Li-Cycle Q4 2023 Earnings Call Transcript

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March 19, 2024

There are 7 speakers on the call.

Operator

Good day. My name is Todd and I will be your conference operator. At this time, I would like to welcome everyone to the 4th quarter and full year 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.

Operator

Thank you. I will now turn the call over to Nala Asmi, Head of Investor Relations. Please go ahead.

Speaker 1

Thank you. Good morning, and thank you, everyone, for joining us for Lifecycle's business update and review of financial results ended December 31, 2023. We will start today with formal remarks from Majic 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 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 assumptions are incorrect, including the cause 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 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 to Ajay.

Speaker 2

Thank you, Nala, and good morning, everyone. On our last call held in mid November, we committed to providing an update on our progress since pausing construction, initiating a strategic review of the go forward strategy for our Rochester Hub. Today, we're pleased to share the meaningful steps taken towards achieving the key objectives from this review and also to discuss our 2023 financial and operating results. Starting on Slide 3. On the left side are the key objectives we discussed on our last earnings call.

Speaker 2

On the right side, I will review the highlights and key actions we've taken to help achieve them. We'll provide more on these later in the presentation. 1st, regarding financing. The Special Committee of the Board of Directors conducted a robust process to review and evaluate potential financial and other strategic alternatives available to the company, including to increase our liquidity. After careful review and assessment of the alternatives identified through this process and consistent with the recommendation of the special committee, management and the board were pleased to expand upon Lifecycle's existing long term partnership with Penncor to increase their strategic investment in Lifecycle by $75,000,000 2nd, with respect to the DOE loan process.

Speaker 2

Simultaneous with our comprehensive we've been actively engaged with the DOE Loan Programs Office regarding the conditional commitment for a loan of up to $375,000,000 3rd, regarding liquidity. We implemented a cash preservation plan to reduce non core spend to slow cash outflows while we evaluate financing options to support our ongoing operations and a restart of construction at the Rochester Hub project. Finally, on the Rochester Hub. As part of our comprehensive review, we've been conducting an internal technical and economic review to assess a possible change in the project development strategy. The review confirmed the technical viability of the process to produce liquid carbonate and mix hydroxide precipitate or MHP.

Speaker 2

Turning to Slide 4, for an overview of our partnership with Glycorp. It has now been nearly 2 years of cooperation with an alignment of strategic vision, technical expertise and asset networks. In 2022, Glencore invested $200,000,000 in lifecycle through an unsecured convertible note and designated us as their preferred recycling partner. We formed a global strategic collaboration that aims to create an integrated platform to supply global customer base with both primary and recycled critical battery materials. Specifically, we've previously entered into long term intake and offtake commercial agreements, which enable us to jointly develop feed opportunities for our spokes, secure offtake for the end and byproducts produced in our spokes and hubs and obtain a supply of key region inputs for our future hubs.

Speaker 2

Turning to Slide 5 details on Glencore's additional investment for $75,000,000 in a senior secured convertible note. This investment, which enhances lifecycle liquidity, represents an interim step in our funding strategy to support our future plans. These notes will have a 5 year maturity to March 2029 and will have an initial conversion price of $0.53 per lifecycle common share. The cash interest payments will be based on the secured overnight financing grade or SOFR plus 5% per year and payment in kind or PIK interest payments will be based on SOFR plus 6% per year. In addition, Lifecycle and Glencore have agreed to amend the terms of the existing Glencore convertible unsecured note, which was issued to Glencore in 2022 and currently has an aggregate principal amount outstanding of approximately $225,000,000 which includes the PIK into 2 tranches.

Speaker 2

The 2 tranches would have among other changes, extended maturities and a reset conversion price to the lower of an amount based on the 30 day VWAP, plus a 25% premium and $9.95 per share in each case based on the earlier of certain trigger events. For tranche 1, the modification date would be the earlier of 1 month after the effectiveness and initial funding of a project loan financing for the Rochester Hub and December 31, 2024. And for tranche 2, the modification date would be earlier of the first commercial production from the Rochester hub, construction costs exceeding the construction budget set forth in the project loan financing and June 1, 2026. As discussed earlier, we believe this additional financing with Glencore demonstrates continued support of Lifecycles business model. I'll now turn this over to Tim to cover a review of the portfolio and operations.

Speaker 3

Thank you, Ajay. Turning to Slide 6 to discuss our Black Mass production strategy. In 2023, we produced 6,825 tons of black mass, more than 1.5 times the level achieved in 2022. This exceeded the top end of our revised guidance of 5.5 to 6,500 tons. As noted on prior calls, in the near to mid term, our Black Mass production will be tied to the availability of feedstock in local markets and to key strategic customers in close proximity to our spot operations.

Speaker 3

Longer term, we will strategically time production in line with the internal demand for Black Mass. Turn to Slide 7 for the highlights of our Spohak operations covering battery material sourcing, processing as well as black mass production. 1st, regarding the composition of sourced battery materials. As seen on the top left, in terms of form factor, the predominant lithium ion battery intake material continued to be manufacturing scrap followed by EV battery packs. On the right side, for our intake of various battery chemistry the position to serve the adoption of changing battery chemistries, including LFP, which has been gaining prominence in the industry, particularly in Europe.

Speaker 3

With respect to our Spoke operations for processing Barry Materials and our Black Mass production. In the Q4, we exceeded 80% availability at our operating U. S. Folks, including the processing of EV battery packs at our Generation 3 sites. In the Q4, of the total battery materials processed at our U.

Speaker 3

S. Generation 3 spokes, approximately 45% was EV battery packs. These EV battery packs can weigh upwards of £1,000 and can be processed using our generation 3 spokes advanced technology to process full EV battery packs with little to no disassembly and without the need to discharge. Turning to Slide 8 for an overview of Lifecycle's commercial agreements. We have the capability to process all types of lithium ion batteries independent of form factor and chemistry.

Speaker 3

This capability combined with the operational capacity in both North America and Europe has enabled us to build out a diversified global customer base. As shown on the left of the slide, our customer base spans the entire battery supply chain, including being a preferred recycling partner with leading global battery EV and energy storage OEMs. On the right side of the slide, we maintain a mix of short and long term intake and offtake commercial arrangements. At the Slurk level, we entered into battery material intake contracts, which range from spot, multi year to evergreen durations, complemented by offtake arrangements for the Black Mass produced at our spokes. At the future hub level, we have offtake arrangements for our end and byproducts with Traxxas and Glencore.

Speaker 3

Briefly regarding pricing, it is important to note that our contracts are predominantly indexed to underlying market prices for metals. Turning to Slide 9 for the status of our network portfolio. We have slowed operations at our Spoke network, including pausing operations at the Ontario Spoke, slowing operations at the New York, Arizona and Alabama Spokes on an ongoing basis and are currently reviewing further pauses or slowdowns. The timing of the France, Norway and Germany Line 2 are currently all under review. We are prioritizing Generation 3 Spokes and aligning with EV and battery OEM customers as they continue to ramp capacity in North America and Europe.

Speaker 3

We have paused construction on the Rochester hub, which we will discuss in more detail later in the presentation. We've also paused the development of the Portobeste Hub while undergoing further review with Glencore on this project. Turning to Slide 10 for a brief overview of our Spoke technology. As a reminder, LifeCycle developed a patented process for processing all forms of lithium ion batteries regardless of chemistry, form factor or state of charge. This environmentally friendly process does not rely on any thermal treatment, produces no wastewater and is highly scalable for the growing EV battery market.

Speaker 3

Turning to Slide 11, we show the status of the Rochester Hub project at the pause in October 2023. Through to December 31, 2023, we incurred total costs of approximately $567,000,000 on the project comprised of a total cash spend

Speaker 1

of $452,000,000

Speaker 3

and costs incurred, but not yet paid off approximately $115,000,000 Turning to Slide 12 for a discussion on our analysis of a change in the project development strategy for the Rochester Hub project. The review is focused on the construction, commissioning and operation of the hub with the intent of producing lithium carbonate and MHP. Notably, both MHP and sulfates approach maintain the production of battery grade lithium carbonate. With the MHP approach, as depicted by the green arrows, Black Mass is processed to produce MHP, a combination of nickel, cobalt and manganese metals. MHP can be sold to a refiner ahead of being supplied to the battery precursor industry.

Speaker 3

With the sulfates approach as depicted by the gray arrows, black mass would be converted directly into nickel and cobalt sulfate ahead of being supplied to the Barry precursor industry. We have no current plans that include the production of nickel sulfate and cobalt sulfate. However, the areas dedicated to the production of nickel sulfate and cobalt sulfate are being left intact under the MHP scope to allow for the potential construction, completion and integration of the future. We are conducting an internal technical and economic review of the Rochester Hub project, which resulted in an estimated cost to complete of approximately $508,000,000 including costs incurred, but not yet paid off approximately $115,000,000 as of December 31, 2023. Taking into account total cash spend of approximately $452,000,000 as of December 31, 2023, we expect the revised estimated project cost of the Rochester Hub project to be approximately 9 $60,000,000 for the MHP scope.

Speaker 3

We know this estimate is subject to a number of assumptions and is likely to change as we continue to complete our comprehensive review work, including reengaging and rebidding construction subcontracts. The increase in estimated project costs as compared to the prior range of approximately $850,000,000 to approximately $1,000,000,000 that included the expected production of nickel sulfate and cobalt sulfate from November 2023 is primarily due to further refinement of the methodology used for estimating the project cost based on the MHP scope. Importantly, our internal technical review confirmed the technical viability of the MHP process. In addition to the cost to complete, we will incur cost during the construction pause between October 23, 2023 to the project restart date, which we expect to fund with current cash and required additional interim funding. We will also incur other costs such as working capital, commissioning, ramp up costs and financing costs, which will be included in the full funding solution.

Speaker 3

As we've indicated, we will require significant additional funding before restarting the construction of the Rochester Hub project. I'll turn this over to Debbie to provide a review of the financials.

Speaker 4

Thank you, Tim. Turning to Slide 13 for a review of our 2023 financial results. Before covering the details, I would like to note that our 2023 financials reflect calendar year reporting as well as a transition to U. S. GAAP from IFRS reporting.

Speaker 4

As you will see, U. S. GAAP is a functional income statement presentation. You will now see separation of our expenses between cost of goods sold and SG and A, a change from the line item detail in nature based approach with IFRS. Moving now to a discussion of the actual results for 2023 versus 2022.

Speaker 4

Starting with sales black mass, which were 4,324 tonnes, a 3% increase versus the 4,190 2 tonnes sold in 2022. Product sales and recycling services revenues before non cash fair value pricing adjustments increased to $23,600,000

Speaker 3

a

Speaker 4

34% increase compared to $17,600,000 in 2022. The increase was largely driven by a higher value product sales mix, coupled with higher recycling services revenues from new service contracts and partially offset by reduced market prices for cobalt and nickel. Total revenue was $18,300,000 compared to $16,500,000 in the prior year, reflecting an unfavorable non cash fair value pricing adjustment of 5,300,000 dollars versus $1,100,000 in 2022 related to the lower market prices for cobalt and nickel. Moving to cost of sales, which were $81,800,000 versus $55,200,000 in 2022. Variable and fixed costs related to black mass and shredded metal products sold in the period were $29,100,000 compared to $23,200,000 in 2022.

Speaker 4

This reflects increase in raw material acquisition costs and other production costs. Fixed and other costs for the Spok network not capitalized to inventory and expenses in the period was $34,900,000 compared to $16,900,000 in 2022. The increase was primarily due to higher spoke costs, including personnel costs, leases and depreciation from the existing and new spook assets in Germany. In addition, cost of sales include fixed and other costs related to production assets in development. $7,400,000 related to the Rochester Hub compared to $2,600,000 in 2022 and $10,400,000 related to the Spok network in development compared to $12,500,000 in 2022.

Speaker 4

SG and A expenses were $93,400,000 versus $81,300,000 in 2022, primarily driven by higher personnel costs before implementing the workforce reduction in November 2023. We note that prior to the construction pause at the Rochester Hub, we had hired operations personnel in anticipation of the Hub commissioning. We also increased headcount to support expanding spoke network, capital projects and corporate requirements, further increasing our cost of sales and SG and A. Research and development costs were $5,700,000 versus $2,700,000 in 2022 and were primarily related to the personnel costs and professional fees incurred for the initial R and D for the Portuguese mini hub. Other income was $24,700,000 a decrease of $27,200,000 compared to the prior year, which was primarily related to a decrease in fair value gains on our convertible debt.

Speaker 4

Adjusted EBITDA loss was $156,400,000 compared to a loss of $118,500,000 in 2022. This was largely driven by higher cost of sales and increased SG and A related to the growth and expansion of the business. Turning to Slide 14 for a discussion on the actions taken on the cash preservation plan. At the beginning of November, we implemented a cash preservation plan, which has helped to reduce cash outflows while we explore strategic alternatives and financing options to increase liquidity. We are diligently working to manage our cash to support our liquidity needs.

Speaker 4

First, on the Spoken Hub capital spend, we paused construction at the Rochester Hub while we are completing our review of the go forward plan for the project. Curtailed Spoke production to focus on key customers and pause development of new spoke capacity. 2nd, on improving working capital. We've been actively engaged with contractors and suppliers to the Rochester Hub project to negotiate extended payment plans as well as extending other payment cycles and implementing other similar measures. Additionally, to the extent possible, we've been pulling forward payment terms for Black Mass sales.

Speaker 4

3rd, on rationalizing our cost structure. We will continue to further rightsize and reshape our organization, further reduce costs at our Spok operations and make additional cuts to non core SG and A costs. As of December 31, 2023 March 15, 2024, Lifecycle had cash and cash equivalents on hand of approximately $71,000,000 $35,000,000 respectively. Excluding restricted cash of approximately $10,000,000 and expected gross proceeds from the Glencore financing of $75,000,000 which is expected to close on or around March 25, 2024. Coupled with the expected gross proceeds from the Glencore financing, we estimate pro form a cash to be approximately $110,000,000 We expect that the results from the cash preservation plan will deliver lower cash outflows in order to maintain current operations until we are able to obtain more substantial financing.

Speaker 4

I will now turn back to Ajay.

Speaker 2

Thank you, Debbie. Turning to Slide 15. Just taking a step back, we continue to see favorable secular industry demand trends in North America and Europe. The chart on the left illustrates the rising adoption of electric vehicles with sales posting record growth adoption at an approximate 45% CAGR from 2019 through 2023 based on 3rd party sources. Notably, these 3rd party industry sources are projecting that EV sales would build on the strong base growth, posting a 25% CAGR through the end of the decade.

Speaker 2

As seen on the right, these growth dynamics support the robust demand for an expanding market for recycling of all forms of lift by matters. Near to mid term, the increase in recycling materials is largely be driven by manufacturing scrap from gigafactory growth, supplemented by end of life battery feedstock towards the end of the decade. It is projected by 2,030 demand for recycling materials will increase by up to times from 2023 levels. Turning to Slide 16, concluding on Lifecycles go forward strategy. First, regarding the financing strategy.

Speaker 2

We are excited to work with Glencore to close the interim financing. And additionally, we continue to work closely with the DOE on progressing the conditional commitment for a loan of up to $375,000,000 2nd, with respect to the Spoke and Hub network, we are evaluating our Spoke production to drive down costs and focusing production through our Gen 3 spokes to support key customers. And finally, we remain focused on completing our analysis of our go forward approach for the Rochester Hub. Before we turn to Q and A,

Speaker 5

we just want to take

Speaker 2

a moment and express our gratitude to multiple supporters during this significant transition. First, we're immensely proud of the Lifecycle team for their continued commitment, hard work and dedication. 2nd, we're very appreciative of our customers, suppliers, the DOE and our financial advisors for their continued support and collaboration as part of our go forward business plans for the Rochester Hub. On a special note, we're excited and appreciate Glencore's support and continued collaboration. Operator, we're now ready for questions.

Operator

Our first question comes from Brian Dobson with Chardan Capital Markets. Please go ahead.

Speaker 6

Thanks very much for taking my question this morning. So as you think about your ongoing conversations with DOE, has the nature of those conversations changed since you put the facility into strategic review? And would you consider the awarding of those funds as necessary in order to continue construction in that with that project?

Speaker 2

Hey, Brian, it's Ajay here. Thanks for the question. So starting with our engagement with the DOE since

Speaker 3

the pause, I was just as

Speaker 2

I said there, I read the call. We're very thankful, I think, to the DOE for continuing to actively engage with us and be very supportive. And that hasn't changed, to be frank, over the last couple of months. So with this interim financing imminently closing, we're looking forward to continuing to progress there towards close with the Dewey. So that's number 1.

Speaker 2

And then number 2, the way to think about our go forward funding is really in 2 parts. Number 1 is around Centrum funding, the cash on hand, and then we have a cash preservation plan to extend our runway as long as possible. And then there's really the need of the project. And today, we gave you a bit of an updated view of our latest estimates of where that is and there's more work to do on that, including with the relevant subcontractors to refine that estimate. But that, all in all, is going to require full funding solution.

Speaker 2

And the project financing loan, AKA DOE, is obviously a key part of that. But depending on where those numbers come out and what the full funding need is, we'll be looking to get together a full funding solution. So we use those words, that's what it means. The DOE is part of that, but it needs to be informed also by where we ultimately land up in terms of the more refined estimate.

Speaker 6

Okay. Thanks for that color. As you're contemplating resuming coverage and you had mentioned rebidding aspects of the project, have you been in I guess have you maintained relationships with your former contractors? And would you need to change contractors in order to proceed forward or do you think that those relationships could be resumed in the immediate future?

Speaker 2

Thanks, Brian. Let's get one for Tim

Speaker 6

to take.

Speaker 3

Hey, Brian. Nice to be talking to you. And so similar to what Ajay was saying at the end, we've had immense support from the contracting community, particularly the contractors within the Rochester region. I think everyone is aligned and has a desire to see this project through to completion. Our focus from a go forward perspective is really how do we best contract the project for the remaining scope of work that needs to be done.

Speaker 3

We're open to the right strategy. That's part of the work that we're going through at the moment. And we're working with that local contracting community to work that out. And that will be something we'll be able to provide more updates on brine as we get closer to a potential

Speaker 6

restart. Yes, excellent. And as you look around your portfolio of assets and you're contemplating, call it, demand in the United States and Europe, which areas appear most appealing to you over the next 2 to 3 years?

Speaker 2

Yes, I can take that. It's Ajay. Yes, look, I mean, I think we've seen both markets grow frankly in a similar way from a amount of material available for recycling. Obviously, we're very present in both North America and Europe. Part of today, we want to give a little bit more color on our customer base.

Speaker 2

You saw those quoted figures of OEMs and battery makers. So those customers stand both North America and Europe. And so I'd say in short brands, it is pretty neck and neck in terms of growth. And each market has its own features in terms of the regulatory landscape, incentives, policy, etcetera. So yes, so today I'd say in summary, as I said there, it's equal from our perspective.

Speaker 6

Okay, excellent. And just one final super quick one. Do you have any concerns about wastewater at the Rochester facility that was brought to completion and went into operation?

Speaker 3

Yes, Brian. And so I can answer that. So to let me sort of break that up into 2 parts. To be very clear, The project that's currently under care and maintenance has never had any reagents or materials introduced into it. So it's purely a construction site at this point in time.

Speaker 3

So just from a status perspective today. From a go forward perspective, one of the the key aspects of the design of the Rochester Hub facility is what we call a 0 liquid discharge system. And so essentially where traditional facilities would be discharging industrial wastewater, we've invested in technology and capital to be wastewater discharge. It's part of our

Speaker 2

overall discharge. It's part of our overall

Speaker 3

ethos, Brian, as a company as we look across our sites.

Speaker 6

Excellent. Thank you very much.

Speaker 3

Thank you. Appreciate the questions.

Operator

Our next question comes from Matthew O'Keefe with Cantor Fitzgerald. Please go ahead.

Speaker 5

Thanks, operator. Thanks for taking my call. Just two questions here. One, with the scope change of making MHP, which is the point you have going forward here, does that change your permitting status at all? Do you need to get amendments to your permits?

Speaker 5

Are there any changes there we should be thinking about?

Speaker 2

Good morning, Matt. It's Ajay, and I'll turn it over

Speaker 3

to Tim. Good morning, Matt. And so the short answer to that is no major changes required from an environmental permitting perspective. It's still the same materials. It's a small operating footprint, so it would be within our existing permanent framework.

Speaker 3

The only considerations is what we would call normal construction style permits and some modifications to those as 1 or 2 of the areas are a little bit physically different. But that's

Speaker 2

the only difference there, Matt.

Speaker 5

Okay. So that won't still a lot of moving parts here and, still a lot of moving parts here and it's going to take some time. But with the Glencore convert, you buy yourself a good amount of time. I don't know whether it's maybe a year to 18 months of runway. You can correct me if you can give me more color on that.

Speaker 5

But the once you do get sort of a financing solution in place, roughly how long would it take to complete the facility construction and then sort of get into your ramp up?

Speaker 2

Yes, good questions, Matt. And obviously, things a lot of folks want to understand. I think at this stage, what we're doing is we're right in the midst of these just did a internal technical review, looking at the technical economic viability, which was positive. And now I think the key thing that we need to get done in the coming periods is really this subcontractor bidding. So before we come out and start talking about timeline and where it's going to be, we have a view, but that view needs to be informed by the folks who are actually going to do the work.

Speaker 2

And that's the key next thing that we're going to be looking to define. So I think post that then at the right time, we'd love to get some color. But where we stand today, we're still reviewing.

Operator

It appears there are no further questions in the queue at this time. I will turn the call back to Ajay for his closing comments.

Speaker 2

Thanks very much. And again, appreciate everybody's time. As I mentioned right towards the end of the call, I know the support from our various stakeholders and look forward to updating everybody as we progress. Thank you.

Operator

This does conclude today's call and webcast. You may disconnect your line at this time and have a wonderful day.

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Key Takeaways

  • Lifecycle expanded its strategic partnership with Glencore through a $75 million senior secured convertible note and amended its existing $225 million convertible note to bolster liquidity.
  • The company is in active discussions with the U.S. Department of Energy for a conditional commitment of up to $375 million in loan financing as part of its full funding strategy for the Rochester Hub.
  • Construction of the Rochester Hub remains paused pending a strategic review; an internal analysis confirmed the technical viability of producing mixed hydroxide precipitate (MHP) and estimated a revised cost to complete of approximately $960 million for the MHP scope.
  • In Q4 2023, Lifecycle produced 6,825 tons of black mass, exceeding the top end of guidance by over 1.5×, supported by more than 80 percent spoke availability and increased EV battery pack processing.
  • The company implemented a cash preservation plan—including pausing new spoke and hub developments, workforce reductions, supplier negotiations, and extending payment terms—achieving a pro forma cash position of about $110 million as of mid-March.
A.I. generated. May contain errors.
Earnings Conference Call
Li-Cycle Q4 2023
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