Li-Cycle Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 13, 2023

There are 10 speakers on the call.

Operator

Good day.

Speaker 1

My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2023 Lifecycle Holdings Earnings Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I will now turn the call over to Noah Azmei, Head of Investor Relations.

Speaker 1

Please go ahead.

Speaker 2

Thank you. Good afternoon and thank you everyone for joining us for Lifecycle's business update and review financial results ended September 30, 2023. We will start today with formal remarks from Ajay Kocher, Co Founder, President and Chief Executive Officer Tim Johnston, Co Founder and Executive Chair and Debbie Simpson, Chief Financial Officer. We will then follow with a Q and A session. Ahead of this call, Lifecycle issued a press release and a presentation, which can be found on the Investor Relations section of our website at investors.

Speaker 2

Lifecycle.com. On this call, management We'll 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 factors discussed in today's press release, during this conference call and in our past reports and filings with the U. S. Securities and Exchange Commission and the Ontario Securities Commission in Canada.

Speaker 2

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 to Ajay.

Speaker 3

Thank you, Dala, and good afternoon, everyone. Beginning with Slide 3, we announced in late October that we're pausing construction at the Rochester Hub to conduct a comprehensive review of the project. Today, I'll discuss the rationale for that vision. Tim will provide an update on the Spokenhub network and Debbie will review liquidity management and our financing strategy. Turning to Slide 4.

Speaker 3

I'd like to provide context on what drove our decision to pause the construction work for a comprehensive review. At a high level, it came down to convergence of 2 factors, namely an escalation in actual construction costs versus prior indicative bids and delays in complex financings. Let me walk you through some of the details as you can see here by the timeline. Starting with the Rochester Hub construction milestones and costs as shown in the blue part of the timeline. We recently started to recognize actual costs significantly higher than previously estimated based on recent subcontractor agreements for packages of remaining work.

Speaker 3

This was specifically related to installation costs for mechanical equipment, piping, structural steel, Electrical Instrumentation for Measurement and Process Control Devices. This cost pressure was exacerbated by the timing of nearly $4,000,000,000 of other major construction projects in the region starting or ramping late 2023 early 2024, driving general contractors to draw construction workers from the larger regional area. Reflecting these escalating construction costs, we arrived at forecasts that results in the aggregate cost of the current scope of

Speaker 4

the project

Speaker 3

substantially higher than the previously disclosed budget of $560,000,000 For reference, the project CapEx to date was approximately $301,000,000 on the project through September 30, 2023. In In terms of the financing, as shown in green on the top of the timeline, with our capital growth needs, We've been successful in timing strategic and competitive financings such as with Coke, LG Chem, LG Energy Solutions and Glencore over the course of 2021 2022. Also in 2021, we submitted our application and began a rigorous process with the GUE loan programs office. We achieved a significant milestone when we received the conditional loan commitment for gross proceeds of $375,000,000 in late February 2023. While we worked closely with the DOE to progress to the final stage, We were delayed from our initial target close from the end of June to September 2023.

Speaker 3

Also, at At September 30, 2023, the company had contributed approximately $92,000,000 for the construction of process building and a warehouse for the Rochester Hub. The spend was incremental to the Hub project budget of $560,000,000 The company was anticipating a refund of a substantial portion of this contribution upon completion of a building's leasing arrangement. Through the complexities of bringing together arrangements for the DOE loan and the building's lease arrangements. Both financings were further delayed into October. Subsequently, We've decided not to pursue the building's lease arrangement, which is expected to simplify the DOE loan closing process for the Rochester Hub.

Speaker 3

Installment. The escalating construction costs combined with continued delays and closing contemplated financings relating to lower current and projected cash balances. As we made this swift and prudent determination and announced a pause of the project to complete a comprehensive review. The review is examining expected capital costs, timing of completion and go forward construction strategy options for the Rochester Hub project. Turning to Slide 5.

Speaker 3

For a snapshot of our current portfolio immediately following the Rochester Hub project pause. The company is undergoing a comprehensive review bringing on additional Spoken Hub capacity in the near term. Until the go forward strategy work is completed, the company will be slowing operations and its North American Spokes as we review the timing and black mass needs of the Rochester route. The company is reviewing its plans, bringing on additional spoke capacity in both North America and Europe. And we'll discuss both the hubs and our focus on the Generation 3 spokes in more detail later in the presentation.

Speaker 3

Turn to Slide 6 for an overview of the key considerations for our ongoing comprehensive review. As already discussed in late October, we announced a pause on the construction work at the Rochester for a comprehensive review of scope, timing and capital. Additionally, we're evaluating our levers to optimize cash and liquidity, including cost spend initiatives, Spok optimization strategy and timing financing needs to support our go forward plans. Let me now turn it over to Tim for more detailed update on our Spok in hub network.

Speaker 4

Thanks, Ajay. Turning to Slide 7 for an overview of the options being considered as part of the Rochester Hub project review. The review is examining a phased approach that ties black mass production from our spoke network to support the battery industry for precursor and cathode production. In a phased approach, the first phase as depicted by the green arrows, the black mass is processed to produce and mixed hydroxide precipitate or MHP, a combination of nickel, cobalt and manganese metals. MHP could be sold to refiner ahead of supplying to the battery precursor industry.

Speaker 5

In the

Speaker 4

second phase, per the original plan, as depicted with the gray arrows, black mass would be converted directly to nickel and cobalt sulfates ahead of supplying to the battery precursor industry. Both approaches maintain the production of battery grade lithium carbonate. The MHP process was part of Lifecycle's large scale pilot program completed in 2019 to 2020 as included in Lifecycle's patented technology portfolio. The key factor for this approach is the ability to reduce immediate construction scope to phase development with project financing. Turning to Slide 8, to discuss our initial assessment of the Rochester Hub project.

Speaker 4

As previously disclosed, engineering and procurement of the Rochester Hub project are largely complete with focus having shifted to construction installation activities. As RJ discussed earlier, the project has experienced escalating construction costs substantially higher than what was anticipated in the previously disclosed $560,000,000 budget. Additionally, We had contributed approximately $92,000,000 towards an expected total cost of $140,000,000 for the construction of process buildings and warehouse for the Rochester Hub. We had previously anticipated a refund of a substantial portion of this contribution upon completion of Building Lease Arrangements. For background, the decision for entering into the building leasing arrangements were based on our initial intention to focus capital expenditure on core project requirements, specifically not real estate assets.

Speaker 4

This is aligned with our general approach to project execution. However, we decided not to pursue the building leasing arrangements, which is expected to assist in simplifying the DOE loan closing process for the Rochester Hub. In terms of the go forward for the Rochester Hub, we have performed an initial analysis of options for completion of the Rochester Hub. Based on the initial analysis and depending on the option selected, we determined that the revised project costs could be in the range of approximately 850,000,000 dollars to approximately $1,000,000,000 This range includes the cost of the process buildings and warehouse for the Rochester Hub of approximately $140,000,000 This total project range based solely on initial analysis is subject to a number of assumptions and will likely change as we continue to complete our comprehensive review work and determine which options to pursue accordingly. Turning to Slide 9 for an update on the Port au Vaestme Cham, which has a similar flow sheet and benefits to the MHP option I just covered with a phased approach for the Rochester Hub.

Speaker 4

Just as a reminder, together with our partner Glencore, we are repurposing part of their existing hydromelurgical site in Portofeste, Italy. This project contemplates competitive long term financing from Glencore to Sun Life Cycle's full share of the capital investment. Once operational, this facility is expected to be one of the largest producers of Barrickrade Lithium Carbonate in Europe. I would like now to hand it over to Debbie review of our liquidity management and financing strategy.

Speaker 6

Thank you, Tim. Turning to Slide 10 for a review of the steps we are taking to maximize liquidity and preserve our cash on hand. Since pausing the project in late October, we've taken action to optimize cash, while also pursuing financing options and strategic alternatives. First on our cost cutting actions. We have reduced our workforce, eliminated other non essential operational spend and our implementing working capital initiatives.

Speaker 6

We have sold operations at our North American Spoke network, including a pause in production at our Ontario Spoke, slowed production at the New York Spoke and the installation of Line 2 in Germany, under reevaluating the plans and timing of our spooks in Norway, France and Hungary. Turning to Slide 11 for an update on our spooks. With our review of timing and scope for the Rochester Hub, We're now primarily prioritizing our operations on the Generation 3 Spokes, specifically Arizona, Alabama and Germany. Consequently, we are revising our 2023 annual production outlook for Black Mass from 7,500 to 8,500 tons CEM25,500 to 6,500 tonnes. As a reminder, we started up the Germany's book line 1 in early August and we're excited to report that the ramp up is tracking our expectations.

Speaker 6

The Generation 3 is advanced novel technology that can sustainably process film electric vehicle battery packs without the need for discharging, dismantling our thermal processing. Additionally, they benefit from economies of scale. Turning to Slide 12 for an update on our cash position. Since June balance is $289,000,000 The majority of the cash outflow has been for capital expenditure related to the Rochester Hub project. We ended the 3rd quarter with approximately $137,000,000 of cash on hand, which is now approximately $100,000,000 of November 10.

Speaker 6

With current cash on hand, our spend cuts and additional cost saving initiatives underway, We anticipate needing additional funding in addition to the DOE room before restarting the Rochester Hub project. As an immediate step, the company in conjunction with its financial advisors is exploring options to support near term liquidity needs. The company is actively engaged and continues to work closely with the DOE to satisfy conditions precedent to financial close for growth proceeds of $375,000,000 as it undertakes its comprehensive review of the go forward strategy of the Rochester Hub. In addition to the conditions precedent to financial close, The company will need to meet additional conditions precedent prior to the first advance, including obtaining additional financing to fund the required base equity commitment before restarting the Rochester Hub project. In parallel, we are exploring additional long term financing options as well as strategic alternatives.

Speaker 6

Turning to Slide 13 to conclude. We continue to believe Lifecycle is uniquely positioned with its Spoken Hub network and remain poised to benefit from strong secular trends and supportive government policy. We remain committed to our mission to of our critical value materials to create a domestic closed loop value supply chain for the clean energy future. Operator, we are now ready for questions.

Speaker 1

And we'll take our first question from Brian Dobson with Chardan Capital Markets. Please go ahead. Your line is open.

Operator

Thanks very much for taking my question. As you contemplate this strategic pause in development outside of the United States in the European countries that you're looking to build hubs and spokes. What do you think is the likelihood that those projects will simply be halted by understandably concerned partners Investors.

Speaker 3

Hey, Brian, it's Sajid here. And you're a bit hard to hear, but I think you're asking about the effect on our European project,

Speaker 4

Steve, what we just decided to do

Speaker 3

or we decided to do with the Rochester Hub. I'll turn it over to Tim perhaps to cover

Speaker 4

Yes. No worries. Hi, Brian. Nice to talk to you. So when it comes to European assets similar to the balance of our projects, It's all part of this broader comprehensive review that we're doing with the exception of Fortubestin, which is The DFS timing is under review, but otherwise is continuing in connection with partnership.

Speaker 4

And I think that was part of your question with Glencore. I want to highlight that our partners and customers have been extremely positive and supportive throughout this process.

Operator

That's good to hear. As it pertains to the Department of Energy, I understand that you've retained an investment bank to seek out strategic alternatives and financing opportunities. As management is contemplating receiving funds from DOE, how likely do you think that is if you had to handicap it?

Speaker 3

Yes, I'll take it. It's Ajay. Yes, look, so let's be very clear and I think there was a lot of misnomer out there in articles and other aspects To be clear, we were in quiet periods. So we want to ensure that we're being prudent. Look, the facts haven't changed.

Speaker 3

We have We still have a conditional commitment from the DOE. That was issued back in February of 2023 of this year That came in for gross proceeds of $375,000,000 Payvan, great to work with through this process. We're very close engaged. We're not just saying that as random language. It's obviously in

Speaker 5

partnership with them

Speaker 3

in terms of whatever we put out there. What I would say is we definitely have some work still to do and I think Tim covered in the body here different options associated with the potential phasing of the project and also around construction strategy. As you can imagine, that's very important for us to be working through with the DOE. And so as we get through the full review and we get to the best path forward. It's going to be in concert with that DOE package.

Speaker 3

Today, we're not ready to comment about how that may change or how that may be different, but I can tell you is The fact remains that we have a commitment and programmatically from the DOE, this is probably you can find it when they give a commission agreement, they actually earmarks the funds. So what we need to do is work through our review, work with them, and then we'll be able to give more clarity in these will be timing than other aspects.

Operator

Okay, thanks. And then just one final follow-up. Local news reports have indicated that Several contracting firms have outstanding bills that have not yet been paid. Would you care to comment on that? Is that because you're negotiating with those firms or what's going on there that those pertain to the Rochester Heart facility?

Speaker 3

Yes, simply keep that.

Speaker 4

Yes, no worries. And Brian, we can't comment specifically on individual contractors. I'll just say that We're working closely with all stakeholders as part of this review process.

Operator

That's very good. Thank you.

Speaker 4

Thank you, sir.

Speaker 1

We'll take our next question from Jeff Rossetti with TD Cowen. Please go ahead. Your line is open.

Speaker 5

Good afternoon. I was just wondering if you could comment a little bit further. You mentioned that you'll need some additional financing before To meet DOE conditions, could you maybe just elaborate a little bit more about how much may be required?

Speaker 3

Sure. Hey, Jeff. It's Ezra here. So we just wanted to make sure that it's clear how the structure works. So let's be very clear.

Speaker 3

The DOE has always had a face equity commitment and it's actually, I believe, a programmatic feature for them and much like usual project financing, which means As of the overall project size, you have to put in a certain amount of equity first, then followed by the debt coming in. As you can imagine, if the capital cost is different, And the project size is bigger. And with an existing commitment remaining at 3.75, there's an additional funding date. And so on Page 8, we went over Indicatively, initially where those capital costs would be depending on the option selected and proceeding with the same approach on the upper end with respect to contracting strategy. I think it's early for us to say precisely what that gap is.

Speaker 3

You can do math based on this, but I think what we'd like to do is complete the work, the refined level of these numbers, which could change, and then come back and be able to talk about all of that together comprehensively in concert and as and when appropriate with other financing alternatives that we're going to be working on.

Speaker 5

Okay. Thank you. And just on the cash preservation plan. It's helpful that you provided where you stand on cash in terms of November 10th versus the end of the quarter. Just wanted to see if you could maybe provide a little bit more detail on what you see The cash burn being on a monthly basis once you've like fully implemented the cash preservation plan.

Speaker 3

Thanks. Good for Debbie to address.

Speaker 6

Hi, Jeff. I appreciate the question. I think what we need to do and I think you're right in some of the I heard it say that we're working with some advisers to help us with that. I think what we do is we really need to work through that plan And then circle back to that in conjunction with the comprehensive review, they're really working in parallel. As an initial step, You saw in the details, we've densized our workforce.

Speaker 6

We're still in production at our plants. And we're also looking at opportunities to maximize liquidity on under working capital position. So we're working with suppliers. We're looking at selling Blackmats versus the path that we were on, which was to build inventory for the opening of the hub. And that work will continue and we'll get deeper into that as it progresses.

Speaker 5

Thank you. No problem.

Speaker 1

The star and one keys on your telephone keypad. We'll take our next question from Adam Jonas with Morgan Stanley. Please go ahead. Your line is open.

Speaker 7

Thanks. I was going to ask about the minimum about the pro form a burn as well, but I appreciate You're not going to answer that right now, but maybe you could answer, is there any remaining CapEx commitment or what financial cash commitments are like near term for the Rochester Hub even with the pause. And then I was curious as a follow-up, what if you had an assessment of minimum cash on the balance sheet to kind of run working capital payroll and your other operational needs with the pause.

Speaker 3

Yes, good questions both for Debbie.

Speaker 6

Thanks, Sassy. It's talking over each other there. My apologies. Hi, Adam. Yes.

Speaker 6

As I said, we've got $100,000,000 as of right now. And as we work through this plan, absolutely working on a minimum that we need and then once you know around that minimum and to build on near term financial options around that to support it's going to be really important. You asked about capital commitments. So I think there's a couple of things in there. One is We paused on future growth capital projects, so there's nothing thrown out as a result of that.

Speaker 6

And then Clearly, everything runs roughly about a month behind any status. So you're absolutely right. There are Still bills to be paid with regards to recent work at the Rochester Hub. In addition to that, we've got costs around securing the site, making the site safe and keeping it in a good preserved state, so that it's in good state for a fast start up when we're ready to do that. So So we've mentioned one time costs in the next couple of months, including the cost of our workforce reduction to work through in November, December.

Speaker 6

So I think that will give you an idea of the sort of speed bumps that we need to hit in the next sort of while. And then as we complete the work around the cash preservation plan, we'll have more of a sense of what the run rate is at the back of that.

Speaker 7

I appreciate that. Thank you.

Speaker 1

We'll take our next question from Matthew O'Keefe with Cantor Fitzgerald. Please go ahead. Your line is open.

Speaker 5

Thanks, operator. Thanks for taking

Speaker 8

my question. Just a question on you're changing the flow sheet a little bit here. I understand You want to go to produce MHP in your review of Rochester. It sounds like it will save some CapEx and I can see that. Why are you applying that also to the Port of Esme hub?

Speaker 8

Is there a is it a significant CapEx or Is the premium just not there to produce the nickel sulfate and cobalt sulfate? What should we be thinking about on your on this side of things?

Speaker 3

Hi, Matt. Those great questions. Good for Tim Tigress.

Speaker 4

Yes. Hi, Matt. Nice to talk to you. So let me answer the first one, which in relation to port of estimate, Just to make it clear, so the plan for Portobesno was always to produce MHP when we originally scoped it out. And there was a couple of factors that were driving that.

Speaker 4

One being the desire to maximize the utilization of existing equipment on-site, I. E. The MHP process was much more well tied to the existing footprint of the existing asset on-site, making it a rental the existing asset on-site making it more experienced and effectively a lower capital project overall. This is a process that we're very familiar with. And when it comes to Rochester, Part of the rationale for driving that, you touched on it exactly right and that is that it reduces the near term capital expenditure associated with installing certain parts of the plant associated with sulfate production.

Speaker 4

What we have seen from a market perspective and this is public and you can look up the indexes is the spread between MHP discounts to metal and sulfates has narrowed and so the financial impact is somewhat negated by that combination. So it's a decision that's based primarily on construction costs, but there is market factors that you can see that have changed in recent times that are also helping support that.

Speaker 3

And on the other side of that just to add, obviously the input typically the precursor And the input to Catherine thereafter, typically the precursor is the sulfates typically. And so one of the things that's been missing in North America is precursor manufacturing. And there are some plans out there, people can see them probably that are coming, but it is taking longer than anticipated. So, we don't have an answer today of what path we would go. We do still see the value in the sulfates to be more adjacent to PKAN production, precursor production.

Speaker 3

But as it's indicated, it's really a question of if we go that path, how you get there.

Speaker 4

And the timing of

Speaker 5

Okay. Got it. Thanks. And if

Speaker 8

I may, just on the CapEx for the Process and Warehouse Buildings, You suggested that was tied to the DOE loan. Is it just that the DOE needs something more in terms of security like land to as part of the loan requirement.

Speaker 3

Not quite, Matt. It's Sergey. Yes, so as Tim articulated and briefly, We usually try to do this and for our folks it's usually much simpler because they're smaller and more typical buildings. So our original approach and then in our FS Along the way, our financial statements is we wanted to do this building leasing arrangement, Which made it would have refunded us a good quantity of the amount that we spent to actually build the buildings. And then the idea was that that would convert it to a lease.

Speaker 3

So it's a way to basically refund CapEx and it's been articulated in the presentation. We're not a

Speaker 4

real estate company, so we only want

Speaker 3

to make money off the stuff in the buildings. However, as you can imagine, that arrangement would have a set of creditors and the DOE is another financing party So, it's always been that way along the course. But as you can also imagine, getting the short strokes on documentation, it frankly was very complicated. That's why I refer to them as complex financings and having this it's not ideal the way this happened, but we have an opportunity to rebates and do this in a way that makes a lot of sense. And I mentioned that it would help with simplifying the overall complexity that we were facing as part of the DoE

Speaker 8

transaction. Okay. Thanks very much. That's it for me.

Speaker 3

Thank you.

Speaker 1

And we'll take our next question with Ben Kallo with Baird. Please go ahead. Your line is open.

Speaker 9

Hey, guys. Thanks for taking my question. I just I want to understand, project, maybe just on the folks. What and I think you said in prepared remarks what was paused and what wasn't. But could you just run me through that?

Speaker 9

And then I think Adam asked a question about just commitment, capital commitments for the Hub, but are there anything capital commitments for the folks

Speaker 3

Hey, Ben. Yes, sure. So maybe to take the first and

Speaker 4

then Debbie could take the second on the spokes. Yes, no problem. Hi, Ben. Nice to talk to you. And so when it comes to the spokes, we've paused 1 spoke in Ontario.

Speaker 4

This was our first generation 1, both it was the smallest of our network. And so as part of this strategy. We decided to pause that asset and the other spokes in North America remain operational.

Speaker 6

Yes. And on future CapEx spend, so you've heard us talk in our disclosures Before we had plans underway for 2nd line in the Germany spoke, and we've also got plans that you know, we have location in Norway and we have plans underway for France and we were looking at site selection for Hungary. So we pause those initiatives until we complete this comprehensive review.

Speaker 3

The Hub is the main capital spend for us, so Just relatively.

Speaker 9

You answered the question about black mass sales versus building inventory. I just want to understand with the operating spokes, if the Black Mat sales are profitable on those individual spots. And I have one follow-up.

Speaker 3

Yes. So the way that we've looked at the portfolio is 1, prioritizing customer needs. So we have customer obligations where we need to 2, we've looked at the folks that have the best economies of scale. So focus on low cost conversion, ability to get to further throughput, further ramp up, etcetera. And 3, vis a vis profitability, I think I'll hold on comment on it today on the outside of our FS, but just suffice to say that The way that we've optimized the network and we'll continue to look at it is intended to be liquidity generating over time or liquidity managing as part of our cash preservation plan.

Speaker 9

Okay, great. And just a follow-up, Tim, in prepared remarks, you said About the Glencore site CapEx, so is it does that still proceed Rochester might be held up for a little bit.

Speaker 4

Yes. Glencore and Life Cycle are both committed To the Port of SME project, we think that it's critically important for both companies and for the region. And so the key thing that we're just reviewing is the timing. We've had some change in staff obviously and so we're just reviewing the timing and so should it be the DFS, but both companies remain committed to the project.

Speaker 9

Thank you, guys.

Speaker 6

Thanks, Ben.

Speaker 1

And it appears there are no further questions in queue. Thank you everyone for joining. This does conclude today's program and you may now disconnect.

Powered by Quartr

Key Takeaways

  • Rochester Hub pause: Lifecycle halted construction to review scope, timing, and capital after subcontractor bids drove actual costs to an estimated $850–$1,000 M versus the original $560 M budget, compounded by financing delays.
  • Phased project options: The review is evaluating a two-phase approach—first producing mixed hydroxide precipitate (MHP) to lower upfront CapEx, then converting to sulfates—to better align with black mass supply and DOE loan conditions.
  • Spoke network optimization: To preserve liquidity, Lifecycle has cut costs and workforce, paused its Ontario spoke, and slowed other North American spokes while prioritizing Generation 3 capacity in Arizona, Alabama, and Germany, revising 2023 black mass guidance to 5,500–6,500 tonnes.
  • Liquidity and financing: With cash on hand down to ~$100 M (Nov 10) from $137 M at Q3, the company is pursuing working capital initiatives, additional equity, strategic alternatives, and is working to satisfy DOE’s $375 M loan conditions before restarting the Rochester project.
  • Portovesme hub commitment: Despite Rochester delays, Lifecycle and partner Glencore remain committed to repurposing the Italian site for MHP—and eventual lithium carbonate production—with competitive long-term financing in place.
A.I. generated. May contain errors.
Earnings Conference Call
Li-Cycle Q3 2023
00:00 / 00:00