Sigma Lithium Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 1, 2024

There are 5 speakers on the call.

Operator

Good morning, everyone. My name is Dennis, and I will be your operator today. Welcome to the Sigma Lithium 4th Quarter and Full Year 2023 Earnings Conference Call. Today's call is being recorded and is broadcast live on Cigna's website. On the call today is company's CEO, Anna Cabral Gardner and company Executive Vice President, Matthew Dihoe.

Operator

We will now turn the call over to Matthew.

Speaker 1

Thank you, Dennis. This morning before market opened, we announced a final investment decision for our Phase 2 expansion as well as preliminary unaudited 4Q and full year 2023 financial results. Before we begin, I would like to cover a few items. First, during the presentation, you'll hear certain forward looking statements concerning our plans and expectations.

Speaker 2

You may

Speaker 1

note that actual events or results may differ materially given changes in market conditions and or operations. Additionally, earnings referenced in this presentation may exclude certain non core and non recurring items and have been based on unaudited financial statements. Reconciliations to the most direct comparable IFRS financial measures and other associated disclosures will be made available. The slides will be posted on our website, and following the call, we'll post additional additional slides with added financial performance information. With that, I will pass the call over to Anna.

Speaker 3

Well, hi, everyone. Good morning. We are absolutely delighted that we are announcing the final investment decision and the initiation of construction to double our production capacity from 270,000 tons of lithium concentrate per year to 520,000 tons of lithium concentrate per year. 2023 was just a transformational year for us. We became a major lithium producer.

Speaker 3

And as an investor operating team, we own more than 50 percent of Sigma. So we are all in together with all of you, our shareholders. I am going to walk you through the key items, the 5 key competitive advantages that gives us so much confidence to make this investment decision. 1st, we're large scale. So we became the 4th largest mineral industrial lithium complex globally.

Speaker 3

Secondly, we are the 6th largest global producer that includes brine and rock. So we got scale. More importantly, we have low cost. We have achieved the 2nd lowest cost in the industry amongst our peers. In parallel, we are producing a premiumizable material we call lithium 5.0 which is the quintuple 0.

Speaker 3

It is irrespectively of environmental and social sustainability physically and chemically is the best chemical grade and most sustainable lithium in the world. It has unique metallurgical properties. So as a result, we made the final investment decision to build double scale to deliver more of that material. So the Phase 2 is going to be the same build team of Phase 1, which delivered Phase 1 successfully on budget and on time. More importantly, and I think lastly, a key point in this confidence behind the investment decision was that as a result of the very successful drilling campaign of 2023, we managed to increase the project life to over 25 years.

Speaker 3

So we have now permanence and longevity at 109,000,000 tons of mineral resource. We have a forecasted 150,000,000 tons of mineral resource. On the next slide, if you can see, we want to demonstrate it quantitatively that we've surpassed every lithium industry record and we've achieved full production capacity just at the beginning, just at our Q2 of operations. We reached 270,000 tons of material from September 23 to September 24, meaning on an annualized basis, we have 12 months we have reached 12 month capacity, and again within just 6 months of commissioning. We have managed to produce and deliver in those 6 months of 2023 105,000 tons of this material.

Speaker 3

We caught quite a lot still off the very great market of last year. And as a result of the superior properties of the material, we achieved a $13.33 per ton of average price, premium price for the material. Net net, we're getting 11 $60 per ton of this material, again, result solely of the product. We have managed to reach a cash cost at plant, which is the 2nd lowest amongst the hard rock lithium producers. And these cash costs get lower as we get bigger because we dilute our fixed costs by a larger production.

Speaker 3

More importantly, we've done all of this while generating and conserving cash in our typical Sigma discipline. In other words, we have a cash position of $109,400,000 sitting in our balance sheet. So theoretically, we have an entire Phase 2 plant right there in our balance sheet ready to be deployed. So as a result, we're initiating to increase our initiating Phase 2 to increase our scale in 100%. We started with all the construction activities, mobilization, contracting Promon and will double capacity to 520,000 tons.

Speaker 3

So it is more of the same because it is working and it's working extremely well irrespectively of lithium price cycles. And I think lastly, again, we got to 109,000,000 tons of audited mineral resource with an exceptional high grade of lithium oxide, which means that we have over 25 years of life of the project, but our resource lasts longer because it has higher lithium oxide. So we are a 100% known 4 largest producing industrial lithium complex in the world and the only one to produce this 5x 5.0 carbon lithium, which makes us all very proud because for us in our team, investor operators, it wouldn't be any point in getting here without being able to be in consistency with the supply chain that we are honored to be part of, this green supply chain that delivers this green electric vehicles. So here's a picture of this industrial plant that kind of makes this magic. This is the cleantech innovation.

Speaker 3

What you see in dotted red is this 3rd module of the plant. This was a lot of work to put together, but that is actually the great responsible to deliver the quintuple 0 lithium, the low cost and green lithium for green cars. And again, it's green lithium for green cars, not brown lithium for green cars. Why is that? We have 0 toxic chemicals, is dense media separation, is centrifugation technology.

Speaker 3

We achieved 0 carbon. We use 0 drinking water. We've been using sewage grade quality water. We produced the lithium with 0 tailing dams and we use 0 dirty power. Our power is clean and renewable.

Speaker 3

On the next page is an illustration of us in the lithium world in general. And you can clearly see numbers. Numbers are quite straightforward. We have our starting point at 85,000,000 tons which is equivalent to 2.7 1,000,000 tonnes of LCE Resources. Then we delivered a first leg of the mineral resource update which got us to 3,300,000 tons of LCE Resources.

Speaker 3

And then we have the expected further increase at 4,800,000 tons of LCE equivalent resources. On this page, you can clearly see where we are in scale. In brown, you see our peers, all of them in Australia, all of them lithium industrial mineral complexes in production. In purple are the non producing. So we basically are the 4 largest lithium industrial mineral complex in production.

Speaker 3

We are of that scale and this is just our 1st year of operation. So it shows that we have permanence because we are as large as the greatest projects in the world sitting in Australia. We joined that club. Here is when we stack us up against all producers, including brine producers. And again, the chart is pretty self explanatory.

Speaker 3

We became the 6th largest producer globally, but because we commissioned our operations with the headwinds of the lithium cycle reaching bottom, we never got the opportunity to be repriced as the large scale producer that we are. And here we're going to demonstrate visually disconnect. When you see in dark green is the volume in LCE equivalent of 20 24 production. In gray, you can see the market cap current of these companies. Clearly, when you look at Sigma at 37,000 tons of LCE equivalent of production for 2024 like right now, you look at our market cap, we're really priced like a developer.

Speaker 3

So the discrepancy speaks for itself. And the plan for this year and our number one mission is to close that gap, basically doing what we're doing, demonstrating that we're here to stay as a large supplier. And this next slide proves it. We're going into our 9th shipment. We have demonstrated resilience and the sheer metallurgical product quality of this material.

Speaker 3

We established shipment cadence basically on month 5 after commissioning by reaching capacity, annualized capacity. We've done all of that against terrible headwinds. So we now have a track record of being a reliable large scale supplier to the EV battery chain. And in a spirit of transparency, we're showing every shipment and every implied price per ton of every shipment. So we've achieved this on merit, slightly premiumizing over our peers because the product has what we call value in use, superior metallurgical properties that deliver measurable quantifiable cost savings to the customers.

Speaker 3

So we're here to stay. We're large scale producers. We are force for good in the industry. On this next slide, a bit more on premium pricing. We've been achieving a meaningful final premium price.

Speaker 3

This month, we able we were able to close the gap completely and eliminated provisional pricing. So that once again validates this outstanding metallurgical and chemical properties of the product. The product is better. It delivers savings. So we're not capturing all of those savings, we're capturing some of it that becomes our premium pricing.

Speaker 3

So just now for its 8 shipment, we've achieved 13.33 nameplate price which included VAT. Net of VAT is $11.60 per ton. So that's a very decent premium for the new producer on the block. This price again is final and non provisional. So it's a meaningful increase over the previous premium prices we already achieved, we showed you on the previous pages.

Speaker 3

And if you translate that into a variable price or into a reference, that's equivalent to 8.75% of the London Metals Exchange Lithium Hydroxide CIF quote. So it shows that we're grabbing a significant portion of the value of the supply chain. The price discovery was transparent. It was driven through close private bidding and the purpose of it is working partnership with Glencore, our marketing and commercial partner to maximize the value of this superior product for Sigma. On this next slide, again, more of why do we have value in use?

Speaker 3

What are these chemical and physical properties that allow us premiumize even against headwinds. 1st, it's because the product is high purity. High purity means low iron oxide, low potassium oxide, low sodium oxide. These are 3, let's say, impediments to achieving ultra high pure lithium chemicals at a low cost for our clients. It also has low mica, which again is another stumbling block in the refining process.

Speaker 3

What's interesting though is that when you look at the physical properties of the product, we have a dry course. The dry course behaves in the calcination stage at the kiln beautifully as it heats up and it becomes better spodumene. So there are efficiency savings right there in the form of saved energy. So this whole combination delivers a saving that's measurable. How so?

Speaker 3

The downstreamers just need 7 tons of our product to produce ultra high purity lithium hydroxide. When you look at the comparable product, 9 to 10 tons of that comparable product is needed. So there's 3,000 tons of savings for our client per ton of lithium hydroxide, which could technically translate as about $3.30 per ton of savings for us. If you look at just 7 tons and again it's visual, you can look at the pictures and you can see the difference. Ours is this very light greenish, which means purity, of course material versus the muddy talc type wet materials from our competitors.

Speaker 3

And again, here's the Quintuple 0. I'll be brief, but we are very proud to say that we've done all of that staying true to purpose. Whether it matters or not, whether we get a green premium or not, that is not why we do it. We do this because 12 years ago, we started on this journey of being investor operators in Sigma to deliver just that, to be at the leading edge of sustainability, 0 carbon, 0 chemicals 0 toxic chemicals, no tailing dams, no cannibalization of the community, portable drinking water with clean power. So we did exactly what we said we did.

Speaker 3

We didn't increase our production cost as a result, but unfortunately we do not get a green premium. But again, our product is better. So a bit about okay, no, a bit about the numbers, right. We're built to last. I mean, we built this company with Draconial Financial Discipline over 12 years.

Speaker 3

So ironically, this is probably one of our best moments because it's the 1st year we have revenues. And more importantly, we're able to quantifiably demonstrate that we are low cost. So we have revenues, we have low cost, we have cash flow. And the consistency of delivery and production of our Green Tech plant keeps on driving revenues, keeps on achieving that at very low cost creating what we call commodity cycle resilience. So irrespective of commodity cycles, we're generating cash and we have a very robust business.

Speaker 3

As Jim Collins used to say, we're built to last. So in 2023, our full year dollar revenues were US135 $1,000,000 We shipped 102,000 tons of material. We produced 105,000, but the average realized price per ton of material was $13.21 per ton. Our FOB adjusted cost at plant was $4.27 a ton. FOB adjusted cost at Port of Victoria meaning taking from the Vantage de Chinoina to the Port of Victoria was $4.85 per ton.

Speaker 3

So in China, all the way in a Chinese port is $5.65 per ton. So very, very close to the guidance we provided to the market as to expect for the full year as we keep on decluttering or as our friend Joe said removing the noise out of our financials given that this was a hybrid year, part commissioning, part production. So in margins, the margins are pretty spectacular. Our FOB plan margin is 67%, port margin 63%, cash cost CIF China margin 57% at what some people consider to be the bottom of the cycle. This is mathematics, the mathematics of commodity cycle resilience.

Speaker 3

And as we say, mathematics has no opinion. Mathematics is just a fact. So on the next page is again more mathematics. For full year, we've already given you the revenues, the shipped amount and the price per ton. Now let's move on to EBITDA.

Speaker 3

We posted an accounting EBITDA cluttered meaning with the noise of commissioning of $24,000,000 from July to December because that's when we earned it less than half a year. Now we adjusted for non recurring items which include things such as RSU expenses and commissioning costs. So the pure EBITDA margin at FOB revenues was 18%, but the adjusted EBITDA margin for the non recurring items and non cash items such as stock compensation is 36%. So again, a very robust EBITDA margin to be expected from us in our very first year. So it is and it is this low the low production cost that drive our ability to generate free cash flow.

Speaker 3

As I said earlier, we are draconian when it comes to cost. We always do more with less. Why? Well, we're all owners. We're all investor operators.

Speaker 3

It's not somebody else's money. It's our money. Every employee, every senior manager is a shareholder. So we look after our money. We look after our expenditures like we look after the money that goes into our wallets.

Speaker 3

So full quarter cash unit operating cost at Victoria is $4.42 a ton. Non recurring commissioning expenses amount to about $94 a ton. So the pro form a 4th quarter cash unit operating cost of concentrate amounts to $4.55 a ton. My partner Matt is going to give you a bridge in a lot more detail in a second. So we're targeting for the Q3 24th an average very close to the guidance, dollars 4.20 a ton FOB Victoria, dollars 3.70 a ton plant gate.

Speaker 3

These cost initiatives include a number of things, diversifying suppliers and service providers. We are onboarding contract labor which was important when we commissioned and that was one of the expenses we adjusted out meaning the engineers of the construction companies, the engineering companies that stayed behind to help us operate the plant and commission the plant. They are no longer with us. We now have our own teams and we've optimized maintenance schedules and we're running this like a clock. We have predictability and umbrella maintenance contracts with our main parts manufacturers.

Speaker 3

So now I'm passing it on to Matt Deo, my partner to go over the bridge for the cost. Matt, you got it.

Speaker 1

Thank you, Anna. So, our reported FOB cost in the 4th quarter as we highlighted in the release, was $5.49 per ton. Within 4Q were a number of costs associated with commissioning expenses that were more of a 3Q phenomena, but booked within the October, November timeframe. They're real costs and we incurred them, but on a pro form they didn't recur in December or January or February. So we feel very confident that those are, as you say, non recurring.

Speaker 1

That would drive a pro form a FOB EBITDA cost of about $4.55 If we strip out the $70 ish per ton in high grade freight, we end up with a 4Q pro form a plant gate cost of about $3.85 within the 4th quarter. That's not very far, as we said, from the $3.70 that we were highlighting for the 3Q average. And again, we haven't even really begun to benefit from the transition of contract labor to salary domestic labor, some of the diversification of our suppliers for the optimized maintenance schedule. So we think we have plenty of room or good line of sight again to hitting that 3.70 number. Obviously, as you build this back up to get to what we hope is a recurring reported COGS all in, you add back that spodumene freight royalties DNA and you should get to a rough ballpark of where we hope to be, at least on a pro form a basis, if you were to think about 4Q.

Speaker 1

Other items that impacted the 4th quarter, low grade trucking and warehousing. We're not trucking our tailings to port anymore at the moment given market conditions. So, we don't expect those costs to continue. As we mentioned, those commissioning expenses are in there, and we got some tailwinds from equipment tax and credit. So, that kind of bridges perhaps the other line items just from a quarterly impact perspective.

Speaker 1

So again, I think we feel pretty good with the direction we're headed. And I'll pass it back to you.

Speaker 3

Yes, sir. So here we go. Next page, again, this is the bridge to EBITDA. And again, it's a very straightforward bridge. We start with sales and we go all the way to the adjusted EBITDA.

Speaker 3

And I want to make it clear, we're adjusting for non cash items and for commissioning costs. So we delivered what we call an adjusted EBITDA of $49,000,000 So we ended our very first year of production with positive cash adjusted EBITDA and cash operating profit. I mean considering the downfall in lithium prices, we are all very proud of this accomplishment. So here it is. We start with sales in dollars of US135 $1,000,000 Then we have operating costs non recurring, transfer and warehousing we get to the gross profit, right.

Speaker 3

So at the gross profit, then we have SG and A, ESG and others, and then we cash EBIT. So then we start moving back into the items for adjustment, meaning stock based compensation gets added back because it's a non cash item, is an IFRS accounting item. Then we get the D and A added back and then we get the EBITDA. So all of this is accounting straight from our non audited financial information. So then we get to the US25 $1,000,000 of EBITDA, which I just showed you on a previous page.

Speaker 3

And then we add back the non recurring SG and A, which is part mingled with the operating costs there. It's mostly related to commissioning costs. For instance, in commissioning engineering costs alone, we have something around $6,000,000 We have a series of this one off items. They're not going to repeat to be repeated on an ongoing basis and as a result shouldn't be part of your modeling of the company. So then we get to what we call adjusted EBITDA of 49,000,000 So here a bit of kind of the breakdown of these non recurring general and administrative expenses that we discussed before.

Speaker 3

What are these items? What's in there? It's a mix of things. For example, as you can see, 25% of these numbers are related to the commissioning team on Phase 1 construction. 29% is legal.

Speaker 3

I mean, we had litigation. We had a strategic review. We were very well advised and very well guided by excellent lawyers, but they are one off. So more important, we had quite a lot of consulting work, which we're calling audit and accounting services, which were basically helping us put our SAP back on track, classify costs properly. I mean, we were kindly supported by the folks at various consulting firms to get us put our back office in order.

Speaker 3

So that's again an investment, a one off investment in that part of the business. We had non recoverable VAT taxes of 7.4%. And then transaction costs in commercial development, achieving the premium price, cost travel, cost money. We spent quite a lot of time in Asia working with clients, working with refineries, working with battery makers, working with end users to test product and establish ourselves. Again, remember, we started from 0.

Speaker 3

We did not have a book of clients. So we built an incredible book of clients that premiumizes our product because we work with them to understand and to test and to demonstrate value in use. That's the 28% nonrecurring. So we kind of gave you a glance of what are these we call investment items. This is us investing in the resilience of our business for the next couple of quarters.

Speaker 3

And on the previous slide, so just to recap then number by number. So this breakdown is if you look at this US24 $1,000,000 that bridge the 25 percent accounting EBITDA to the $49,000,000 of adjusted EBITDA. The next page basically shows you the breakdown of that 24.5 non recurring G and A expenses. We try to give you as much clarity and insight as possible into a number that is an adjustment that is non recurring. So now we go on to how are we going to look like steady state?

Speaker 3

Well, we started with the current prices with the guidance we provided, which we stick to it. So again, the estimated well, the net concentrate price we just obtained is 11 $60 Whatever it is on a cycle, it doesn't matter because our CIF costs in China are $5.10 We believe the recurring SG and A should be about $48 and the maintenance CapEx to be about $18 So the estimated run rate cash operating margin per ton is $5.84 which means we make money with every single ship, right? So deduct $11.60 minus $510,000,000 minus $48,000,000 minus $18,000,000 There you have a substantial net operating margin, cash margin. So then when we go to mid cycle, this number gets even bigger because we achieve an even bigger run rate cash operating margin per tonne. So we gave you the per tonne numbers so that you can actually model in whichever cutoffs you choose.

Speaker 3

So we generate cash at the trough of the cycle. At mid cycle, we generate quite a lot of cash. So that's just a demonstration of our unique operational efficiency. And I must say that on this aspect as well, we are in full tandem with where the electric vehicles industry is going. It's now all about producing cheaper batteries, cheaper cars, lower priced cars.

Speaker 3

So we are the low cost producers. So we're here to stay. And these low costs are basically mainly due actually to our lower Greentech plant processing costs. It is a dense media separation, uses centrifugation, uses less electricity. Yes, our electricity is clean and cheaper, but our process just have basically 7 6 main DMSs, 7 main steps plus the crusher.

Speaker 3

So we don't even crush the powder. So it is a lower cost industrial process period. That's where we gain competitive advantage. We decided to invest in this technology. We took a contrarian view in 2019 and we proved that Dance Media Separation Technology is not only greener, but it's also more cost effective.

Speaker 3

So it is intended with the future of the industry in its 2 core characteristics. Batteries have to be cheap and we believe materials in these batteries have to be green. So this is us. So when you perform 2024 estimated cash flow assuming a 270,000 tons per year produced, we have the equivalent of $158,000,000 of estimated run rate cash operations generated at current prices, mid cycle will be US249 $1,000,000 So pretty robust cash generation. When you go to 25 percent with doubling the capacity, we can dilute down a bit the obvious fixed costs such as recurring SG and A.

Speaker 3

So that number goes a bit higher. It goes higher than double. It becomes $304,000,000 So again, as we've shown on the bridge that my partner presented, you can clearly see that as actual costs with air, we're delivering actual costs that are closer to guidance because we built the guidance bottom up supplier by supply before providing it to the market. And so with all of that, I think I might have given you comfort that we got a very resilient business. We have solid cash generation.

Speaker 3

So we're building. Our Board in green lighted final investment decision and we are initiating the construction to double production capacity to 520,000 tons per year. On the next page, the picture, a 1,000 words. You can clearly see that all we got to do is build another Greentech line. That will cost about US100 $1,000,000 and you will add 250,000 tons of lithium concentrate production capacity.

Speaker 3

Given our cash at hand, meaning cash at hand of $109,000,000 in theory, we could actually build a plant right now just drawing down from our cash position. Now why is that? And that's what our next slide is going to show. This comes and we haven't explained it as clearly. We have trade finance.

Speaker 3

Yes, we do. It's revolving because it's linked to our ability to deliver what we just showed you, cadence. Every month, every ton produced generates permanence of trade finance. In Brazil, it's called advancements of export contracts, ACEs. They last about 180 days, but they are linked to our ability to produce, cadence of production.

Speaker 3

The thing though is that we did not draw down these lines. So meaning sorry, we drew it down, but we did not use it for trade finance. So to make it clear, we have the trade finance, we drew down the lines, but we did not use it to finance the working capital until the client pays us. Why? Because this is where Glencore steps in.

Speaker 3

In addition to being a fantastic commercial and trade partner, they're also our financing backstop. As you noticed in the previous shipments, they advanced on a final and non provisional basis now 85% of our boat, of our shipments. So we rely on Glencore not only for their incredible marketing and commercial expertise, but also for providing us with the actual trade finance. So the trade finance lines we have in the banking system here are sitting untouched in our balance sheet. So they are drawn and they are untouched.

Speaker 3

And what are we going to do with them? Are we going to build a whole plant with them? No, we're not. But they are going to be the cash that will advance the funds for construction as it progresses because the Development Bank lines of BMDS are on a reimbursement basis. So we pay, we get reimbursed and the cash position is the demonstration that we have the ability to green light this entire construction right now today with the snapshot you got in front of you.

Speaker 3

So as we keep on generating more cash with every shipment, we're extremely comfortable financially. So again, we approved the initiation of construction of Phase 2 because, well, we have a track record building on schedule, on budget. We actually broke the record of this industry of getting there fast. So with the total CapEx of $100,000,000 for the 250,000 tons of increased capacity, essentially we're going to have on with P2 enough lithium for 850,000 tons of EV. So we like to say the Sigma belongs to the world.

Speaker 3

I mean, we can deliver this to many markets, well beyond our borders. We are a global force for good in the industry. The EPCM is mobilizing the fleet for earthworks. We are in active construction mobilization preparation. The Phase 2 flow sheet is consistent with the processing sheet, the technology to process the material just becomes improved.

Speaker 3

So it's consistent with all the lessons we learn with Phase 1. So we have quite a lot of technological advancements and improvements and lessons learned that we are building or we built into the engineering of Phase 2. So Phase 2 is a better version of Phase 1. And this comes from savings in engineering, optimized design, offsetting material costs. Well, the dry stacking for once, which didn't work in June.

Speaker 3

So we figure out how to make it work. We're now going to build a dry stacking that's going to work immediately together with the module 2, the dense media separation plan. So we got technological improvements all along and this is why we were eligible for the Brazilian Development Bank Innovation line because there's innovation all around this flow sheet. And again, innovation as all of you innovators know is not an Eureka thing, is a sum of various optimizations in industrials like we are throughout a processing plant. So the sum of all these innovations, the sum of all these optimizations leads us to the incredible production cadence and consistency that we were able to reach.

Speaker 3

So the next slide, well, has a lot of meat. This slide has a lot of information, a lot of detail, but we wanted it to be just that. We wanted to do a side by side of what was Phase 1 and what is Phase 2 and where are the savings. This is public information, so you can refer back to it. I'm not going to spend that much time on it, but essentially, where are we saving?

Speaker 3

It's a bit of everything really, right? We're saving on spare parts because we're an operating entity, so we don't need to build an inventory of spare parts. We're saving 50% of engineering because we have a plant that works. So we're basically doing the designs of a plant that we already have with the improvements. There's a bit of environmental savings to the extent that, for example, we do not need to build an entire sewage treatment station like we did before, given that we use sewage water from the Jekicinohe River.

Speaker 3

So it's a sum of various savings that leads us to a plant that is going to cost about 20% less than Phase 1. On a total construction CapEx basis, it's kind of roughly 10% less, which is 10% less of a very inexpensive plant. So given the track record, given that we've done this before, given that the team is exactly the same, everyone that built this is here. Keith Prentiss is leading it. I'm here.

Speaker 3

Felipe, which was Chief Controller of Procurement is back here. So it's kind of the back is putting the same team back on the field to do what they do best, build on time, on budget. And we're hiring Promon again, which has done a spectacular job for us in a previous project and we're hiring Parex again, which done a spectacular project assembling this in record time. The next slide is a bit more meat. We'll put labels on this, but the purpose here is just to illustrate that when you start construction, you don't really have all the costs on month 1.

Speaker 3

Is a crescendo, right? So you start with Earthworks Civils Foundations, which cost about $10,000,000 but it's not $100,000,000 which means it's back loaded costs. The disbursements start to increase as equipment gets order prepaid or intermediate payments and then later on delivered to sites. So this slide kind of illustrates that, that construction of a plant is back loaded. Even though we have the cash sitting in a balance sheet, we could do all of it from loaded.

Speaker 3

In theory, that's not how it really works. And this is why we're so relaxed. On the other hand, in typical financial prudence, we're going to build 1 plant at a time. So that's an important point to leave you with. We're building a plant this year and then next year we'll build another one.

Speaker 3

So the next step, more on the construction process. So construction activities are starting this month for Earth Civil Works, foundation, infrastructure installation, mobilization of equipment, we're going to have about 200 extra workers in Valle de Quixinhoyas. So more of the prosperity that we brought to the region, we're going to probably launch them in Icinga, which is a city closer to us. So the first step, the very first step was licensing. So we were already awarded a license.

Speaker 3

So we're fully licensed to build and to operate. That's an incredible accomplishment. We have the LO, the operating license for this plant already. Why? Because of the track record.

Speaker 3

We demonstrated that we are impeccable. So we got something that is typically granted to industry in Brazil, but rarely to industry connected to mining. So we got the same industrial cloud as a high-tech industry because we demonstrated to be good protagonists of mineral transformation. Our plant is innovative, is green tech. It changed the conversation in the sector.

Speaker 3

So we got the operating license right at the get go. So we're fully licensed. As soon as we're done building, we can start selling product. Then we got the financing. As we've shown you, we got the cash balance.

Speaker 3

It's linked to trade lines. Trade lines exist based on production, 180 days revolver, so we're good to go. Then we've done the engineering work. We are FEL3 quoted, Promon leaded. So we have the number to precision is US100.5 million dollars BNDES has honored us with an innovation line.

Speaker 3

We're very proud to be part of this club of companies that has been extended development bank financing in this country. We are planning to honor the taxpayer money that's been given to us by again delivering this on time and on budget. And this is a backstop financing because again it's a reimbursement line. So we need the cash on hand in order to submit the reimbursement that then BMDS covers. So we made the FID.

Speaker 3

This is kind of what led us to do final investment decision. There's been months of work, months of work going into the 9th month of work that led us to this moment of starting mobilization. It wasn't overnight. The next page is again completed detailed engineering, CapEx with FEL3 accuracy. This is how we keep it on schedule.

Speaker 3

This is how we keep it on budget. This is the secret sauce of building responsibly. We don't get it wrong because we quote suppliers. We are licensed. We have a permanent mining license for the area.

Speaker 3

So we updated project execution plan. We're doing procurement. We're doing import logistics as final investment decision for Phase 2. Our Board couldn't be more comfortable. Remember, last time we green lighted final investment decision, it was in 2020, it was in the middle of COVID and we did not have cash generation.

Speaker 3

So this is kind of why we sound so relaxed. On the next page, we're relaxed, but we're vigilant. We're relaxed, but we didn't lose discipline. So we're going to do Sigma style, one step at a time. So this chart has a lot of information, but it's a modified chart that you already know.

Speaker 3

Year by year, we're showing in dark green sources of cash flow. What are the industrial capacity modules we got running, right? So 2023, we produced 105,000 tons of lithium concentrate cash flow, right? We finished building it, we're done. In 2024, in orange, we're showing what we're building.

Speaker 3

In the greenish here is what's being green lighted to build. So we're almost doubling capacity. We go from 270 to 520. And we're putting this because that's nameplate, right? We probably can go higher, but it's nameplate.

Speaker 3

We're going to have the benefit of the cash flow of Phase 1. So cash flow from 1 module of the industrial plant, construction of another module, that's been green lighted. In brown, it's what hasn't been green lighted, but this is where we're going. This is the industrial plan that we submitted to BNDES with the whole development strategy for the Lithium Valley when it comes to Sigma. In 2025, we're going to have the benefit of Phase 1 running cash flow, Phase 2 running cash flow.

Speaker 3

Depending on where we are, we may or may not even deliver a dividend. Let's see. But Phase 3 is going to be green lighted to be built, most likely integrated with a lithium sulfate plant. Why? Well, because of that meaningful gain, the value in use that we are currently providing to the clients for very little premium.

Speaker 3

So if you recall, at today's prices of $14,000 per ton of lithium hydroxide, if you quote it for technical grade, it doesn't matter because our $3,000 are intact. 1 needs 7 tons of our material to do a ton of, let's say, lithium sulfate or intermediates or full chemicals. We need less units, less quantity of our material. So what's the rationale? If I can calcinate and do the acid wash ourselves, which is what's called intermediate chemicals, lithium sulfate, we're capturing that $3,000 for ourselves.

Speaker 3

So that becomes extra cash flow. So the decision will be made in 2025 because we got a whole year to see if we can premiumize to that value in use. If we can't, we're just going to do it ourselves because calcination is a kill and acid wash is an acid wash. These are intermediate chemicals. It's basic chemistry.

Speaker 3

Brazil is an industrial country. So the human capital and the capabilities are here. We are not going to do specialty chemicals. What we'll be doing then is shipping less volume to specialty chemical refineries all over the world, including to our dearest Chinese customers who already agreed to buy this material from us. So we'll ship lithium sulphate intermediates to China, to Texas, to Europe, to Japan, South Korea to all over the world.

Speaker 3

So that's the 'twenty five plan. And then in 'twenty six, we're going to sit and we're going to enjoy the industrial site we built. So these are our plans for the next 2 years. So we're going to be quite busy. What I also want to share with you is that none of the activities related to the strategic review has impacted at all our ability to think, to make a strategic plan, to execute, to deliver, to continue to do what we do best, which is to execute.

Speaker 3

Concluding remarks. I mean, we have completely transformed Sigma from and you can see the picture. It's a 1,000 words. It was a construction site in March 23. You can look at the left.

Speaker 3

What we have now is the 6th global largest producer of lithium across the board, brines, hard rock and the 4 largest mining industrial complex in the world. We delivered everything that was under our control, completed the DMS commissioning, initiated production in April 23, hit nameplate capacity by 4 quarter. We delivered a dry stacking. So, we have 0 tailing dams, not a drop of water to spare. Where we use the water, we reach net 0, which again has been 4 years in the making.

Speaker 3

And we also delivered this quintuple 0 lithium that we all love here. We increased mineral resources significant to give longevity to our ambitious industrial plants. So those industrial plants now are backed by 104,000,000 tons of reserved resources, mineral resources, 40 three-1 101 audited and an expanded expected mineral resource of 150,000,000 tons. And we're quickly in the process of converting part of the 109,000,000 into additional reserves. And we got to consistent monthly shipments.

Speaker 3

What to expect from us this year? Well, mobilization, we're beginning construction. We're going to deliver the mineral reserves. We're expecting to increase it by 40%. We got 54,000,000 tons of mineral reserves.

Speaker 3

We're going to increase those in 40%. And again, it's just to add longevity, solidity and permanence to our industrial plants. We're going to audit further the 150,000,000 ton mineral resource and we're going to commission Phase 2. So we're very, very, very enthusiastic about 2024. And again, a lot less worried than when we did this the first time because we have the first execution under our belt.

Speaker 3

So we know what we got right, we know what we got wrong, and we're going to try not to make the same mistakes. Making mistakes is human. We're not going to make the same mistakes twice. So here we go, twice as company and hopefully being able to getting priced at least in tandem with what we produce today. And I'll go back to this slide.

Speaker 3

If the market could only give us the credit for the producer we are today, we would be quite happy because right now we're kind of priced cheaper than a developer. So that's kind of what gives us so much confidence to be more than 50% owners of this company here in the management team and work all hours to deliver this 2024 milestones to our investors. And to all of you, I want to close this with a huge thank you for supporting us, encouraging us, sticking with us, and believing in us. And this is my accountability to you. We're delivering exactly as we promised on every element that we can control.

Speaker 3

Now we're moving on to the Q and A. Matt?

Speaker 1

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

Operator

And we have a question from the phone line. It comes from the line of Steve Byrne with Bank of America. Please go ahead.

Speaker 4

Yes. Thank you. Is it fair to assess your net cash position in the Q1 as dropping by $30,000,000 Is that a fair assessment? And if not, what unusuals might have led to the cash drain? I'm asking because you're moving forward with an outlook of generating free cash flow in these subsequent quarters.

Speaker 4

I just want to make sure that squares with what the results were in the Q1.

Speaker 3

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

Speaker 1

Nadia, you can grab this one.

Speaker 3

Yes. So Steve, well, we're giving you the snapshot of the cash for now. So $109,000,000 is March 30th cash position, right? So that's an important point. What happened between then and now?

Speaker 3

Well, we drew down and this is why we wanted to give you clarity on the trade lines, right? We drew down the trade lines, but we did not use it. So what we have there is a combination of drawn trade lines, but unused trade lines. And then if you take the cash page here, you're going to see that we got there you go. Can you see this page?

Speaker 3

Yes. So we got $88,000,000 of these trade lines that were drawn but unused, right? And then the balance is just cash generated. Now when you look at the back of the year end cash, there was a $12,000,000,000 advanced interest payment that was made on the long term loan we have from a shareholder in our balance sheet. So maybe that's probably the we call the clutter when you look at the cash position in December.

Speaker 3

Not sure if I answered your question.

Speaker 4

When you say that the You

Speaker 1

can take it offline, Joe. I think your math is a little bit I think your math is a little off.

Speaker 2

Okay.

Speaker 1

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

Speaker 3

Because if you look at the total yes, if you take a snapshot of like today and that's an easy snapshot, right? We got $100,000,000 of long term debt of from shareholders. We got all U. S. Dollars, dollars 10,000,000 from BDMG.

Speaker 3

So that's long term debt, not amortizable. But the interest on the long term debt has to be paid upfront. So it was decreased from the cash position in December 31. It wasn't paid then. It was paid in January.

Speaker 3

Then what we've done, we drew all the trade finance lines, but we didn't use it. We got $90,000,000 we got $88,000,000 unused. So when you think about the overall position of net debt, we got roughly US110 $1,000,000 sitting long term and that's very benign shareholder plus development bank. And we got these trade for landlines, which are in Brazil kind of a unique animal. They're kind of a revolver, which are sole function of our ability to produce.

Speaker 3

So we wanted to show that when you look at the cash position, if you deduct 109 minuteus the trade finance, it's actually generated cash, right? And if you try to kind of triangulate that with the cash in December, probably the big item that's missing is the payment of about US12 $1,000,000 of advanced 2024 interest for the long term shareholder line.

Speaker 4

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

Speaker 3

Well, that is the centerpiece of BNDES industrial strategy. We will put it whatever natural gas is going to be made available to us at the lowest cost per BTUs. Most likely, I mean, Brazil is a very large oil and gas producer offshore. The gas is available in what we call the pre salt ports of which the Victoria port where we are is one of them. So if we can get the affordable dollar per BTU of natural gas at the port where we are already, most likely we're going to put it at the port, which is where it makes most sense.

Speaker 3

One of our partner clients has basically announced to do exactly what we're going to do with one of our peer companies in Australia. It's the obvious thing to do and we were the first to talk about this. To do lithium sulfate is the natural evolution for a lithium concentrate producer. And we demonstrated why. Now what's the advantage of Brazil?

Speaker 3

Clean, cheap power, I mean, electricity costs $0.02 of a U. S. Dollar per kilowatt hour. We can obtain a very, very favorable $1 per BTU gas contract at a pre South port at the shore. And we do have a study, which in fact is very similar to what our peers going to announce in Australia of how much this plant is going to cost.

Speaker 3

I can't divulge it now, but this was one of the centerpieces of the conversation with the MDS. This is the ambition and it's pretty straightforward because it's basic chemistry. An intermediate plant is a kiln and an acid wash. The kiln makes spodumene into beta spodumene and the acid wash produce the sulfate. Now what is the real key?

Speaker 3

And that's a key competitive advantage we've built into this company, residues, the tailings, what do you do with 12 tons of toxic sulfuric acid tailings generated per ton of lithium sulfate? That is the question the very few places can answer sustainably. And here in Brazil, we have an answer to that. Why these materials can be recycled in the construction industry because it is a cement based construction industry we have in Brazil. These materials become concrete binding, number 1.

Speaker 3

And number 2, they are aluminum sulfate. So they're used by the cleaning products industry, which in Brazil is of massive scale. We have 230,000,000 people obsessed with cleaning. So we have one of the largest cleaning products industries in the world. So we can absorb all of the tailings.

Speaker 3

So we can do this 0 tailings. And there are very few places in the world that can do the 0 tailings. Most plans involve shipping these toxic sulfuric acid tailings by boat elsewhere to a developing country with a lot of people where you got a cement based construction industry and a large cleaning products industry. But we have this market right here. We are here.

Speaker 3

So that is also a key competitive advantage to do in intermediate chemicals because we solve a key piece of the puzzle for everyone, even for China. For China, we can deliver what we call intermediate negative. We can deliver carbon credits that allows China to do 0 carbon chemicals. For the West, we're going to deliver chemical to chemical supply chain with 0 carbon and 0 tailings. So the West doesn't have to worry about licensing or worry about storing or doing what have you with 12 tons of toxic sulfuric acid loaded tailings generated in the intermediate chemical process.

Speaker 3

Waste is the key to where these industries are going to be located. How to actually recycle and reuse the waste responsibly from an environmental perspective. And in fact, that's what China does very well today. That's what we can do because of these reasons. You need a large cement based construction industry and you need a large cleaning products industry to take all the aluminum sulfate.

Operator

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

Speaker 2

Good morning, Anna and everyone. I have a few questions. I'm going to ask them 1 by 1. So can we talk about SG and A? You had talked about earlier this year about trying to get SG and A down to, I think about $11,000,000 American run rate annualized.

Speaker 2

I think you did about a CAD10 1,000,000 run rate in Q4, so getting there or CAD10 million excuse me in the Q4. Can you talk about what you think SG and A will look like in Q1 and Q2 of this year, Q1 of this year, what it was? How much of that how much of the burn rate might be in SG and A for the strategic review?

Speaker 3

Yes. Well, if you look at this slide, Matt, you can take it as well and please help me here, okay? You see that we posted $42,000,000 right? When you look to the right, you see the $24,000,000 So if you deduct 24 from 42, we're still at double the guidance we gave you. We try to give you guys a reason of why is that.

Speaker 3

And we do believe that this cluttering of SG and A will not be here in all its entirety in Q1, but some of it's still going to be here such as the legal. We still have the teams working on our SAP. So the Q1 is still going to be work in progress. We're still going to be getting there. Matt, when we look at the bridge though and that goes back to your point, Joel, on the operating costs, we're almost hitting it, right?

Speaker 3

So the SG and A becomes a work in progress of actually decluttering and evolving into what we call steady state SG and A. But on the operating side, we're almost at the guidance we gave at BMO's conference for what we call a run rate operating cost. Matt, do you want to complement?

Speaker 1

Sure. I mean, Joel, some of this is going to be tightening the belt where we need to and where we can. Obviously, this is kind of a recurring number. So to the extent we have litigation or in the strategic review, those will be additive. But from a bottoms up perspective, if you think about the cost that really takes to run the corporation, it's a pretty lean back office.

Speaker 1

Now, we hope we'll get additional scale as we ramp Phase 2 because we won't have to add nearly as many heads as we would when we double capacity, right? We'll get key operating leverage through SG and A and port traffic primarily as we double. But from our perspective, if we take a more stringent approach to spending and perhaps spending us more in line with the, I would say, where the economics of the market are versus if you rewind to really the first half of the year, when price expectations were much higher and we were spending to ramp the facility. We think we've got a pretty credible path to getting there. But it's a little bit more of a lift perhaps than the operating cost side, but numbers all the same that Anna and team feel pretty comfortable about.

Speaker 2

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

Speaker 3

It varies. That's the problem. And this is what call shooting a moving target. It really varies and that's one of the items we don't control. That's one of the reasons why we can't fully declutter this.

Speaker 3

It's one of the non predictable elements. It totally varies on the flow of drafting documents and structuring and things that come our way. But I would say is much alleviated this year. It's much, much alleviated because we don't have to do structuring. We don't have to do the heavy lifting of what a transaction is going to look like.

Speaker 3

Documents already being overly marked. So it's different. It's a lot easier, but it's still here, right, still cluttering the numbers. But it's one of the non predictable items, it's still totally outside of our control.

Speaker 2

Okay. You said Q1 spot, you mean production was 53,000 tons, it was 60 or 59,000 tons in Q4. So you're down about 7,000 tons in the quarter sequentially. Talk about why you had lower utilization in the Q1?

Speaker 3

Well, it's a funny quarter in Brazil. It's kind of we have our own version of the Chinese Lunar New Year. There's something called Carnival, where it's pretty hard to get people to operate at capacity. So we kind of lose most companies lose 10 days. If we whipped up our team as we did, we lost about 5, 6 days where people kind of show up not exactly sober, not fully productive.

Speaker 3

And it happens, it's cultural. These people have been working like crazy, right? So Carnival is a problem. And then we also caught the what we call the pressure evolve of the 1st week of the year because we put all systems go to deliver the 2023 last shipment, which failed. I'm not sure if you remember this, but it literally failed on the 30th, right?

Speaker 3

So the 1st week of January was like, oh, yes, we're going to relax. No, we won't because we're going to have to make Q1. So it was a combination of what we call collective vacations where we're working with downshift in the 1st week of the year plus the carnival. And it's kind of always like that. This is it's the Brazil version of the Lunar New Year, you might want to build into your calendar.

Speaker 3

Q1 has Carnival and Q1 has the hangover of New Year. And in our case, it was a hard hangover because let me tell you, to make that shipment, we made people work 20 fourseven crazy hard. Our general manager for the plant didn't spend Christmas nor New Year with his family and his new granddaughter in South Africa. He didn't meet his granddaughter to make that shipment. So that was the level of commitment of this team.

Speaker 3

They were like really all out to ship that boat in December and make the cutoff for the year, right?

Speaker 2

Okay. And just finally, you gave color around so you've obviously given Q4 pricing, you talk about what the April shipment is going to be final. For the 2 shipments in Q1, can you give an idea of what pricing looks like and how much is provisional on that?

Speaker 3

Yes. Well, I think what you see on the screen is a pretty good indication where we sit on the first on the Q1 with fluctuations. But we're kind of averaging the industry a little bit of a premium, but not really. Q1 was a tough quarter from an industry perspective because you see what happened in Q1, clients were stocked, but they were still buying our product. Why was that?

Speaker 3

Because of this slide. Given that life was so difficult for the clients, they were putting other products aside and processing our product just to bank that margin that we are literally giving to them. And we were told this much. So we just the fact we had people buying full boats and paying us, I mean, not the full premium, but a tiny bit of a premium meant something for us. But what they were really doing is that they were banking this much extra margins that's provided by the metallurgy of the product that's kind of we're delivering for free.

Speaker 3

So it was a fascinating quarter. We learned quite a lot and we just got a team coming back from China for like they were there for 32 days and they were told just that. So part of this enormous premium we were able to obtain in this very, we call price discovery process where we got 18 clients to that auction bid this boat was a result of the clients having experienced this for now 6 shipments, 7 shipments and ascertaining for themselves that they do need 2 tons less, sometimes 3 tons less of our product versus the comparable. So they're banking that difference, right, which kind of ties back to the question Steve was asking us about why lithium suffered. Well, we want this money too.

Speaker 3

So that's this is value in use floating around. We're either going to get it through a premium or we're going to just bank it ourselves in a lithium sulfate plant. We're not going to let it hang for that long. But one thing at a time, now is to double.

Speaker 2

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

Speaker 3

can use

Speaker 1

You can

Speaker 3

use what's here. Yes. Okay. It's indicated.

Speaker 2

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

Speaker 3

Yes. There's about $100 of a difference, right? So there's $100 floating. So you can just take a pick, but it's we don't have the finals, right, because there is 2 on provisional, but it's going to be between this number and the number we achieved for this last auction, somewhere in between.

Operator

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

Speaker 3

Well, I just want to thank everyone for the support, for the patience and for sticking to us. I mean, I think we are on to build probably one of the most resilient lithium businesses in the industry. We're building the next major. The mathematics show this numbers talk for themselves. Math has no opinion and we're here to stay.

Speaker 3

So and you look at when you look at this picture, we now have the longevity which was the missing link of the sustainability when it comes to Project Ears of Sigma, given that we have prioritized cash flow and now it's clearly demonstrated why it was so important because we were able to hit the tail end of the bull market and we earned quite a bit of cash. So then this year we reprioritized lengthening the project life. So we're one of the greatest forces of the industry. The 4th complex, when you attribute the names of the projects to the owners, we're the 3rd largest lithium industrial mining complex in hard rock. We're quickly closing in on the number 5 producer.

Speaker 3

By next year, we're going to probably be on top of number 4 and number 3. So it's a force for good. So here we are aiming to be number 3 very soon with a product that is clearly metallurgically better from a physical and chemical scientific standpoint. So is the mathematics of savings for our clients, the mathematics of value in use, numbers are numbers. So thank you so much for being here with us, for supporting us, for encouraging us, and for being partners with our team.

Speaker 3

And I can only close by saying we're in this together. I have never sold a single share of this company. So we're here to stay. And we're here to follow this journey with you.

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Earnings Conference Call
Sigma Lithium Q4 2023
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