Arcadium Lithium plc (NYSE:ALTM) Bank of America Securities 2024 Global Agriculture and Materials Conference February 27, 2024 2:00 PM ET
Company Participants
Paul Graves – Chief Executive Officer
Unidentified Company Representative
Thank you. Our next session is with Arcadium Lithium of course created from the recent merger of Livent and Allkem. Arcadium owns a number of Argentine assets — I did it, sorry, number of Argentine carbon assets as well as spodumene hydroxide conversion assets globally. Please join us in welcoming Paul Graves, CEO for our fireside chat. Well, Paul, let’s start off this discussion. Again, please submit questions on the app. We’ll make us interactive and I will read them.
Question-and-Answer Session
Q – Unidentified Analyst
Let’s start with the merger rationale. So, you’re combining operations in Argentina. You have some development efforts in Quebec, you have increased flexibility from serving customers, multiple assets, you’re feeding hydroxide plants and multiple carbon assets now. Maybe talk about the merger rationale?
Paul Graves
Yes. Look, I think the starting point for the merger rationale from our perspective is that we believe that in the long run, the most successful lithium companies are going to be fully integrated. You’re going to have control of the resource and you’re going to have control of downstream processing and you’re going to have control of the customer relationship. And they’re all important. People ask me sometimes where is the value? The value is really spread throughout that chain.
And what we saw was an opportunity to accelerate this plan of both growth and growth as an integrated business through the merger more than either one of us would have been able to do independently. We certainly have complementary expertise whether it’s in downstream hydroxide or brine-based processing or hard-rock mining. And I think we also have a much stronger balance sheet as a result of the transaction. It allows us to continue to invest as we’re showing today through these cycles while at the same time having greater operating efficiency, higher margins, bigger and deeper relationships with customers.
Final point I’ll make is that, we talk about scale being important in this industry, not scale for the sake of it, but scale with customers. You cannot be a small supplier to a customer. You just slip too far down their priority list and you need to be one of the top two or three suppliers to each customer you have. And if you’re going to have more than one customer that means you just need to be bigger.
Unidentified Analyst
So, let’s go through some of the things that you talked about last week. I have announcements as part of your first outlook for the combined company. So, you announced that you’ll be slowing down expansions including the massive Quebec spodumene mine, some of the expansions happening in Argentina at Sal de Vida, the greenfield and the Fenix carbon assets, which we call Hombre Muerto. We all know what’s happened in lithium markets, but please elaborate on the rationale for slowing down some of this growth.
Paul Graves
Yes. Look, I think there’s two reasons behind it. We have to run the business based on the environment we’re in today. And pricing is lower today than it was a year ago, lower than when we announced the merger. These projects all still make sense at what we believe the future lithium price is likely to be. But you have to recognize that, if pricing stays where it is today, we don’t generate the same level of profitability in the short-term or the same cash flow.
And so, we have to take a look at all of our development plans and decide how quickly are we going to develop them. Does the market even need all that volume on the time frame that we were looking to put it in place? We’re somewhat fortunate that Sal de Vida which came from Allkem and Fenix or MDA or Hombre Muerto or call it whatever you wish, from Livent are basically right next door to each other.
And so, the opportunity to slow those down and look at ways for them to be developed in partnership, particularly because on ground-based resources, all of the cost, all the complexity is really aboveground infrastructure that the ability to slow it down actually we think will quite likely end up with a lower capital cost for those two than if we carried at the same pace.
Quebec’s a little different. We have the Nemaska which will continue to develop. We’d already had the mining at Whabouchi little bit ahead of the hydroxide plant at Becancour. So, the scope to rethink about the timing there so that we still are on track to produce hydroxide on time.
And then, when we want to look at James Bay, we still think there are opportunities to optimize in Quebec. Nemaska sort of single-entry gated entity, but on the right circumstance as opportunities to think about downstream resource for James Bay at Becancour maybe even exactly the same location, the location is large enough.
So, in some regards it’s not great that we have to slow down. We will be late to bringing volume to market, six to nine months later maybe. But I think it will give us the chance to maybe take the opportunity to look at these projects collectively and drive some benefits from there.
Unidentified Analyst
And you also lowered some production at the Mt. Cattlin legacy Allkem mine?
Paul Graves
Yes, we did. I mean, Mt. Cattlin’s very much end-of-life for those of you who know the mine. It’s got somewhere between one and three years of life left. And so, in today’s cost environment, it just didn’t a price environment just didn’t make it sense to maximize production of a mine that’s almost end-of-life.
So, the aim frankly is to slow down production, minimize the amount of material we sell at low prices. And if the price recovers great and if it doesn’t, we’ll end up in the same place we would have been anyway where Cattlin will be shut down.
Unidentified Analyst
So, let’s talk about that and then we’ll go back to Argentina and Quebec. So spodumene price around $850, $900 ton something like that now. If these prices stay spot spodumene, do you run Mt. Cattlin 2025?
Paul Graves
Probably not.
Unidentified Analyst
And what would you need to ensure that it’s — what price point do you need to keep it going?
Paul Graves
I think if you look around, a lot of people say, $1500 a ton is where a lot of investment decisions are being made in spodumene. I think Mt. Cattlin needs pricing in that kind of range for it to make sense to extend the mine life another two or three years. If you’re going to go underground, which is what comes after that, two or three years, it’s probably even a higher price. So, I think it’s probably fair to say it’s hard to see Mt. Cattlin going on beyond two or three years. But it’s entirely possible. I mean, who knows? Spodumene prices were $6,000 a ton, not that long ago.
Unidentified Analyst
Okay. Let’s talk about Argentina. So now you’ve got two-close located — sorry, you have not sorry — again, you have two assets that are in production right now. And talk about things you can do to maybe integrate and make the Argentine business better, where you’ve got Olaroz, that’s mostly a technical-grade lithium, technical-grade carbonate producer. You have Fenix or Hombre Muerto that mostly produces basically battery-grade carbonate. Are there things you can do with conversion plants and the feedstock to optimize things?
Paul Graves
Yes, I think there’s a reality of producing carbonate from brine is that generally speaking, particularly with a conventional system, you produce some technical-grade carbonate and you can produce more carbonate, if you’re willing to lower the quality. For many pond-based systems, you can never really get to 100% battery-grade. We today send most of our battery-grade carbonates into the lithium hydroxide space and we refine it into battery-grade lithium hydroxide. We don’t need carbonate as good as what we use. It just so happens that the former Livent’s DLE process produces battery-grade carbonate as pretty much standard.
The optimization opportunities to take the lower value technical greater into the hydroxide side and sell the battery-grade carbonate. And it’s an interesting one because what you find is, if you’re going to sell technical-grade carbonate in a market like 2023, you’re not really disadvantaged. I mean hydroxide didn’t have a premium to carbonate then technical grade didn’t have a discount to battery-grade carbonate. But most of the time, and particularly in softer markets, you get a lower price for technical-grade.
So, we like to avoid selling technical grade where possible. So, the opportunity and what we’re looking to do is to optimize the flow of carbonate, which grades go into hydroxide, where we source the battery grade from. By the way, our customers are all looking for this. Pretty much across the board, every battery-grade hydroxide customer we have is now looking for some flexibility to take carbonate and hydroxide under those contracts. So having that degree of flexibility starting with battery-grade carbonate, I think, it’s going to make a big difference to our ability to attract the best customers.
Unidentified Analyst
So maybe over time, Olaroz carbonate ends up being converted in your plants in North Carolina and elsewhere, and you end up selling historical Fenix, Livent, battery-grade carbonate merchant market?
Paul Graves
Merchant market, but we sell it into the battery-grade market. It’s more likely to be done as part of a hydroxide contract with a major OEM. I mean, you all know, I think the OEMs are moving side to side, backwards and forwards on their own battery roadmaps from certainly very much high nickel and therefore hydroxide based to start with to LFP and mid nickel, which will tend to be more carbonate based. And so, they’re looking for flexibility too. And I think they’d rather do it, I had GM once say, I don’t need 10 lithium suppliers, right?
They’re looking to have a concentrated list of lithium suppliers that can meet all of their needs, hydroxide today, carbonate in the future, probably metal in the long run as they move to solid state too.
Unidentified Analyst
So, stay in Argentina here. So, if this current environment doesn’t improve, you now have some decisions. Do you prioritize spending at the legacy Livent carbonate? Or do you prioritize spending for the Sal de Vida greenfield which is ramping up? There’s two-part. How do you see the best use of capital?
Paul Graves
Yes. It’s a difficult one because we’re in that early phase of asking that question. I think Sal de Vida is a two-phase project. So is Fenix, the MDA Livent asset, there’s an assessment as to which makes the most sense to move into the next phase or maybe neither of them. Look bluntly, it may be depending on what the market conditions are. There’s a natural cut off point to not move into the next phase.
Finish stage 1, Sal de Vida and what we call 1B at Fenix and maybe we stop at that point. What we don’t want to do is stop projects partway through. We saw in COVID when we were forced to stop projects, it’s expensive and it slows you down a heck of a lot more than you realized. So where possible, we would rather optimize and slow down projects than stop them.
Unidentified Analyst
What do you think it costs you to slow down the carbon expansion at Hombre Muerto and Fenix?
Paul Graves
I don’t think there’ll be a big cost to slowing down the Fenix project. And I think when you look at Sal de Vida and Fenix together because of where they are, they’re both quite advanced, they’re both about half complete. I think with some relatively small changes to the execution plan, I think any increase in capital cost will be offset by savings in the execution plan. The cost is really the six- to nine-month delay of bringing the material online rather than necessarily a higher capital cost from slowing them down.
Unidentified Analyst
And while we’re talking about Argentina, I mean, we’ve got a new government, different policies. What do you think — what’s the trajectory like in Argentina right now, the environment for investment?
Paul Graves
It’s no different to how it’s always been. The one thing about Argentina is it’s volatile. It changes. It always changes, right. There’s no doubt that the new administration absolutely has certainly talks about implementing policy that will be favorable to investment in Argentina and now the real question is, can it actually deliver on those policies? And it’s difficult because I’m sure you know they don’t really control much of the machinery of government, but they do have an incredibly strong mandate to push their changes through. So, I think the environment is reasonably good. It’s just a little different than it was two or three years ago, which by the way, is a little different to how it was six or seven years ago, which was a little different to how it was 11 years ago. You have to learn to operate through different environments in Argentina.
Unidentified Analyst
Remember, you’re allowed to ask questions in the app and I will read them. So, let’s talk about Quebec now. So, like we talked about earlier, so you slowed down Nemaska, Whabouchi mines to catch up with Becancour, the conversion plant. Talk about I mean, we’ve been waiting to hear about what strategics might get involved with that whole project? Talk about maybe an update on that.
Paul Graves
When you said strategic?
Unidentified Analyst
Well, how we get, yes, involved with the like the product offtakes, strategic investments, like talk about some updates on that?
Paul Graves
Yes. Look, I think Quebec, there’s a few interesting aspects to Quebec. The resources are good hard rock resources. There is good infrastructure in terms of hydroelectric power. And I think that’s a really important point as we think about sustainability in our industry. Quebec itself has some, I think, some very good policies to attract customers into Quebec and is providing support at places like Becancour to build infrastructure there. But it’s still — look, it’s more expensive to mine in really cold locations. It’s more complicated to mine in these quite remote and infrastructure-poor locations.
I think it’s probably fair to say that getting permitted is not as easy in Quebec as many other parts of the world. I think it’s also fair to say that labor costs and construction costs are much higher in parts of Canada and Quebec specifically. But it’s IRA-qualified material. It’s a location that certainly has the support of many U.S. North American automotive companies. So, look, overall, we like it because it gives us geographical diversification.
Our customers like it because it’s IR rate-qualified material. And so, I do think it’s going to be an important part of the non-China lithium landscape. And there really isn’t much, let’s be honest. There’s very little non-China lithium processing available today in the higher-grade products like lithium hydroxide.
Unidentified Analyst
You have a partner in that project, Investissement Quebec or IQ. Maybe talk about that relationship? Are you aligned on how the project will develop? Who the product gets sold to? And how that might develop?
Paul Graves
I have to be careful because there are some IQ representatives in the room including some Nemaska board members. So, I’ll be careful what I say. No, look, I think we’re completely aligned. Look, while our objectives may come from different places, we both want the same thing. We want a successful Nemaska project.
We want it to sell to the best customers. Optimally, that will be customers that are reasonably closely located to Becancour. It’s much easier with lithium hydroxide to have a customer that’s close by than one that’s a long way away given the qualification, the product warranties you have to give, the challenges sometimes with those processes. I think we’re all really quite closely aligned.
Unidentified Analyst
Let’s see, if anything else I want to talk about before we get a little bit more.
Paul Graves
You know what any of our questions are? Come on, you can’t.
Unidentified Analyst
You know I won’t call.
Paul Graves
It’s never going to happen.
Unidentified Analyst
And you don’t want to have answers. I know this too. Actually, I want to ask a question. I don’t think on the conference call last week, like, I don’t know if Naraha, which is the legacy Allkem hydroxide conversion plant investment in Japan, if that came up. How is that going? What are the plans for that?
Paul Graves
Look, Naraha, for those who don’t know, it was built in partnership with Toyota Tsusho, the Japanese distribution arm of Toyota Motor Company. TOYOTA Tsusho themselves, we have a — they’re an investor in the Olaroz asset, the former Orocobre asset down there in Argentina.
And they have put a lot of capital to work. They’re a major investor now in Arcadium. They built a 10,000-ton lithium hydroxide plant at Naraha in Japan. It’s still in that phase of being brought online. I know you asked a question earlier about ex-China lithium hydroxide plants coming online and being successful.
One of the challenges is that probably the technically demanding customer is the Japanese customer. And so, Naraha has a lot of learning to do to bring itself up to the point that it can in fact produce not only battery-grade material but get itself qualified into some of these supply chains. It’s still at the early stages of that. We’ve seen this ourselves. We’ve built now 5-lithium hydroxide plants in the last five years, all of us similar size to Naraha.
There’s a bit of a learning curve to get up that they’re going through at the moment. And it is operated by Toyota Tsusho, not by Arcadium. So, while we are planning to help them move it forward, we haven’t done today. So, it’s a little bit earlier stage.
Unidentified Analyst
Let’s talk about the market a lot, which I know you like to talk about. We have some questions in two. So, a good question that’s here is so I’ll read it. It says, why has Livent/Arcadium seemingly been able to hold contract floors better than most peers? Is it product related, better terms, better customers, something else?
Paul Graves
I can only speak to what we do. And I think what we focused on when we put these contracts in place is a couple of things. We put flaws in place that we spent a lot of time explaining to the customers why we needed them. And they’re absolutely connected to the contractual commitments that we make.
And what do I mean by that? If we put a contractual commitment in place with the customer, it is likely to be increasing volumes over the life of the contract. So, if it’s a five-, six-year contract, volumes in year six look maybe 2x or even 3x what they were in year one. We’ve made it clear that that requires investment on our part and so we need certainty over price to deliver on that investment.
And I think generally speaking, we don’t try to get greedy with flaws. The whole point of a flaw is not for us to earn what I call excessive profits. It’s to protect us in environments like today where we want to keep investing and more importantly, the customer wants us to keep investing.
I think maybe a second reason is we only do it in hydroxide. Hydroxide is just a fundamentally different product than even battery-grade carbonate. The nature of the qualification process, not only is it complicated to qualify. Once it is qualified, the customer, the user, the cathode printer does not want to swap you out. They’re optimizing their processes for the material that you’ve supplied to them.
So, breaking a contract to save a couple of dollars is just frankly just not worth it for most of them. Not only have we seen no pressure today to challenge those flaws. To the extent that we’re having conversations with customers about new contracts and longer contracts which we are, the flaws that are being discussed are actually a little higher today than they were when we put these contracts in, which I think sort of reflects an acceptance of the customers that are doing a lot of work that the risk is asymmetric here. There’s more risk of the price kind of spiking than there is for it staying in a prolonged slump.
Unidentified Company Representative
And is that a risk now when you talk to customers that a boom bust lithium commodity, which what we’re seeing for the last little while, that’s risky because then you’re going to see a bunch of products get announced then get canceled. And then if people are worried about security supply, those things don’t get done in a bit — those projects don’t get done in the end or they get delayed years. Like let me talk about those discussions.
Paul Graves
Look, I think there’s a whole bunch of it. It’s really complicated. One of them is what they recognize is even if projects still come online, why would somebody continue to keep investing further downstream? It’s hard to build a hydroxide plant. It’s hard to produce qualified material.
They don’t want to create a scenario where those of us that have demonstrated the ability to do this are incentivized no longer to do this. Why not? Look, if the market is all just going to be commoditized and everything is pricing off the lowest common denominator, why would I invest more capital in a more challenging process if I’m not getting paid for it, if I don’t have some certainty around it all?
So, I think they are focused on the availability of usable product. It’s no use to them, frankly, if there’s a whole bunch more spot concentrate. Maybe there’s a bunch of Chinese converters that can do this, but they’re trying to diversify their supply chains.
I would just make the point that if you have a large global OEM entering into a contract like that with someone like Arcadium, it’s only a part of what you buy. This is not your entire portfolio, lithium hydroxide. They’re still buying a bunch of it in probably open market applications. And so, they will and they can take a portfolio approach to how they source their lithium.
Unidentified Analyst
So, I asked you a question on the conference call last week and it was about, how the market — I was asking Kent from Albemarle half an hour ago about this, right? How it seems the lack of visibility right now in the market, it’s always been a tough market, but I just find like industry players, people that should know, producers that should know information either relying on one piece of data from one data provider and everyone use it. The lack of visibility is very scary. And thank you for last week you used the word as opaque, the most-opaque ever. I used that in my comment. Thank you for that. But maybe just opine on that a little bit. In your long history in this space, how why would you say it’s the most-opaque you’ve ever seen?
Paul Graves
Well, I think it’s bigger and more complicated today. And more than ever it all runs through China. I think there have been some pretty meaningful changes in the Chinese market that were driven by the spike in lithium prices. And with five minutes left, I’ll maybe touch on a few of them. But I think one of them has been what we’ve seen is this constant rationalization you see in the China market.
And so, we saw in ’22 and ’23 a lot of pressure if you were a 2 or 3 Tier battery cell producer to justify your existence. And so, we saw a lot of probably what I’m going to loosely call speculative buying of lithium materials with people that didn’t really have a market for their cells.
But if they didn’t build them and market them and get out there, they were going to be out of business. And I think that created a real spike. We struggled to see why price went as high as it did. The fundamentals didn’t support it.
The second thing that we’ve seen is this large construction of, on the face of it, irrational lithium production, lipid-like based, African DSO-based production. And we see it not being switched off in this price environment. We know it’s probably costing between $23 and $30 a kilo.
And I think the second thing that’s happened, and I think this is a bit of a reaction to some of things like the IRA but other international attempts to diversify global supply chains away from China, is for China to secure long-term supply of lithium materials even if it’s two times the price of everything else.
And so, they’re not shutting them down because this is captive supply. And so, what it’s done many of these are owned by cell producers, they’re owned by battery producers. And so, what they’re doing and what they have done I think is built some integrated lithium supply, which takes out both demand from the market because this is not being sold it’s just being used captively but it also kind of locks up another piece of supply.
And so, it sort of temporarily shrunk the free market for lithium. But it’s also really difficult as a result of that to get insight directly into what is happening with some of those assets. So, I think a lot of these things are what’s been causing a lot of the confusion, the lack of clarity in the market more broadly.
Unidentified Analyst
So, I got a question from the app. It’s — would you expect, Paul, to see more M&A for the sector in general as the lithium prices remain depressed? And what might that look like for Arcadium?
Paul Graves
I think it’s really hard to do M&A, to buy something or sell something when it’s just a punt on where the lithium price might go in the long run because who knows. And I think, it’s unlikely that you’ll get perfect risk adjusted alignment between a buyer and a seller for cash purchases.
I think the Allkem, Livent merger structure is clearly the best way to do this but I can speak from experience, they’re not easy to put together, they’re not easy to line up and they have their own challenges as to what needs to happen.
I do believe being a single resource lithium company is not a viable structure in the long run. It’s extremely difficult to run your business with just a single resource even if it’s an integrated one. And so, I think there will be more pressure to be larger, to have multiple resources in multiple geographies, to be able to serve your customers with multiple products.
I think that’s going to have to result in some M&A. I don’t know it’s easy to do at a low-price environment, easy to do at a high price environment. It’s definitely easier to do in a stable price environment. And so, to me, price stability is more important than the absolute level of the price.
Unidentified Analyst
So, you have your first new board meeting coming up in a few weeks?
Paul Graves
We do.
Unidentified Analyst
Maybe talk about what the objectives for that are? What you think is going to happen in that board meeting? Or what are you talking about? What are you guys going to plan out? What do you think is going to be the key thing?
Paul Graves
It’s an island, so there’ll be lots of golfing lots of Guinness, I would imagine, maybe not. Island in early March. It’s not sunbathing weather. I think, look, what we’re really focused on is what is the long-term, what’s the right long-term strategy for a business like Arcadium that is going to deliver the most shareholder value?
Look, it’s very easy sometimes to take a resource-based approach and say we’ve got these resources, we should focus on bringing them online as quickly s possible and therefore maximizing revenue and maximizing EBITDA. But we also have to be sensitive to, frankly, valuation multiples as a public company.
Our aim is to drive the share price higher. And looking at what will this industry look like if we follow various strategies. I think we’ve been clear. Livent has followed a strategy historically of protecting our profitability in a downturn. And you can see that today.
Much of the profitability that Arcadium is looking at in today’s environment is really legacy Livent. But as the share price moves up, we go in the other direction and much of the increase in profitability that we are able to offer as the market price increases, which it will, is really driven by legacy Allkem.
And so, a lot of the conversations at the board are going to be, okay, so how do we manage this through different environments? How much do we contract? What is the right strategy? Who are the best customers? How much risk do we take on resource development? How much risk do we take in developing more hydroxide assets? What does this business look five years from now, not just five quarters from now?
So, it’s going to be — this is not just the first part, this is going to be a conversation our industry will be having for the next two or three years in my view.
Unidentified Analyst
Thanks, Paul. Appreciate it. Thank you.
Paul Graves
Thank you.
