Earnings Call Transcript - SGML Q2 2025

Operator, Operator

Good morning, ladies and gentlemen. Welcome to Sigma Lithium 2025 Second Quarter Earnings Conference Call. We would like to inform you that this event is being recorded. There will be a replay for this call on the company's website. I would now like to turn the call over to Anna Hartley, Vice President of Investor Relations. Please go ahead.

Anna Hartley, Vice President of Investor Relations

I'd like to welcome everyone to our conference call this morning. Joining me on the call today to discuss our second quarter results is Ana Cabral, CEO of Sigma; and Felipe Peres, CFO of Sigma, who will be available to answer questions during our Q&A session. Before we begin, I'd like to cover a few items. Our press release with our second quarter results was issued yesterday after market closing and the release, along with the corresponding documents, are available on our website. I'd like to remind you that some of the statements made on this call, such as any production guidance, expected company performance, the timing of our projects and market conditions may be considered forward-looking statements. Please note the cautionary language of our forward-looking statements in our presentation and news release. I will now turn the call over to Ana.

Ana Cabral-Gardner, CEO

Thank you, Anna. I want to welcome all the new participants joining our shareholder call and thank our long-standing shareholders for their support during our recent AGM. Sigma is the world's second largest independent lithium industrial mining producer. Our independence provides us with flexibility and responsiveness in a rapidly changing global market. As a multinational company, we are the largest lithium pure-play producer listed in the United States. We completely own the fifth largest industrial mineral-producing complex globally, located in Brazil, which is a low-cost area in a historical mining region with strict labor laws. Importantly, we have strong relationships with both host countries. In September, we will celebrate four years of being listed on NASDAQ, where we contributed to the establishment of Brazil's Lithium Valley in Vale do Jequitinhonha, significantly helping to uplift over 50% of the economically active population in one of Brazil's poorest regions. For those new to the company, I'd like to highlight our competitive advantages and resilience, driven by operational excellence, low-cost production, and strong commercial support from our clients. This quarter, we achieved large-scale production and are on target to meet our guidance of 270,000 tonnes of lithium oxide concentrate, about 40,000 tonnes of LCE, thanks to our clean processing technology that has reached a 70% recovery rate at our Greentech industrial plant. Our position as one of the world’s lowest-cost producers allows us to navigate market downturns with commercial flexibility. For instance, we achieved final sales in August at nearly $966 a tonne. I'm also pleased to report that this August marks two years without any lost-time accidents and 0 fatalities, a remarkable safety record over our 14-year history. Our company was founded by a disciplined team of long-term private equity investors who believed in the energy transition, instilling a culture of financial discipline focused on capital efficiency. This quarter, we reduced our short-term debt by 16%, and compared to last year, we have cut it by 40%. This enables us to continue executing our expansion project with diversified funding sources, relying on our clients and securing USD 100 million in subsidized government debt from BNDES. We are also negotiating definitive long-term offtake agreements with prepayments. Let's highlight our significant achievement—two years without lost-time accidents and 0 fatalities—reflecting our commitment to the safety of our team members. Sigma has become the first company in the upstream EV supply chain to achieve this milestone, and we are ranked among the top two in ICMM rankings, demonstrating the strength of our safety culture and ongoing workforce training. Now, let's discuss our second quarter highlights. We reduced costs, maintained production scale, and continued to deleverage. We managed to lower our operating costs while maintaining production cadence, resulting in a 40% year-over-year production increase, keeping us on track for our annual guidance of 270,000 tonnes. We saw a 4% decrease in plant gate costs to $348 per tonne and a 14% drop in CIF cash costs to $442 per tonne. Our all-in sustaining costs went down by 24% to $594 per tonne, which is impressive given our environmental and social safety standards. We reduced our short-term finance debt by 57% year-over-year and by 15% compared to the first quarter. Our production cadence remains robust, allowing us to achieve full-year annualized guidance. We are excited about our progress compared to last year, with a 40% increase in annualized sales from Q2 last year. We sold approximately 40,350 tonnes, generating USD 21 million in gross sales revenue, based on a conservative average provisional price of $637 for SC6. This quarter, we managed to store 28,000 tonnes of product during price volatility, allowing us to preserve pricing power. As a result, some clients concluded final resales at over $960 a tonne, indicating expected positive price adjustments in the next quarter. We ended the quarter with USD 15 million in cash and about USD 16.8 million in accounts receivable, positioned well for a company with low burn rates in Brazil. Currently, we are making progress on our Phase 2 expansion by adopting a disciplined approach and utilizing existing operational resources to expedite construction. We focused our CapEx on elements that could immediately lower operating costs, such as widening Mine 1 to prepare for expanded volume deliveries for two plants next year. Our costs remain among the lowest globally, supporting our ability to navigate lithium price cycles effectively. Our plant gate costs are stable at $348 per tonne, and we continue to strengthen our financial position with structured strategies for provisional pricing, allowing us to benefit from lithium market recoveries. We have successfully reduced short-term trade finance debt significantly by relying on our diverse client base, maintaining liquidity and financial discipline. Currently, we are working on geographically diversified offtake agreements that will further support our deleveraging strategy. We aim to engage clients for 3- to 4-year offtake agreements, translating to significant potential prepayment values without locking in prices. Throughout our financial journey, we've established a strong cash flow position while also effectively managing operational costs and expenses. Our focus on strategic elements of Phase 2 enables us to prepare for the next market upcycle. As we look ahead, we remain positive about our significant expansion opportunities and our commitment to sustainability and value creation for our stakeholders. Now, I will open the floor for questions, joined by my partners Felipe Peres and Anna Hartley.

Operator, Operator

The first question comes from Mr. Joel Jackson from BMO Capital Markets.

Joel Jackson, Analyst

Can you hear me now?

Ana Cabral-Gardner, CEO

Yes, I can hear you perfectly well.

Joel Jackson, Analyst

Let's talk commercial a little bit. So should we expect your inventories to normalize at the end of Q3, so you're going to sell your excess volume? And it seems like in your prior 2 quarters, you disclosed that IRH was your #1 trader of your product. You don't have that disclosure this quarter. Can you talk about your trading relationships, if they've changed, if that was part of the strategy across Q2 to warehouse inventory?

Ana Cabral-Gardner, CEO

Absolutely. We've been diversifying our trading relationships further and further. We've basically now commercialized material with large trading companies and large downstreamers from all over the world. We've had new trading companies stepping in to become our clients throughout the second quarter, especially as price volatility increased. And we have maintained the discipline of just selling product using our standardized provisional price conditions, which as we have mentioned on the call, have paid off handsomely, boding well for the lithium price recoveries we are experiencing now in the third quarter. So what we have done, the summary is diversification. We now have an array of trading partners that are willing and ready on the back of the strength of their balance sheet to finance our operations, especially given the price volatility that we experienced in the second quarter. As far as the inventories, which is the second part of your question, the situation is normalized, as you can see from the cash bridge when we've shown the receivables. It happened essentially during a very volatile few week period that we experienced in the previous quarter that we all remember but would like to forget, where we were not striking agreements to our standard policy, whereby we have an upside sharing when our trading clients resell their product. So if we had sold that material at that period, we would not be able to benefit from the current lithium price cycle. So we held back, given that we had the financial capability to do so, and that was quickly normalized after the cutoff date for the quarter as we've shown in the cash flow bridge.

Joel Jackson, Analyst

Okay. So we should expect sales in Q3 to be 85,000, 90,000 tonnes. Is that right, something in that range?

Ana Cabral-Gardner, CEO

They will match and be closer to production. Typically, we do not hold back inventory, but this situation occurred due to unusual conditions we experienced in the second quarter, mainly due to factors beyond our control.

Joel Jackson, Analyst

Sorry, I'm confused. Sales will be production plus another 25,000 or 28,000 tonnes in Q3?

Ana Cabral-Gardner, CEO

Yes, absolutely.

Joel Jackson, Analyst

Okay. And just my last question before I pass the baton here. Ana, you've been talking about prepayments and offtakes for many, many months. You've been traveling the world. You've been talking to people, trying to sign these deals. I think a lot of people thought you would have signed this already, signed some of these already. You haven't. Talk about why you haven't been able to get pen to paper. What's been the pushback on both sides or what's going on?

Ana Cabral-Gardner, CEO

Well, we have quite a number of parties that have engaged with us. We're now negotiating definitive documents. So we have adopted a very strict directive here where we're going to announce the transaction once the definitive documentation is completed and signed. We're not planning to announce term sheets of any nature, binding, nonbinding or not. So this is why we felt comfortable putting the value on the transactions. And just to give you a recap of the mathematic on the deals, and that's a very good question, actually. When you think about current market prices at around $950, $960 or even $900s, the implied price for the prepayment, again, this price is not locked, is currently sitting at $833. It's very easy to ascertain how you get to this. For example, if we talk about an 80,000-tonne commitment for 3 years, we would be committing 240,000 tonnes of product. These industries typically have the iron ore mathematics where you divide that commitment by 2. So that is 120,000 tonnes of product committed. When we say on that page in the presentation that these agreements are worth $100 million, it had an implied prepayment price of $833, which is well below even current market prices. So as time went on and markets have recovered, our prepayment negotiations have become very much of a win-win, especially for our counterparties, which demonstrates, let's say, the willingness of our counterparties to advance these discussions. So we are very well positioned to announce prepayments in short order. Again, we will announce definitive documents.

Operator, Operator

The next question comes from Mr. Armando Wolfrid. Could you please explain the expected consequences of the U.S. tariffs on your business, if any? And any plans to refine lithium to increase margin and help lower reliance on China?

Ana Cabral-Gardner, CEO

Well, we have a diversified customer base. To your point, China today refines most of the lithium chemicals that are utilized by PCAM and CAM, meaning precursors and cathode producers globally. However, our clients, I mean, the accounts receivable of our company are extremely diversified because we do not necessarily sell to refiners. As far as the refining business, we are adopting a wait-and-see approach in terms of that business. As it is widely known, that business currently has negative margins. So you would be margin-decreting to the industrialization of lithium oxide materials that we conduct in Brazil in this beautiful plant you can see in the background.

Operator, Operator

Our next question comes from Ms. Katie Lachapelle from Canaccord Genuity.

Katie Lachapelle, Analyst

You walked us through the different provisional pricing adjustments that you're expecting to see in Q3. Can you give us any context on how many tonnes are still open to provisional pricing on a go-forward basis? And then in the contracts that you're negotiating, will provisional pricing continue to be a theme?

Ana Cabral-Gardner, CEO

Provisional pricing has become a permanent aspect of our operations. Throughout the year, all our sales were executed on a provisional price basis. When examining our sales data, the average provisional price for the second quarter is presented, and when we average that with the first quarter, we still do not exceed $700 on a net basis when adjusted for grade. This positions us well for the anticipated increase in lithium prices that is already occurring in the third quarter. This strategy was intentional, as we started the year dealing with significant volatility in lithium prices driven by factors outside our industry, primarily concerns around tariffs. We expect to see a substantial positive adjustment in the financials for the third and fourth quarters. We have contracted execution deadlines, with the first date on September 30, continuing through October, November, and December. It's important to note that we're aiming to establish these deadlines to facilitate our client resales—where we sell, they resell, and we share the profits, which is standard in the industry. We anticipate these resales will occur within the year, affecting our financial results for the fiscal year of 2025.

Katie Lachapelle, Analyst

Got it. And then maybe a follow-up on Phase 2. I don't think anyone is surprised to see a more disciplined approach to when that production is coming online and you're now projecting 2026. Can you give us any guidance into when you're expecting the commissioning to take place in 2026? Is that going to be front-end weighted or perhaps later in the year?

Ana Cabral-Gardner, CEO

It will be probably mid to third quarter of 2026 later in the year. It will depend on whether the current price recovery holds. What we've done, though, we do not stop because as you've seen, you've been there a few times, we have a high strip ratio on our Mine 1. And Mine 1 will feed Plant 1 and 2 for the first year. So what we've done, we redeployed the CapEx for construction into Mine 1, which helped us maintain plant gate costs. It helped us lower overall costs. So we basically decided that CapEx for Phase 2 now needs to be translated into an immediate return either for current infrastructure that will help feed Phase 2 or help support Phase 2, or current mining operations that would also feed Phase 2, which is exactly what we did, meaning a more immediate return for CapEx deployment. And if the project in question, I mean, if the request for deployment does not meet that criteria, we simply do not pursue it.

Operator, Operator

Our next question comes from Chris Dix. Can you provide me the team's comments on recent price action? How do you see market developments over the next 12 months? And what are Sigma's price expectations?

Ana Cabral-Gardner, CEO

Lithium, there's never a dull moment in lithium and I don't see any other possible way to answer your question. What we've experienced this quarter was a very sharp recovery. And it happened on sentiment. Putting into context, the main driver of prices now is the GFEX futures market in China for lithium chemical prices. Now what is interesting is that, that market trades a day about 300,000 tonnes of LCE, yes. So in a day, there's the equivalent of 1/5 of global demand being traded. So it is essentially a paper market not backed by physicals of either nature, which just shows how susceptible to news and sentiment the market has become. And as a result, I think to your point, as we entered August 11 this week, we saw a very sharp price increase, very sudden, basically a result of news of mine closures, which weren't even attached to volume but they were attached to an overall concept that there is a limit to loss-making within the supply chain. So the less profitable operations were closed off and that provoked an immediate reaction in the market. I'm just trying to give you context to your question. In which way, it's now expected from market participants in Guangzhou, where this futures market is located, where GFEX is located, that the bond of RMB 80,000 for lithium chemical prices may hold and may hold throughout the quarter, given that with the closure and the news that certain operations were not able to profitably withstand the second quarter lithium price environments where lithium went as far down as RMB 60,000 per tonne for chemicals, we expect that RMB 80,000 per tonne of chemicals to hold, which translates kind of on and around the levels of sales that we have been experiencing currently in the industry on and around between USD 900 and USD 950 per tonne of lithium oxide concentrate. We do not see further upside for this year, but we wanted to highlight to the listeners of the call the nature of volatility on GFEX, given the volume of what we call paper contracts compared to actual demand in the industry.

Operator, Operator

Ladies and gentlemen, without any more questions, I am returning to Ms. Ana Cabral for her final remarks. Please, Ms. Ana Cabral, you may proceed.

Ana Cabral-Gardner, CEO

I would like to reiterate my gratitude to all of you listening to the call, supporting us throughout all of these years and essentially expressing optimism because we do believe that markets have now normalized in terms of fluctuations of pricing being a little bit closer to the supply-demand dynamics we've been observing in the industry. EV growth has not receded, as all of you know. The latest year-on-year annual changes have been on and around 27% coming from mainly China. So demand is extremely robust, and we expect that to translate into a more stability and less volatile pricing environment for all of us industry participants. Thank you so much for being part of this call. Thank you so much for entrusting us with the company.

Operator, Operator

Thus, we conclude the second quarter of 2025 conference call of Sigma Lithium. For further information and details of the company, please visit the company's website, ir.sigmalithiumresources.com. You can disconnect from now on. Thank you once again.