AMG Critical Materials N.V. (AMG) Earnings Call Transcript & Summary

Good day, everyone, and welcome to today's AMG Q2 2024 Earnings Conference Call. [Operator Instructions] Please note that this call may be recorded. [Operator Instructions] It is now my pleasure to turn today's call over to Head of Communications, Michele Fischer. Please go ahead.

Welcome to AMG's Second Quarter 2024 Earnings Call. Joining me on this call are Dr. Heinz Schimmelbusch, the Chairman of the Management Board and Chief Executive Officer; Mr. Jackson Dunckel, the Chief Financial Officer; Mr. Eric Jackson, the Chief Operating Officer; and Mr. Michael Connor, the Chief Corporate Development Officer. AMG's second quarter 2024 earnings press release issued yesterday is on AMG's website. Today's call will begin with a review of the second quarter 2024 business highlights by Dr. Schimmelbusch, Mr. Connor will comment on strategy, Mr. Dunckel will comment on AMG's financial results and Mr. Jackson will discuss operations. At the completion of Mr. Jackson's remarks, Dr. Schimmelbusch will comment on outlook. We will then open the call to take your questions. Before I pass the call to Dr. Schimmelbusch, I would like to expressly refer you to our statement on forward-looking statements and the meaning thereof, as we have used at all previous occasions and we will use at this earnings call, and which will explanatory statement has been published as part of our financial presentation and on our website, all in connection with this earnings call. I will now pass the floor to Dr. Schimmelbusch, AMG's Chairman of the Management Board and Chief Executive Officer.

Thank you, Michele. The second quarter 2024 adjusted EBITDA of $39 million reflects the success for our strategic positioning and the diversified Critical Materials business model, enabling us to navigate market volatility effectively. Aerospace continues to be a source, of course, with AMG Engineering securing $90 million order intake in the second quarter ended June 30 order backlog of $310 million. Additionally, AMG Chrome, AMG Graphite and AMG Antimony all performed well compared to the second quarter last year, and it is noteworthy that every operating unit at AMG was profitable in the second quarter of 2024. I now come to growth opportunities. And to speak about our growth initiatives, I have the pleasure to introduce our newest management board member, Mike Connor, who was voted in our Annual General Meeting in May, with a nearly unanimous approval for appointment. He's AMG's Chief Corporate Development Officer, managing all the AMG's strategic branches and he will speak on corporate strategy going forward. Mike?

Thank you, Heinz. The highlight of the second quarter 2024 was our acquisition of strategic interest in Savannah Resources, which made AMG the company's largest shareholder. Savannah is the sole owner of the Barroso Lithium Project in Northern Portugal, which is Europe's most significant resource of hard rock spodumene. In this partnership, AMG looks to contribute its expertise in sustainable mining practices and mineral extraction technologies, bringing to the table, a wealth of experience in operational efficiency and environmental stewardship. With current low price levels, AMG has been able to increase its access to lithium resources with minimal capital outlays. We believe this collaboration marks a significant milestone in the development of European [indiscernible]. Our strategic growth investments of the Brazil lithium [indiscernible] the expansion of our lithium concentrate plant from 90,000 tons to 130,000 tons is ramping. And we expect to reach full nameplate capacity of 130,000 tons in the fourth quarter this year. In Bitterfeld, Germany, the qualification process for our lithium hydroxide refinery's first 20,000-ton model is underway, and the production batches are expected in the third quarter of 2024. Both of these projects strengthen our position in lithium hydroxide. With the successful ramp-up of our Zanesville, Ohio plant, we have not only expanded our custom capacity, but also reinforced our position as a leader in the vanadium industry. Looking ahead, we remain focused on innovation and sustainability as we believe that vanadium is positioned by a major role in the future of renewable energy. On this note, our vanadium electrolyte plant at Nuremberg, Germany is in the final stages of completion. We expect to have meaningful capacity available by the fourth quarter of this year as part of our vertical integration into lithium batteries. Our vanadium business demonstrated a strong volume growth of 23% in the second quarter of 2024 versus the second quarter of last year, helping to offset a 29% decline in price. Our operations in Ohio continued to be the low-cost global producer of ferrovanadium significantly outperforming primary mining operations. We believe the future of energy storage systems will be driven by ongoing innovations and increasing efficiency, reducing cost and expanding storage capacity. Advancements in battery technology, such as solid-state batteries and flow batteries, hold promise forever higher energy advantages and longer life span. Moreover, artificial intelligence and advanced controls systems are integrated to optimize energy storage operations and maximize [indiscernible] AMG Lithium is in the forefront of this year and is currently engaged in the executing several battery projects to optimize energy management of industrial plants and incorporate renewable energy resources. And the recent inflation in the service hybrid energy storage system with a 4.5 megawatt hours of capacity, integrating wind and solar energy for our major industrial clients, enabling 80% storage capacity. We believe there's massive potential in this space, and we are well positioned to capitalize on the graphite and chrome demand. I'm also pleased with our significant liquidity to support our many growth opportunities. Cash flow on hand is $308 million over $500 million of total liquidity. I will now pass the floor to Jackson Dunckel, AMG's Chief Financial Officer. Jackson?

Thank you, Mike. I'll be referring to the second quarter 2024 investor presentation posted yesterday on our website. Starting on Page 5 of the presentation, I'd like to reiterate Heinz's comments about the strength of the EBITDA performance this quarter. With very low lithium and vanadium prices, the rest of AMG's portfolio demonstrated significant strength and delivered excellent results. Net loss attributable to shareholders for Q2 2024 was $11 million, but this is strongly affected by our strategic project costs, which represent the ongoing investment into our battery-grade lithium hydroxide business and our LIVA battery growth plants. Combined with an inventory cost adjustment and restructuring charge, these three items accounted for a $14 million earning deduction. Moving on to Page 6. You can see the price and volume movements for our main key products represented by arrows, which I'll go into in more detail as we review the segmental slides. On Page 7, you'll notice that we've added a new slide displaying our leverage and valuation figures for the current quarter as compared to year-end 2023. It's important to note that we've invested $650 million over the last 4 years for our lithium and vanadium expansion projects, which has impacted the return on capital metrics displayed here. Nevertheless, we have significant liquidity to support our future growth opportunities. Now I'm going to review our three segments, and I'll start with AMG Lithium, which is shown on Page 8 of the presentation. On the top left, you can see that Q2 '24 revenues decreased 71% versus Q2 '23. This was -- this decrease was driven by a 59% decline in lithium prices as well as by lower lithium concentrate volumes, which are impacted by the ongoing ramp of our spodumene expansion currently underway. Q2 '24 gross profit decreased $4 million from $90 million in the second quarter of '23, due mainly to the aforementioned decline in lithium prices. EBITDA for the second quarter 2024 came in at $2 million. The quarterly CapEx shown on the bottom left of $16 million was driven by our two expansion projects in Bitterfeld, Germany and Brazil. Turning now to Page 9 of our presentation, which shows the AMG Vanadium segment. AMG Vanadium's revenue for the quarter decreased 7% to $168 million compared to Q2 '23 due to lower sales prices across the segment, which were partially offset by increased volumes in vanadium and chrome metal. Q2 '24 gross profit increased by 15% compared to Q2 '23, due mainly to the higher sales volumes in vanadium and chrome metal. Q2 '24 adjusted EBITDA increased 27% compared to Q2 '23 to $20 million, due to increased volumes in vanadium and chrome metal as well as the ongoing benefit of Section 45X production credit for which AMG Vanadium has qualified. This benefit is currently running at $10 million annually, but we continue to discuss with our advisers as the RS finalizes the regulations. Given the uncertainty we are aiming for conservatism around our estimates. Moving on to AMG Technologies on Page 10. Starting on the top left, you can see that Q2 '24 revenue increased by $33 million or 26% versus Q2 '23. This improvement was driven by strong revenues in our Engineering units as well higher sales volumes of silicon, graphite and antimony and higher sales prices of antimony. Adjusted EBITDA of $18 million during the quarter was more than 3x to $5 million in the prior year. The increase was primarily due to higher profitability in our Engineering business as well as strong performances from our Graphite and Antimony units. AMG Silicon began operating two of its four furnaces in March of 2024. As we plan to run two of four furnaces for the remainder of the year, the results of AMG Silicon remains excluded from EBITDA. Turning now to Page 11 of the presentation. On the top left, you can see the AMG's Q2 '24 SG&A expenses were $45 million versus $49 million in Q2 '23. The decrease was largely attributable to a onetime pension expense related to employee benefit plans in Q2 '23, partly offset by the increase in headcount in our Lithium, Engineering and LIVA businesses. AMG's net finance cost in Q2 '24 of $8 million, is 3% higher than in Q2 '23. AMG reported an income tax expense of $11 million in the second quarter of '24 compared to $27 million in the second quarter of '23. This variance was mainly due to lower profitability in the current quarter, but also due to a $7 million increased deferred tax expense related to the depreciation of the Brazilian real versus the U.S. dollar. Fluctuations in the Brazilian real exchange rate impact the valuation of the company's deferred tax positions in Brazil. AMG paid taxes of $4 million in Q2 '24 compared to tax payments of $35 million in Q2 '23. The reduced cash payments in the current period were largely a result of the decrease in profitability year-over-year. Turning to Page 12 of the presentation. You can see on the top left, the cash used in operating activities was $9 million in Q2 '24 compared to cash from operating activities of $60 million in the same period of '23. This was due to lower profitability in the current quarter as well as ongoing working capital investment into our lithium businesses. AMG ended the quarter with $453 million of net debt. And as of June 30, '24, we had $308 million in unrestricted cash and $200 million available on our revolving credit facility. As such, we had $508 million of total liquidity at the end of the quarter. That concludes my remarks. Eric?

Thank you, Jackson. Although falling prices for lithium and vanadium products negatively impacted our financial performance in the quarter, all operating units are performing on or better than planned. We continued our cost reduction efficiency programs in the second quarter. And as Mike mentioned, the execution of our strategic growth projects remain on schedule. Our Brazil lithium operation delivered 17,092 metric tons of lithium concentrate in the second quarter. The average realized sales price was $891 per ton except China and the average cost was $543 per ton except China. Both total production volumes and the net cost of production was better than planned and underscore the strong execution and low-cost position of our lithium concentrate operations in Brazil. Our lithium concentrate plant expansion from 90,000 tons to 13,000 tons per annum is ramping up, and we expect to produce at 110,000-ton annualized capacity in the third quarter and at 430 million tons annualized capacity in the fourth quarter. AMG Lithium's battery-grade lithium hydroxide refinery's first 20,000-ton module in Germany is on schedule. The plant will set new industry standards on quality management, safety and product handling for lithium hydroxide. We have completed commissioning of the utilities, the fully automatic warehouse and the feedstock product transportation system and are in the process of full commissioning. We expect to ship production batches in the third quarter of 2024. AMG Vanadium's operations in Ohio continued to perform exceptionally well and exceeded target production volumes in the first half of 2024. The production from the roasting operations achieved record high production in June. Our operational and financial performance continues to exceed the performance of our publicly listed competitors as today market prices are below many of their operating costs. It's important to note that EBITDA of our Vanadium segment increased by 27% in the second quarter of '24 over the prior year period, while at the same time, ferrovanadium prices fell 29%. This is indicative of our team's operational focus and further validates the value of the economics -- and economics of our recycling business model. In May 2024, AMG Titanium signed a multiyear contract extension with SAFRAN to supply titanium aluminides for production in the CFM International LEAP engine. The AMG's Titanium Aluminide materials are used to produce low-pressure turbine blades for LEAP engine, used in the single-aisle of the aircraft. Titanium aluminide blades are resistant to temperatures in excess of 750 degrees Celsius and reduce the mass and weight of the blades, contributing to the improved performance in reducing fuel consumption by 15% versus prior engine models. AMG Titanium has supplied titanium aluminide to SAFRAN since 2014 for the LEAP engines in the Boeing 737MAX and Airbus A320 families. AMG Titanium was able to deliver synergies with AMG tracking technologies, our engineering business, to jointly develop the technology and equipment to produce systems. In terms of our Technologies segment, AMG Engineering signed $90 million in new orders during the quarter, driven by strong orders of remelting and turbine blade coating furnaces. And as mentioned, we have an order backlog of $310 million at the end of the quarter, driven by the strong aerospace market. Our other operating units under the AMG Technologies' umbrella, antimony and graphite, also performed exceptionally well in the quarter and made a significant contribution to the $12.4 million in the quarter-over-quarter increase in AMG Technologies' EBITDA. I'm kind of repetitive when I say this, but throughout our organization, our overriding operational objectives are to be the low-cost, highest quality and most environmentally responsible producers of our products. I would now like to pass the floor to Dr. Schimmelbusch, AMG's Chief Executive Officer.

Thank you, Eric. AMG Lithium BV, the parent of all of AMG's lithium activities, we commissioned the first European lithium refinery on September 18, '24. At the site in Bitterfeld, in section undeard AMG Lithium will produce lithium hydroxide battery grade with an annual capacity of 20,000 tons per year, enough for the batteries of around 500,000 electric cars. With the refinery, we are making a decisive contribution to securing the supply of the critical raw material for the industry in Germany and Europe. The establishment of our own complete lithium value chain also contributes to the European Critical Materials Act and offers data independent for our materials and critical materials. The development of the battery industry in Europe is in full swing despite the many discussions surrounding e-mobility. Lithium hydroxide is one of the most important critical materials, and we are ready for the ramp-up with this lithium refinery. In addition to the reliable supply of lithium resource particularly well, we score particularly well on our technological expertise. Our team has a large number of years of experience in the production of battery grade lithium source of the highest quality. Now looking ahead, we remain focused on our lithium projects and anticipate improved market conditions. We expect our adjusted EBITDA to exceed $130 million for 2024. Operator we would now like to open up for questions.

[Operator Instructions] We will take our first question from Ephrem Ravi with Citigroup.

A few questions. Firstly, Savannah's scoping study estimated CapEx for the project of about $280 million, and they have also said you can offtake upto 90 kilo tonnes per annum for 10 years if you provide them with a funding solution. Given the market cap of around $100 million, isn't buying out Savannah profitable to providing the funding for another 45,000 offtake? And again, just if you can give us a context why you just kind of took an 18% stake and not a bigger chunk of the company?

Talking about the financing of Savannah is a little early because the project is under development. But let me mention one particular item. We are operating in Germany, and we have an offtake agreement with Savannah. And all of that leads ultimately to project financing, which is a major element of which is the German government institution which provides government-guaranteed long-term financing for Critical Material input contracts. And that's significant synergies between Savannah and AMG.

Also on your new term loan of $100 million, you have said that you will use it for lithium resource development. Just to clarify that it means upstream resource development rather than downstream processing capacity, if I'm interpreting it correctly.

Yes. Correct.

Okay. And last one, as you ramp up to 130,000 tons of lithium concentrate, could you give us an indication if you're expecting any improvement in unit cost at [indiscernible]?

Eric?

Minor improvement. Minor improvement, actually. And of course, the Brazilian real has weakened recently, that may also help us on those production of our costs.

And just be reminded that our cost is [ $550 ] delivered to China, which is a very, very low mark.

[Operator Instructions] We'll take our next question from [ Tom Robinhorse ] with ABN AMRO.

[ Tom Robinhorse ] ABN AMRO. So one question from my side. I saw the strong operational performance in the vanadium sector, I was just wondering if you can give any guidance on the margins going forward? If this is sustainable.

I think it's sustainable. The Vanadium segment includes our vanadium operations in Germany as well as Ohio and our chrome businesses. And as we mentioned, our vanadium recycling business model is exceptionally strong. Our production costs are, as we mentioned, lower than our competition. So I think we'll -- other than any onetime adjustments, I think vanadium profitability is sustainable.

I mean, if you saw maybe, in particular to the vanadium business, and our vanadium business is contrary to the primary vanadium mining business is benefiting from fees which we collect for recycling, for extracting the vanadium and other metals from this spent catalysts which we use as feed material. And the metals expected our vanadium, but also melt [indiscernible]. So we have metals in a way. [indiscernible] is cash. So we, in a way, have negative mining costs in a sloppy definition. So that is an intrinsic competitive advantage vis-a-vis primary mines, which I think is very important in phases of low vanadium prices. So that's, I think, the reason for the stability of our vanadium business. So we are still increasing production and we perform -- receive fees to do what we do. Thank you.

We will take our next question from [indiscernible] with ING.

[indiscernible] from ING. First question, what's driving the strong earnings recovery in Engineering? And do you see this improvement are sustainable?

Engineering is benefiting from a strong demand of high-performance steel-related furnace [indiscernible] And that, in our interpretation, is a function of growth in that sector, aerospace related. And also in renewable -- in renewed capacity drives. So the plants -- globally, the plants in high-performance steel-related furnaces are pretty old and they are undergoing renewal -- renewing both in America and in China. And that is, I think, the beginning of a longer-term development. So which benefits us, as we have very high market shares, in the furnaces related to that material, high performance fees. Now the other plan in this business is that every year, the percentage of secondary raw material in all these, of our customers' plants, is increasing. Remelting, in fact the use of -- perfection of the use of remelt and rescrap melting, and that is a trend which is ongoing and it won't stop in the foreseeable future to the contrary.

Okay. In your outlook statement, you mentioned that you anticipate improved market conditions, is this tied to lithium? And can you provide some context as pricing still seems where you used to do?

It is a -- I think, it's a wide-ranging comment. If you look at the cost curve of, for example, lithium, and there are -- at depressing prices, there's a certain significant percentage of producers which are below cash cost, operating below cash cost, prices below cash costs. Now you can have predictions of how long that is sustainable. But it is reasonable to assume that there will be a reduction of capacity. We, secondly, believe that the demand as against -- as mentioned as against more pessimistic statements proves to be globally rather stable. Meaning, the growth rates are rather stable. And if those two things meet, then it is reasonable to expect a price correction. Now the prices are, of course, artificially, in our interpretation, discounted because of particular raw materials in China for [indiscernible], which are high-cost mines, high cost environmentally [indiscernible] mines, which are operated as vertical integration of parts of the Chinese production. So that is, I think, also not necessarily sustainable. That's lithium. Vanadium, two of the Western -- and I think there are a lot more. There were two of the Western primary producers are operating below cash cost. So prices below cash costs. And that is, of course, an unsustainable situation. So as prices are low and, in our interpretation, partly are efficiently low given the strategic orientation of some of these industries, this will correct itself.

Okay. Great. And my last question is what is your review on the current new battery supply chain, where some players are backtracking on their EV growth plan or switching to LFP over LMC?

Well, we believe when we look -- when we analyze the demand statistics, there is not much of a change. When you look from the forward line to 2030, there are only minor corrections, insignificant corrections of the estimated total demand of the EV cars in 2030 vis-a-vis. So the demand seems to be rather resilient. And so that's all we can say. We have our statistics analysis and that is the result. So we believe that the demand will be developing rather strong.

[Operator Instructions] And it does appear that we have no other questions at this time. I'll turn the call back over to Michele Fischer for any closing remarks.

This concludes our second quarter 2024 earnings call. Thank you, everyone, for joining.

Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time.