Lithium Americas (Argentina) Q2 2024 Earnings Call Transcript

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August 14, 2024

There are 11 speakers on the call.

Operator

Thank you for standing by. My name is Bailey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lithium Argentina Second Quarter 2024 Earnings Call. 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

I would now like to turn the call over to Kelly O'Brien, Vice President of Investor Relations and ESG. You may begin.

Speaker 1

Thank you, Bailey. I want to welcome everyone to our earnings conference call this morning. Joining me on the call today to discuss the Q2 results is Sam Pigott, President and CEO of Lithium argentina Alex Shoga, Vice President and CFO, will also be available during the Q and A session. Before we begin, I would like to cover a few items. Our press release with Q2 2024 results were issued last evening and the corresponding documents are available on our website.

Speaker 1

I remind you that some of the statements made during this call, including any production guidance, expected company performance, Ganfeng's strategic investment in Pastas Grandes, the timing of our projects and market conditions may be considered forward looking statements. Please note the cautionary language about forward looking statements in our MD and A and news release that was filed last night. I will now turn the call over to Sam.

Speaker 2

Thank you, Kelly, and thank you, everyone, for joining us today. Since our last earnings call, we have remained focused on our strategic efforts, supporting a successful ramp up at Kochari, Olaraz, ensuring that the company remains sufficiently capitalized and advancing our long term growth plans with our partner, Ganfeng. I'll begin with an update on the ramp up of Kachari Obraz. As mentioned in the earnings release last night, we are very pleased with the progress being made and remain on track to achieve 2024 guidance. During the Q2, production volumes reached approximately 5,600 tonnes of lithium carbonate, an increase of 24% compared to the Q1 of this year.

Speaker 2

And we have achieved monthly production records in each of the past 3 months. Production is now being sustained at around 70% of design capacity and we have been able to surpass these production levels achieving close to design capacity for limited periods of time. The focus is now on maintaining these higher production levels near design capacity. Last night, we also provided further insights into our current pricing formula for the sale of lithium carbonate from Kuchari, Ularg and additional financial information on the project. We are working to find the right balance between increased disclosure to the market as we manage the variability typical and the new operation undergoing a ramp up.

Speaker 2

We realize periodic or backward looking information during a ramp up may not always give an accurate picture with significant changes often month over month or within a quarter. Once the operation reaches commercial production expected later this year, we intend to provide increased disclosure and additional financial metrics on the project. With the current market while the current market conditions remain challenging, Kachari Olaroz remains well positioned with minimal capital performance ongoing and positive operating cash flow adjusted for working capital tied to the ramp up of production. Even in the current pricing environment, we expect to remain operating cash flow positive with costs continuing to decline and better realized pricing as quality continues to improve. At the close of the Q2, lithium Argentina had $96,000,000 in cash before completing the $70,000,000 Pasos Grande transaction, which is expected to close imminently following receipt of Chinese regulatory approvals.

Speaker 2

Proceeds from this transaction are expected to strengthen Lithium Argentina's balance sheet, including using a portion of the proceeds to reduce debt at the project level. Along those same lines, in May, working with Ganfeng, we successfully secured an $80,000,000 bank credit facility for the project to replace existing short term debt with more flexible and long term financing. Finally, we continue to carefully advance our regional development plans for Pastos Grande Basin and Stage 2 expansion at Kochari. Focus today remains on completing the ramp up, but we remain cautiously optimistic following the recently passed Riggi incentive bill in Argentina that includes an attractive investment framework and important clarity on FX regulations to support our longer term growth plans. I have officially been part of the lithium Argentina team for 5 months now and while there is still a long road ahead, I'm increasingly confident in the ramp up Kichari Olaroz supported by the right team in Argentina and partnership with Ganseng.

Speaker 2

As the project reaches steady state, we see Kochari Obraz providing a powerful platform for long term growth in Argentina. With that, I'll now open the floor to questions. Thank you.

Operator

Thank you. Your first question comes from the line of Ben Isaacson with Scotiabank. Your line is open.

Speaker 3

Hi, Sam, Kelly. This is Apurva on for Ben. Congrats on the quarter. My first question is, I'm just taking a look at your off take agreements for the last, I think, 3,800 tons of Phase 1 production that's yet to be committed. Is it planned to get these out the doors to an additional offtake or are you considering marketing them yourselves and potentially selling them at spot?

Speaker 2

Thanks for the question. So at this point, we plan to retain this uncommitted share of offtake. This gives us flexibility longer term as well as the uncommitted offtake on Stage 2. So but during the ramp up, even though we haven't committed this portion to anything, I think at this point, we expect to sell that product to Gansai.

Speaker 3

Got you. Thank you. And then my next question, you mentioned the debt profile of the operating company at XR. Given some of the given the plan to use some of those proceeds from the Pazos Grande transaction towards reducing leverage, can you give any color on what other or the scope of the refinancing that we might see, potentially what those terms look like at a high level? Are they still favorable?

Speaker 2

Yes. I mean, we're open to all credit facilities. So we in May, we secured an export credit facility for CAD80 1,000,000 We expect that type of facility which is accounted for in the overall debt on XR. We expect that to be able to roll. We expect to use a portion of the proceeds from the PGCO transaction to delever XR significantly.

Speaker 2

And then we're also working with Ganteng to pursue longer term financing options to take advantage of the improved financing conditions in Argentina. And that an example of that would include evaluating a local bond offering in Argentina, which could allow us to take advantage of improved lending conditions there.

Operator

All right.

Speaker 3

Thanks for the color.

Speaker 2

Thank you.

Operator

Your next line or your next question comes from the line of Joel Jackson, BMO Capital Markets. Your line is open.

Speaker 4

Good morning, Sam and team. Sam, just a first quick question. When you said in the press release last night, assuming the current market dynamic continues, the lithium price commentary, what and do you do the operating cash for positive excluding network capital changes, sorry. What do you think is the current operating environment for pricing? What were you referring to exactly?

Speaker 4

What levels?

Speaker 2

So, I mean, we look at the battery grade price in China, spot price. So, dollars 11,000 Yes. Okay.

Speaker 4

So the pricing across the first half of the year was higher than that. And depending on assumptions you would make on what your actual sales volume was from the JV, you were making maybe the JV is making maybe $1,000 $2,000 a tonne of profit, right, at first half pricing. We know that spot pricing is lower. Can you comment on that? I mean, it would seem like you're very razor thin margins here at spot prices at XR?

Speaker 2

Yes. I mean, the expectation for since the beginning of the year, we've been running this business on very conservative assumptions around pricing. And that seems to be a very prudent thing given where the market is today. Our expectation through the back half of the year is as production volumes ramped, we expect costs decline. I think we've been very pleased with the trajectory of costs through the first half of the year and expect that trend to continue.

Speaker 2

And then in terms of the kind of realized pricing that we're receiving, we disclosed this pricing formula, which is a snapshot of where we are today, but we really expect that realized pricing to improve given that the trends on quality have improved and therefore the reprocessing cost comes down. So we're confident that in today's current pricing environment, we remain operating cash flow positive adjusted for working capital tied to the ramp up. We expect costs to continue to decline as volumes progress and we expect the realized pricing relative to battery grade spot market pricing in China to improve as quality does.

Speaker 4

Okay. That's helpful. And then I think you took down the plants

Speaker 2

a lot of part of

Speaker 4

the circuits in April, sometime in the spring, right, to sort of fix the stuff, ramp it back up and focus on quality, right? That's correct so far?

Speaker 2

Yes.

Speaker 4

And then now that you've had a few more months on the re ramp and after you did some fixes and some optimizations, are you now as a team now at XR thinking about some changes to the design, changing maybe how the KCL plant works or other things like to try to like are there some new ideas you guys have with 3 or 4 months more runtime that you want to implement?

Speaker 2

And what

Speaker 4

would that look like if true?

Speaker 2

Yes, I mean the planned shutdown in April was very effective. We've seen it in the last 3 months where we've kind of progressively hit higher and higher production volumes. Part of this ramp up is about learning how the plant operates at higher and higher production levels and being able to sustain them. I think there's a lot of optimization work that is ongoing. I wouldn't say that we're certainly not looking to change the design of the plant.

Speaker 2

I think we've been very pleasantly surprised by how it's been operating, but certainly tweaks and minor optimizations along the way are going to be necessary to kind of continue to ramp up, achieve higher levels of production and then sustain them.

Speaker 4

And just finally, it's a tougher question and it kind of makes you look at the hat you wear now and the hat you wore to recently, but we all know what's happened with the environment and we're seeing a lot of different companies start to push off projects, curtail conversion plans, lot of things happening in different regions of the world. You're obviously tied to Ganfeng and some of your future goals, investing in the different basins in Argentina, your partner in XR, with their view on things would matter. Do you see a difference now in how some of your partners look at the market and how that might affect investment decisions by yourselves and them going forward?

Speaker 2

I mean the short answer is no. I think a bit more color on that is I think it's kind of heightened the focus on lower cost operating assets. So I would include high quality brine projects within that. So I think there's certainly been a bit of a redirection in market participants' strategic positioning around which assets are developed. I think we're very fortunate to have a partner like Gansang that continues to invest through the bottom of these cycles.

Speaker 2

I think this industry is prone to these very aggressive bull and bear markets. The long term outlook I think is what drives us and certainly what drives Ganseng's investment decisions. But I think when they when we and they look at which projects should get developed, I think we're very pleased with the portfolio that we have today.

Speaker 4

Thank you.

Operator

Your next question comes from the line of David Deckelbaum with TD Cowen. Your line is open.

Speaker 5

Thanks for taking my questions guys and Sam thanks for the time. I did want to ask if you could just kind of help us quantify as you're in like the final stages of ramping towards battery grade. Can you sort of refresh us on what your operating cost target is and sort of how meaningful you think some of these cost optimization endeavors are going to be with regards to lowering your operating costs, which still appears to be in sort of that $6,000 per ton type level?

Speaker 2

I mean, I think the ultimate objective is to we expect costs once we reach steady state to be in line with some of our low cost producing peers in Argentina. As we ramp up, obviously, cost is largely a function of volumes. There's a high degree of fixed costs within our business. So getting volumes up towards the end of the year will be a major driver of that. And then into next year, there's going to be a lot of room to kind of optimize business across numerous things, reagents for one being a big bucket of costs.

Speaker 2

So I think we've seen a lot of great work led by Ganzang and the team at Monerixar in terms of lowering specific consumption of reagents. And I think that trend will kind of continue next year once we reach steady state. So ultimately, this would be one of the lower cost projects certainly in South America and in line with our peers in Argentina.

Speaker 5

Appreciate that. And then

Speaker 6

if I could just ask for

Speaker 5

a little bit more elaboration on I know in the comments you said that discussions around expansion of the 20,000 tons at Kichari continue to advance. Can you give a little bit of insight into what those discussions are right now? And I'm just curious, like as you look to delever at the XR level, is this a matter of conversations just within the existing XR kind of partnership? Or is there advancement in talks of and thoughts of bringing in additional parties before considering expansion?

Speaker 2

Yes, I mean, so the development work both on Stage 2 and the regional development plans continuing. For the regional development plan, the ongoing work right now is really around technical collaboration on kind of pulling together the reserve and resource model, the hydro geological models. And then we're obviously collaborating to explore the benefits of DLE technology to complement conventional solar evaporation processes. For the regional development plant specifically, Ganseng is leading this plan and is bringing a lot of expertise from their experience in Marianna and globally and within China. And that combines with the early work studies that we're completing right now on the reserves and the hydrogeological models.

Speaker 2

So I think we're trying to position this business to be able to obviously support the ramp up, but also put us in a very strong position to capitalize on the opportunities for growth at the right time. Obviously, we will have more to say on these development plans, both the regional development plan and the expansion plan. Once those studies are complete, which in the case of the regional development plan, we'll have a lot more to say by the end of the year.

Speaker 5

Appreciate the color.

Operator

Your next question comes from the line of Santosh Sesedri with HSBC. Your line is open.

Speaker 7

Yes. Hi, thanks very much.

Speaker 8

So firstly, when you increase the battery grade spec increase towards the battery grade spec eventually, should we expect your average cost to go up or maybe stay flattish as it becomes incrementally difficult to bring down costs given the additional processing involved? And my second question here is, is Gangplank fulfilling its commitment levels in the current low demand scenario where your peers are finding it difficult to sell their battery grid space? Thank you.

Speaker 2

Yes. Thanks for the question. I'll answer the second one first. Yes, Genting is continuing to take as much of the product as they can get. The second question is there is a bit of a trade off.

Speaker 2

So as we obviously as we reach near nameplate capacity on a sustained basis, we expect operating costs to fall In order to get to battery quality product, there are a few additional steps that need to take place. These aren't material. I wouldn't classify them as material to the cost. So the expectation is that producing battery material grade at steady state production should have a very immaterial increase to overall costs compared to producing the quality that we're producing today.

Speaker 8

Thank you. Just a follow-up on that. Do you think that incremental cost will be lower than the $2,000 discount that you're getting over?

Speaker 2

Yes.

Speaker 8

Thank you.

Operator

Your next question comes from the line of Mohammed Sidibe with National Bank Financial. Your line is open.

Speaker 9

Thanks, Sam and Tim for taking my question. A bit of modeling questions here. Sam, should we assume that most of the production that you've had in the first half of 2024 was sold to Ganfeng, all of it? Or could you maybe help me reconcile the production and sales number here?

Speaker 2

So I mean, Ganfeng is entitled to 80% of offtake from the first 25,000 tons of production. The remainder is to Bang Chek, which is a Thai oil and gas company. So, Ganpeng is taking the vast majority of product today. In terms of reconciling kind of production and sales, there obviously as we're ramping up and increasing production levels, there is a bit of a lag between production and sales. So there's a bit of a mismatch there.

Speaker 2

We expect that mismatch to obviously normalize as we approach and sustain steady state production towards the end of this year.

Speaker 9

Great. Thank you. My second question, you mentioned that you expect to reach commercial production by the end of the year. Can you qualify that? Is that the level of capacity?

Speaker 9

Is that reaching 90% capacity? Is that a specific amount going through the plant? Could you give me some color on that, please?

Speaker 5

So I mean that's reaching

Speaker 2

higher production levels on a sustained basis over several months. So Alex Shulga, who is on the call, I'm not sure if you want to step in and answer that question.

Speaker 10

Yes, sure, Sam. It's an accounting area here. There are policies and there's an approach from accounting efforts and point how to define commercial production. There are several criteria that are being used. 1 is achieving certain level of capacity.

Speaker 10

The other one is being able to maintain that level of production of capacity for a prolonged period of time and quality of the product. So we are monitoring all these criteria and when we feel that we met these requirements, the project will be considered in commercial production, which will mean start of depreciation of all fixed assets including the processing plant. Currently processing plant is not depreciated as well as not discontinuation of capitalization of certain costs.

Speaker 9

Thank you. And then my final question just is on the liquidity front as it relates to the 3rd party loans at the Argentinian level. I know that you have about 200 on a 100% basis, I'm calling this out here, dollars 280,000,000 that is due before June 30, 2025. Could you give me some color on the cadence of that repayment? Would it be more weighted towards 2025?

Speaker 9

Or is it fairly split across the next 4 quarters as you guys continue to advance your refinancing efforts? Alex, do

Speaker 2

you want to take that question?

Speaker 10

Yes, sure, absolutely. It is spread between the remainder of 2024 2025. We are actively working on refinancing this short term debt and we achieved certain level of flexibility by replacing some of the short term loans with more flexible banks, more traditional bank loans. So yes, it is spread between 24% 25%. And we do have, as I mentioned, some flexibility on timing of repayment.

Speaker 10

We are able to extend, enroll some of the loans. As Sam mentioned, we secured an €80,000,000 facility, which is expected to be rolled as well. So yes, I hope this addresses your question.

Speaker 9

Yes, that's pretty helpful. Thank you very much guys.

Operator

Your next question comes from the line of Corrine Blanchard with Deutsche Bank. Your line is open.

Speaker 6

Hey, thanks for the question. This is actually Mike Melte on. First of all, congrats on the 70% capacity. My question relates more to pricing. Can you talk about the discount, the $2,000 discount per tonne and how you expect that to evolve in future quarters years?

Speaker 2

Yes. So the current $2,000 processing fee is a reflection of the cost incurred by Ganfeng in China to remove trace levels of impurities and sell into the battery grade market. We're constantly reviewing quality and it's gradually improving. So we expect that processing fee to narrow between now and certainly the end of the year. The expectation of course is once we exit the year towards nameplate capacity on a sustained basis, we'll prioritize quality.

Speaker 2

And once we achieve better grade spec as the plant is designed, that adjustment will no longer be required.

Speaker 6

Okay. Thank you. Very helpful. And then the other question I have is related to Miner XR on the 100 percent level. There was a $113,000,000 loss related to the fair value of derivatives.

Speaker 6

Can you help us give a little more context around that please? And then how you expect it to evolve moving forward?

Speaker 2

Sure. Maybe I'll turn that one to Alex.

Speaker 10

Yes, sure, Sam. This fair value loss relates to intercompany funding by shareholders to MinerXR and represents unrealized non cash foreign exchange loss and the loans from shareholders lack and gain thing to the project. Loans were provided at the market for an exchange rate and generating foreign exchange gain at the time of grant. Loans are denominated in USD at market USD peso exchange rate. So changes in the market exchange rate in Argentina may result in unrealized gains or losses.

Speaker 10

Like for example in Q2 as you mentioned, market exchange rate of peso devalued over 40% in reading a loss over €113,000,000 At the same time, if you look back at last year, 2023, we recognized a gain of over €250,000,000 So it is fluctuating foreign exchange situation in Argentina's dynamic. Unfortunately, we cannot predict how it develops. But yes, we can see some fluctuation from quarter to quarter. As I mentioned, this is on intercompany loans from shareholders.

Speaker 6

Okay. That's very helpful. Thank you.

Operator

And your next question comes from Shannon Gill with Cormark Securities. Your line is open.

Speaker 7

Hey guys, thanks very much for taking the question. Just a follow on to Joel's question here.

Speaker 10

Just wanted

Speaker 7

to know how we can interpret the availability of the KCL plant going forward. Is this something somewhat more of like constant rates at lower volumes on one of the trains? Or is it going to be more choppy with brakes for tweaking or optimizing the processing more can we expect more pauses like the one in April to come? Yes, if you could give some color on that, that would be great.

Speaker 2

Sure. Yes, the I mean the KCL is, as you know, one of the last plants that we committed still on ramp up. We've now operated both trains simultaneously.

Speaker 4

And I

Speaker 2

think running both trains at full production will be kind of critical obviously to removing trace levels of impurities and kind of reaching our offtake spec sheet. Right now, we have no expected meaningful downtime to reorient or optimize. Again, we are obviously in a ramp up. I think we've done a great job so far in terms of achieving approximately 70% capacity. But as we push to higher levels and try and sustain them, there could be the need to shut down for a couple of days in order to kind of fix on these bottlenecks in terms of reaching nameplate capacity.

Speaker 2

But right now, we don't see anything that would indicate that that would be needed.

Speaker 7

Okay, great. So the biggest one, I guess, in Q2 would have been the April one, but no meaningful downtime in between end. Got it. Okay. Thanks so much.

Speaker 9

Yes.

Operator

There are no further questions at this time. I will turn the call back over to Kelly O'Brien for closing remarks.

Speaker 1

Thank you everyone for joining the call this morning. We look forward to reconvening next quarter and remind you that we are available, all of us, to help answer any questions or concerns before then. Thank you. Have a good day.

Operator

This does conclude today's conference. You may now disconnect.

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Key Takeaways

  • Production ramp-up: Q2 output reached 5,600 tonnes of lithium carbonate, a 24% increase over Q1, sustaining around 70% of design capacity with monthly production records in each of the last three months.
  • Cash-flow positive: Even at current ~$11 k/tonne battery-grade prices, Kachiari-Olaroz is generating positive operating cash flow (adjusted for ramp-up working capital) with costs expected to decline further as quality improves.
  • Balance sheet strength: The company ended Q2 with $96 M in cash, is poised to receive $70 M from the Pastos Grandes transaction, and secured an $80 M bank credit facility to replace short-term debt and reduce project leverage.
  • Growth initiatives: Technical work on Stage 2 expansion at Kachiari and Pastos Grandes regional development—including DLE technology evaluation—is advancing, with more detailed results expected by year-end.
  • Commercial production target: Lithium Argentina aims to achieve sustained nameplate capacity and reach commercial production later this year, at which point it will increase project disclosures and begin asset depreciation.
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Earnings Conference Call
Lithium Americas (Argentina) Q2 2024
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