Calix Limited (CXL) Earnings Call Transcript & Summary

Excellent. Thanks very much, Christineh, and thanks all for joining the webinar today. Obviously, hugely important announcement for us and very proud actually of the team that's been working on this for quite some time and obviously very thankful to be working with Rio Tinto who have been great to work with as well. It's a major milestone for us. The ZESTY technology has been around for a little while. We've tested ores from all sorts of -- from different iron ore players who we have -- continue to have very good relationships with. But Rio is really a great player to be moving forward with in this joint development arrangement. It's not exclusive. So I will make that clear from the start, but Rio are partnering with us in a joint development arrangement to help develop this technology. So -- in terms of the highlights of this particular deal, it's -- Rio is going to be contributing over $35 million to help us develop this technology, and it's a combination of cash and in kind. The cash is about $8 million component. It will be coming in, in 2 phases, $3 million and then a $5 million phase, and that will be coming in before we take FID on the project. So we're still targeting to take FID at some stage, hopefully, this financial year or soon after. And we're targeting as we move the project forward through certain milestones that, that cash comes in. It will come into Calix to be spent on the project. In addition, there's over $27 million in-kind support. That in-kind support takes several different formats. And I'll go through those a little further as we move through the pack. The other thing that's important for us is that the ZESTY unit demonstration unit will be located in Kwinana. We've sort of been a bit silent about the location of the plant up to this point, but we're very pleased to be able to now tell you that it's going to be located in Kwinana. I'll show you a map a bit further in the presentation of roughly where that is, both in terms of Australia, you're unfamiliar with Australia, but also in terms of Perth and also proximity to other projects, other important projects that are happening. Just in terms of the breakdown, if you like, and the support that we're getting from Rio Tinto, I talked about the 2 tranches of cash that are coming in. Rio are very keen to support us, get through a positive FID, which is great. We'll be working side by side with them as we develop it. They'll also be providing up to 10,000 tonnes of iron ore, and that's to help with the plant commissioning and ultimately operations. And also, which is really interesting, they're very keen to help us with respect to introductions to other potential users of the technology. What I'm talking about here are steel producers. So obviously, a lot of -- or all of Rio Tinto's customers are in their iron ore division are steelmakers. And so with respect to this potential agreement, the facilitation that Rio can bring to commercialize the technology cannot be underestimated. And it's great to have them there enthused for the potential of the technology and interested in making sure that they can introduce us to end users such as steel producers of green iron. So whereabouts are we located? So here's -- obviously, on the far right, the back of Australia. Hopefully, most people are familiar with that. The Pilbara region where a lot of Australia's iron ore is exported from is shown there in the upper sort of northwest of Western Australia. Kwinana is an industrial hub on the outskirts of Perth. So you can sort of see on the map of Australia where Kwinana is versus Perth. And the reason that we like Kwinana, there's a few reasons, but certainly, the proximity to the NeoSmelt project is interesting. Rio is a partner in NeoSmelt and also in the NeoSmelt project, BlueScope, BHP, Mitsui and Woodside. And what's interesting here is our little demonstrating unit targeting about 30,000 tonnes per annum throughput is using hydrogen to make a direct reduced iron. And that direct reduced iron is actually the feedstock that NeoSmelt need to look at to test what they're terming their smelting technology that they're developing there. And what smelting does is it helps purify the iron. And so what we've got -- if we can turn when we sort of turn Pilbara iron ores into iron, they still have some contaminants in there. And so what's interesting about the NeoSmelt project is they're looking at a technology to smelt and remove those contaminants. So we're getting a couple of different elements, if you like, of what could be quite an exciting opportunity ultimately in Western Australia for the production of green iron. So that's where we're going to be located. Rio are helping by providing a site to do this project. So that particular site there, if you read the Rio Tinto press release, it was a site they were developing for their BioIron facility. Rio were developing their own proprietary green ion technology called BioIron. They want to do a bit more research and development on that. And it's interesting that they'd like to move ahead with us on the same site that they were looking at for BioIron. And so it's a great deal for us in that Rio Tinto are bringing a site as well as all of the other support they bring in Kwinana. So that's where we're located. Just in terms of other support that Rio are giving, in terms of operations of the demonstration plant itself once it's built, they'll obviously have some use of that plant. They want to test some iron ores through it, and that's great. That will be nonexclusive. The plant will continue to be developing an industry solution, but Rio will have nonexclusive use of the demonstration facility. That will contribute to the ongoing costs via tolling type arrangement. The business model for the demonstration plant will be a tolling type of business model. And so with respect to the way that the demonstration plant will cover its cost is to charge a tolling fee and already Rio is going to be helping and contributing to that business model through a tolling arrangement. And they'll also facilitate the offtake of the iron we make. So we could be making it in the form of hydrogen direct reduced iron or hot briquetted or cold pelleted iron. And so there will be some help from Rio in the offtake out of that facility, which is great, really important for us. Just in terms of commercialization, when we think about commercializing a technology such as ZESTY, obviously, having a strategic partner of the likes of Rio really helps derisk. They have the option to take up shares in a ZESTY subsidiary for the $8 million in cash that they're looking to contribute. And so should we move past all of those points in the project and we get the $8 million cash in, Rio have the option to convert that cash into equity in a ZESTY subsidiary. So if you can recall, our Leilac deal, where for the cement and lime opportunity that we have here in Calix, we actually had money that we raised within Leilac to continue to help develop that Leilac business. And so there's an option here for Rio to do the same is to have equity in a subsidiary. With respect to the key terms, if you like, of a royalty and license arrangement with Rio, that's also been agreed. What that does is help validate the business model, if you like. And so when you have to think about, again, our Leilac business, we've got a couple of permanent global perpetual licenses now in place in Leilac. We've got a license agreement in place with Pilbara for our Pilbara Minerals project. And the key terms now agreed for a license agreement and structure for the iron and steel opportunity in our business with a company like Rio Tinto. And so what's interesting and what's important about that is the business model as a license and royalty business model continues to be validated and is now forming within another vertical within the iron and steel opportunity in this business. As part of that licensing arrangement, Rio Tinto have the ability to sublicense and so to their customers, for example, they have the ability to take our technology and license it to their customers, for example. And so that ability to market and sublicense significantly enhances the reach of a little Australian technology company called Calix. If you think of the muscle that Rio Tinto have and the reach, as very substantial aid to commercialization for us. And of course, just to emphasize, it is non-exclusive. So Rio, we do have the ability to continue to license to other members of the industry, both iron and iron ore producers and steelmakers. And so the technology is not locked up. Rio helping us develop it nonexclusively, which is a great outcome. So just in terms of pathways, I guess, to iron and steel production. So there's a few different ways that ZESTY can help decarbonize iron and steel. The first way is if we go all the way through, say, a direct reduced iron that's made with the ZESTY technology and that is green. And so that gets unsold, if you like, into some sort of smelting technology such as a NeoSmelt to remove the impurities and then ultimately into steel production, that's one production route. But there's also other ways that you can help start to decarbonize the iron and steel industry from a ZESTY type of technology. We've done all of our testing to date on Pilbara ores, which are typically sort of higher in contaminants or gain compared to, say, magnetites. 96% of our exports are what we call hematite, goethite ores or that have slightly higher contaminant content than magnetites. And so the ability to actually make a green iron hot briquette, for example, out of a ZESTY technology and then take that briquette and put that into a blast furnace, what that does is if you've made that briquette with green electrons, then that can help the blast furnace reduce its exposure, reduce its carbon exposure. It can back out a bit of the carbon that it uses in the blast furnace. And so with Asia, with a fairly young blast furnace fleet, they can't take all those blast furnaces and chuck them out and just put electric arc furnaces in run on renewable power. The ability in the interim to help those guys decarbonize is a really interesting opportunity. And so again, making a green briquette using a ZESTY technology, exporting that to blast furnaces in Southeast Asia and allowing those guys to reduce their carbon intensity with a green iron input is the other opportunity that we're looking at for ZESTY. So just in terms of -- obviously, with respect to Western Australia, recently, the Premier there was talking about the opportunities for green iron. Green iron is obviously, huge opportunity in Western Australia. As I mentioned, we've got nearly 1/3 of Australia's export income is coming from iron ore. And it's also under threat if there's green iron and steel that starts to be made from other parts of the world, green iron that are exported from South America or Africa, then Australia has an existential sort of threat there. So it's great to see that the government in Western Australia recognizes that. The government is very interested in setting up a green iron industry in the country. And obviously, with respect to where we're going to be building this in Kwinana, the back -- if you like, the backyard of the Premier and also the [indiscernible]. So 2 very important political -- 2 very important people with respect to political support for this particular project as well. Just in terms of ZESTY itself, one of the things that I sort of said when we started this journey, if you like, to try and decarbonize the steel back in 2021. When we first announced ZESTY, one of the things we wanted to do was to see if we could increase the pace of development of the technology and commercialization of the technology and with respect to our Leilac technology, that's been around since about 2014, 2015 when we first filed the patent. And we're just moving through the stages now of getting a commercial demonstration unit sorted out for Leilac. But ZESTY started quite some time later, 2021. And I said at the time, our aim is to fast track this deployment as quickly as we can, fast track the development and deployment. You can see the time line has been pretty good, pretty quick. So we've moved through. We've got some arena support early on. We've completed a FEED study for a demonstration -- commercial demonstration facility. Along the way, we've had some great support and some great recognition. So certainly winning an award at last year's COP that was great recognition from -- and not only recognition on the technical stage, but also, again, the Minister, Chris Bowen coming out and supporting us, it was really important for us to continue the momentum behind this technology and its development. Only recently, back in July, we're able to announce ARENA supporting the technology further with another $44.9 million. And we thank ARENA enormously for that support. We still need to find some match funding. This investment and this support from Rio goes a long way to helping with that match funding. Certainly, the $8 million and part of that in-kind support can count towards match funding for the ARENA. We still need to raise some capital into ZESTY to match that ARENA funding, but having this strategic support gets us a long way there. And so moving into '24 and '25, very pleased to see how much we've been able to progress in just a short space of time. So we're on track, if you like, to really accelerate this and develop this technology and commercialize it faster than we have in the past. So -- and it's excellent to see -- and excellent to have done this deal with Rio to enable us to stick to that time line. So all sorts of things happening now. We have what we call our blue slides, which sort of track our progress and what we're trying to achieve and by when, I won't go through in detail. This presentation is available, but it's great to add another name to the top there, Rio Tinto, largest iron ore producer in the world, alongside our partners, HILT CRC and all of the other iron ore players who are part of the HILT CRC who have also been great supporters of our technology as we've developed it and tested it. So watch this space, enormous opportunity. And yes, really pleased to be able to talk about this advancement at last. Obviously, these things take time to get across the line, but it's very gratifying to have got there. Huge thanks to Rio Tinto and the support that they've shown us, and we really look forward to working with them on developing the ZESTY technology. So I might pause there. Hopefully, left plenty of time for questions. Christineh, I'll hand back to you.

You definitely have. Thank you, Phil. So just a reminder of in case you weren't on the line in the first few moments when we began, the way you can engage with us with this Q&A session is you can either use the Q&A box and drop your questions in there and we will read them out for you. You can also be anonymous if you choose to. And otherwise you can raise your hand and when you're prompted in turn -- you will be unmuted by me and you can go ahead with your question. So I will kick off with a few that have already dropped into the Q&A box. And the first question was, can we get any clarity on the comment Calix intends to source the remaining funding required for the project at the ZESTY subsidiary or project level and how the funds will be sought.

Yes, certainly. So if I think and take people back to what we did with Leilac when we first raised capital into the Leilac Group. So Leilac is a wholly owned subsidiary of Calix. It's developing cement and lime application of our technology. And we had an impact fund called Carbon Direct come in and invest EUR 15 million for 7% of that Leilac entity. So we sit there as a 93% owner of Leilac and Carbon Direct a 7% owner. And so that was important capital to help progress the Leilac part of our business. What this deal represents, Rio Tinto are putting in EUR 8 million in cash that's coming into Calix, but they also have the option to have some equity in a wholly owned subsidiary of Calix called ZESTY. ZESTY is the entity that will develop this and commercialize the technology for this. So Rio have that option to take equity in this entity called ZESTY, and ZESTY owns the project. Calix is also contributing the money from ARENA into this project, the $44.9 million. And the remaining money that the project needs to get up and running, we're looking to raise capital for. We've been doing that for a reasonable amount of time. So speaking to impact funds and venture capital, if you have a look at the last sort of 18 months, 2 years, successful raises into decarbonization opportunities from impact funds and venture capital, there's always a strategic investor involved. And by strategic, I mean someone from industry. And so what this deal represents is, I guess, a nice proof point for us, a nice piece of interest from an industry player in the core tech and so we're looking to use this to help catalyze that capital raise into ZESTY to find the remaining funds to complete the project. So hopefully, that explains it, Christineh, but happy to go a bit further if that doesn't quite get us there.

Well, let's go to the next question and see what comes through as well. Next question is, to your knowledge, have any of the impact funds recently provided any funding for similar technologies without a strategic partner?

I'm not aware of any, no. The ones -- the raises I'm aware of into iron and steel decarbonization and cement and lime decarbonization, every deal over the last 18, 24 months has involved as strategic.

So I'll just move into the Q&A box. So the next comment here is congratulations, Phil. $8 million will form part of Calix's cash flow at this stage.

Yes, absolutely. So the $3 million and the $5 million that come in 2 tranches are coming in as we progress the project forward. So as we tick off certain items along the project pathway that we would have ticked off anyway, but with Rio beside us now, then we should unlock those tranches. So yes, it certainly adds to Calix's cash position.

Okay. We've got another question come through. Could the team outline the near-term next steps for ZESTY?

Yes, absolutely. So really, what we want to do is progress this project to FID as soon as we can. As I mentioned before, we unlocked 2 tranches of cash from Rio as we do that. So as we can tick off certain boxes with respect to the project, the site, the technology to be built at that site, then we start to unlock those tranches. So that's a big, big focus for us. The second tranche of cash, which is the $5 million, that gets unlocked as we approach the key things that need to form part of our final investment decision. And as I say, we were going to be having to do them anyway as part of our own final investment decision. But doing them with Rio beside us is going to be a whole lot -- well, it's going to be a great deal of support for us, which is great. So once we unlock that second tranche of cash of $5 million, then obviously, what we want to do is get and make that final investment decision. The other thing that we need for that final investment decision is to raise that cash into ZESTY to match the ARENA funding. So as I mentioned, the Rio financing, the cash and a little bit of the in-kind goes a little bit of that way or goes a reasonable amount of that way, I should say, but we still need to raise that other additional funding into the ZESTY subsidiary. And so in parallel, we're progressing the project, we're going to be talking to impact funds, venture capital, et cetera, about the fact that we've now got this strategic partner and hopefully catalyzing that capital raise.

Thanks, Phil. Next question is, can you go deeper into hydrogen sources? And I imagine that means [indiscernible] for ZESTY.

Absolutely. Hydrogen is one of those areas that we thought would be a no-brainer, but as we've moved forward, we've seen a few of the hydrogen hubs not progress. So we're having to look at a few different options for hydrogen. There's all the different colors of hydrogen as people may be aware. Ideally, at scale to produce a green iron, you probably use a green hydrogen. And so the ability to use renewable electrons from solar or wind and backed up by obviously some storage off the network. you'd be producing green hydrogen ultimately that would go into our technology to produce the green iron. We are looking at a few different options. Do we do our own electrolyzer? We know that there are certain smaller hydrogen projects that are being looked at in Kwinana and do we tap into those. So there's a couple of options still that we're looking at with respect to hydrogen. And as we progress the project and obviously, before we do an FID, we need to have, I guess, derisked and understood the hydrogen supply situation better. So either external projects across the fence or we do it ourselves.

Thank you. So the next question here is, does the $8 million just convert into a percentage of ZESTY when that valuation is decided presumably through Impact Fund investment?

That's absolutely right. Yes. So there's no predetermined valuation that's part of this joint development arrangement and that particular part of the agreement. So yes, obviously, as we progress on the financial investor, the financial investment front, whether there's 1, 2 or several, typically, if a lead emerges, they typically set the terms of that deal and typically set what value they're going to value the ZESTY entity at. And then that, if Rio decide to take up their option for equity, the $8 million will be converted to that value.

Okay. So we've come to the end of the questions in the Q&A box. I might give everybody a minute to if they're typing something in to get another question through. Want to give everyone a chance to get their questions through -- [indiscernible] may just for a little bit longer. Phil, over to you. Thanks.

If people can't leave a question now and they think of it later, send it through. Obviously, contact us via -- I think in the slide pack, it's how to contact us. So just make sure you send it through and we'll get back to you on that. So look, I'll conclude it here just coming up to the half hour. Thanks hugely for your attention. Hugely important deal for us. Great to get it across the line. It represents a major strategic who's interested in working with us. So it really does help validate and derisk the technology in the process. It's a ratification of our business model because the basics of the license arrangement are already outlined in the JDA and really allows us to catalyze the way we're going to fund this. Having a strategic interest is really a nice derisker for impact funds and venture capital. So a very important step. Still a way to go. We're not saying that there's not, but this is a major step forward for us. So I'm very, very pleased to get this done. Very grateful to be working with the largest iron ore company in the world to develop our technology. Thank you all very much.