Albemarle Q2 2022 Earnings Call Transcript

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Provided by Quartr
August 3, 2022

Key Takeaways

  • Q2 performance and guidance: Net sales reached $1.5 billion in Q2 (up 91% YoY) and adjusted EBITDA was $610 million (over 3× YoY), prompting Albemarle to raise its 2022 outlook and forecast positive free cash flow.
  • Lithium segment surge: Lithium EBITDA grew by over 350% in Q2 and is now expected to increase more than 500% for full‐year 2022, fueled by strong market prices, successful contract renegotiations, and volume growth of 20–30%.
  • Key growth projects: The Kemerton 1 lithium conversion plant in Western Australia achieved first product in July, and Albemarle announced plans for a “MegaFlex” integrated lithium site at Kings Mountain to bolster North American battery supply chains.
  • Catalyst segment challenges: Catalyst EBITDA was negative in Q2 due to high natural gas, freight, and raw‐material costs, and full‐year EBITDA is now expected to decline 25–65% amid an ongoing strategic review.
  • Strong balance sheet: With $931 million in cash, $2.6 billion of available liquidity, and a net debt/EBITDA ratio of approximately 1.7×, Albemarle is well‐positioned to fund growth investments and pursue strategic M&A.
AI Generated. May Contain Errors.
Earnings Conference Call
Albemarle Q2 2022
00:00 / 00:00

There are 12 speakers on the call.

Operator

Hello, everyone, and welcome to the Q2 2022 Albemarle Corporation Earnings Conference Call. My name is Nadia, and I'll be coordinating the call today. Please note, we will take one question and one follow-up. I will now hand over to your host, Meredith Bandy, Vice President of Investor Relations and Sustainability to begin. Meredith, please go ahead.

Speaker 1

Thank you, Nadia, and welcome, everyone, to Albemarle's Q2 2022 earnings conference call. Our earnings were released After the close of market yesterday, and you'll find our press release and earnings presentation posted to our website under the Investors section at albemarle.com. Joining me on the call today are Kent Masters, Chief Executive Officer and Scott Tozier, Chief Financial Officer Rafael Crawford, President, Catalyst Netha Johnson, President, Bromine and Eric Norris, President, Lithium are also available for Q and A. As a reminder, some of the statements made during this call, including our outlook, guidance, expected company performance and timing of expansion projects, may constitute forward looking statements within the meaning of federal securities laws. Please note the cautionary language about forward looking statements contained in our press release And earnings presentation, that same language applies to this call.

Speaker 1

Please also note that some of our comments today refer to non GAAP financial measures. A reconciliation GAAP financial measures can be found in our earnings release in the appendix of these slides. And now I'll turn the call over to Kent.

Speaker 2

Thanks, Meredith, and thank you all for joining us today. On today's call, I will highlight our Q2 results and achievements. Scott will provide more details on our financial results, outlook, balance sheet and capital allocation. I will then close our prepared remarks with an on our operating model and strategic growth projects aimed at further strengthening our long term financial performance And sustainable competitive advantages. Albemarle's leadership positions in lithium and bromine, Coupled with our team's ability to execute through the current inflationary environment led to another quarter of strong results.

Speaker 2

In the Q2, we generated net sales of $1,500,000,000 nearly double the prior year. 2nd quarter adjusted EBITDA of $610,000,000 was over 3 times the prior year, Continuing the trend of EBITDA significantly outpacing sales growth. The supply demand balances remain tight in the markets we serve. Strong market prices and our continued success in contract renegotiation drove the tremendous strength we are experiencing in our lithium business. As a result, we are again raising our 2022 outlook and now expect to be free cash flow positive for the year.

Speaker 2

Scott will review the key elements of that outlook later on in the call. We are also successfully executing our growth strategy. Our Kemerton 1 lithium conversion plant in Western Australia achieved first product in July. I want to especially congratulate our teams in Western Australia for their hard work and dedication in achieving this goal. And lastly, we made a major announcement regarding plans to build an integrated lithium mega site in the United States.

Speaker 2

This will support our Western expansion and the development of the battery materials supply chain in North America. Now, I'll turn the call over to Scott to walk through our financials. Thanks, Kent, and good morning, everyone.

Speaker 3

I'll begin on Slide 5. During the quarter, we generated net sales of approximately $1,500,000,000 a year over year increase of 91%. This is due primarily to increased momentum in our pricing efforts as well as higher volumes driven by strong demand across our diverse end markets, Especially for our lithium and bromine businesses. We saw volumes and pricing grow in all three of our businesses. For the Q2, net income attributable to Albemarle was $407,000,000 Compared to $425,000,000 in the prior year.

Speaker 3

As a reminder, the year ago quarterly results included a one time benefit of 3.30 $2,000,000 related to the sale of Fine Chemistry Services. EPS for the Q2 was $3.46 A year over year improvement of 300%, excluding the one time benefit of the FCS sale. This overall performance was driven by strong net sales and margin improvement, partially offset by the Ongoing inflationary pressures we are feeling across all three businesses. Turning to Slide 6. 2nd quarter adjusted EBITDA was $610,000,000 up 2 14% year over year.

Speaker 3

The primary driver of the strong growth was higher lithium EBITDA. Lithium was up nearly $400,000,000 compared to the prior year, Driven by momentum in our contracting efforts and overall higher market prices. That's an increase of 3 50%. In fact, lithium's 2nd quarter EBITDA was greater than the EBITDA it generated in the full year of 2021. Bromine was also favorable year over year, up nearly 50%, reflecting higher pricing driven by tight market conditions And an uptick in volumes, partially offset by raw material and freight inflation.

Speaker 3

Catalyst was negative in the quarter as higher sales volumes and pricing were more than offset by cost pressures, Particularly for natural gas in Europe and raw materials. And finally, we also experienced an overall FX headwind of $14,000,000 for the total company. Moving to Slide 7. We are further increasing our 2022 outlook from our last announcement in late May, primarily to reflect the Expected continued strength and execution in our lithium business and further improvements in bromine. We now expect 2022 total company net sales to be in the range of $7,100,000,000 to $7,500,000,000 Up about 115 percent to 125% versus last year.

Speaker 3

Adjusted EBITDA is expected Between $3,200,000,000 $3,500,000,000 reflecting a year over year improvement of up to 300%. This implies EBITDA margins are expected to improve significantly to a range of 45% to 47% For the total company. Together, this translates to updated 2022 adjusted EPS guidance in the range Of $19.25 to $22.25 that is about 5 times more than 2021. Additionally, we are increasing our net cash from operations guidance to a range Of $1,400,000,000 to $1,700,000,000 driven by our updated sales and margin expectations.

Speaker 2

We are

Speaker 3

maintaining guidance for capital expenditures of $1,300,000,000 to $1,500,000,000 as we drive our lithium investments forward To meet increased customer demand. Together, the midpoint of our guidance implies approximately $150,000,000 In positive free cash flow for the full year. And further, if you assume our realized pricing remains relatively flat next year, We expect to continue to generate positive free cash flow in 2023 even with continued growth investments. Security of supply remains the number one priority for our customers, and we are continuing to partner and work closely with them. We are pushing hard to meet those accelerating customer growth requirements.

Speaker 3

Regarding the quarterly Progression of sales and EBITDA. On our last call, we indicated that we expect results to be relatively evenly split among quarters. Given the underlying strength across our portfolio and continued momentum in our contracting efforts, we now expect second half adjusted EBITDA To be roughly 120% higher relative to the first half. Turning to the next slide for more detail on our outlook by segment. Our lithium businesses full year 2022 EBITDA is expected to be up more than 500% year over year, Up from the previous outlook for growth of approximately 300%.

Speaker 3

The improved outlook reflects renegotiations of pricing On legacy fixed price contracts and continued strong market pricing flowing through our indexed referenced variable price contracts. We now expect our average realized selling price to be up more than 2 25% to 2 50% year over year. This is the result of our successful efforts to renegotiate legacy contracts and implement more index referenced Variable price contracts as well as a significant increase in index prices. From the beginning of the year to today, indices are up 60% to 130%. And note that our outlook assumes Albemarle's expected Q3 realized selling price remains constant Into the Q4.

Speaker 3

There's no change to our lithium volume outlook for the year. We continue to expect year over year volume growth In the range of 20% to 30% as we bring on new conversion assets plus some additional tolling. There is potential upside to our outlook if market prices remain near current levels or with additional contract renegotiations Or additional tolling volumes. And conversely, there is potential downside with material declines in market pricing For bromine, we are also raising our full year 2022 EBITDA expectations with year over year improvement in the range of 25% to 30% compared to the prior outlook of 15% to 20%. This revised guidance reflects continued strong demand and pricing from end markets such as fire safety solutions And Oilfield Services, plus other macro trends such as digitalization and electrification.

Speaker 3

We expect higher volumes of 5% to 10% following our successful execution of growth projects last year. For Catalyst, full year 2022 EBITDA is expected to be down 25% to 65% year over year. This is below our prior outlook due to significant cost pressures, primarily related to natural gas in Europe, certain raw materials As well as freight, partially offset by higher sales volumes and pricing. The large outlook range for Catalyst reflects Increased volatility and a lack of visibility, particularly related to the war in Ukraine. Given the extraordinary circumstances and the resulting changes in oil and gas markets, the business continues to aggressively seek cost pass throughs, Particularly for higher natural gas costs.

Speaker 3

The strategic review of the Catalyst business is ongoing, But it is taking longer than we anticipated. As soon as we have any news, we will provide an update. Turning to Slide 9 for an update on our lithium pricing and contracts. This slide reflects the Expected split of our 2022 lithium revenues. Battery grade revenues are now expected to make up approximately 85% Compared to 70% to 80% in our prior guidance due to successful contract negotiations and higher market indices.

Speaker 3

Of the total battery grade revenues, 15% is expected to be from short term spot purchase orders, 65% is expected to be from index reference variable price contracts. Pricing on these contracts Generally reset with a 3 month lag and a number of these contracts do have floors and ceilings in place. The remaining 20% comes from legacy fixed contracts with price reopeners, normally every 6 or 12 months. And since we last updated the outlook in late May, we have successfully repriced a portion of these contracts to better reflect the current market price environment. This segmented approach to contracting gives more flexibility for our customers while allowing Albemarle to preserve upside And ensure returns on our growth investments.

Speaker 3

Our operations and project teams are also delivering volumetric growth. Slide 10 shows the expected lithium sales volumes, including technical grade spodumene and tolling sales. In 2022, we expect volumes to improve 20% to 30% year over year. This growth is largely driven by our expansions at La Negra and Kemerton, the acquisition of Qingzhou as well as some additional tolling volumes. Looking forward, we expect volumes to grow approximately 20% per year from 2022 to 2025, Driven primarily by the ramp up of new conversion assets.

Speaker 3

We see room for further upside from additional conversion assets such as our Greenfield and Meishan Turning to Slide 11, our strong net cash from operations And solid balance sheet give us ample financial flexibility to execute our growth strategy. Our balance sheet is in great shape With $931,000,000 of cash and available liquidity of $2,600,000,000 Current net debt to adjusted EBITDA is approximately 1.7 times. With rising EBITDA from higher pricing and volumes, We expect leverage to trend lower in the near term. This will this gives us plenty of capacity to accelerate Our growth investments are value creating M and A. During the Q2, we extended our debt maturity profile Through a public offering of senior notes, proceeds total approximately $1,700,000,000 A portion of which was used to redeem senior notes maturing in 2024.

Speaker 3

92% of our debt position is at a fixed rate, Which buffers us against the impacts of this rising interest rate environment. Before I turn the call back over to Ken, I wanted to briefly review our capital allocation priorities and our ability to adapt to market changes while building durable capacities to support growth. Our capital allocation priorities are unchanged. We remain committed to strategically grow our lithium and bromine capacity in a disciplined manner. Capacity growth will also be supported inorganically by continuously assessing our portfolio Pursuing bolt on acquisitions at attractive returns to strengthen our top tier resource base.

Speaker 3

A perfect example of this strategy is the $200,000,000 Jinja acquisition that is expected to close in the second half of the year. Maintaining financial flexibility and shareholder returns are also key capital allocation priorities. We remain committed to maintaining an investment grade rating and a strong balance sheet to provide significant optionality to fund future growth. Finally, we also plan to continue to support our dividend. We are laser focused on the durability of our business.

Speaker 3

The management team and the Board regularly review our capital allocation priorities and have identified levers we can to quickly adapt to changing market conditions if needed. These include slowing non growth CapEx, reducing discretionary spending and hiring, Shifting production volumes to highest demand markets and accelerating partnering and tolling arrangements to support cash generation. Additionally, a downturn may allow us to take advantage of lower priced acquisitions, capitalizing on the strength of our balance sheet. In summary, we believe Albemarle's ability to maintain a focus on growth through all market conditions is strong, Thanks to our operating model that Kent is going to discuss next.

Speaker 2

Thanks, Scott. So let's turn to Slide 13 to discuss Our cost structure and how we are managing inflation. Our vertical integration and access to low cost resources for lithium and bromine Allow us to avoid the worst impacts of inflation and control our cost structure. For example, while approximately 45% of our costs Come from raw materials and services, actually 20% of those costs relate to our owned spodumene. The implementation of our operating model, the Albemarle Way of Excellence, is also helping manage cost.

Speaker 2

In 2020, we identified our supply chain as a key area for improvement. At that time, we reorganized to form a global supply chain function And implemented a new enhanced procurement strategy. That team's efforts are now paying dividends. Last year, our procurement team set a target to achieve $90,000,000 in value creation by 2022 year end. We are on track to meet or exceed that target by about 40%.

Speaker 2

About half is from cost savings with lower year over year cost, And about half is from cost avoidance, where procurement efficiencies have allowed us to realize below market increases. An example of cost savings includes logistics efficiencies, minimizing material handling, maximizing equipment capacity and Shortening haul routes. Cost avoidance includes using fewer suppliers and pooling buying for key raw materials and services to offset Inflation. In other cases, we've shortened supply chains to improve resilience and reduce total cost. This success is driven by diverse teams, including supply chain, procurement and production scheduling.

Speaker 2

Thanks to everyone across the enterprise and around the globe. It took commitment from every individual to make this happen. Our operating model is also focused on building the structure, capabilities, discipline and design approach To enable faster capacity growth. As a leading lithium producer, Albemarle is investing in lithium production around the world, Including China, Australia and the Americas. This year, we plan to deliver projects that more than double our annual capacity from 85,000 tons to 200,000 tons by year end.

Speaker 2

We are also progressing a portfolio of projects that As you can see, the near term projects are largely in the Asia Pacific region. Longer term, We expect to transition to a more localized supply chain in North America and Europe. Turning to Slide 15. Our capacity additions in Australia and Asia significantly enhance our ability to leverage our low cost resource base. In terms of lithium conversion capacity, we have made progress on the regulatory approvals for the acquisition of the Chenzhou conversion We continue to expect that acquisition to close in the second half of twenty twenty two.

Speaker 2

In the meantime, we continue to Toll spodumene through this facility. As I mentioned earlier, Kemerton 1 has achieved first product. This important milestone signifies that the manufacturing processes and equipment can meet the project's design objectives. Our focus now is on qualifying our product with our customers. At our China greenfield expansions, Construction of a 50,000 ton per year lithium hydroxide conversion plant at Meishan is well underway.

Speaker 2

Importantly, with our ownership stakes at the Wodgina and Greenbushes lithium mines, we already have The restart of the Wodgina Lithium Mine by our JV partner, Mineral Resources, It's going well. We continue to negotiate agreements to expand and restructure the Marbel joint venture, and we'll update you when we have more information. We also have a 49% stake at Greenbushes, one of the best lithium resources in the world. The Talison joint venture is ramping up Chemical Grade Plant 2 or CGP 2 and has approved construction of CGP 3, Which is broken ground. Our intention is to ramp up lithium resources in advance of conversion assets, In which case, in the near term, we could be net long spodumene.

Speaker 2

If that's the case, we will elect to toll spodumene or sell spodumene into the market. If it's economical to do so and if it allows us to bridge until new conversion assets ramp up. Albemarle is a leading global lithium producer with a significant U. S. Presence and access to some of the world's best resources.

Speaker 2

As such, we are well positioned to establish world class production of battery grade lithium that enables the localization of the battery supply Chain in North America. This would offer important benefits to U. S.-based automotive OEMs Seeking a derisked local supply chain, more reliable logistics, and a reduced carbon footprint. We plan to leverage our Kings Mountain Lithium Mine, a top tier resource, and build a multi train conversion site in the Southeast. This site would be capable of handling mineral resources from Kings Mountain as well as recycled feedstock.

Speaker 2

This MegaFlex site would leverage Albemarle's best in class know how to design, build and commission both resource and conversion assets. This creates significant competitive advantages for Albemarle and its customers, while also addressing the need for localized lithium Supply to support growing demand in North America. In closing, on Slide 17, We expect to achieve significant growth milestones this year, thanks to strong end market demand as well as actions that we've taken To invest in profitable growth for lithium and bromine, those investments are now paying off as we ramp up volumetric growth. To maintain our financial flexibility to fund growth through cash and our balance sheet and to leverage our operating model to manage cost And execute our growth projects. So this concludes our prepared remarks.

Speaker 2

Now I'll ask Nadia, to open the question open the call for questions.

Operator

Thank you. When preparing to ask your question, please ensure your phone is unmuted locally. Please note we'll take one question and one follow-up. Our first question today comes from P. J.

Operator

Yakova of Citi. P. J, please go ahead. Your line is open.

Speaker 4

Yes, good morning. Kent, your volume growth has been very impressive. Can you discuss your key steps you're taking at Kings Mountain in terms of Building the mega site, what environmental permits do you need? Or are you engaging with the community today? And the same question on Silver Peak, When you expand that, what kind of production ramp up can you see?

Speaker 2

Right. So the 2 sites are slightly different scale. And so Kings Mountain is a significant site. Silver Peak is smaller, but still the expansion is important. I mean, that is the only kind of Lithium sourced in the U.

Speaker 2

S. Today. But at Kings Mountain, we are early in that process. We're still in pre feasibility, so we've got to do permitting, but we have done a lot of work Already? We've done all of the drilling necessary.

Speaker 2

We continue to do some of the drilling to make to understand the resource at Kings Mountain, We still got to do permitting. We've engaged with the community. We've been doing community meetings for Almost 6 months now, maybe not quite 6 months or early in the year that we started that process with public meetings. We've opened an office in the town so people can come in and ask questions. We've really engaged with the community early on.

Speaker 2

We're working on the permitting processes that we have to go through, but it's in a pre feasibility study. We feel confident we'll be able to get there at Kings Mountain, but there's a lot of work to do, including all of the permitting.

Speaker 4

Great. And then you have a strong balance sheet. You will be free cash flow positive this year. You talked about M and A. Can you give us some idea of what you would potentially be looking at?

Speaker 4

Would you look at technologies like DLE? Or what geographies would you look at? Thank you.

Speaker 2

Yes. Well, I think what we've really always talked about from an M and A So if we see conversion assets that we think are attractive, so we would do that, consider that as a bolt on. Technologies, we see technology to help us, so direct lithium extraction could be part of that. And then resources. So we continue I mean, we are good on resources Pretty close to the end of the decade, but we need to be planning now to build out our resource base past that.

Speaker 2

So I think those are the 3 primary categories.

Speaker 5

Thank you.

Operator

Thank you. Our next question comes from Christopher Parkinson of Mizuho, Christopher, please go ahead. Your line is open.

Speaker 6

Great. Thank you so much for taking my question. Just turning to Slide 18, The third and the fourth point, can you just give us a quick update in terms of some of the contract renegotiations On the additional polling, I mean, on the former, what percent are still up for renewal That have essentially given you the momentum to raise guidance twice in the last quarter and a half or so. Just any color you could offer on that would be very helpful. Thank you.

Speaker 7

Good morning, Chris. It's Eric here. So, what we've been able to do, just to recap this year, is we've been able to We negotiate contracts that have opportunities for reopeners or with customers who are seeking additional line commitments in the out years. And in order to entertain those discussions, we've opened up have been able to ask for higher prices on legacy contracts. We don't have any contracts that are expiring anytime soon.

Speaker 7

Most of our book of business is committed. We're very tight In the next year or 2 as we anticipate bringing on new capacity from some of the projects Kent described. But that doesn't mean we won't have opportunities. There might be still some contracts that shift. The big thing that's happened in the past year has been The movement to now having 2 thirds under an index reference variable price whereas before most of that was fixed.

Speaker 7

Now our movement is going to be very much driven by prices and some potential changes on the margins of a few contracts or potentially if prices remain where they are some resets on some of the fixed price contracts.

Speaker 6

And just a quick follow-up, just you've also seen OEMs make a very conscientious effort and been a little bit more decisive Attempting to lock in incremental supply through, let's say, the middle of the balance of the decade. I mean, has that been fully reflected in your negotiations in terms of just What you're willing to commit to them and as we progress over the next year or 2, it seems like there's still a bit of a bottleneck in terms of the OEMs What's available in lithium in terms of better grade hydroxide? What else are you willing to do to Help facilitate the growth plans, and how should we think about that just from a broader market perspective, you versus some of your peers? Thank you.

Speaker 2

Look, we're working with our customers and we are being very aggressive about adding capacity. So I think you see that in our Plans and they're coming through now, and we get better at that. So the period when those come on, we're able we believe we're able to execute better from a conversion. We're good on resource for a number of years, but we still need to add that. And we work with the customers to do kind of unique arrangements we're having in conversations with those with Our customers about those, but they have to work for us.

Speaker 2

And we're working towards some arrangements like that, so and they may or may not come to pass. I'm not I can't say that because those are conversations and discussions that we're having. But we're in those discussions, and but we're committed to build capacity to serve the

Speaker 4

Yes, I think what's also unique, Chris, just

Speaker 7

to add is that we're speaking with OEMs and battery companies on 3 different continents.

Speaker 8

Out

Speaker 7

in the out years, you saw them on the charts, we're looking towards Europe, so that's the further south. Where we are established well now is in Asia and where we've announced now next we're headed is North America. And we've got the resource base as Kent described So between that localization, which is very important to these OEMs and battery producers, the sustainability and Principles in which we operate and then some of the new technology areas we're focused in for next generation technology. The partnerships we strike are going to Be it fall in one of those dimensions. And we're not in a position where we need to raise capital.

Speaker 7

So we can look at and have been discussing with various Producers, various OEMs, upfronts and potentially forms of investment, but that's not a requirement for We don't need that capital. It would only be something we do as part of a broader deal to advance our strategic agenda and help our customers win in the market.

Speaker 6

Very helpful. Thank you.

Operator

Thank you. And our next question comes from David Begleiter of Deutsche Bank, David, please go ahead. Your line is open.

Speaker 8

Thank you. Good morning. Question for Eric. Eric, just on your Slide 9, Can you talk about the difference of pricing between the index reference contracts and the spot prices in Q2 And that'll compare versus Q1.

Speaker 7

I'm sorry, David. To make sure I understand your question, you're wondering how They compare now the prices versus back in Q2? The

Speaker 8

price difference between the index reference and spot prices In Q2 versus differential in Q1.

Speaker 7

Okay. I'm sorry. We don't give enough detail to disclose that, but I will say that You know that spot prices, you would know by looking indices are they vary, but currently in the low 60s in China, they're actually Some of the some contracts in outside of China are even higher now at $70 We are not there yet on our index pricing, Which is one of the reasons our guidance is if prices stay where they are, we could continue to have a rising mix increase in our variable based contracts.

Speaker 8

Understood. And just on the Southeast project, have you given out any cost or timing indications for that project?

Speaker 3

David, we have not given out any class yet since it's really pre feasibility. So Timing wise, it's going to be later in the decade when that would come online. Clearly, it needs to have a feedstock With the mine, that's probably the long pole on the tent.

Speaker 8

Understood. Thank you very much.

Operator

Thank you. And the next question goes to Josh Spector of UBS. Josh, please go ahead. Your line is open.

Speaker 6

Yes. Hey, guys.

Speaker 2

This is James Cannon on for Josh.

Speaker 8

Just wondering why it seems like

Speaker 7

the sales drop through to

Speaker 6

EBITDA in this Earnings upgrade is

Speaker 7

much higher than the last update through the year. Could you give any color as to why that is? And similarly on SCF, has anything

Speaker 9

in the underlying business changed to improve that?

Speaker 4

Yes, James, I think that

Speaker 3

the big difference is that this upgrade has been purely driven by price. So you're seeing that drop through and we're not Seeing the same impact from spodumene, which was a drag. So the spodumene price This was a drag on our earnings in the last guidance. As you look at free cash flow, we continue to see Improvements there driven by the growth in EBITDA and we're because of some of the tolling efforts that doing we're actually absorbing some of the inventory that we didn't have before. So seeing a better working capital profile as a result.

Speaker 8

Okay, great. Thank you.

Speaker 4

Thanks.

Operator

Thank you. And our next question goes to Colin Rusch of Oppenheimer. Colin, please go ahead. Your line is open.

Speaker 8

Thanks so much. Can you guys just talk a little bit about the ramp up in Cemberton and any surprises you're seeing at this point? Any concerns around labor or any equipment that you're

Speaker 2

So I mean, look, we're we've just we made first product Last month, and we're just starting to ramp up. So I think the key thing for us when we're able to make product and Are comfortable with the quality, it means that our process chemistry is right. So there are no surprises really around The kind of core process chemistry around that, so that was a big milestone. That's kind of the first big hurdle that you want to clear. And then now it's just getting everything run at scale And get purities up to the to our specification.

Speaker 2

So as you kind of run-in a new plant, We continuously see that the spec on battery grade material is very high, and so it just takes a little bit of time to get to that, and it takes volume to do that. So it's just About ramping up, we feel very good about the process chemistry and that the plant will be a good operating plant. It's just that we need a little bit of time to ramp it up And get to those, the purities we need, and then we have to go through the qualification process with our customers. So that's on the now That's on the 1st train. 2nd train is still on schedule, that we've indicated in the past.

Speaker 2

And the learnings we had on Train 1, we've stumbled a bit On train 1 with issues in getting it there, we think we as we saw those, we've rectified that for train 2. There's still labor issues in Western Australia, but I think we're through the worst of that because we're past most of the big construction elements of it. So now we're into commissioning on 1 and just finishing up construction on 2. There's still labor issues in the operating facility to some degree, but that's kind of business as usual in Western Australia, I would say.

Speaker 8

Thanks so much. And then on

Speaker 10

the North America potential expansion, can you

Speaker 8

just talk about philosophically how you're thinking about contracting that out? Is that Something where you would think about taking in prepayments to lock in volumes with customers. How far down the road are you in terms of the thought process Discussions on offtake for that facility?

Speaker 2

Well, we're having discussions with people, but we're not I would say we're not very far down. We're not locked anything in. We have some ideas around some unique models, and we're having conversations with people about that.

Speaker 8

Thanks so much

Operator

guys. Thank you. And our next question goes to Vincent Andrews of Morgan Stanley. Vincent, please go ahead. Your line is open.

Speaker 5

Thank you, and good morning, everyone. Kent, I think when you discussed the mega project, you Indicated an ability to take recycled feedstock. So I just was curious, one, just for that mega project, how much of a contributor you thought that would be? And whether your customers are telling you or indicating that obviously maybe more in the out years than anytime soon, that they would like to have some percentage of recycled feedstock and the mix of lithium that they procure.

Speaker 2

Yes. So I mean it's a big part of the conversation And it's about recycling creating a recycle loop through the system. It is in the years out, but we have to design it in. And so we think we can build the facility we'll build it in phases, but ultimately we'll operate a recycled facility, be lower volumes of But we'll have time to ramp that up and really learn how to use that, optimize that, and that would kind of be our facility we would learn off of as well. So It's part we're trying to think ahead and design that into a facility so we get scale with the other operating facilities and have the benefit of having

Operator

Thank you. And the next question goes to Kevin McCarthy of Vertical Research Partners. Kevin, please go ahead. Your line is open.

Speaker 10

Hi, good morning. This is Corey on for Kevin. Going back to Slide 9 with the contract breakdown in lithium. I'm curious versus last quarter, you have more index reference variable price contracts, right, 65% versus 50% and the fixed contract piece is down to 20% from 30% of your battery grade revenues. Do you have A number in mind for how low you can go on in terms of having fixed contracts, like are you trying to get to all index reference priced contracts?

Speaker 2

Yes. So I think I mean we've talked about this for a while and we've always said we're not sure where this ends up. It's a little bit about how our customers want to contract and then the Direction that we're trying to go. So, I mean, what you're seeing in that is just how the math is evolving. So we've upgrade, we've changed contracts from those fixed.

Speaker 2

But remember, the fixed prices adjust over time, so they're not really fixed. And we're trying to shorten that period that we as they adjust. So I'm not I don't really want to call the mix. I mean, we had at one time said we thought it might be a 3rd, a 3rd, a 3rd between those categories, and It's turned out to be quite different. We do want to have some in the spot category that gives us flexibility.

Speaker 2

But I don't know, it's hard to say where it goes. We're not necessarily absolutely driving it to that variable price, but we kind of like that model where it's Index reference and variable, and I think our customers are getting comfortable with it as well.

Speaker 3

The other moving piece that As you look at that chart between different presentations is, of course, where the market indices are. And so that can drive some mix shift In those percentages, as you go forward.

Speaker 10

Got it. And then I guess to stick with that Slide, similar question in terms of change quarter over quarter. Last quarter you mentioned product offering, this quarter you mentioned partnership offering. And in the context of One of your competitors receiving a large upfront payment for future capacity. Have you Approached anybody about similar upfront payments for future lithium capacity or Maybe you could talk sort of the philosophical approach to how you want to contract future volumes?

Speaker 10

Thanks.

Speaker 2

Yes. Well, I think we've migrated our philosophy around pricing contracting over time, and we've talked about that Quite a bit. Now that's coming to fruition. Our unique models, we've been having we've had discussions for years with people about prepayments and Investments and things like that, we've not done that yet. It's not that we're opposed to it, but has to fit in our philosophy and it has to work for us.

Speaker 2

And it's probably more relevant a few years ago when we needed more cash for our investments. It's less important for us today, but we're still open for those investments. But we consider them strategic as part of a relationship and not just because we need the cash.

Speaker 10

Understood. Thank you.

Operator

Thank you. And the next question goes to Alexey Yefremov of KeyBanc Capital Markets. Alexey, please go ahead. Your line is open.

Speaker 8

Thank you, and good morning, everyone. As you re signed these lithium contracts, what's your philosophy towards the floor and the ceiling in those contracts? Are you Widening that range, are you narrowing it? Is it kind of staying the same versus what you held in general last year?

Speaker 2

Yes. Well, I would I mean, it's a philosophy, but they are widening and going up. So there It is definitely not narrowing. So widening and they're moving up, I guess that's our philosophy.

Speaker 8

I guess, I should assume that the floor is also moving up. Is it fair?

Speaker 2

Absolutely.

Speaker 8

And as a follow-up question on Wajina, is the restart Contributing in any meaningful way to your second half results this year? Or is it mostly in 2023 and thereafter story?

Speaker 2

So there'll probably be some volume coming through Wodgina in the second half, but it's not I don't think it's material. So that will start impacting in 2023.

Speaker 8

Great. Thanks a lot.

Operator

Thank you. Our next question comes from Joel Jackson of BMO Capital Markets. Joel, please go ahead. Your line is open.

Speaker 11

Hi, thanks. Good morning. On Slide 10, you gave your volume guidance again per year. So you're guiding to something like 180,000 tons or something else In 23, could you maybe risk adjust that? How much of that incremental for Nexter is in the bag?

Speaker 11

How much? Maybe you have to work

Speaker 7

for a bit harder

Speaker 11

and kind of give the ranges of how you get up to that number?

Speaker 2

So I think that I mean, if I understand your question from a volume standpoint, right? So there'll be it's ramping up at La Negra and Kemerton and some tolling volumes. So it's we'll be producing tolling from Waijina and ramping up At the facilities at Talison. So it's pretty much within our control. So that's kind of you can put the risk however you I categorize each one of those, but it's probably we don't have to do anything extraordinary to get there.

Speaker 2

We have the plants that we built and Now starting up, have to run and produce at volume, and then we just continue to ramp up at La Negra, and we're going to have some toll volume And some of the ones in the product before we're able to build conversion. So that might be but the tollers we're using, we used before It's new product for him, so there's a little bit of risk in that, but not it's not extraordinary.

Speaker 3

And Ken, I'll just add the other component is just the Qingzhou So we still have to close that. So it's progressing well, but again, there's potential risk that that just doesn't close. Yes.

Speaker 2

No, that's right. That's probably the bigger risk in it.

Speaker 11

Okay. Then my second question would be the DOE seems to be A lot of money to battery metals, to a lot of smaller companies these days, grants and loans, things like that. You could probably qualify For a bunch of this money. It's not a massive amount of money from where you guys sit, but it's probably a nice little kicker. Can you talk about that?

Speaker 2

Yes. I mean, look, it's money that's available strategically. It's in, right? And we're working on that. So nothing that we can announce today, But we're working

Speaker 8

on it. Thank you.

Operator

Thank you. The next question goes to Steve Richardson of Evercore. Steve, please go ahead. Your line is open.

Speaker 8

Hello. Hi. This is Sean on for Steve. Just in terms of just returning back to Wazniak and merchant production, can you just please walk through How the volumes are flowing through there and also in terms of green bushes and how the COGS and the costs are Moderate

Speaker 2

throughout the year. So let's just I mean, Wodgina, we're running Wodgina today. We're ramping up, but we And we'll eventually toll that. We'll toll that volume until we get plants on that we can process through that. Kemerton is just it's a matter of ramping.

Speaker 2

And we've kind of we've said historically, we bring a plant on. We kind of Our planning is we give it 2 years to ramp to full capacity. Now we would hope to beat that, but that's kind of what we built in that's what we build into our planning processes. And I don't the other was about Talison. So the oh, that's the expansion.

Speaker 2

CGP 2 is operating and CGP 3, Which is the next one is, we've broken ground on that. So, we're ramping up we're CGP 2, we're commissioning and ramping up, And we've just broken ground on CGP 3. I think that's the right?

Speaker 8

That's correct.

Speaker 2

That's correct.

Speaker 7

CGP 3 would come on and would be available in Several years and it would support some of the capacity expansions that are in one of our charts to talk about further China expansion in Kempen 3.4. And then of course as you already pointed out Kent, the Marbled joint venture, some of those China plants, at least one would be a part of the joint venture Potentially, and it would take that material.

Speaker 4

Okay. Thank you.

Operator

Thank you. And our next question go to David Deckelbaum of Cowen. David, please go ahead. Your line is open.

Speaker 9

Thank you. Thanks for taking my questions today.

Speaker 8

Ken, I just wanted to

Speaker 9

follow-up on The conversation around the MegaFlex site. I believe the target was 100,000 tons per annum of conversion capacity. I just wanted to confirm whether you all felt that Kings Mountain and recycled feedstock would be enough to Speed up to that capacity as a resource eventually? Or it sounded like earlier, perhaps Eric was discussing perhaps another need for another asset to support that.

Speaker 2

Yes. So I mean our thinking and again it's pre feasibility and it's still we're trying to make sure we understand The resource at Kings Mountain, so we're doing more work on that. But we think that we could feed that Megaplex facility With Kings Mountain plus ultimately at steady state with recycled material that get to the scale that you referenced 100,000 tons a year.

Speaker 8

Okay. And then I just wanted

Speaker 9

to follow-up earlier on some of the conversations around upside volumes. It looks like in the current chart that you all sort of are still assuming this 10000 to 20000 tons per annum of tolled volumes, Which is, I guess, basically the levels that you're at in 2022. And how significant or how much available capacity is out there that you Theoretically, pull into because I guess there's also the strategy of selling spodum into the market, which seems like A pivot from sort of previous views that you all had, but just wondering volumetrically, how much capacity Past the upside you think that there is in the market.

Speaker 2

So Eric can talk about the tolling, but just on the spodumene, I mean, We're just being a little more flexible. That's a bridging strategy that we've not changed strategy long term about selling spodumene. We want to convert and sell To our end customers, the products that they use, the lithium salts. So but if we have if we ramp up Plants, you can't do all this perfectly, right, between conversion and the mine. And we've decided to push the resource is in advance of the mines because they have longer lead times typically, and we get them up and operating, and if we've got resource available before we have conversion capacity, We'll either toll it or we'll sell spodumene rather than let it sit on the ground.

Speaker 9

Okay. So that's the answer to the question. There's no deviation from the strategy. Yes. Thank you.

Speaker 2

That's right.

Speaker 7

Yes, there's no deviation from the strategy. As to your question about the availability of tolling volume, there's still a healthy market of Conversion capacity being built or operating in China without available spodumene to source against that. So It varies by year, and China's and a lot of these projects, it can be opaque sometimes to get the exact numbers. It's a big market, but it can be sometimes 60% to 70% utilized. So that implies that there's capacity out there.

Speaker 7

In We know this through our tolling network that's available or coming on that we can take advantage of. But that is a bridging strategy To our own conversion assets, and one which we prefer to do as opposed to selling spodumene directly into the market.

Speaker 9

Thanks, Eric. Thanks, Cam.

Operator

Thank you. Our next question comes from Arun Viswanathan of RBC Capital Markets. Aaron, please go ahead. Your line is open.

Speaker 8

Great. Thanks for taking my question. Yes. So I guess I just wanted to ask a more high level question. So you noted that obviously your contracts have your results or guidance has some upside if Market prices stay where they are, but also some downside if we do receive from these present levels.

Speaker 8

So What would it take for the market to kind of go back to prior levels, obviously, dollars 60 to $70 Is a new normal, so is it really a new normal? Do we ever go back down into The lower 20s or 30s or 40s, has there been any demand destruction or changes to the adoption curves that you've Been observing, especially as the cost of lithium rises in the battery and the vehicle?

Speaker 2

Right. So that I mean, look, we're not going to call the long term price because we don't know that. And I think it will move up and down. It's I'm going to just go I'm going to sit where it is forever. I'm probably pretty confident in saying that.

Speaker 2

It will move around over time, but we see the market being tight On lithium for a pretty long period of time. And there might be periods, slight periods of oversupply, and that we see that Several number of years out, but then that disappears pretty quickly. So we model that. I'm sure all of you guys model that. Everybody has their own opinion on But prices are going to move they're going to move around and we're not we can't call it.

Speaker 2

We do know that The cost to produce to get to the volumes the market needs goes up quite a bit from what we see the cost curve today out over time. Could it move into the 20s 30s at some point? Absolutely good. But we still we see the market being tight for a pretty long period of time.

Speaker 8

And then

Speaker 7

maybe Yes. And I just add on your point.

Speaker 8

Sorry, go ahead.

Speaker 7

You had another question that had to do with cost in the vehicle and technology. I mean, as you know, lithium is a small part of the cost of the battery, but hasn't seen a significant, you pointed out, escalation in its costs over the past year. I think the other phenomenon that's important to note is the technology phenomenon around innovation and driving out. The longer range energy density and penetration doesn't come from lower cost raw materials. It comes from innovation in energy density and more dense materials.

Speaker 7

That's the movement towards higher nickel, that's the movement towards more elaborate chemistries on the anode side and maybe potentially someday solid state. So Those innovations are well and continue down that experience curve, notwithstanding the price of lithium, Which again is a fairly small part of the cost of the battery.

Speaker 4

Okay. That's helpful. And then maybe if

Speaker 8

I could just elaborate on that Earlier what you said, the cost curve now, I guess, are you seeing most of the additions at the upper end of the cost curve outside of Yourselves? And what would you kind of say is kind of a good range to think of as the cost curve, maybe the upper end? Should we just take kind of spot mean prices and use that and convert that into battery grade? Or how should we think about Where the cost curve has moved to now?

Speaker 2

Well, I think well, we're thinking and we think about it as a longer To get to the volumes the market needs over time, so new capacity coming on. And some of that is about the quality of the resource, Where it is, the technology that you need or even to develop in order to bring that to market. So We don't publish our view of the cost curve, so I'm not going to talk about those particular numbers. But I think from our view, it's moved up over the last Several years. And as the market requires more and more volume, it will continue to move up.

Speaker 8

Okay. Thanks.

Operator

Thank you. And the next question goes to Laurence Alexander of Jefferies. Laurence, please go ahead. Your line is open.

Speaker 5

So good morning. How much could you flex the tolling side of the business? And Are the margins significantly different from your segment average? And secondly, As you look at the opportunities around recycling, is there any incentive to shift your center of gravity downstream and just more of a Processing and are there ways to integrate your knowledge of the chemistry with the downstream processing And capture more margin that way.

Speaker 7

Yes. So first of all, Laurence, on the Tolling, I would say, we're evaluating that now. There is as per the earlier question, there is capacity in the marketplace, And we will have spodumene coming from MRL, the Marvell joint venture and our partner with MRL that we can put into the market. So, It could flex upwards from the guidance that we have here. That is possible.

Speaker 7

Our margins are slightly less, because you're paying a several dollar A kilogram sort of fee, over what our normal cost would be. But obviously, at current pricing, that's Fairly immaterial in the scheme of things. And then your second question, Laurence, was around recycling going downstream. I think we are looking at this now that we believe If you look at what it takes to process black mass to various mineral components and many of the unit operation fact, we more than believe we know that many of the unit operations are very similar to what we do throughout our company and certainly in lithium. Many of the technologies are practiced In our existing operations to process mineral resources we do.

Speaker 7

And so other than just that last step processing to battery grade lithium, We're evaluating just how we partner, invest, and develop that supply chain, Which will be a regional effort from region to region because it's a very regionalized business recycling is. So we're in that and we'll as we develop that strategy further, we'll obviously

Operator

Thank you. That is all the questions we have time for today. I will now hand back to Kent Masters for any closing remarks.

Speaker 2

Okay. Thank you, Nadia, and thank you all for your participation on our call today. The momentum we are experiencing in 2022, Combined with our pipeline of projects, strongly positions us to execute on profitable and sustainable growth for the longer term. I'm confident in our team's ability to drive value for all stakeholders by accelerating our growth in a sustainable way and to lead by example. Thank you for joining

Operator

us. Thank you. This concludes today's call. Thank you all for joining. You may now disconnect your

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