ERAMET S.A. (ERA) Earnings Call Transcript & Summary

Hello, and welcome to the ERAMET management call related to ERAMET's lithium project. My name is Josh, and I will be your coordinator for today's event. [Operator Instructions] Please note that this conference is being recorded. And I will now hand you over to your host, Christel Bories, Chair and CEO, to begin today's conference. Thank you.

Good morning, ladies and gentlemen, and thank you for being with us early in the morning. It's an important day for us as we announced the restart of the construction of our lithium plant in Argentina. As you know, development in metals for energy transition is a key pillar of our growth strategy, and this lithium project is the first key milestone in this development. So we considered it important to spend some time together this morning to explain, or for some of you, reexplain the project in more detail. Energy transition is not anymore a buzzword. It's now a reality. And as the COP 26 is taking place in Glasgow, the world's attention is on climate. And the need for the energy transition is becoming a reality, and both companies and states are accelerating their action plans. On the second slide, you see that this transition will require metals, a lot of metals because storage and the transport of electricity goes through metals. And let's take the example of electrical vehicles. By 2030, EVs will represent around 75% of European annual production and about 40% of the global annual production of vehicles. And the battery of a medium-range EV requires on average 50 kilos of pure nickel, 7 kilos of cobalt and 45 kilos of lithium. And to produce such quantities of metals, you need 5 tons of nickel ore for 1 EV and 125,000 liters of brine also for one EV. So the consequence on the demand of these metals, key for the energy transition, is huge. And by 2030, we estimate that global demand will be multiplied by 2 for nickel, by 4 for cobalt and by 6 for lithium. So this is huge, and this will require a lot of new projects and a lot of CapEx to justify growth in -- to supply -- sorry, growth in demand. Next slide. In this context, ERAMET has the historic chance to be at the heart of the solution. We have, in our portfolio of activities, several of the critical metals for this transition, including the superb world-class lithium deposit located in Argentina, in the Indian Island. With fantastic reserves of about 10 million lithium carbonate equivalent terms. And which we restart today in partnership with Tsingshan, I'll come back to that. And we also have the Weda Bay giant nickel deposit in Argentina, which has big limonite resources that we want to valorize through another key project, Sonic Bay, to produce high purity nickel and cobalt salts for batteries. And this project is currently under development with BASF and it is in the pre-feasibility study stage, and we should enter into the detailed feasibility stage early next year. Since I joined as Head -- CEO of this company, expanding ERAMET portfolio in metals for the energy transition has been a key pillar of our strategy. And we are now in the position to accelerate this strategy, and we have decided to do it through partnerships to go faster and share financial risk as well as technical execution risk. Next slide. So now, let's have a look at our lithium projects into more details. We have a long-life brine deposit with resources estimated at 10 million tons of lithium carbonate equivalent. It represents about 40 years of production, with the production of the first plant. We have 100% ownership of the salar with perpetual mining rights. We have developed, as you know, an in-house high-performance process with a high recovery rate of about 90% versus around 50% of conventional process and a very short lead time of 1 week versus 18 months. As you know, it takes a lot of time with traditional conventional process to produce the lithium. This process has been successfully proven at our pilot plant in real condition on site over the past 2 years. The cash cost of this plant is expected to be around $3,500 per ton, first ramp up, and this positions the project in the first quartile of the cash cost curve of the industry. And finally, our site offers easy access to export logistics and infrastructure, and we benefit from a stable tax regime for 30 years. On next slide, you see that since the beginning of this project, we have been firmly focused on implementing topnotch sustainability standards and continuously consolidating our social license to operate. In such wild and fragile environment, this is not an option for us. It is mandatory, and we consider it is our responsibility. Our project is in line with the United Nations Sustainable Development Goals and includes a robust environmental program, significantly lower incidence on hydric balance versus conventional process, long-lasting and constructive relationships with local stakeholders and a solid local content with about 95% of the workforce expected to be local and about 50% of the sourcing of the company expected to be local. Since the beginning of our presence locally, we have significantly contributed to local community development, including education, but also local economic activities with, for example, 60 -- sorry, with 60 direct beneficiaries of our Quinoa Project over the past 4 years. You know that sustainability is at the core of the business model of ERAMET. This project will be in line with the best standards and continues to position ERAMET as a reference in this area. And it is also most important as the way we produce metals for energy transition should respond to the ecological promise of this transition. So I will now leave the floor to Thomas Devedjian, our CFO, who will give you more details on the legal scheme and financial metrics of the project.

Thank you, Christel, and good morning to everyone. First of all, the financing. The scope of the project is the same as the one initially shared with you and which was mothballed in April 2020, as you can remember. We aim at building a facility to produce 24,000 tons lithium carbonate equivalent battery grade per annum. Our balance sheet commitment will be very limited. We will control and operate the project with a 50.1% interest, and our cash contribution will be up to $25 million only. Our partner, Tsingshan, will contribute up to $375 million to finance the plant construction in exchange of 49.9% interest in the project. The commercial production will be shared on a pro rata basis. Next slide, please. We expect a very quick time to market, thanks to a world-class development expertise on Board. I remind you that all studies have been performed and that permits are in place. The environmental impact assessment was approved in February 2019, the definitive feasibility study was completed in April 2019. Tsingshan has proven and seamless project execution capabilities. We already teamed up at Weda Bay in Indonesia, as you remember, and it has been a success story. The plant was built in 20 months despite the ongoing health crisis and reached nameplate capacity well in advance. The teams are already in place and they are fully ready. We have a seasoned management team with a very solid track record in direct lithium extraction technology, and the onsite training center has been fully running over the past 2 years. Slide 8. The lithium market is a market with very sound fundamentals. The supply-demand balance shows a deficit which is forecast to increase year after year over the next 10 years. We don't expect the market to rebalance by 2030. The price trend should remain, therefore, very favorable. Prices have been threefold since January 2021, beginning of the year. Average price for Q3 2021 is $15,700 per ton lithium carbonate equivalent. And the current spot price is around $25,000 per ton. Therefore, you can see that the long-term price assumption of $11,500 per ton can be considered as rather conservative. This is the assumption we've taken for the calculation of the IRR. Taking into account the timing of our project commissioning and ramp up, as you can see, we are poised to enter the market at the right time. Slide 9. To summarize, the project's key performance indicators are extremely robust. A yearly lithium carbonate equivalent production of 24,000 tons after ramp-up, a cash cost ex works of $3,500 per tonne and an EBITDA at full ramp-up of $160 million, representing a 60% margin. The IRR, internal rate of return, 24% after tax, excluding CapEx already spent until project's mothbolling, but based, as I said, on a rather conservative price assumption. This is clearly a strong value-accretive project. I will now leave the floor to Christel for conclusion.

Thank you, Thomas. ERAMET is bound to become the first European company to operate a large-scale and sustainable lithium industrial complex, leveraging on its own process. We take great, great pride in this project and see it as an opportunity for Europe to secure tomorrow's critical metals for the energy transition. As Thomas said, we are up running, and we are very confident that we have the right setting to make it a success. Since the early phases of the projects in 2019, the teams have remained highly committed, preserving the assets and maintaining strong relationships with all stakeholders. And we are now ready to engage the site development in the best conditions. We have a clear path to start up. In Q1 2022, we will start a plant construction. In Q1 2024, the plant will be commissioned. And in H2 2025, we will run at full capacity. So as you can hear in conclusion, we are very excited to relaunch this project which is highly value creative for ERAMET, perfectly in line with our growth strategy, and it reflects our ambition to become a leader in metals for energy transition. So thank you for your attention. And now Thomas and I are ready to answer your questions.

We do have a question. It comes from Jason Fairclough from Bank of America.

Good morning, everybody, [Foreign Language]. Congratulations on the announcement, looks interesting. Look, I just wanted to think a little bit about what Tsingshan is paying to get involved here. First, could you remind us what the sunk cost is in the project? And second, if I think about this, they're paying about $375 million to get about half of $165 million in EBITDA per year. So on my math, that makes them paying about 4.5x. Is this the right math? And is that a fair price?

Jason, the sunk cost is $185 million already invested...

Dollars.

In dollars. So if you add this to the total amount expected to be expensed, you have the total number. And the IRR, with the price I've given, would be 18% if you include the same cost. So for us, given the fact that we've mothballed the project and we stopped it, to restart it and add up to $25 million is a very good return.

Just versus the multiple reasons that you mentioned, you have to keep in mind that they are also taking the risk of the construction of the plant and the time it takes between the investment and the full ramp-up. So it's -- also, it has to be factored in when you compute that kind of multiple. It's not as if they were buying a plant that is already built and full running.

The EBITDA multiple is a bit optimistic when you compare our valuation with other projects for -- at the same level of development. For instance, when you look at other projects such as [indiscernible] or Pastos Grandes, and you take the multiple EVian reserves or EVian resources, which is, I think, the best way to compare. It's very favorable to the deal we've -- find with -- we found with Tsingshan. There is no EBITDA for the moment.

Fair, fair. Just one last follow-up, if I could. So if we look at $165 million in EBITDA, how should we think about that in terms of translating into free cash flow? So sustaining CapEx and tax, I guess?

Regarding CapEx, there is a very limited amount of recurring CapEx, it's around $10 million per year. Regarding taxes, we have obtained a very favorable approval from the Argentinian government. We have stability given for 30 years. Today, the tax rate is around 30%. And so that's how you can calculate the free cash flow.

When you -- yes.

Okay. And in terms of -- last one, I'm sorry, I'm being a bit of a hog here. But the -- in terms of getting money out of Argentina, sometimes that's not so easy. What's the latest status?

The latest status is the decree, which has been approved in last April, Decree 234, to be precise. And it gives us the possibility to freely receive 20% of foreign currencies we received from exports to reimburse our debt and distribute dividends. So we have plenty of flexibility, and we had a very good dialogue with the authorities, and we are -- we know we have all the possibilities to be able to obtain cash back if needed.

This decree has been passed just to, in fact, to attract this kind of project in Argentina. So it allows us to be able to freely get a significant part of the cash flow generated out of Argentina. And beyond that, we had a discussion with the Central Bank, which is also, I mean, willing to help us, to be able to repatriate the rest through dividends, if needed. But you have to keep in mind also, Jason, that the idea then is to build a Phase 2, maybe a Phase 3 because this deposit has huge resources. And the first phase plant has only a capacity of 24,000 tons which is not big. It's a normal standard module for this kind of plant. But we expect, if it's working, to do quite soon after, a Phase 2 and maybe after that, a Phase 3. So we'll have to reinvest money internally if we do it.

[Operator Instructions] Our next question comes from Sylvain Brunet from Exane BNP Paribas.

My first question is on CapEx. If we follow your latest estimate, it looks like the new version of CapEx would be somewhat lower than the previous one. So just interested to know what has changed in the design? And my second question is on, say, the risk on raw material costs on procurement. Whether Tsingshan -- in the agreement you have with Tsingshan, whether they would bear the cost of any potential increase in raw material costs included in the $375 million? Or otherwise, how would -- how would this be shared?

The CapEx, Sylvain, is not -- is the same as Thomas just said before. If you look, the CapEx already spent before is around...

$185 million.

Yes, $185 million is what we have spent, including some mothballing costs. But it's the ballpark of what we have spent before, plus $400 million that we are planning to invest now, it's adding to $580 million, and we had announced $595 million, if you remember right. So we are exactly at the same level. The infrastructure part has already been built locally with the local comp, some infrastructure, the laboratory, the pilot plant. All this has been invested already before. So it's exactly the same CapEx spend. And regarding the inflation in raw material, it's -- we will see what is happening. But if you also remember, in this $180 million that we just mentioned, already spent, there are already some equipment that had been ordered early. Long lead items, CapEx had been launched. And part of the cost of the mothballing, which was quite important, if you remember, was, in fact, to finish these equipment and put them in boxes. So part of the CapEx, [indiscernible]. Also equipment that have been put in boxes, and so it's already owned by the company. And of course, there will be the additional cost of all the construction locally. And if the cost goes beyond, at the end of the day, the $400 million that we are expecting, both partners will finance the extra cost proportionally. So we will have 50% of the extra cost if it goes beyond the $400 million that we have estimated right now.

[Operator Instructions] Our next question comes from Alain William from ODDO BHF.

Yes. Good day, everybody. It's Alain William from ODDO. I have 1 question, please. Could you give us a bit of context around the decision to share the cost and benefits of the project as opposed to going on your own a bit later because the project was essentially derisked from a technical standpoint, and you could have waited a bit to go with your own balance sheet later? Because clearly, having Tsingshan in the project reduced the materiality.

Yes, you're right. But it was a decision, I mean, that we assessed and that we took. We thought that it was absolutely -- it was important to move fast and restart the project quite quickly in order to position ourselves in the lithium market. As the market, is right now, in shortage, that's why we have spot price that are close to $30,000 per tonne right now. Very high because of the shortage of lithium. So as you can see, there are already quite a lot of offtake contracts and discussions and investments in the lithium industry in order to be able to supply this huge demand that we have now, and that is going to grow. So we thought that the, "first mover advantage," was important. And that's the first point. The second point is that, of course, we were -- we are confident on the process, even if it's a new plant, it's a greenfield. But we have other projects for ERAMET. There is this Sonic Bay project that is quite big that is coming. And that we want to accelerate as well as much as we can. We have a recycling project in the battery area. We continue to grow in our other businesses. So at the end of the day, we wanted to balance and not put all our risk and money in the same project. And we thought it was a good compromise. I mean, to be able to restart the project soon. Sharing the risk and -- the financial risk and also the technical execution risk, even if we have largely debugged the process. And also, the idea is to be able to very soon after, as I said, after the start of this first plant, to be able to launch a new one. And so it's -- we will have -- we think that together with Tsingshan, we will have the possibility to do it also very quickly, and we will have the 50% of the Phase 2 as well. So again, we thought it was a good balance between creating value, sharing the risk and being able to go fast.

Okay. So we have no further questions, so I'll hand you back over to the speakers.

There is no question on the webcast? Okay. So if there is no further questions, thank you very much to all of you. I hope that you share with us this excitement that we have on the restart of this project. We are convinced that it's not only a high value creation for ERAMET but also, I mean, the start of a great story in the metals for energy transition. So we are very happy to be able to restart this project now. Thank you very much. Have a good day, and we will certainly have the opportunity to talk to you and the team -- the IR team in the coming days. Thank you.

Thank you very much for joining today's call. You may now disconnect your handsets. Hosts, please stay on the line. Thank you.