Earnings Call Transcript - SGML Q1 2024

Operator, Operator

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

Matthew DeYoe, Executive Vice President

Thank you, Dennis. Good morning, everyone. Thank you for joining us on our first quarter 2024 earnings conference call. On the call with me today is the company's CEO, Ana Cabral. This morning, before market open, we published our 1Q earnings release and posted our financial results, which will be available through regulatory filings. Before we begin, I'd like to cover two items. First, during the presentation, you'll hear certain forward-looking statements concerning our plans and expectations. We note that actual events or results could differ materially from changes in market conditions in our operations. Additionally, earnings referenced in this presentation may exclude certain noncore and nonrecurring items. Reconciliations to the most comparable IFRS financial measures and other associated disclosures, including descriptions of adjustments, can be found in the back of the release. With that, I'll pass it over to Ana. Ana?

Ana Cabral Gardner, CEO

Thank you, Matt. Good morning, everyone. We're delighted to present you with our first quarter 2024 results. And without further ado, I encourage you to go to the following page. We are extremely enthusiastic about our prospects as we have been advancing towards key catalysts of our plan to double production capacity by 2025. The four key deliveries of this quarter were: first, the delivery of an increased premium pricing where we achieved a fixed floating formula of 9% of the London Metals Exchange lithium equivalent, basically reaching a $1,290 pricing. That represented an 11% increase over the April 24 realized pricing. The numbers we released for the first quarter of 2024 clearly demonstrate that the pricing trend is upwards, an 11% increase from previous months and an overall almost 30% increase from the average pricing of the previous quarter. The second catalyst is that we've been reaching our marks on achieving a low cost of production. We became the world's second lowest cost lithium concentrate producer this quarter, reporting the cost of $397 per ton. More importantly, we have also managed to increase the operating life of the company to 25 years. We increased mineral reserves by 40%, auditing 77 million tonnes, according to National Instrument 43-101 standards. We also made a final investment decision on a fully funded expansion to double production to 520,000 tonnes annually, equivalent to 70,000 tonnes lithium carbonate equivalent. So, on the next page, we demonstrate that we've been delivering our vision to combine large-scale production with low cost and higher standards of environmental and social sustainability in lithium. These three elements are rarely achieved together. More often than not, scale and costs are achieved at the expense of traceability and environmental high standards. Alternatively, scale and traceability and environmental and social high standards are achieved at the expense of delivering a resilient business while maintaining the lowest production costs. So here we are delivering on all three fronts. The next slide illustrates one of our key deliveries for the quarter, demonstrating how we became the fourth-largest producing lithium industrial mineral complex globally. So, Sigma now is the first non-Australian company in the top five. We're trailing behind Greenbushes, Pilbara, and Wodgina. Grota do Cirilo is now at 4.8 million tons of lithium carbonate equivalent with a very high-grade average at 1.4%. And that's the result of a very well-coordinated exploration, development, and visibility of deliveries achieved over the last 12 months. In this quarter, we delivered visibility and therefore declared mineral reserves of 77 million tonnes, which were increased by 40%, marking a significant milestone. Why is that? Because it lengthens the life of the project to 25 years. And therefore, as we expand to double capacity, we now have an operation that is sustained for 25 years. That is a moving target. In other words, as we move forward with our expansion plans, we will continue to unlock and transform the mineral resources we have into mineral reserves backing up a similar duration in operational life. Therefore, with this mineral resource work executed, we demonstrate that Sigma Lithium is not at all constrained by the sheer scale of the mineral resources available on its properties. And here, we demonstrate the mineral resources in one of our four properties. With that, I move forward to the following page, where we again deliver on the mathematics of our numbers. And we love mathematics because numbers don't really bring an opinion with them. In 2024, as we discussed, we are delivering on every operational target we set out for ourselves. Some of those were quite ambitious. And again, the numbers demonstrate the resilience and longevity of our project, essentially combining scale, costs, and the highest global standards of environmental and social sustainability. We are sustaining nameplate capacity. We have been sustaining nameplate capacity since December 2023. In the first 10 months of production, we already reached 178,000 tons, which delights us all, given our pioneering dry stacking circuit of the dense media separation industrial plant, the Greentech plant. In parallel, the highest premium and the highest quality that our product exhibits is translated into premium pricing. And we have been able to do that consistently. The economics for our nine shipments is again, reaching our mark of capturing a 9% share of the value of the lithium hydroxide posted at the London Metals Exchange, which now is equivalent to $1,290 per ton. That number is a fixed floating formula, and it will be adjusted by that lithium metal exchange price one month after delivery. We were able to achieve that while delivering on our very low marks on a very ambitious target of a low cash cost at the plant. So, we got to $397 per ton at the industrial plant gate, which places us as the lowest cost producer among all lithium concentrate hard rock producers, all of our peers in Australia. So, we're demonstrating that despite not yet reaching that scale, we have the cost discipline to be in second position, making us incredibly resilient to lithium cycles. So, we're here to stay. In the meantime, we've also maintained our liquidity; our cash position on March 31, at the end of the quarter was USD 108 million. The Phase II, the second Greentech plant construction that will deliver double capabilities, is fully funded with cash at hand in the balance sheet, and we will continue to work on improving the capital structure to fund that construction. Regardless, the funding is in the bank as we speak. So, we'll keep going with the construction project to meet our delivery timelines of around this time next year. We've been initiating the construction with earthworks engineering, design, and the teams. We have our second construction team in place. We've bifurcated our teams to ensure reliable, timely, and on-budget delivery of the second Greentech plant. And again, this will lead us to double capacity to approximately 70,000 tons of lithium carbonate equivalent or 520,000 tons of lithium concentrate. And lastly, we already talked about this. We delivered the longevity that will back up the operational life for 25 years with 77 million tonnes of proven and probable mineral reserves. It makes us very proud to remind everyone that we're the only global producer that has achieved the zero-carbon, very sought-after objective so that we're delivering lithium products aligned with the ethos of the electric car industry that we service. So, on the next page, I'll initiate this section, then hand over to my partner, Matthew DeYoe. We want to again reiterate how resilient, reliable, and consistent our business has been since we made our first shipment. We have reached scale during 2023. And we have been shipping like clockwork, approximately 22,000 tonnes of lithium concentrate materials every 35 days. More importantly, at the height of the market, we initiated a premiumization drive that has been delivering these premium prices through auction/price discovery conversations with our customers. This demonstrates that we've been increasingly gaining commercial leverage as our clients experience the savings they can achieve with our product, which reached 20% to 30% over competing products in the marketplace. And that translates into commercial leverage. Mathematically, we demonstrate that with a 25% increase from the realized prices in the first quarter. The page illustrates also in two colors, yellow, which we believe to be the market benchmark, and blue, which we believe to be our own pricing benchmark. So, as you can see in the areas from February, which is when the Lunar New Year dropped in the industry onward, we've been able to premiumize prices by 25%. From last month alone, we were able to achieve an 11% price increase. So that's again, a mathematical numeric demonstration of increased commercial leverage. It results in a partnership, a win-win partnership with our clients, given that our product does bring measurable chemical savings compared to other available competing products in the marketplace. By no means is this a win-lose game; it's simply the flourishing of commercial partnerships with our clients. At the chart, we also illustrate the translation of our prices into value capture of lithium hydroxide priced in the London Metals Exchange, where we've gone from 8.75% to 9% of the index. This indicates an increased value capture over the lithium hydroxide chemical, and again, is a mathematical demonstration of this partnership with clients that win as they acquire our products. Typically, the average premiumization achieved hovers around 10% over similar competing products, which again, given that we bring 20% to 30% of cost savings to our clients, clearly demonstrates that our clients are still achieving a 20% to 10% savings. Clearly, a win-win relationship with our stakeholders.

Matthew DeYoe, Executive Vice President

Thank you, Ana. So, in the first quarter, the company sold 52,857 tons of lithium concentrate, which composed of two full shipments and a partial sale of warehouse inventory to Glencore towards the end of the quarter. Production totaled just over 54,000 tons. Reported revenue in the quarter totaled $37.2 million, which included a $12 million impact from provisional adjustments associated with prior shipments, particularly our November shipment. This reduction is a decrease versus the $30 million we experienced in Q4. The company assesses revenue for business conducted during the first quarter at $49 million. Against our volumes, that would imply a realized price for business conducted in the first quarter of $930 per ton. Operating cash cost per ton at the plant gate was $462 per ton, down about 16% sequentially and delivering a 50% FOB margin against that $930 per ton price. Reported adjusted EBITDA of $6 million drives a margin of nearly 16%. However, we assess EBITDA for business conducted in Q1, excluding the provisional implications, at about $17 million, which reflects an EBITDA margin closer to 35%. Importantly, as we want to note, as prices rallied during the first quarter, the implications of these provisional adjustments subsided. Given our fixed shipment in April and the material correction we've seen in market prices, these adjustments should be immaterial going forward. I want to move to our cost bridge. We believe our guided targets are very much in reach. Importantly, moving past much of the noise associated with commissioning activity is helping us deliver a much cleaner quarter and a clearer look into the company's advantaged cost structure. Cash cost per ton, as Ana had mentioned earlier, was $397 for the first quarter, which drives an FOB cost at Vitoria of $62. The differential here to COGS represents only royalties, noncash depreciation, amortization, and a small stocking effect associated with production of concentrate in Q1 that we'll sell in the second quarter. As we said, guidance is clearly within reach. Recall from our earlier conversations, the company expects to have $370 a ton at plant gate and $420 FOB Vitoria during the second quarter for the third quarter. Absolute dollar costs are already there. As you can see, the main hindrance for achieving these numbers in Q1 was production normalization for cost base for Q4, which will lead to plant gate costs of $359 in the first quarter. Production improved through the course of the first quarter, leaving us confident again that we can hit these targets, which would position us comfortably, although we already are at the second lowest cost hard rock project in the world, at least that we know of. Next, I'll move to our cash balance. As Ana had mentioned, we ended Q1 with $108 million, primarily reflecting the cash gained from trade finance and trade facilities, partially offset by an annual interest payment and a modest build in working capital. Operations proved neutral to our earnings formula as revenues were offset by a partial adjustment in operating costs. Going forward, we mentioned that as prices improve, we should move past provisional headwinds and begin to accrue substantial amounts of free cash. The next slide points to what we believe to be the cash flow potential on a recurring basis. The model or column at current price or $11.60 reflects broadly the current market, while the costs are our targets, which, as stated above, are within reach. This is an explicit cash flow guidance for this year as the numbers just portray at capacity and don't reflect perhaps the realities of Q1, but it gives a good idea of the potential of the company going forward. As you can see, we are comfortably above the $100 million required to fund our expansions. So, with that, I'll pass it back to Ana.

Ana Cabral Gardner, CEO

So, going straight to the point where Matt left off regarding doubling production capacity. Again, we show the drone aerial picture of the simplicity of that project. You can clearly see in the background the expansion area highlighted in red, where we already have the truck maintenance patio installed. It's an area without vegetation; it's basically composed of former pasture areas. So, very straightforward, perpendicular to the elevation of the terrain, perfect for the installation of our ROM pad that will feed a second Greentech production plant. That second line trend will be equivalent to the one highlighted in yellow and sustained by the existing infrastructure in green, which could also sustain a third Greentech line expansion, which we do plan to execute the moment we commission the second Greentech plant. So, the infrastructure, which costs almost $40 million to $45 million, is no longer necessary because it sustains two additional Greentech plant expansions. With that, we again would like to reiterate that the cash to build it is at hand. We've been able to secure robust and resilient trade lines as a result of our consistent, resilient performance of production, shipping, delivery, and customer acceptance of our product throughout the first 10 months of operation. This reliability gives us access to green line mandatory funding, which is called ACEs in Brazil, advancements on export contracts, and is the main source of funding for this construction at the moment. It's cash sitting in our treasury right now. We will continue to work to improve the capital structure for the construction of the project. We have very interesting plans to tap into that capital market low throughout the course of the next few months. But with or irrespective of it, we are confident that we can carry on and execute our plans to double production capacity. The commercial uptake is there; we could be selling far more boats if we had the material to deliver. Ultimately, we're sitting in a very comfortable position in the industry. So, our objective is to continue to bank on the comfort of our business position in the global lithium industry at the moment. The following page just shows the exceptional execution we aim for in the lithium industry. We will do it again. We've already completed the licensing of the industrial plant. We've achieved the initial financing through securing trade lines. We completed the engineering FEL3 CapEx quoting throughout the course of last year essentially. We've been working at this for actually more than 12 months now. We are comfortable with the capital structure we have; we're going to work to improve it and finance it. An average 9.3% cost for trade lines is a reasonable cost considering the returns we will achieve out of volumes and production on a cash generation basis. With confidence in our execution ability and prowess, our Board of Directors cleared and gave us the final approval and final investment decision for the construction of Phase II in the quarter.

Matthew DeYoe, Executive Vice President

Yes. From the company's perspective, we have a unique track record of being able to build on time and on budget, and we're going to do that again. As Ana mentioned, on April 1, Sigma's Board of Directors issued the Phase II final investment decision. The CapEx budget is only about $100 million to add 250,000 metric tons, enough lithium equivalent for about 850,000 electric vehicles. The EPCM teams are finishing earthworks engineering, and mobilization is ongoing. The Phase II flow sheet, importantly, follows Phase I. The goal is to reduce risks as much as possible as we go through this process. The local EPCM team is the same, the parts design team is the same. We're going through Phase II with knowledge and experiences gained through Phase I, which should mean a faster ramp and a faster path to free cash flow as we move forward. This represents a higher-level path to where we're going. As Ana mentioned, there's a third phase coming on the back end, which is already supported by the infrastructure.

Ana Cabral Gardner, CEO

Yes. Here is kind of the whole picture, right? This is the industrial plan we submitted to our development bank and to our investors earlier in the year. It graphically shows where we are and where we had it, and how disciplined we have been in adding production capacity based essentially on the one element in short supply—our ability to execute on time and on budget. So, we got here in '23 what we've delivered over the last 12 months. As of now, in 2024, we would have 270,000 tonnes of production, thus furthering that safety net of cash generation. We are building double capacity—approximately double capacity, another Greentech line at 250,000 tonnes. We are in construction of what equates to 35,000 tonnes lithium carbonate equivalent. Again, we plan to execute the third line supported by existing infrastructure, which will get us to another 250,000 tons. This scales us to 770,000 tonnes of annual capacity, reaching what we call the magic number of 100,000 tons lithium carbonate equivalent a year. Ladies and gentlemen, there are very few companies that can operate at these levels, and they are referred to as super majors. With our careful, conservative, and disciplined execution, we plan to get there, most likely by the beginning of 2026 with three Greentech production lines. We have already begun earthworks construction for the second one. One important point, if warranted, and this will depend on the premiumization, we have plans for 2026 to potentially build an integrated intermediate chemicals line connected to the third line. That discussion is already in the works, scouting locations for a potential setting for this industrial plant. As we like to say in our industry, 2026 is literally around the corner in the metals industrial time—18 months away.

Matthew DeYoe, Executive Vice President

In closing, the future has arrived. Sigma is the sixth largest producer globally. We are on our way to becoming the fourth as we conclude the construction of the second Greentech plant. We have the same team, the same execution, the same engineers, even the same suppliers. That's how conservative we have been. The unfortunate thing that hasn't happened is that we have not repriced from developer to producer, but we believe that with our resilience and the cadence of successful execution, that shall happen in due course. You can clearly see on this slide an illustration of the disconnect between Sigma and its peer producers. The following page illustrates this further using fractions as a clear way of prorating valuation to production. So, to graphically illustrate, if we were to perform this exercise comparing to an Americas player or an Australian player, we would highlight a significant disconnect.

Ana Cabral Gardner, CEO

In this industry, superb execution and solid resilience have been demonstrated by our team, which faced market headwinds in our first year of operations and emerged as the industry's second lowest cost producer and sixth largest producer. Thank you, everyone, for your trust and confidence in us. I will now close our first quarter 2024 earnings presentation. We will take questions.

Matthew DeYoe, Executive Vice President

Yes. Thank you, Dennis. If you can move now to Q&A, that would be great.

Operator, Operator

Your first question is from Rob Hoffman with Bank of America.

Robert Hoffman, Analyst

Just wondering, can you provide the latest regarding the strategic review? And is that currently on pause?

Ana Cabral Gardner, CEO

Yes, it is. We've publicly reiterated that it's on pause. The reasons are quite clear. There's a symmetrical disconnect between what we believe our fair value should be. Given the strength and resilience of our operation, we decided to continue delivering. We have a fantastic business and there's absolutely no pressure to conduct any review from our end. We will deliver on the targets we set out for ourselves and reevaluate two years from now to decide on the next phase of growth.

Robert Hoffman, Analyst

Understood. And just to follow up regarding the LG press release regarding arbitration. Just wondering what the timeline is on that and the updates on that process?

Ana Cabral Gardner, CEO

We have a very friendly relationship with the LG Group and with South Korea. There are going to be more positive news on that end that we will publicize in due course. What I can say as of now is that the commercial relationship couldn't be better with the LG Group as a whole. That includes their trading arms, which were visiting our plant facilities at the time when another subsidiary of the group initiated arbitration, which surprised everyone. But that's being managed. We want to reiterate how we have a fantastic relationship with both the government of South Korea and with LG Group as a whole. We don't see any reason to worry.

Matthew DeYoe, Executive Vice President

Dennis, if you want to move on to the next question?

Operator, Operator

Of course. Your next question is from the line of Mac Whale with Cormark Securities.

MacMurray Whale, Analyst

Congratulations on bringing the cost down quite handily. I was wondering if you could speak a little bit; I saw two big items in there versus Q4 in mining services and consumables. What's behind such a big decrease in those two items in particular?

Matthew DeYoe, Executive Vice President

Hey, Mac, on the consumables side, we got effective in using our ferrosilicon and recycling that through the process. If you recall, we installed the magnetic separator in November as part of that was on the tailing side, allowing us to improve the recyclability of ferrosilicon through our process. Some of these purchases may also be a little bit lumpy, but we are getting better at optimizing and running the plant. So, that will explain a good portion of the consumable side. The decrease in shared services, I'll have to double-check. But as part of what we've said, we're removing a lot of on-site contractors and replacing them with domestic and local labor. As the roll-off happens, you'll see perhaps an overall reduction in costs, and also a little bit of left pocket, right pocket as some of that is allocated and reallocated through our cost lines, if that makes any sense.

MacMurray Whale, Analyst

Yes, that's helpful. And then regarding G&A, some of your costs for G&A in particular looked lower. Is that a good run rate moving forward?

Matthew DeYoe, Executive Vice President

Yes. G&A is—as we tried to portray on our Q4 call—there's a lot of noise and clutter in the annual SG&A number, and we had confidence that would come down. As the strategic review is paused, additional costs will come out of the business. However, we're at a pretty good level, considerably lower than where we were. The productivity initiatives we've been implementing take time to show through the system. You can't just cut all costs at the end of the year; some of that will bleed. The goal is to keep a strong approach on all costs. If you asked me recently, I would express excitement about $1,200 a ton spodumene because we can generate cash and grow in this market, and it also keeps everyone honest on costs. Expect continued intensive cost control at Sigma to deliver on these numbers.

MacMurray Whale, Analyst

As the pricing environment improves, how will the provisional pricing situations change throughout the year?

Ana Cabral Gardner, CEO

I'll take that. The provisional pricing is, we believe, a commercial element of the past. It doesn't connect as much with the market environment but is 100% related to our market entry. A lot of what our clients experienced with our product were bulk samples, 100-ton, 200-ton samples. This last 12 months was the first time they got to try full tonnages. As it happened, clients realized 20% to 30% cost savings from our product, which in turn improved our commercial conversations. Lithium prices globally are still in their infancy. Prices for concentrates are still developing. We weren't seeing substantial uptake in high-purity, coarse, lumpy product. We believe clients experiencing our product will lead to more amenable conversations on pricing terms. We demonstrated this first with fixed pricing last month, which was final, similar to other players in the industry. Now, we have moved to a fixed-floating formula where we work alongside our clients. We aren't fixing their expense, we're merely fixing our value capture. So we're maintaining friendly relations within the industry and continuing to capture premium pricing.

Matthew DeYoe, Executive Vice President

As pricing improves, we want to retain some optionality in the pricing cycle. April reflected a locked-in firm price, while May has the firm 9% lock.

Ana Cabral Gardner, CEO

Exactly. This is essentially the core of creating customer partnerships, akin to the dynamics in industries like copper and iron ore. That's our goal.

Matthew DeYoe, Executive Vice President

I think we can close it down now. Thank you, everyone, for joining our call. We look forward to updating you as shipments and the company progresses through our Q2 bill, engaging further on Q2 earnings.

Ana Cabral Gardner, CEO

Thank you. Thank you, everyone.