Earnings Call Transcript - SGML Q4 2021

Operator, Operator

So, everyone, look, I apologize for the delay. We had technical difficulties, each one of us in a different part of the world. I’m on the West Coast of the United States, and Calvyn is on the mine site. Without further ado, we have great updates to give you. So, we’re very delighted that we’re able to co-host this call. So, without further ado, I’ll go through the disclaimer. It’s very important to notice that we’re going to make quite a lot of forward-looking statements in this presentation. So, please bear that the forward-looking information does not take effect from any items or occurring after the statements are made, right? And without further ado, I’ll pass it on to Calvyn, who delightfully will give you the construction update and starting with the completion of 100% of the first step of construction with the Phase 1 plant foundation earthworks. Go ahead, Calvyn?

Calvyn Gardner, CEO

Good morning, everyone, and I apologize for the delay in getting online. We faced some connectivity issues, but we're here now. There's a lot to discuss, and I will be brief. Most of you have probably been keeping up with the construction updates. The earthworks are now complete, although we did encounter significant rainfall in December that caused some delays. However, we've caught up and are now progressing to the civil works phase. We're currently mobilizing the civil work equipment, which is arriving on site, and we anticipate starting the physical foundation work by late April to early May, depending on when materials arrive. We're continuing to receive steel and rebar among other supplies, and as soon as they are on site, we will begin the primary crushing area. Commissioning is set to begin in December of this year. Importantly, we are fully funded and have ordered all the long lead items, totaling over $8 million, and things are moving along well. Moving on to the updated Phase 1 feasibility study, the net present value stands at $1.6 billion. We've significantly increased the project's reserves to 34 million tons, and we are committed to making it a sustainable project, with further reserves expected this year at an average grade of 1.4%. I'll provide additional details on Phase 2 later, which aims for a capacity of 450,000 tons. To remind you, Phase 1 is set at 220,000 tons, and Phase 2 is projected to nearly double that capacity. The updated Phase 2 mineral resource shows 29 million tons, with 25 million tons measured and indicated at a grade of 1.4%, and an inferred resource of 4 million tons at the same grade. Additionally, we’ve completed all the metallurgy for Phase 2, and the plant design is finished, largely resembling Phase 1, with expected average recoveries of 60%. Next slide, please.

Operator, Operator

To summarize, we tripled our reserves and completed the metallurgy, which positions us to potentially establish a second plant as soon as the feasibility study suggests it. The outlook is positive. We have made significant strides in our ESG initiatives over the last six years, which is reflected in our construction efforts. Currently, over 300 people are working on site in one of the poorest regions globally, with 72% of our highly skilled workforce sourced locally. We launched a comprehensive homecoming program to promote job opportunities across the nation and have successfully reunited many families, helping to restore the social fabric of the region. Notably, among the 315 workers, many were previously reliant on food aid, and now they are part of Sigma. We plan to boost our workforce to 500 once commissioning begins, prioritizing local technical talent following our ESG guidelines. We also expanded our meals program, aiming to serve 2.4 million meals by the end of 2022, up from 1.2 million. Our ongoing disaster relief has supported 400 individuals affected by flooding, and we are active in COVID relief campaigns, having distributed 36,000 liters of resources, facilitating over 240 medical appointments annually. On the financial front, we have achieved significant liquidity, reaching up to $16 million a day recently. This marks our highest average daily trading volumes on NASDAQ, a milestone we are proud of as it was a key reason for our NASDAQ listing.

Calvyn Gardner, CEO

In this update, we are discussing the planned construction and milestones. Workstream Phase 1 focused on pre-construction, which started at the beginning of the year and encompassed 30% of the detailed engineering or project execution plan. This was finalized at the end of November, allowing us to begin construction with earthworks, and we are now progressing into civil works. To summarize our milestones briefly, we've conducted extensive geotechnical and hydrogeological studies. The primary task in construction has been the degrubbing and earthworks. Additionally, we've completed over 60% of the 3D modeling for detailed engineering. In this phase, we have finished 30% of the project execution plan. The EPCM contracts with Promon are finalized, and Primero is responsible for detailed engineering and acting as the construction advisor. Both Promon and Primero are collaborating from the field to the current construction phase. On the right, you can see the commissioning strategy aimed at starting commissioning by the end of the year. We have completed the earthworks and are now transitioning to civil works.

Ana Cabral Gardner, CFO

So, similar slide, where are we now, I’m not going to really talk about this previous work. So essentially, we are now pre-stripping. There are two things happening here in terms of mining. The main thing is really the pre-stripping. Also, it’s not really showing here the fact that there are three things happening in this area. We’re pre-stripping the north pits, we are building the haul roads, and building the ROM pad. So, this is all happening in parallel. And in the mining area, that has now specifically happened, and we’ve developed the area where we are putting the gas station, which obviously is also being developed. So, there is a lot happening in this area.

Calvyn Gardner, CEO

So, construction update. I think what I like about this slide, it’s not so much the writing and I think it gives you some idea of what’s actually happening here in terms of size, right? So, this is over 1 kilometer long, just to give an idea of what’s happening here, and this is just Phase 1. So, this is a big construction. And as you can see, the earthwork is coming to an end here. And right in front of us is actually the primary crusher. So, you can see this sort of oval shape here is literally where the primary crusher sits down. And then, below that is where the secondary and tertiary crushers are situated. And then, as you go right down, there is where the DMS plant itself is. So, this is the plant, infrastructure, water plants, and everything on the left of the screen. But I think, it’s quite nice to get an idea of the size of this. So here, where the grass is in the front is where the ROM pad will be and where we’ll be feeding then this crusher that is sitting there.

Ana Cabral Gardner, CFO

And so, again, an important message on this slide as well is the process design advancement. I mean, typically detailed engineering goes all the way through the end of construction, right, Calvyn, but the fact that the engineering team advanced on process design is what allows Calvyn and his team to have some certainty about the outcomes of the processing within the DMS Greentech processing plant in terms of recovery, in terms of the flow, in terms of what are the pieces of equipment that need to go in adjusted, fine-tuned and calibrated in order for us to achieve what we call the feasibly estimated recoveries?

Calvyn Gardner, CEO

Yes, I believe this is likely the most crucial point. It may start off slower when we take this approach, but it has really instilled much more confidence. We have gone into such detail that we know this design is not just a matter of trial and error. It represents the best of our understanding. This site has been well tested and well designed, and I view this plant as being solid for 30 years. It is grounded in strong engineering and execution. So, on the photograph on the left that we see on the right, the one below on the left just looks at the primary crusher from another angle. More importantly, the layout is highlighted. On the left part of that earthworks is the plant itself. You can see the line, and on the right is the plant's infrastructure as well as non-plant infrastructure. Non-plant infrastructure refers to services such as administration, workshops, canteen, change rooms, weigh bridges, and other facilities. At the bottom is the crusher, and you can clearly see the primary crusher at the top. We're looking down into the secondary and tertiary crushers that are on your left, then it swings back up to what we call the feed bin, which automatically feeds into the DMS. This plant is fully automated; there is absolutely nothing manual here at all.

Ana Cabral Gardner, CFO

So now, I’m going to stop and Victor is going to put a video quickly of where we stand on the 3D plant. We can put a video at the end. Got it. Okay. So, Calvyn, do you want to narrate it?

Calvyn Gardner, CEO

Sure. So, we are examining the south pit and north pit. Access to the south pit reveals the river, highlighting our focus on environmental, social, and governance factors. The river is about 30% behind schedule. We made the decision not to proceed with this river. The north pit is part of the pre-strip. You can see the roads and bridge we’ll be constructing. There’s also some waste material visible. Now, we’re looking west towards the pit and making our way to the mine site. To the right is where the mine is located, which includes the diesel and truck maintenance areas. The plants are at the back, with access roads leading to the ROM pad. We can load materials on this pad and feed them into the plant. The primary, secondary, and tertiary crushing plants lead into the feed bin, which can hold eight hours of material. Our goal is to maintain a constant feed into the DMS, with overflow options available if needed. The DMS consists of three lines that process coarse, fines, and ultra-fines for the plant.

Ana Cabral Gardner, CFO

And sewage water. That’s a very important point.

Calvyn Gardner, CEO

Well, it’s contaminated with sewage water, so we do clean it up. And obviously, we then put that for industrial use here on the plant side. And then, we sort of head back south across the river itself.

Ana Cabral Gardner, CFO

So back to the presentation. The next slide is the like studies detailed engineering, I think Calvyn said quite a lot about it. But I think it’s just to consolidate what we discussed. The reason why we have been so precise on CapEx and so precise on the building plants is because we devoted the time, the money and the energy to engage in detailed engineering, project execution plan, and then CapEx from actual suppliers. So, that we have FEL3 level of accuracy, which we published today. What does that mean? It means that we didn’t start building just on basic engineering. We started this construction with all the knowledge that we needed to basically take it to completion successfully on schedule, on budget. And more importantly, we tested the flow sheet and the processing flow sheet through that previous chart you saw at 70 plus percent of the detailed engineering on designing to the level drawings the flow sheet was completed. We knew the pitfalls and the successes of each one of the steps in processing. And that’s what allowed us to go about and adjust that on paper before we actually had this plant built.

Calvyn Gardner, CEO

So, we’ve done additional test work for both Phase 1 and 2. So, recoveries are now to a much higher level of confidence due to variability. And we updated the mineral reserve. We almost - it’s 2.6 times bigger basically because of Phase 2. More importantly, we reflected the current market conditions to pricing, but we’ve been using benchmarks. So, we’re using on a curve of benchmarks. So again, very conservative life of mine average, I think, well below current levels. And then, we got optionality, which is something that’s very important. The current markets are being very agnostic when it comes to cutoff. So, at our cutoff grades considering the extra productivity, we would be at 251,000 tons per year. If you were to do standard cutoffs, it would be 242,000. And then market delivery type of cutoffs 5.2%, it’ll be 265,000. So yes, I’ll just add that this is only Phase 1. Everything we are discussing pertains to Phase 1, which highlights the robustness of this project. We have not yet included Phase 2, which is forthcoming. The Phase 1 levels represent thousands of tons of lithium concentrate. For year one, we estimate 235,000 tons at 6%, but this could increase based on commercial discussions.

Ana Cabral Gardner, CFO

Here’s another interesting slide. We brought it back from the visibility study for Phase 1 in September, and we updated it. On the left, you see the annual average economics on two bases. You can see each year’s average and the income statement of the company using the average annual price. Then, you see all the numbers that will lead to after-tax earnings, which totals 290 million. EBIT is 340 million.

Calvyn Gardner, CEO

We didn’t do the DA because of 43-101. So you can estimate depreciation to EBITDA here. So then, here you see the per unit costs, which is quite interesting. So, you see the gross revenue, meaning per ton, right? One ton, $1,954 achieved for that tonnage. And then we translated all the items on the income statement on a per ton basis, which just shows how profitable this company is in this current market environment. So, if we were to ship this today, it would’ve been replaced this for 5,000, and then you do your numbers. So, you can play around with the numbers if we give you this blueprint and build your own models, and that’s what we wanted to do with this slide. So with economics, such as these, I mean, no wonder we are fully funded. We got a very solid cash position. We disbursed quite a lot already on construction. We keep on disbursing. The disbursement rate is going to go up now significantly, with civil and electromechanical build. So, in the second quarter expect this number to be a lot higher. Now, on to Calvyn on the releasing equity to an additional growth opportunity.

Ana Cabral Gardner, CFO

So, just quickly on the ESG update, I think we’ve talked quite a lot about it. The actions have quite a lot of breadth. I mean, we focus on the vulnerable. We supported the community with COVID for almost two years. We’ve done it three times. The first one in March 2020, second in May ‘21, and then we did it again now for Omicron. So, we are clocking in about 36,000 liters of disinfectant total delivered, three tons of sanitizers covering the same, exact 16 clinics, first care centers that cover 20,000 medical appointments a month, to a total of 240,000 medical appointments a year.

Calvyn Gardner, CEO

Yes. Additionally, our suppliers and local partners involved in this project are now committed to this program, joining the effort against hunger. Furthermore, Sigma is actively assisting with training. Specifically, 70% of the workers being trained to drive the trucks are local. We established a training course because many of them had never worked in a mining environment, despite having the necessary licenses for driving trucks. The experience is a bit different from what they were accustomed to, as they were primarily engaged in hauling materials.

Ana Cabral Gardner, CFO

And it’s all connected because the other action we took was the childcare center sponsorship. When considering households of single women, we looked into why they were receiving food baskets from us. One reason was the absence of husbands and a lack of skills. For those who had skills and worked in the services industry, when the reopening occurred, they faced a lack of childcare. So, we collaborated with the towns of Itinga and Araçuaí to reopen the childcare centers, allowing the women to place their children, aged zero to three and zero to five, in childcare so that they could return to work and reintegrate into the workforce.

Calvyn Gardner, CEO

So, we would take questions from the participants. So please go ahead, guys.

Ana Cabral Gardner, CFO

I answered one on a chat, but I’ll bring it back again. So, there I was asked, what are the challenges we’re seeing in gaining more customers? Well, there really aren’t any challenges. In fact, it’s a very favorable market, and we were very fortunate that the timing turned out to be right. It’s a seller’s market, really. And I think our challenge is to make sure, given that our customers are the battery makers and the downstream clients, our main challenges are just to think about the deliveries because we’re promising and delivering, right? So, we’re trying to keep the contracts to a pace where the customers can count on the material at the dates we tell them we’re going to deliver, so far, so good. But that’s basically, there’s no challenge. I cannot provide an immediate comparison of production costs between lithium rock and lithium brine as they are completely different operations. Conceptually, there's a cost curve referred to as the great equalizer for lithium carbonate. This curve is fair and indicates that salar salt lakes are currently the lowest cost producers of lithium carbonate globally; any claims to the contrary are inaccurate. Greenbushes stands out as the richest and highest yielding lithium rock mine. However, even for the lowest-cost producer like Greenbushes, producing lithium carbonate incurs higher costs due to conversion expenses. Additionally, there are other low-cost salars, such as Hombre Muerto and Sigma, which also contribute to our strong position in the lowest cost quartile for carbon-based production. On the other hand, producing lithium hydroxide from lithium carbonate entails a conversion cost currently exceeding 1,500. So, I think more questions, costs. Yes. The breakdown of the cost. Well, we’re discussing the breakdown, right? We are trying to manage our transport costs to China into a normalized shipping market. And how do we manage? By hiring bigger ships. That’s the only thing we can do, right? And that’s a disadvantage we have to Australians, indeed. Someone asked me questions about comparing from Brazil to China versus Australia to China. Well, it’s a lot cheaper to go from Australia to China. And they were initially quoting $40. It got to $60, but the normalized price for them is $40 a ton from the West Coast of Australia. So, that’s a huge advantage. Hence, our focus on being low cost so that ex-CIF level, which is where we are for 50, we are extremely competitive.

Calvyn Gardner, CEO

Yes. And so, we’ve always looked at it, CIF, China, so that we factor it in the shipping costs. And we try to manage the non-shipping related items to the best of our abilities, right? From a Sigma perspective, I believe it is very important to increase the capacity of resources, which makes advancing to Phase 2 much easier. If this trend continues, we could potentially move to Phase 3 and even Phase 4. This is something I am considering, which would stand alone as a project.

Ana Cabral Gardner, CFO

Phase 2 is complete. The plant design is finalized, the mine plan is set, and we are currently conducting the geotechnical work. I don't anticipate any significant changes. This is a fresh start for us, and we are now moving forward with it.

Calvyn Gardner, CEO

Yes. Phase 3 is represented in an older slide I have been using from the start to illustrate potential. The purpose of these slides is to show how and when we will return. On the left, you can see the four properties we own. I still plan to conduct some drilling in this area this year, which is a separate topic. We are increasing drilling on the surface and potentially below ground. While some operations are focused solely on underground, I don’t want anyone to think that Sigma is ignoring this area. We are very aware of it and it holds potential for the future, but for now, I have over 1,000 potential candidates.

Ana Cabral Gardner, CFO

And this is also a huge project, something close to our heart. From day one we’ve been talking about that. And Ana’s been doing a lot of work there to bring the training courses to the city. So with that look, I mean, we want to thank everyone for your time. We would love to continue questions. We have Jamie Flegg and James Ellis, Vitor helping us on investor relations. Two of them are in Canada at the moment. They are based in Toronto. So, they are easily accessible to you. So, we are hoping to have more engagement with our international investors this year. Due to a presence, we opened an office in Toronto where they are going to be based. So, we are having five people based there. So, we’re looking forward to being more present in your investment decisions and the dialogue with you throughout this year as the stock finally has liquidity.

Calvyn Gardner, CEO

Thank you guys and looking forward to getting this thing into production. And again thanks for all the support.