Sigma Lithium Corp Q2 FY2024 Earnings Call

Good morning, everyone. My name is Regina, and I will be your operator today. Welcome to the Sigma Lithium Second Quarter 2024 Earnings Conference Call. Today's call is being recorded and is broadcast live on Sigma's website. On the call today is Company's CEO, Ana Cabral; and Company Executive Vice President, Matthew DeYoe. We will now turn the call over to Matthew Deyoe.

Thank you, Regina, and good morning, everyone. Thank you for joining us for our second quarter 2024 earnings conference call. As Regina noted, on the call with me today is Company's CEO and Co-Chairperson, Ana Cabral. After the market closed yesterday, we published our 2Q financials, which are available both through SEC and SEDAR. Before we begin, I'd like to cover two items. First, during the presentation, you will hear certain forward-looking statements concerning our plans and expectations. We note that actual events or results could differ materially from the changes in market conditions in our operations, and additionally earnings referenced in this presentation may exclude certain non-core and non-recurring items. Reconciliations to the most comparable IFRS financial measures and other associated disclosures, including the descriptions of adjustments, can be found in the back of the press release. With that, I will pass it over to Ana.

Hi, good morning everyone. I am very pleased to present you with our second quarter 2024 quarterly results. We are actually delighted that we managed to achieve all-around operational excellence, thriving in our financial results, despite what is a lithium price environment that we just do not control. So, what we're going to show in these results is that we have, where we control all of our operational elements, fully managed and actually demonstrating our operational excellence. Starting with the volumes, we further increased the cadence of volume sold to 22,000 tonnes of material shipped every 30 to 35 days. So, that means we have achieved what we call reliability as a producer, which is linked to our ability to receive favorable rates and favorable terms in export-linked credit, meaning credit lines linked to our ability to continue to maintain this export track record. Another very important point in delivering our strategy was the ability to continue to increase the sales price premium relative to our competitors. That's a key element of our strategy, and it's a result of increased commercial assertiveness. As we deliver cadence of volumes, and as we are rewarded by the banking system with more favorable credit linked to the export financing, we can continue to exercise commercial assertiveness, and therefore, achieve a sales price premium. These elements are all interlinked performance, favorable credit lines, and then price premium performance. On the cost front, on the operational front, we are just delighted to have been able to print one of the highest cash margins in the sector. This happened against a quarterly backdrop where the top-line resulting from lithium prices wasn't as favorable. By posting these cash margins, we have our cost structure well under control. I mean, we're very proud of having reached our cost targets for 2024 ahead of schedule, meaning we're now amongst the lowest in the sector and we managed to print every cost target that we indicated to investors early in the year for the year 2022. This is just in the second quarter, which shows the direction of this trajectory. This is the result of a bottom-up, top-down culture. It would be impossible to achieve all these metrics if we hadn't implemented a culture of excellence and high standards amongst our employees. That starts with a clean metric that's highly beneficial to them, which is safety. Again, we're very proud of having completed a full year with zero fatalities and zero accidents without loss of work days, meaning, we send our people back to their families safe. We've been doing this for an entire year, which is an incredible achievement for a young operation. This has catapulted us to the very top of the metals and mining industry rankings as measured by ICMM, the International Council of Metals and Mining companies. There's just one company that ranks above us on these combined ratings. The summary of where we are is, again, we were able to combine three attributes that are quite unique and not easily combinable in our industry. We initiated our shipments last year and have been operating at large scale. We have maintained low production costs consistently and we have been delivering the most sustainable lithium in the world. Our lithium became a brand for all attributes related to sustainability and traceability. Not one company in our space has been able to deliver what we call the trinity of metal producers since 2018, when our dear Pilbara initiated their operation. Six years have passed, billions of dollars have been invested in the lithium industry, quite a lot of hype, a massive cycle, but not one company has managed to deliver the trinity that we actually have delivered, which demonstrates how rare an achievement this is. On the next page then, I will encourage you to look at our operational highlights. Again, I'm going to start with the slide where we implemented this culture of excellence and high standards, which drive our entire performance throughout 2024. We're proud to present this slide because the numeric quantification of our ability to operate our Grota do Cirilo industrial mining facilities adhering to the highest operational standards. We were able to surpass in the ICMM rankings dozens of much larger and much more mature metals and mining company producers. We had to quickly rise to the occasion during our first year, meaning we had no slack and zero breaks. Essentially, we had to, straight out of the gate, behave like a seasoned producer, commission like a seasoned producer, and ramp up like a seasoned producer. There are several operational milestones that we will be showing here today, which are rarely achieved by a company that's just one year old and the rankings you see here are just one of these. The next page talks about our cadence of volume shipped, which again, we were able to establish that reliable cadence of product sales, which is a hallmark of the operational maturity of a seasoned producer. We've sold 52,500 tonnes of our Quintuple Zero Green Lithium concentrate, both in the first and the second quarter, meaning we were able to manage the cadence and reliability of our shipments. That was possible because of our enhanced creditworthiness at the end of the first quarter. We were able to conduct what we call FOB sales at the warehouse, which again are a hallmark of trustworthiness and reliability between Sigma and its clients, when we transfer ownership of material at port to the final client before it boards the ship, which again is another operational mature milestone rarely achieved by a company that's just one year old. The next page has a color coding that highlights two different moments in our one-year history. We are now a seasoned producer. We demonstrate shipment by shipment on this page that we have this cadence and reliability of consistently shipping 22,000 tonnes every 30 to 35 days, which drives our export credit lines increasingly more favorable terms and rates. It underpins our commercial independence and assertiveness. The color coding demonstrates this evolution of our commercial strategy. In other words, we've gone from the first six months where we had a counterparty trader as the principal, moving into where we are today, where there are various forms of exercising assertiveness, selling to end users, selling to counterpart trading agencies, but trading companies as agents. This last shipment capped this one year by sending the last shipment to Mitsubishi, which is a very large industrial cadet in Japan that just associated itself with two other automakers for EV strategy and development. We hit our stride. We also want to leave you here with the certainty that we're going to further enhance this cadence, targeting 60,000 tonnes of sales for the upcoming third quarter, closing on September 30, which is just 45 days away. This track record that we established allows us to tap into these leading global supply chains for lithium, going direct to downstream members of these supply chains, because this is a result of this commercial flexibility. One of the other points we want to make is that we are agnostic as far as our client base, but typically, given that Asia concentrates the supply chain manufacturing today, we have been equally distributing our shipments into Japanese, South Korean, and Chinese clients, which reflects the industry. The next page is a derivative of the previous page. As you can tell on the left chart, you have the quantification of these two different moments of commercial strategy. First, we had the first six months, and then on this page, we demonstrate where we are today, where we continue to premiumize, we continue to increase sales price of premium relative to pure lithium producers. We'll be maintaining an average of 10% price premiumization to-date, which again are a result of this cadence, reliability as a seasoned producer, and then more importantly, the financial flexibility of our own credit and customer financing lines, which allow us to navigate what we call mini cycles in a cycle. This allows us to sell into the purchasing cycle and consequently achieve the price premiumization. We are now able to gradually monetize what turns out to be a chemically superior quality of our Quintuple Zero Lithium concentrate. At that, we turn into the next page where we numerically demonstrate that this high quality drives premium pricing. More importantly, this is a win-win situation for our customers, as they save significantly if they acquire our product, even at a premium price versus our competitors. In other words, buying a ton of product from Sigma means that the client saves approximately 20% to 30% in raw materials when refining lithium hydroxide chemicals, with everything else staying the same. This is a gradual process for us to simply monetize a portion of that, leaving another portion for the customer in a full win-win relationship. The next page talks about the operational improvements that we have been able to effect in our Greentech plant over the last year. We're very proud of this because we keep on perfecting this plant in a continuous effort. The dry stacking started with us about a year ago, and we were barely finishing commissioning the dry stacking, which has been a centerpiece of our overall purpose as a company, to deliver the most sustainable lithium materials. We dry stack our fines and ultra fines produced by the Greentech plant, which allows us to maintain minimum levels of water usage because we reuse all the water, which in our case comes from sewage. Operational improvements translate into decreasing the shipment intervals between each boat. The target is to get to 30 to 35 days, driving maximum efficiency of the plant and reducing the shipment intervals. This is how we are going to get to our annual guidance. Within the Greentech DMS, we've been making further adjustments to perfect this plant. We have been able to reprocess the fines that were generated in the early commissioning period, which have higher grades. They have lithium oxide grades of about 1.5%. This means we are benefiting from higher recoveries and higher daily production, but we also utilize that circuit to concentrate material that, if we didn't dry stack, would be left in a tailings dam. By recycling material that has zero cost, we are gradually increasing our throughput of high-purity Quintuple Zero Lithium concentrate. Some of these results of this continuing improvement have already been reflected in our third quarter performance, hence the robust guidance of 60,000 tonnes of lithium materials to be shipped. Regarding the crusher, we keep working on new flow sheets for it, which helps us increase efficiency. The latest changing flow sheet is that we're creating a setup that aligns with the best crush designs in the world separating screens from the motor, thereby improving crusher efficiency. Our customized crusher has 1,200 milliliters of job crusher opening, which means less fines, which means higher yield and higher productivity. Decreased cadence is a result not of one change but of multiple improvements on this plant that actually lead to our higher confidence that we'll be hitting 60,000 tonnes of lithium concentrate sales in the third quarter. With that, I'll hand over to my partner, Matt DeYoe, to go over our financial highlights.

Thank you, Ana. In the second quarter, we reported revenues of $45.9 million on nearly 53,000 tonnes sold, which implies a CIF equivalent realized price for the quarter of about $894 a ton. The top line was supported by strong cost management, which we will get into shortly, but our FOB cash operating margins came in at about 54%, while adjusted cash EBITDA margins were closer to 30%. Production on the quarter totaled just over 49,000 tonnes. The company has spent energy familiarizing investors with the implications of provisional price adjustments, particularly with the first few boats that shipped. We did not have any offsetting settlements. We have taken steps to harmonize our EBITDA margins to balance out this volatility. As the extreme market volatility of the second half of 2023 slows, and we establish a regular shipping cadence, we expect these headwinds to subside and ultimately revert as we come back for a market rally. On the right side of the slide, you have seen our FOB margins, which balanced out against peers, with Sigma happily finding its way towards the upper echelon of costs. This is predicated on the hard work that I will discuss here. I'm quite pleased to present the cost slide to you this morning, as the company has been able to achieve broadly our unit cash cost guidance ahead of schedule. Recall we had highlighted a target CIF cost of $510 per ton, FOB of $420, and plant gate costs of $370. The numbers in front of you for 2Q represent a reduction of 22% to 24% from our Q4 reported levels, which is where we were when we issued this guidance. As production ramps in the second half of the year, we expect the operating leverage to drive incremental improvements from these levels. While ocean freight rates are subject to change, we believe we have some room for traction here. This reflects how the hard work has paid off on our cost structure and how we see ourselves stacking up globally against some of our peers. We will continue to work through cost and productivity initiatives to drive home a better cost structure, which hits back to what Ana discussed regarding building an operational culture of excellence. The next slide is a bit of the same view, though it's a waterfall to reported COGS. Again noting we've removed much of the noise present in our initial quarters and internalizing our commercial efforts while keeping a focus on productivity has not only helped us generate revenue and COGS, but it's also helped right-size our SG&A structure, which you see on the right side. Notably, SG&A is down an additional roughly 24% from the second half of 2023 levels. As this productivity plays out, we see further proof of competitive cost position as we stated on the prior slide concerning the cost curve as provided by benchmark. So what does this all mean? It helps drive what we consider to be a highly robust cash model. We started the quarter with $108 million in cash, which we supplemented with nearly $46 million in net revenues. Cash costs on the quarter totaled $33 million, a reduction of nearly $12.5 million from our Q3 '23 levels. Working capital proved to be a headwind this quarter, which was functioned by two occurrences: a reduction to our payables of nearly $14.5 million and a delay in receivables associated with two shipments. As per the pro forma bridge, we've received those payments shortly after quarter close. CapEx on the quarter was roughly $9 million, representing some payments on the Phase 2 expansion and some of the brownfield mine and plant investment that Ana mentioned on the prior slides.

So again, just to wrap up the financial section. We have a very comfortable liquidity position. The consistent operational performance that Matt described and we discussed regarding sales cadence and cost controls has translated into very tangible benefits for this company. In other words, robust access to export-linked credit. Our cash balance in August topped up at $99 million. You can see in the upper left chart that the short-term debt is export linked, is basically comprised of those export-linked trade lines, which are drawn but are entirely sitting in our treasury. We could pay them all back today if they're all due. More importantly, we have decreased the cost of these export-linked credit to 5.85% total fixed in dollars, a very favorable rate for a company in its first year. That sharp contrast to 15% we were granted in our very first trade line in January 2024. This first straight line has long been retired, demonstrating the quick evolution of our robust creditworthiness as we continue to demonstrate sales cadence and cost discipline. This brings us to the update on our Phase 2 expansion. I have to reiterate this strong and compelling business case for Sigma to continue executing on doubling its production capacity by expanding its industrial facilities in Brazil. We have a very privileged position in this industry, where our industrial line delivers one of the lowest CapEx-intensive projects worldwide and this is measurable. We tracked announced projects in CapEx announcements and calculated what we call the CapEx efficiency ratio, which essentially divides the total CapEx of a project in US dollar millions by the production capacity in tonnes for lithium concentrate. We rank at the very top of this metric. On the left, we provide additional color, where you can see a plotting on a 2D chart that shows our little index of 0.40, indicating our capital efficiency. And this is a result of our subsequent slides that show our aerial demonstration of our site in Brazil. We have one square kilometer of industrial facilities here. This layout demonstrates that we have in green the existing infrastructure inside the gate. This infrastructure is sufficient to support three production lines with the same throughput as our first line with 270,000 tonnes of lithium concentrate per year. This lowers the construction cost significantly. So, we have trade lines to deploy the early CapEx required for this project. Based on our cash position which keeps getting replenished every month with our cadent sales, we have a very comfortable position to execute our Phase 2 expansion within the set timetable, which is a 12-month construction period. We already started. The earthworks are underway. We're conducting a very important point during Phase 1, adhered to very high standards of environmental sustainability. This includes an inventory of species, where we capture fauna species and deliver them to the appropriate authorities while clearing an area for earthworks. You can see here the work being conducted by our proprietary team, as this is an expertise we have in our environmental department. So, where are we going? We are on a disciplined approach to reach 100,000 tonnes of lithium carbonate equivalent production by 2026, one production line at a time. We have all the area we need and the existing CapEx infrastructure supports two lines. Hence, we are focusing on a disciplined approach to capacity expansion. Our construction plan is measured and achievable. We will increase production capacity to approximately 80,000 tonnes of lithium carbonate equivalent, or 520,000 tonnes of lithium concentrate, by this time next year. We are planning the construction of the third production line with the same capacity. This environment is ironically similar to when we were doing the detailed engineering for Phase 1 during COVID. We are pacing ourselves now, not rushing to sell cheap lithium. We will continue to follow our regular trajectory of the schedule. Moving to market dynamics, it's clear that the growth engine of electric vehicles this year is China. China has delivered almost 40% growth in EV sales. By the end of the year, it is expected to reach 60% of the global EV market, overtaking Europe. This growth is the result of consistent policy-making over the last decade that has enacted a very successful EV growth subsidy program. If we consider that in 2019, EV sales in China represented only 3% of total car sales, by 2024, just five years later, we see that EV sales have already surpassed combustion car sales significantly. The global demand is set on a path to reach 1.1 million tonnes of LCE equivalent by the end of 2024, with China potentially needing about eight Sigmas worth of capacity to meet its demand.

To expand on that, the dynamic nature of the industry is evident. We have observed a flywheel effect where lower prices are stimulating demand in other markets. Tesla's mega pack results highlight the improved economics of energy storage as battery prices fall. While we don't control lithium prices, we acknowledge the market is navigating oversupply. Seasonal supply ramps in spring and summer coincide with early buying patterns dipping and peaking again in the fourth quarter. We are commercially flexible to capitalize on these windows.

It's important to highlight that consumer behavior regarding car purchases hasn't changed. Consumers tend to buy cars in the fourth quarter, which generates the need for materials to meet this demand. The significant volumes of materials required for electric vehicles cannot simply be stockpiled by participants once a year. Accordingly, this reflects the emergence of spring and fall stocking cycles due to increased electric car sales. As the sheer scale of electric cars continues to grow, we must address the traceability and sustainability of the materials used in manufacturing. Sigma did not benefit from the execution in its valuations. Despite being a large producer and achieving credit worthiness akin to one, we're still trading like a pre-operational developer. When compared to leading companies in our sector, we remain significantly undervalued. We extend our welcome to Pilbara as they join our emerging Lithium Valley territory, contributing to our commitment to sustainable practices. We transformed from a construction site to an industry leader, delivering on every operational aspect we set to accomplish for our shareholders. From completing construction to starting Phase 2 Earthworks, we have achieved all our metrics and hit our annual cost guidance ahead of schedule. The next step is commissioning Phase 2, occurring a year from now as we continue delivering to our shareholders.

With that, I'll hand it back to Regina for Q&A.

Our first question will come from Steve Byrne with Bank of America. Please go ahead.

Thank you. Good morning. Your Slide 9 that shows your monthly pricing year-to-date, is that $953 you show in there the month-to-date average for August or July? More importantly, I'm curious if you're seeing any signs of price inflection or stabilization, any signs that things could tighten? I welcome your thoughts on this.

The data point you see there reflects the value for our August, which we press released the other day. It's a single data point in time, not meant to be the average realized price for the quarter. Many peers in Australia and Canada are currently underwater in terms of economics. It's challenging to predict when it will affect the suppliers, but we know the current economics are unsustainable.

This chart summarizes the situation. We have a finite universe of producers in regions delivering low-bar human rights adherence materials. There’s a gap between supply and demand at current price levels, but untraceable materials are filling this gap. If industry players accept untraceable materials to build electric cars, it poses risks.

And what fraction of global supply, Ana, would you say is untraceable? Is that more prevalent in the cost curve?

The untraceable material currently comes from low-cost producers. Historical patterns show how supply chains have dealt with similar issues in the past, indicating a need for compliance among untraceable suppliers.

Thanks. If I can squeeze one more in?

Sure.

The technology you’ve implemented to recover more lithium out of your refined material, was that anticipated or a result of your engineers figuring out a new way? Does it impact your production capacity?

It does impact production capacity as we've enhanced our feed into the centrafugator. By improving the quality of feed, we enhance recovery without changing the fixed capacity.

Thanks, Steve. We'll go to the next one.

Our next question will come from the line of Joel Jackson with BMO. Please go ahead.

Good morning, Ana and Matt. Thanks for your comments on Phase 2. Is there any clarity on the land disputes you mentioned? Can you proceed with Phase 2 if needed?

There's confusion surrounding land disputes. Phase 2 is entirely independent of any ore body issues. We can continue business as usual as we control the relevant land and mining concession.

Great, I appreciate the clarity. In terms of SG&A, could you detail what plans you have to bring it down?

When providing SG&A guidance, we acknowledged our intention to grow. We are currently building a sophisticated operational organization to facilitate our planned capacity increase.

Ana, would more months of suppressed spodumene prices affect your decision on SG&A cuts?

Phase 2 is happening regardless. We focus on lowering costs as we pursue further production yields, but the timeline allows us to maintain our pace.

And your next question comes from the line of Andrei Kroupnik with Drakewood. Please go ahead.

Looking at your second quarter financials, your capital spend was light. When do you expect capital-intensive work to begin on Phase 2?

During construction, CapEx spikes at the end. Earthworks are inexpensive with overall expenditure beginning to intensify as equipment deliveries are made.

Is there a plan to take on any more debt or will you fund it through existing lines?

We’re in talks with Brazil's development bank, BNDES, for a $100 million credit line, expected to have favorable terms. We’re also looking to manage our liability by replacing existing shareholder debt.

That concludes our Q&A session. I'll hand the call back to Matt. Thank you, Regina. We're closing the call now. We appreciate everyone's time this morning and your participation. We will see you on the conference circuit in the coming weeks and months.

Thank you for your trust. We believe the best is yet to come, as we're operating in one of the most fantastic jurisdictions for critical minerals globally, and we’re committed to delivering results for our shareholders in the coming years.

That will conclude today's call. You may now disconnect.