Standard Lithium Ltd. Q3 FY2024 Earnings Call

Ladies and gentlemen, thanks for standing by. Welcome to Standard Lithium's Fiscal Third Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. It is now my pleasure to turn today's call over to Salah Gamoudi, Chief Financial Officer. Sir, please go ahead.

Thank you. Welcome, everyone. Joining me on the call today are Robert Mintak, Director and CEO, Andy Robinson, President, Director, and COO, and Mike Barman, Chief Development Officer. As a reminder, some of the statements made during our call, including any forward expectations, company performance, and timing of projects, may constitute forward-looking statements. Please note the cautionary language about forward-looking statements contained in our press release, which also applies to this call. I will now turn the call over to Robert.

Thanks, Salah. The start of 2024, coinciding with our fiscal third quarter, presented a complex economic environment. Inflationary pressures, rising interest rates, and shifting geopolitical dynamics added to the headwinds the lithium sector has faced over this past year. A key factor, as listeners are likely aware, was the retreat in lithium pricing from its all-time highs seen in 2022. This, coupled with a broader cooling of market sentiment within the EV and energy transition space, further compounded the challenges. Over the past fiscal year, we've taken proactive measures to navigate this environment. We strengthened our team with strategic additions at the executive level and implemented the necessary financial tools to balance the continued advancement of our projects and strategic plan while always being cognizant of potential dilution to our shareholders. We are seeing signs of stability returning to the lithium sector, with both pricing and investor interest gradually picking up. Our strong projects are in favorable jurisdictions that position us well to capitalize on this improving sentiment. At our Southwest Arkansas project, we engaged the engineering team and kicked off the definitive feasibility study and front-end engineering design work. Working closely with the team at Koch Technology Solutions, we installed a commercial-scale Direct Lithium Extraction column at our demonstration plant. I'll leave more of the specifics on these developments to Andy, to share as part of his operational update. However, the most significant development for Standard Lithium, and the one I'm sure many of you are eager to learn more about, happened after the close of Q3. As we have clearly communicated over the past year, we strongly believe in the benefit that strong strategic partnerships bring. The lithium industry is facing significant challenges. Projects are becoming more expensive, access to capital is becoming harder, and even with funding, the necessary expertise for successful project delivery is rare. And solving these challenges requires taking an innovative approach. Only then will the industry be able to deliver the required supply that's necessary for the energy transition. To that end, working closely with our advisors, we conducted a robust process to find an ideal partner that would bring the ingredients we need for success. Last week, we announced a landmark project-level strategic investment and partnership with Equinor, a global leader in energy and low-carbon solutions. The investment is at our Southwest Arkansas and East Texas projects. Equinor's backing is a strong endorsement of our strategic direction. We believe this partnership validates the quality of our industry-leading DLE flow sheet, the expertise of our team, and the world-class potential of our resources in Arkansas and Texas. We're confident this partnership will generate long-term shareholder value. I'll now hand it over to Andy, who will provide more insights on the transaction, what the partnership means at the project level, and an update on operational developments.

Thanks, Robert. As you mentioned, we're extremely excited to be working with the Equinor team to advance our largest and highest-grade projects within the Smackover. The joint venture with Equinor validates, first and foremost, the quality of our lithium-brine assets in Southwest Arkansas and East Texas. One of the fundamental items we've learned as a company, is that irrespective of lithium chemical pricing and market fluctuations, having large, high-quality assets for the highest grade will always leave you in a favorable position relative to your competitors. This is true in lithium as it is in any natural resource project. The work conducted by Equinor over the last several months has scrutinized these resources and has determined that the Smackover formation is where they want to invest. Another important part of their diligence was related to our DLE knowledge and experience, which we've gained through operating the demo plant for the last four years. There's a lot of discussion in the lithium world regarding DLE. We view DLE as a critical tool, one that allows us to unlock the value in the resource. Our partnership with Koch has been fundamental in building a shared understanding of how DLE works with the Smackover brines. And the amount of knowledge, data, and experience that our shared technical teams have in DLE and brine processing was another reason that supported the investment. Over the past quarter, we announced a successful commissioning with the first commercial-scale DLE column at our demo plant that was performed in partnership with Koch Technology Solutions. Results to date have exceeded our expectations, with lithium recoveries averaging over 97%, and the rejection of impurities at the DLE step being greater than 99%. To the best of our knowledge, this is the first and only truly commercial-scale DLE column operation in North America. The success of this commercial column is based on the prior year and a half of continuous operation of the Koch Technology at our demo plant location. Over 8,500 cycles have been completed, and 17 million gallons of brine have been processed. I know I've said it before, but the only way to know if your flow sheet works is to operate it continuously for long periods of time. We've learned so much from the demo plant, and we'll use these fundamental process learnings in the FEED studies for the Southwest Arkansas project, as well as into Lanxess and East Texas. All of the work we do at the demo plant is to make the flow sheet cheaper to build and cheaper to reliably operate. When that knowledge is combined with the highest-grade brine resources in North America, it moves us towards the most advantageous project economics. Project work continues in Arkansas on our Lanxess and Southwest Arkansas projects. The new joint venture with Equinor means that we are fully funded to work as quickly as we can through FEED on the Southwest Arkansas project. We'll be adding significantly to our team with key Equinor people. These additions will significantly bolster the project's best strengths in terms of subsurface and reservoir knowledge, project delivery, project finance, health and safety, sustainability, and commercial and off-take relationships. The joint venture is kicking off a series of work programs for infill drilling, well field development, additional process testing, and overall FEED design. This new joint venture project team is being put together as we speak, and we're excited to see increased project de-risking at the Southwest Arkansas project as we move towards bankable feasibility and the final investment decision. In East Texas, we continue to grow our existing land position in the highest quality and highest-grade resource areas. The new joint venture with Equinor means that we are now fully funded to expand our leasing activities, as well as complete additional drilling work to verify the quality of these growing brine resources. As with the Southwest Arkansas project, we're adding key Equinor people to the project team to allow us to execute more efficiently across all project development disciplines. Our first goal in Texas is to produce resource reports for the key project areas, so we're looking forward to completing the work necessary to make that happen. As we mentioned before, the grades that we're seeing in East Texas are excellent. In some places, over 800 milligrams per liter. These are unparalleled anywhere other than a handful of projects in South America. The work that we've completed on our other projects has demonstrated that when you're looking to use DLE, the lithium grade in the brine is the most significant factor to consider. And so, we think that these very large, very high-grade lithium brine assets will become significant for both us and our joint venture partner. And with that, I'll turn the call over to Salah, who will speak to our quarterly results and the impact of the joint venture on our corporate economics.

Thank you, Andy. For our fiscal third quarter, for the three and nine months ended 2024, we reported a net loss of $10.4 million, or $0.06 per share, and $30.3 million, or $0.17 per share, respectively. Our net losses for the current period were primarily driven by expenses at our demonstration plant, where we have continued to invest in improving our flow sheet, refining our technology, and have continued to test commercial-scale applications with success. Further, expenses related to back-office personnel and share-based payments make up a significant portion of our operating expenses. These expenses have increased from the prior year as we have expanded our engineering, finance, procurement, and accounting functions in order to best serve our upcoming growth. Further, our non-cash share-based payments are meant to compensate and align our personnel with the interests of our shareholders. Turning to our balance sheet, our cash balance remained flat from the second to the third quarter, and our working capital remained positive, with no term or revolving debt obligations. Subsequent to the quarter end, our balance sheet strength has further been bolstered by our Equinor partnership, which provided an immediate US$30 million liquidity injection and removes $60 million in near-term capital requirements for our Southwest Arkansas and East Texas projects that Equinor will sole fund up to that total amount. This transaction resulted in no parent company-level equity dilution. As we have stated previously, our plan of capital formation in order to execute on our projects while minimizing the cost of capital was, and is in the order of importance to, one, secure a strategic partnership. Two, secure off-take and potential customer financing, three, secure low-cost project debt financing, and four, pursue other forms of financing, such as government grants and parent company-level equity financing. The Equinor partnership exhibits that we are executing on our plan of delivering value to our shareholders. With that, I'll turn the call over to Robert for closing remarks.

Thank you, Salah. The transaction with Equinor achieves a number of objectives for us. From a financial perspective, it provides Standard Lithium the required capital to, first, progress the Southwest Arkansas project through DFS and FEED. Secondly, to do the work on the ground in East Texas, where we see the potential to develop what could be one of the best lithium resources in the world. It's delivering on these projects in a timely manner that will determine long-term fundamental value for our shareholders, and this requires money. In these tough capital markets for lithium and battery materials companies, an equity financing of comparable size to this Equinor transaction would have cost us significantly more, if it could have been done at all. Looking at it slightly differently, the implied look-through value of Standard Lithium in the Equinor transaction represents a significant premium to the value the market has ascribed to these projects. Importantly, this is all done without giving up control. I would encourage you to look at the transaction presentation on our website to get a better understanding of this transaction. This is more than just financing for Standard Lithium. It comes with benefits that have considerably more long-term value. It comes with a partner that has tremendous resources and skills to not only fund the work we need to do now and in the future through its 45% contribution of capital, but also the resources required to build a truly world-class, U.S.-based sustainable lithium business, a business that will, through the development of a portfolio of assets, create significant value for our shareholders. And in closing, before I hand it back to the operator, I want to express my sincere gratitude to the entire Standard Lithium team for their continued dedication and hard work that has made this possible. I also want to give a shout-out to both Salah Gamoudi and Mike Barman; their additions to our team have been critical in bringing these types of transactions to reality. And finally, a special thank you to our Strategic Advisor, David Park, for his invaluable insights and support through this process. Thank you. Operator, back to you.

Thank you. Our first question comes from Joseph Reagor with ROTH MKM. Please go ahead.

Hi, guys. Thanks for taking the questions. On the financing side, can you give us kind of an overview of how you see financing the Phase 1A Lanxess project, timing, and structure?

Thank you, Joe. This is Salah Gamoudi. On the Phase 1A project, the critical path items there are the negotiation of the brine fee with Lanxess, as they've determined they would like to be a supplier. We also need to establish a royalty rate in Arkansas. When I say we, I mean that's really the AOGC and the local regulators to do. I think on the conclusion of those two processes, we'll have a clear vision on the final economics of the project, and also how we would determine our financing for that project.

Okay. Thanks. Can I ask a second follow-up on financing?

I'm sorry, can you repeat the question?

I had a follow-up question. The operator said one question each, so I was making sure it was okay. On the Equinor financing, have you guys already received the $30 million, or is that still in process?

Yes, we have. We have received that.

Okay. I'll turn it over.

Our next question comes from a line of Greg Jones with BMO Capital Markets. Please go ahead.

Hi. Good morning, Robert and team. In relation to the Equinor deal, firstly, congratulations on the announcement. I was wondering if you could share any color on how you were thinking about structuring as you were going through that process. In relation to SWA, there's a pre-feasibility study that provides some parameters around the project. East Texas is at an earlier stage of development. How did you think about striking the right balance between retained ownership, the qualities that Equinor brings as a partner, and your view of what East Texas could become in the future?

Hi, Greg. Thank you. I'm going to utilize my team members that are on the call today, because we have a strategy that has been well communicated that from the get-go of kicking off Standard Lithium, building these projects benefits from having strong partners that are aligned. The Southwest Arkansas project is an extremely valuable opportunity for the scale and the existing regulatory environment in Arkansas. The preliminary feasibility study that we concluded in Q3 of last year influenced how we would move that project forward. The brine grade results were exceptional, and the opportunity to develop that large-scale project became increasingly important. The expertise that was necessary to keep it moving forward in a timely manner required subsurface expertise and project development excellence that an oil and gas major could bring. We've seen interest in this region from super majors taking a Smackover, which opened additional doors that we had been pursuing but really moved the needle on the opportunity presented. The timing of the work we have done in East Texas aligned exceptionally well with that. The challenge has been in the market with the lithium pricing cycles we've encountered. However, having a strong asset made these demand extremely attractive. We always wanted to maintain majority control of these projects and bring the required capital to move them towards a final investment decision, which aligned with our strategy of maintaining control and getting the necessary capital to create additional shareholder value before tapping the markets. The additions of Salah and Mike this year have allowed us to engage at that level. I'll bring Mike Barman onto the call now, our Chief Development Officer, to share how we executed this strategy. Mike, if you're ready to jump on.

Thanks, Robert. In answering your question, Greg, there were a number of things. Just to add to what Robert said, in selecting the partner, we were clear that we were looking for a partner, specifically in the oil and gas space, due to the complementary skill sets to what we're aiming to achieve with this project. Ultimately, we wanted to reduce as much risk from the projects as possible. We wanted to offer meaningful ownership to this partnership. Retention of operatorship and control was important to us. We sought out a partner that demonstrated a priority on sustainability and ESG criteria, which can sometimes vary regarding views in the oil and gas industry. Finally, we aimed to ensure that sufficient ownership was allocated so that all parties had a meaningful stake in the success of this endeavor. Balancing that with sufficiency of funding was critical to our decision-making process.

Great. Thank you very much. If I could just get one quick follow-up. In terms of the final investment decision for SWA, the presentation mentions 2025. Do you believe that would be a first or second half type event?

So, I'll pass that over to Andy on the project development side.

Yes, thanks, Robert. Hi, Greg. We've got work to do. We're starting this partnership with Equinor. We have the FEED work to complete, as well as putting out the definitive feasibility study. I think one of the key things, as Mike mentioned, is starting to move through the project finance process, gaining a true understanding of what Equinor can contribute to the project finance part of the development cycle. I'm not going to give guidance on timing just yet, as there's a lot of work ahead. However, we're very comfortable providing a 2025 timeline for FID. There are many tasks to achieve between now and then, but we feel that we're in a great place with Equinor as a partner to move toward a final investment decision in the next calendar year.

Great. Thank you very much.

Our next question comes from the line of Jeff Robertson with Water Tower Research. Please go ahead.

Thank you. Good morning. Andy, can you talk a little bit more about the DLE column at the demonstration plant, and how you can extrapolate the learnings from that plant and all the cycles that you've run to Southwest Arkansas?

Yes, of course. Yes, thanks. Thanks for the question, Jeff. The purpose of the demonstration plant is multi-pronged. What we're aiming to do is continually process real brine in real-time at the demonstration plant, and continually make learnings to figure out how to simplify the flow sheet and operations. The commercial column that we installed is an eight-foot tall, four-foot diameter column. The column design precisely matches what will be deployed at the project, be it at Lanxess, Southwest Arkansas, or eventually into East Texas. We've executed extensive work at the plant. As mentioned, we've run over 17 million gallons of brine through the system and over 8,500 cycles of the DLE columns, with the Koch Technology. Through this experience, we're acquiring an exceptional understanding of how the Smackover brines react when processed for lithium extraction. The learnings from the demo plant regarding Southwest Arkansas include optimizing filtration and gathering lithium extraction data that will inform the final investment decision. We have additional process testing work planned as well. We'll be using real brines from the Southwest Arkansas project. Although we've engaged with Southwest Arkansas brines in our technology previously, more work will continue through the summer, consistently adding to our already expansive data and understanding. We’re very confident in progressing towards the final investment decision as swiftly as we can with the most robust knowledge of DLE in a natural brine resource.

Do the higher concentration, do the higher lithium concentrations in the brines significantly lower the cost to extract lithium?

Yes, I mean, basically, Jeff, with a DLE process, if you think about it in its fundamentals, you are building equipment that processes brine in a continuous 24/7 fashion. To produce a ton of product, whether lithium carbonate or lithium hydroxide, if the brine grade doubles, the equipment needed for processing can be smaller, and the costs significantly decrease. We've published project economics for Lanxess 1A, with an average brine grade of around 220 milligrams per liter, in comparison to Southwest Arkansas, with a PFS study that indicated average brine grades of around 440 milligrams per liter. The improvement in project economics becomes apparent as the brine grade improves. In our experience, lithium grade in the brine is the most significant factor influencing project economics. The higher the lithium grade, the less costly it is to build and operate; it's that straightforward.

Thank you.

Our next question comes from Noel Parks with Tuohy Brothers. Please go ahead.

Hi, good morning. I just had a couple. I'm just curious, did Equinor have any investment itself in DLE technology? Had it done any experimentation of its own? I'm just wondering what steps they might have taken before linking up with you?

Yes, Equinor, thanks Noel, for the question. Equinor, through their venture capital, has invested in direct lithium extraction in a project in Europe, a geothermal project. So, they do have and have been paying attention to the sector. I want to provide some background before passing it over to Andy, as our team has spent numerous months on due diligence regarding this. We've actively engaged with strategic partners including Equinor since 2017, to identify those who could provide skilled capital aligned with our goals. Our initial meetings with Equinor go back as far as 2018. Thus, continual dialogue has been crucial to our partnership — discussing direct lithium extraction and its potential for unlocking globally significant resources effectively. Andy can dive deeper into the DLE aspect and the diligent work we've accomplished with Equinor.

Yes, thanks. Hi, Noel, this is Andy. As Robert stated, Equinor has invested in Lithium de France, a geothermal project in Northeastern France, within the Rhine area. They’ve been working in the DLE space for several years and have carefully vetted the technology we will be implementing at Lanxess, Southwest, and East Texas. They have been pleased with the performance of the Koch Technology in our flow sheet at the demo plant. Presently, we view the partnership with Equinor as a highly complementary addition to our existing relationship with Koch. We look forward to expanding on that as we progress through the projects.

Great. Terrific. I was also wondering, as far as additional leasing goes, particularly East Texas, is there any sort of area of mutual interest arrangement, or anything that governs how much Equinor may participate in the project's expansion?

Yes, thanks, Noel. We developed areas of mutual interest for the purpose of co-developing the East Texas assets. So, yes, we've outlined boundaries for where our joint venture contemplates. These areas are extensive. As we've previously mentioned, we've been working in East Texas for nearly four years. We have a clear understanding of where we want to focus, and we've already established a significant presence in those locations. The liquidity injection, as Salah described earlier, empowers us to accelerate our leasing activities. Our established foothold in the key resource areas of East Texas is now strengthened with this mutual interest concept with Equinor.

Great. That sounds exciting. Thanks a lot.

Our next question comes from the line of Jeff Robertson with Water Tower Research. Please go ahead.

Thank you. With respect to Equinor, do they bring any new contacts or reach to the table as you look to negotiate off-take agreements with customers? I'm particularly thinking, do they open any doors for you in Europe or the EU that other partners couldn't have opened?

I'll start on that one. Thanks, Jeff. Equinor brings significant commercial arrangement strategies that will greatly benefit what we're building. There is significant interest in off-take from a strong U.S. project that has great sustainability criteria surrounding it. However, there hasn’t been any lack of interest in securing off-take from a U.S. asset, from both domestic requirements and from Asia and Europe. When I say Asia, I mean Korea and Japan. Equinor’s expertise in the commercial arena will truly benefit us. Post-announcement, we've received significant congratulatory messages and ongoing follow-up from the parties we're already engaged with. I'll quickly hand it over to Mike for additional comments.

Thanks, Robert. I think the answer is yes, Jeff. We are delving into those details over the next couple of months.

There are no more questions at this time. Mr. Mintak, back over to you.

Thank you, everyone, for joining today's call. We truly appreciate your interest in Standard Lithium and value your continued support. For any further information or inquiries, please feel free to contact our Investor Relations team. Thank you once again, and have a great day.

This concludes today's call. You may now disconnect.