longer term engineering challenge and question for us. I think in the short term, there's some relatively basic stuff, to be honest. I mean, I don't think there's going to be attempts to physically integrate 2 mines that are that far apart. But I think it is important that we standardize where we can the way that we think about mining, something as simple as the fleet, as the mining fleet and making sure that we're not being inefficient with who we contract with, how we think about optimizing staff.

Speaker 2

I mean, this is a pretty remote part of the world. So how we think about support services as well. I'm not suggesting for one moment that the synergies of the savings there are on the same magnitude that they're likely to be in Argentina with FedEx and Sal de Vida. But it's about thoughtful and efficient with where we go. I mean, we're in a sort of an unusual place.

Speaker 2

And I think it's probably fair to say that Gucci is better permitted, further advanced in some areas, but not as well engineered. James Bay is very well engineered, is absolutely ready to go. But we don't have all the permits there yet. So we have 2 different resources at different stages of development. And so it's just a fantastic opportunity to sit down and try to optimize what the development plans are for both of those plans.

Speaker 5

Okay. Thanks. And then just a follow-up, just to the last question, you talked about contracting, etcetera. But just when I look at the guidance for volume for 2024, you talked about scaling back Mount Caitlin. But what about the carbonate hydroxide business?

Speaker 5

I mean, you've got otherwise which should be I would have thought ramping up faster. Is there some flex in those numbers that you've given us for 2024 if prices recover? Or is that the maximum you think you can achieve this year? Just wondering if you could throttle back anything on the chemical side?

Speaker 2

No, we're absolutely not throttling back on the chemical side. Look, I think it's going to be a learning process for everybody, particularly at Olaroz. The plant based systems are not as easy and quick to ramp up as I think many people seem to think they are. Oller Rose itself has a bunch of process changes it needs to make or at least some pond maintenance issues that changes it needs to make in order to continue to manage output, historical output. I think it's also important to understand that the output of all of those in 2023 was absolutely not representative likely what all of those is able to do in the future.

Speaker 2

Two important reasons for that, one of which is it chose and quite rightly so to maximize technical grade production. The market in 2023 from a pricing perspective didn't really differentiate between the 2. And by doing that, the volume the capabilities go up meaningfully. Looking into today, when you do the same math, premium, the battery grade carbonate will get or is getting over that technical grade product doesn't justify that decision. And so they'll be absolutely running the purification circuits more to get more battery grade material, but that derates the plant.

Speaker 2

That's an unfortunate consequence of that process flow sheet. I think a second factor that benefited them last year, one of the benefits as well, you're constructing Olaroz II, they were able to take some of the brine concentrated from the Phase 2 ponds and feed it into the Phase 1 operations. So again, they had a richer yield, they had better output. Again, that you can't do that when you bring all of those 2 online. So the best estimates we have today is that we'll get about 40% of all of those 2 expansion volumes productive in the calendar year.

Speaker 2

We'll obviously be operating at a higher rate than that by the end of the year, but we're still very much in that early ramp up phase. Now there's no dropping back happen with regard to carbonate production down there in Argentina.

Speaker 6

All right. Thanks for the color, Paul.

Operator

Next question comes from the line of Joel Jackson from BMO. Please go ahead.

Speaker 7

Good night. Let me ask a couple of questions 1 by 1. Maybe just a short term question first. So you've given some sensitivities to earnings like you said around if the price was this much per kilo, that much per kilo across the year. Can you give us a sense of obviously, you've already locked in product for several months.

Speaker 7

How much visibility do you have into your order book right now? So how much have you priced through March, through April? Maybe give us a sense of how much is already locked in?

Speaker 2

So I mean, it really depends on where we're looking. I think the majority certainly all the multi year agreement hydroxide is done for full year. These are take or pay. They're very clear, well scheduled and well planned volumes. So all of that, we have very good visibility on the timing of it.

Speaker 2

Clearly, I don't know what the price on some of it is because some of it is still starting variability to it around floors and ceilings. So there's certainly opportunities for upside on some of that volume. On the uncommitted volumes, again, reasonable visibility, we're going through the qualification process. When we do that, tend to have a pretty good conversation with the company. We're qualifying as to what their demand plans are.

Speaker 2

So again, we have pretty good visibility on that volumes. The lithium carbonate, and that's a little bit more complicated. I mean, it's a business that is largely been sold on a month to month basis. I have no doubt that the demand is there. It is primarily technical grade product.

Speaker 2

It is not typically going into or not directly into battery grade applications. And so the technical grade market in a PureSense is smaller and growing slower. And the customers out there that are able to take that material and upgrade it are also relatively small. But we do have some pretty good commitments from some of those customers. Allkem has quite long relationships with customers in that space.

Speaker 2

And so we have some visibility. Again, market pricing is the big question. It's less about whether the volume gets placed. It's much more about the pricing. On the other specialties, I mean, I'm sure you know that they're largely plants that we're currently sold out in, right?

Speaker 2

So we know that material is going out the door. We know it's going to and the pricing in that industry tends to, as I said, it's bilaterally negotiated, but largely negotiated off the pricing of lithium metal, which is part of the feedstock, which itself tends to be driven by lithium carbonate pricing. So again, volumes, we have a lot of visibility to, but the pricing well and by the way, in that visit margins too because of the way we price it. But we have a little less clarity as to what the price is going to be.

Speaker 3

Okay. Then my second question is

Speaker 2

going to be also on

Speaker 7

visibility, but different, little open question. So can you comment, 1, it seems like there's a lot of blurriness right now in China. People are all relying industry relying on maybe 1 or 2 suppliers of inventory data, other data. Everyone's making decisions and plans and thoughts on what seems to be a blurriness of data. So that's common on that.

Speaker 7

And then how about all these different pricing indices that we're seeing now, contracts based on these indices, it's fragmenting these indices, there's not a lot of liquidity on these indices, which is exchanged. So how do we navigate that? Thanks.

Speaker 2

Yes. Look, I think it's the most opaque I've ever seen in the decade or more that I've been in this industry in various forms. I think there's a bunch of reasons for that. I think some of it is the supply chains have got much more complicated than some of the bigger customers that we have. They're shifting between different battery technologies.

Speaker 2

They're thinking differently about, particularly with the IOA about manufacturing locations. We see this. We typically with a major customer, we're qualified into multiple cathode producers and we see movement. We see the OEMs directing us into different places, different directions as their supplies change. I think the lepidolite and the African DSL type product or semi DSL has not made it any easier either because I think a lot of that material is going into somewhat more captive supply chain.

Speaker 2

And so visibility as to where it goes, who's using it, whether it's even operating and on what operating rates is incredibly difficult today and we'll see very definitive statements or observations come out from 1 very credible observer and maybe 12 hours later a very credible observer counter that with the opposite view. Opposite view. It's incredibly, incredibly opaque. And I think the indices reflect that. The indices we've got 2 types of indices, like we've got the price reporting agencies and then we have these attempts to build some kind of exchange traded or derivative based contracts.

Speaker 2

And I think the latter are incredibly immature. We've certainly not seen a very successful physical delivery, even though it's small volumes on those contracts because of product particularly product quality and in the material that's been sat there under those contracts has been the lower grade material that people struggle to use. And so I think that's caused them some issues in those derivatives. And it's still an incredibly small, incredibly thin market. I have sympathy for you all because it's tough enough for us to see what's going on out there.

Speaker 2

And I promise you, I'm not hiding from you a whole bunch of sensitive information that I have. It's just hard to get information out of China right now.

Operator

Your next question comes from the line of Kate McCutcheon from Citi. Please go ahead.

Speaker 8

Hi, good evening, Paul. Realized pricing for December seems to be much lower than peers have reported. And I realized Catalin is not a big part of your business, but 850 a tonne on an SC6 basis, PISA reporting 1300. And if I look at Olaraz realized pricing for December is about 3 ks below the ex VAT indices that I'm looking at. Is there scope to do better with those contracts?

Speaker 8

Or is it down to timing of shipments? Because I guess typically Alcat would have realized the top end of spodumene pricing versus peers, for example, and better than spot at Olaraz. So interested in sort of what's changed there.

Speaker 2

Yes. Look, as you know, that was a pre close. That was all chem. So I have to go back and figure it out. Well, I have had to go back and figure that out myself.

Speaker 2

But you're absolutely right. Compared to All Chem's historical performance, I think it's fair to say Q4 wasn't necessarily the strongest performance in either of those two areas. I think in the spot concentrate, it's a relatively small shift in volume. And I think for a whole bunch of reasons, it went out really late in the quarter and really late in the month. And particularly as they also shifted maybe from earlier in the year where they were shipping on an immediate pricing basis, even a lagging pricing basis to an N plus 1 pricing basis.

Speaker 2

I think that also accentuated in a falling price environment as it will do. I think on Autorose, I think that the challenge with Autorose, first of all, was just a significant increase in volumes that they were trying to ship. I mean, you'll notice that they sold significantly more in that quarter than in any others. Again, why they made the decision to do that is, again, valid at the time, but history can be a harsh judge. Holding volumes back just into a falling price environment doesn't look great with hindsight.

Speaker 2

And I think there's also this question of technical grade. I think as the market weakens, and we've seen this before, customers will take any carbonate and they'll just deliver with the lower quality. But in a market where there's less demand, more supply, whichever, then the discount that technical grade attracts just goes up and goes up quite significantly and can create some pretty meaningful short term disconnect. So I think that was also part of the challenge that happened in Q4 as

Speaker 8

well. Yes. Okay. Thanks for the color. And then in Argentina, you called out reducing some of that CapEx spend and pace, and you cited a 9 month delay there.

Speaker 8

So should we think about Sal de Vida pushing back there? And what are the drivers? Is it just maintaining cash? Or is there some more issues that projects had delay after delay and CapEx and revisions time and time again. So just wanting to understand that and how we think about the timing now.

Speaker 2

It's not a project related decision so much. I think it is 2 things. I think one of them is clearly, like at this pricing level where the market is today, we're not going to leverage ourselves and put the balance sheet at risk. And so all projects you'll notice have had take a step back and say, is there a different way to deliver the conserved spending without negatively impacting the success of the project or creating a capital increase that's not acceptable to us in this environment. It's not the readers, no different to Phase 1b at MDA or the Canadian projects in that regard.

Speaker 2

It also creates an opportunity because I mean, Southern Reader and Phoenix really are close to each other. And we do share we practically we do even compete for above ground infrastructure and above ground resources, whether that's contractors, people, energy, water, you name it, there's an opportunity there to optimize across those 2 to improve the way in which we deliver those projects. Our first glance suggest to us that actually we may even be able to reduce the total capital cost across those two projects by taking this moment to take a look at where those efficiencies possibly could be. And it certainly helps that we can optimize labor. Labor is a big resource constraint there.

Speaker 2

So our suppliers and contractors, so optimizing across those 2, quite likely to lead to some cost savings. But yes, it will lead to 6 to 9 month delays across those two projects.

Speaker 8

Okay, got it. Thank you.

Operator

Your next question comes from the line of Chris Kapsch from Loop Capital Markets. Please go ahead.

Speaker 9

Yes, good evening. So my first question is a follow-up really to the opaqueness discussion, because also what's been opaque has just been the sort of the nature and the magnitude of the destocking activity in China. And I'm just wondering about visibility you have around that. I'm asking because it's kind of it seems like that the Gigafactories, for example, are operating at very low rates in China overall. And that's probably one of the dynamics that's dragging on pricing, the underutilized Gigafactory, perhaps factories that shouldn't have been capitalized and thought they're going to supply EV companies that maybe shouldn't have been capitalized.

Speaker 9

So I'm just wondering, is that feeding into your commercial discussions? And what's the visibility you have into that destocking working its course?

Speaker 2

Yes. Look, we don't have a huge amount of visibility. I mean, I frankly would have expected to see some more announcements of Tier 2 or Tier 3 battery cell manufacturers closing down rather than not even just going on hiatus, but actually closing down. And we haven't seen a lot of that yet. Now it's probably a little early still.

Speaker 2

We see this every time at this time of year because of the Lunar New Year impact and effect. So we'll be looking out over the next month or 2 to see whether we do start to see some buildup. I know there was some commentary from some Australian swaddlers, I mean guys about maybe inquiry levels are going up. And so maybe we're going to start seeing a pickup again in demand. But we don't see it today.

Speaker 2

Now I would say when it comes to contract discussions, it's less of an impact to us because we're not really supplying into that chain. I mean that piece of the market absolutely impacts market price that we're all exposed to, but it's not really where Arcadion has been spending its time thinking about customer contracting and embedding ourselves into those supply chains. And that may be another reason why it's just not quite as visible to us as we would like it to be.

Speaker 9

That's helpful. And then the follow-up was on the discussion around the evolution of your commercial strategy. I'm just curious about what tenants as you evolve the strategy, what tenants are important to you? And you also had said that customers were showing a preference for flexibility around hydroxy versus carbonate. I'm wondering if that should be interpreted as momentum around LFP more globally or is that too much of an extrapolation?

Speaker 9

Thanks.

Speaker 2

Look, I think there's a couple of things going on today. I think one of the obvious things that we see more and more is an IRA focus, where do we supply and source IRA qualified material, whether that's carbonate or hydroxide. And as I'm sure you know on hydroxide, we're reasonably well placed there on carbonate. Argentina today is not technically IRA qualified carbonate unless it's upgraded into hydroxide. So I think much of the commercial strategy remains taking our asset portfolio and lining it up most closely or as closely as we can with the customers that make the most sense to us.

Speaker 2

I missed the first part of what you said, Chris, you're asking about?

Speaker 9

Well, in your formal comments, you talked about evolving your commercial strategy and coming up with an integrated one for the combined company. And I'm just wondering what you perceive as important in terms of the tenants and also I guess what you think your customers are going to perceive as important as you partner with them? Thanks.

Speaker 2

Yes. Look, well, I think for us at least, it's finding the customers that value what we do, making sure we can produce the quality materials they demand, right? And that's really important question. One thing that I don't think is going to be an option if you pursue a commercial strategy, the way we do is to be indifferent to the quality of the materials that you make. So we have to produce usable qualified material and that's less of a challenge in hydroxide, but it's probably going to take a bit more time and effort in the carbonate space.

Speaker 2

And I think the second piece of what that does, I think you've always heard historically from a Livent perspective, we've always wanted to be closest to the customers that are leading the charge and have the best insights. And that remains the case because the shift between technologies between high nickel and mid nickel hydroxide and carbonate is pretty significant. We certainly see a lot more LFP adoption for sure. And I think while LFP adoption is limited, there's no doubt that the LFP the cost of an LFP battery package has fallen below $100 a kilo and that's a bit of a Holy Grail, frankly, for the OEMs that are trying to drive low cost vehicles, bring the price of the EV down. And if you're going to work with your customers, they're going to need carbonate to service that market.

Speaker 2

So our strategy continues to evolve. There's no doubt it's more complicated. There's no doubt that having the right partners that are willing to really sit down with you and share their roadmaps is even more important, particularly if we're going to invest in improving the quality of the material. It's not going to be a strategy that's going to be quick to evolve or quick to change, though. It takes time to do this as a combined company.

Speaker 3

Appreciate the color.

Operator

Your next question comes from the line of Rob Stein from Macquarie. Please go ahead.

Speaker 10

Thanks for the opportunity. Just, two quick ones for me. The roughly 10 ks cut of spod from the account. Just on that one, are we would it not be better to sell that asset or to explore sales of that asset to existing Australian spodumene producers that may see value upside into the future, given that's obviously a key lever you're pulling to manage supply? And then secondly, just on the EBITDA sensitivities that you've provided, my rough math has prices of about $10,000 a ton of LCE, that being kind of EBITDA breakeven.

Speaker 10

Is that sort of roughly aligned with your thinking? Just trying to get some bookings on the numbers that you've provided for guidance. Thank you.

Speaker 2

Outlook scenarios, no guidance. But when you say $10 are you saying that your projection for the year is $10 a ton or you're asking me if today's market is $10 a ton?

Speaker 10

No, no. No. Basically, what I'm asking is if I use your guidance and I linearly extrapolate at about 10,000 breakeven

Speaker 2

and I just want to

Speaker 10

understand from a bookend point of view whether that's right.

Speaker 2

Yes. Look, it's a difficult one to answer because our portfolio is not linear, which is why we did this. I think if it was linear, we wouldn't have to do it. But what will happen is that a big chunk of our volume has flows to it. So once you get price falls to 10, a big chunk of our revenue didn't move because it's flows are above 10.

Speaker 2

The second piece of it is how it flows through to a specialties business, which as I'm sure you know is a much, much higher price per LCE than the rest of the business. It's a little bit harder to predict as well. It's sort of it will flow through, but again, not on a linear basis. That is the hardest question to answer is in a price environment where price goes that low, I don't know how big the discount for technical grade carbonate will be. I just don't know.

Speaker 2

So that's the variable in there. There's no doubt at $10 a kilo, if the market sits at $10 a kilo for a long period of time, clearly, all bets are off as to what we do with regard to capital projects, etcetera, because of those kind of pricing, the EBITDA of the business and the cash flow generation of the business is severely impaired relative to the numbers we've put in there. So currently, it doesn't really matter to me at least whether that number is $9 $8 or $11 When you enter that kind of sustained price environment, it's a completely different strategy for the organization.

Speaker 10

Thank you. And then sorry, just to follow-up on the spodumene business as

Speaker 2

we move forward. Yes, if you're asking should we sell Mt. Cattlin, Mt. Cattlin has got, I don't know, a year's life left if we run it flat out, 3 years if you kind of are willing to invest a decent amount of money on stripping further, maybe further if you're willing to take the risk of going underground. I don't know how attractive an asset that is to a potential buyer.

Speaker 2

We've been merged for less than 2 months. So as you can imagine, that's not been a particularly high focus for us. But I don't know whether that bio exists, frankly. Mt. Catlin, again, with only 2 or 3 years life, life is never going to be a core part of the long term strategy of Arcadium Lithium.

Speaker 2

But that doesn't mean that it is an important asset for the next 2 or 3 years.

Speaker 10

Okay. Thank

Operator

you. Your last question comes from the line of Aleksey Yefremov from KeyBanc Capital Markets. Please go ahead.

Speaker 6

Thanks. This is Ryan on for Aleksey. Just two quick ones from me. I wanted to ask you, there's some recent reports of some operations in China seeing some environmental inspections, which may cause some shutdowns. I'm not sure if you've seen or heard of those reports and what your opinions on that would be?

Speaker 6

And then secondly, if you could just run us through what the ramp of the new 15 kt hydroxide facility in China would look like and when that might reach full run rate? Thanks.

Speaker 2

Yes, sure. Look, I think the environmental I mean, it's some sort of an annual event now or maybe more frequent than annual events, but there are some locations that are subject to environmental inspections that don't go so well and they're shut down for a period of time. I've heard the same reports. I've also heard the complete opposite. This is one of my comments earlier about 12 hours later, somebody equally credible comes out and says the opposite.

Speaker 2

So I don't know, time will tell. I have heard and I have seen some very credible reports and commentary and news that there are certainly some converters that are going to be closed down for longer periods of time than normal 3, 4, 5 months, not necessarily for environmental purposes though simply because of the economics that they face if they're not integrated. I think in terms of our new facility ramping up, the question is qualification. It's not the plant itself. The plant, it's already demonstrated that it can run and produce full rate and produce material that we are highly confident will get qualified.

Speaker 2

The qualification process though can still take anywhere from 3 to 9 months. And so it really depends upon how quickly our customers and their supply chain works its way through that qualification process.

Operator

This concludes our Q and A. I will now turn the call over back to Mr. Daniel Rosen for closing remarks.

Speaker 3

That's all the time we have

Speaker 1

for the call today, but we will be available following the call to address any additional questions that you may have. Thanks everyone.

Operator

This concludes our the Arcadium Lithium 4th quarter 2020 earnings release conference call. You may now disconnect. Thank you.

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Earnings Conference Call
Arcadium Lithium Q4 2023
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