Sigma Lithium Corp Q4 FY2023 Earnings Call

Good morning, everyone. My name is Dennis, and I will be your operator today. Welcome to the Sigma Lithium Fourth Quarter and Full-Year 2023 Earnings Conference Call. Today's call is being recorded and is broadcast live on Sigma's website. On the call today is company CEO, Ana Cabral Gardner; and Company Executive Vice President, Matthew DeYoe. We will now turn the call over to Matthew.

Thank you, Dennis. This morning before the 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. We note that actual events or results may differ materially given changes in market conditions and/or our 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 slides with added financial performance information. With that, I will pass the call over to Ana.

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, and as an investor operating team, we own more than 50% of Sigma. So we are all in together with all of you, our shareholders. I'm going to walk you through the key items, the five key competitive advantages that give us so much confidence to make this investment decision. First, we are large-scale. So we became the fourth largest mineral industrial lithium complex globally. Secondly, we are the sixth largest global producer, which includes brine and rock. So we have scale. More importantly, we have low cost. We have achieved the second lowest cost in the industry amongst our peers. In parallel, we are producing a premiumizable material, we call Lithium 5.0, which is Quintuple Zero. It is in respect to environmental and social sustainability, physically and chemically, 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 at double scale to deliver more of that material. So the Phase 2 is going to be with the same build team from Phase 1, which delivered Phase 1 successfully, on budget and on time. More importantly, a key point in the confidence behind this 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. So we now have permanence and longevity at 109 million tonnes of mineral resource. We forecasted 150 million tonnes of mineral resource. On the next slide, we want to demonstrate quantitatively that we've surpassed every lithium industry record, and we've achieved full production capacity just at the beginning of our second quarter of operations. We reached 270,000 tonnes of material from September 23 to September 24, meaning, on an annualized basis, we have reached 12-month capacity in just six months of commissioning. We managed to produce and deliver 105,000 tonnes of this material in those six months of 2023. We caught quite a lot of steel of the very great market of last year, and as a result of the superior properties of the material, we achieved an average price of $1,333 per tonne for the material. Net-net, we're getting $1,160 per ton of this material solely because of the outstanding metallurgical and chemical properties of the product. We have managed to reach a cash cost at the plant, which is the second lowest among hard rock lithium producers. And these cash costs decrease as we scale up because we dilute our fixed costs by larger production. 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 $109.4 million 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 Phase 2 to increase our scale by 100%. We started with all the construction activities, mobilization, contracting promos, and will double capacity to 520,000 tonnes. So it is more of the same because it is working, and it's working extremely well, irrespective of the lithium price cycle. We reached 109 million tonnes of audited mineral resource with an exceptionally high grade of lithium oxide, which means that we have over 25 years of the project life, but our resource lasts longer because it has higher lithium oxide content. Therefore, we are a 100% known fourth largest producing industrial lithium complex in the world. And the only one to produce this Quintuple Zero lithium, which makes us all very proud because for us, in our team of investor operators, it wouldn't be any point in getting here without being able to be consistent with the supply chain that we are honored to be part of. This green supply chain delivers these green electric vehicles. So here's a picture of this industrial plant that symbolizes this achievement. This is the Cleantech innovation where you can see in dotted red this third module of the plant. This was a lot of work to put together, but that is actually what is responsible for delivering the Quintuple Zero lithium, the low-cost 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 zero toxic chemicals, no tailing dams, and we use zero drinking water. We’ve been utilizing sewage-grade quality water. We produce lithium with zero dirty power, and our power is clean and renewable. On the next page is an illustration of our positioning in the lithium world, showcasing our starting point. We began at 85 million tonnes, equivalent to 2.7 million tonnes of LCE resources. Then we delivered the first leg of the mineral resource update, bringing us to 3.3 million tonnes of LCE resources. We expect a further increase to 4.8 million tonnes of LCE equivalent resources. This positions us favorably among our peers in Australia, showing that we not only have permanence but also scale. In this first year of operation, we became the fourth largest lithium industrial mineral complex in production. We are closing in on being the sixth largest globally, yet because we commissioned our operations amidst the headwinds of the lithium cycle at its lowest point, we didn't have the opportunity to be repriced as the large-scale producer that we are. Our plan this year is to close that gap, demonstrating our commitment as a large supplier. We are now going into our ninth shipment, having demonstrated resilience and the incredibly high metallurgical quality of our product. We established a shipment cadence shortly after commissioning and achieved that despite market challenges. Now we have a track record of being a reliable large-scale supplier to the EV battery chain. We’ve been able to achieve meaningful final premium pricing and eliminated provisional pricing this month. That validates the outstanding metallurgical and chemical properties of our product. Our product is not only better; it also delivers savings. We’ve captured a meaningful portion of that value, translating this into decent premium pricing. Our high purity product has unique properties that enable us to premiumize against market headwinds. This is what defines our competitive edge. We are built to last, built with draconian financial discipline over the past 12 years. We posted 2023 full-year dollar revenues of $135 million with astonishing margins. Our metrics display that even amid a commodity cycle downturn, we are well-positioned financially and operationally. Our average realized price per tonne of material was $1,321 per tonne, with a cash margin of 67%. Even at what some might consider the bottom of the cycle, these figures speak volumes about our resilience in commodity cycles. The mathematics demonstrates a robust EBITDA margin that retains cash flow, and these performance metrics should give you confidence in our low-cost approach. We now have the opportunity to generate cash at all operational levels moving forward in 2024, indicating that we are very likely to remain positive. With that, I'm going to pass it on to Matt DeYoe, my partner, to go over the specifics of our financials.

Thank you, Ana. Our reported FOB costs in the fourth quarter were $549 per tonne, but included a number of costs associated with commissioning. On a pro forma basis, we believe these non-recurring expenses should drive a pro forma FOB Vitoria cost of about $455. If we strip out around $70 per tonne in high-grade freight, we end up with a pro forma Plant Gate cost of about $385 in the fourth quarter. This isn't far from the $370 guidance we provided for the 3Q average. As we transition from contract labor to domestic workers, we foresee improved efficiency in our cost structure, and we're confident in our trajectory toward achieving that $370 target. I feel assured with our progress and the direction we're heading. Ana, I’ll hand it back to you.

Yes, sir. Next page. This bridge illustrates our path to EBITDA. We start with sales of $135 million. After accounting for operating costs, non-recurring expenses, transport, and warehousing, we achieved gross profit. After factoring in SG&A and other costs, we arrived at a pure accounting EBITDA of $25 million, which is further adjusted for non-recurring and non-cash items to get an adjusted EBITDA of $49 million. This shows our strong cash-adjusted EBITDA and cash operating profit, representing an exceptional accomplishment considering the lithium price downturn. We have effectively tightened our operating costs as we move towards a steady-state SG&A and have a clear pathway to achieve operational efficiency.

So our net debt has increased modestly since year-end 2023, but we're currently locking in prices at good economics. This position allows us to anticipate accruing significant cash flow should the markets stabilize as we expect.

The centerpiece of our strategy with BNDES aligns with the ambition to penetrate downstream into lithium sulfate. Our target location relies on optimizing energy costs, particularly leveraging low-cost natural gas from pre-salt ports in Brazil. This method satisfies market dynamics for our production while ensuring we can maintain sustainability standards, such as managing tailings effectively by recycling residues through the cement industry. This represents our competitive advantage and positions us favorably for the industry transitioning towards sustainable practices.

Is it fair to assess your net cash position in the first quarter as dropping by $30 million? Is that a fair assessment? And if not, what usuals might have led to the cash drain?

Well, Steve, we're giving you the snapshot of the cash for now. So $109 million is our cash position as of March 30. That's an important point. We drew down the trade lines, but we did not utilize them for working capital until the client pays us. Specifically, we made a $12 million advanced interest payment on a long-term loan from a shareholder that was deducted from our cash position in January, resulting in a modest increase in our net debt since the year-end position.

Can we talk about SG&A? You discussed earlier this year about trying to get SG&A down to around $11 million run rate annualized. You did around a CAD10 million run rate in Q4. Could you provide insights on what you expect SG&A to look like in Q1 and Q2 this year?

We posted an SG&A of $42 million, but when we subtract certain items from there, it gives us clarity. We anticipate variances for Q1, mostly due to legal and ongoing work related to refining our processes. Both the strategic review and existing operational costs will still have an impact initially, but we are progressing towards our stated goal of streamlining our SG&A. Q1 spodumene production was around 53,000 tonnes, which is slightly down from the 59,000 tonnes in Q4. A key reason stems from cultural factors in Brazil around Carnival where productivity can temporarily dip. It’s essential to factor in these seasonal dynamics in our operational evaluations.

You gave details about pricing for Q4 but can you provide insights on Q1 pricing for two shipments?

Regarding Q1 pricing, it’s in line with Q4 pricing with certain fluctuations of about $100 variations. We are evaluating provisional prices, but they will likely average out to be between the Q4 figures as we finalize our shipments. In conclusion, we appreciate your support and patience. We are in the process of becoming one of the most resilient lithium businesses in the industry with a focus on sustainability and substantial profitability. We look forward to doubling the size of our company and making strides toward capturing our rightful market share.

This concludes the Sigma Lithium fourth quarter and full-year 2023 earnings conference call. Thank you for participating. You may now disconnect.