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

Welcome to the Eramet Post Q3 call. I now hand over to the Eramet team.

Good morning, everyone. I am Sandrine Nourry-Dabi, Head of IR. We are very pleased to host this call today regarding the 2 press releases we published this morning. The first one regarding Eramet regaining full ownership in its flagship lithium business in Argentina, Centenario; and the second one regarding the group Q3 2024 turnover. Live from Paris, we have Christel Bories, Eramet's Chair and CEO; and Nicolas Carre, Eramet's CFO. We will start with a brief presentation, followed by a Q&A session. I now hand it over to Christel. Christel, the floor is yours.

So good morning, and thank you to all of you for making yourself available on such a short notice. I know it's a busy day for all of you with lots of publication today. We are presenting some slides as a support of this call. So I would like to focus my introduction on the most important news of today, which is our acquisition of the full ownership of our lithium assets in Argentina. We have announced today a strategic investment, which is to acquire 100% of our subsidiary in Argentina, hosting the Centenario and Arizaro salars. This is, we think, a very attractive opportunity that will provide us with full market flexibility and optionality to develop our portfolio of lithium Tier 1 assets. In concrete terms, we are buying back the 49.9% minority stake held by our partner, Tsingshan, for a net cash impact of $699 million, which represents a limited premium to Tsingshan equity injection of $619 million since its entry in 2021. It also brings out attractive multiple versus recent and comparable transactions in the lithium sector. And one reason that you know is the Rio acquisition of Arcadium. The transaction is entirely funded using our available liquidity, and it is now completed with no condition precedent. Let me remind you that we engaged the construction of Centenario first lithium carbonate extraction plant in October 2021. And at that time, we decided to have Tsingshan helping us, and we -- they entered as a partner in October 2021 to fund the plant. This first plant is now already almost 100% invested with a nominal capacity of 24,000 tonnes of lithium carbonate per year. The CapEx should amount around $870 million. And we will now have 100% of the lithium offtake rights, of which a portion will be jointly commercialized with Glencore. Over the past years, Eramet has undergone a major transformation, focusing on its core and strongest assets in mining and metal, in particular, for the energy transition. And on the back of a stronger balance sheet and high liquidity, with today's announcement, we deploy our capital to reinforce our exposure to a world-class asset expected to create significant value in the future. Our mining concession in Centenario and Arizaro is one of the largest and most attractive lithium brine deposits in the lithium triangle. Centenario mineral resource only estimated over 15 million tonnes of lithium carbonate equivalent, with a very high concentration of lithium contained in the brine. In the long run, it will enable us to expand the capacity to more than 75,000 tonnes of lithium carbonate per year. Our plants should be very competitive, positioned in the first quartile of the lithium cash cost curve. We have, as you know, developed in-house a highly selective lithium sorbent tested and proven in wind conditions since 2019 in our pilot on site. And we will be the first Western company to use a new-generation DLE, direct lithium extraction, technology, confirming our technological leadership. We think this transaction takes place at the right time. It is countercyclical at a time where lithium price is at the bottom. But the fundamentals for lithium remain very attractive. It's a key metal in the battery technologies for the growing electric vehicle market. And we estimate and all the economists estimate that the demand should almost double every 5 years in the next 20 years. So to conclude my introduction, we are very enthusiastic about this transaction. We regained full ownership over the scale-up of our lithium activity in Argentina. And of course, together with our trusted partner, Tsingshan, we remain fully committed to the sustainable development of our Weda Bay Nickel joint venture in Argentina -- in Indonesia, sorry. Now I will hand over to Nicolas, who will update you on the upcoming start of production and also on the second communique, which is our Q3 figures.

Thank you very much, Christel, and good early morning, everyone. Thank you very much for attending to this call on such a short notice, as we said. So if we move to the next slide, so we inaugurated our Centenario plant, as you know, last July, and the start of production is still expected in the coming weeks. The transaction announced today has absolutely no impact on the timing of this plant. And we are aiming to ramp up to reach a nominal output of 24,000 tonnes of lithium carbonate by mid-'25. Post ramp-up, we are aiming at a forecasted annual EBITDA of $210 million to $315 million, assuming the market consensus price in a range of $15,000 to $20,000 per tonne. So this plant is clearly fully aligned with our company's purpose to be a reference in the responsible mining. It is expected to be best-in-class in the lithium industry and aligned also with our IRMA standards. With regard to the expansion of production Phase 2 in Argentina, we'll be assessing the most optimal scope, timing, and execution model over the coming months. As you know, we have the potential to achieve production capacity above 75,000 tonnes of lithium carbonate per year in the long term, and we'll continue to innovate and improve our technology. This asset is absolutely key for Eramet with a very strong potential of value creation as a conclusion. And now I will move to our turnover for the third quarter, which has also been published earlier this morning. As you have seen, the third quarter saw a sharp downturn in the manganese market with a sharp fall in demand from China. Our adjusted turnover came to altogether EUR 800 million, down 17% versus Q3 of last year, reflecting accordingly a negative volume effect of minus 43%, partly offset by a positive price effect of plus 26%. On the first effect, volumes are down sharply, especially in manganese, but also in nickel and only mineral sands continue to grow. Start with manganese ore. The sales of manganese ore produced in Gabon fell by 37% compared with Q3 '23. Given the sharp decline in steel production in China in Q3, the local domestic market closed and Chinese customers consumed their stocks in the period. In addition, the price gap between high-grade and semi-carbonated ore led to an over-consumption of the latter, further reducing the demand for high-grade ore. Concerning nickel, the nickel ore sales volume in Indonesia fell by 83%. So it's a huge number by definition, and this was solely due to the timing in issuing sales permits in the country, so as we have announced in our press release last week. Finally, in Senegal, we achieved a record operating performance with a 55% increase in our mineral sales production. On the price effect, the positive effect we are seeing in Q3 is misleading. Indeed, the manganese ore price is average, so I'm talking here about the CRU 44% CIF index, averaged $7.3 per dmtu over the quarter, up 62% compared with Q3 2023, but it corrected sharply throughout the period. The price is currently around $4 per DMTU in October, down 56% compared with the end of July. The price of nickel ore sold in Indonesia remained stable versus Q3 last year. The high-grade HPM index was down 18%, but it was absolutely fully offset by high premiums resulting from restrictions to domestic supplies, as mentioned previously. Regarding our cash costs now, the full cash cost of manganese ore activity averaged $2.5 per dmtu over the quarter, a strong increase from Q3 2023. This change actually mainly reflects the decline in volumes transported and sold over the quarter as well as the rising fixed costs. Sea transport cost per tonne also increased to $1.1 per dmtu versus Q3 '23, strongly impacted by the situation in the Red Sea. Overall, this context of depressed manganese demand and new permitting in Indonesia, so the delay in obtaining the new permitting in Indonesia, we have adjusted our volume guidance for the year as announced in our communication of October 15. In manganese ore, to start with, we now expect to sell volume between 6 million to 6.5 million tonnes in 2024, including 0.7 million tonnes internally. Consequently, as a responsible mining operator, we have decided to suspend the ore production for at least 3 weeks. It started earlier this week. This means that it will be stopped until at least mid-November. The target volume of ore produced and transported for 2024 has therefore been revised to between 6.5 million and 7 million tonnes. In Indonesia now, in the context of the Indonesian government's transition, we finally obtained a permit in October, so in the last days. That limits annual nickel ore sales to 32 million wet tonnes for 2024 and for the next 2 years. This number of 32 million includes the 3 million tonnes internally for our NPI plant within Weda Bay. This is accordingly significantly lower than our request, which was also in line with the newly validated environmental and mining plan, so-called AMDAL in Indonesia. As a result, PT Weda Bay Nickel external ore sales target has been revised to 29 million tonnes for '24. So I'm talking here about externally sold volumes. of which 2/3 in high-grade saprolite ore and 1/3 in limonite ore. This compares to 40 million to 42 million tonnes previously anticipated. Nevertheless, the impact on PT Weda Bay Nickel 2024 financial performance is expected to be very largely offset by a significant increase in ore premiums, as mentioned before, versus the HPM floor price set locally, which is resulting fully from the restriction to domestic supply. Regarding SLN, it continues to face major structural challenges, which are exacerbated by events ongoing since the month of May. The French state is expected to subscribe today, October 24, to a further EUR 20 million into TSDI to finance the SLN needs until the end of the year. [indiscernible] has absolutely no impact on the group's net debt, as you know. We absolutely reiterate our decision not to provide any further financing to SLN while continuing to support its operations. And I really want to emphasize the fact that we don't put any more financing, which means that SLN remains having no economic impact on the group anymore. As regards on our battery recycling project in France, we have decided to suspend it. Due to the lack of ramp-up in Europe of battery factories and their components, there are currently major uncertainties about the supply of raw materials to the plant and about the selling opportunities for the metallic source. The required conditions for pursuing hydrometallurgical battery recycling plant project in France are, therefore, not met to pursue this project for the time being. As a conclusion to this Q3 presentation, we are aiming for adjusted EBITDA in the second half of 2024 to be higher than the first half. At the same time, given all the context we have been describing and also to the announcement we've just done before, we are implementing action plans to preserve our cash flow. We are, first, reducing our capital expenditure to EUR 450 million, so between EUR 450 million and EUR 500 million in 2024. This range is accordingly revised down by EUR 100 million compared to our target announced at the end of July, and it is even EUR 250 million lower than our target announced at the beginning of the year. We have optimized also our working capital requirements by adjusting production as closely as possible to the demand. The key example is what also we have disclosed concerning the stop of the Moanda mine for manganese ore. And we apply a strict control in all our activities, in particular, what I've just reminded, the temporary suspension of production at the Moanda mine, which enables us to better control the cost in a difficult manganese market. This concludes, I'm sorry, my part. And now I hand it over to Christel for the conclusion. Thank you.

Thank you, Nicolas. So to conclude, I think that you can see that we remain agile and responsive in each of our markets in a very, very volatile and unpredictable environment. Our in-depth transformation to reposition on a portfolio of best-in-class assets and become a key player in responsible mining with a solid financial structure is bearing fruit. This has enabled us to regain full ownership of our flagship lithium business in Argentina despite the present weak market situation. And we are convinced that this will strengthen further our position in the new era of metals for the energy transition. So thank you for your attention. And now with Nicolas, we are available to answer your questions.

Operator, could you please open the Q&A session?

[Operator Instructions] The first question comes from Fairclough Jason with Bank of America.

Congratulations on your deal. I think it's a very interesting deal you've done in Argentina. Two questions for me. First one is just on lithium. Second one on manganese. On lithium, I guess my question is, how do we think about the cash flow profile for the asset from here? My understanding is you're already going ahead with Phase 2. So you're spending $699 million today. But then I think realistically, this should still be cash flow-negative for another 2 years at least, but maybe you could give us some color on that. Secondly, just on manganese, you mentioned the destocking in China. Where do we think we are in that destocking process? Are they going to have to come back to the market soon to start buying high-grade manganese?

Just maybe on these 2 questions. First, on lithium, and I will let Nicolas, I mean, go into more details about the cash flow profile. But with this acquisition, we have expanded our exposure to lithium with an additional 12,000 tonnes of lithium carbonate already. So we are reassessing the scope, pace and execution model of the Phase 2. We are still, of course, convinced that we should expand and we will expand the production on this very valuable deposit, and we have paid for that. So I think it's important to have that in mind. But we have regained flexibility in the -- again, the timing and I mean, execution model of this expansion. So we are not in a hurry for Phase 2. We will do it, but we are reviewing now the timetable and the scope. That's -- maybe, Nicolas, you want to elaborate on the cash profile. And then I will come back to your question on destocking in China.

Yes. Thank you, Christel, and thank you, [indiscernible], for your questions. In any case, Christel has already mentioned the key item in your question. Clearly, that's what I quickly said presenting the financial consequences of the deal. Clearly, we are reassessing the timing of Phase 2. It doesn't mean that we give it up at all. And I think it's really important to have it in mind because clearly, we have taken the ownership, the full ownership of this deposit and of this project to be able to unlock the full capacity. And as we have described, it's overall a capacity above 75,000 tonnes. So clearly, per year. So this is really something we are slaying. Now of course, we want to be capital allocation-conscious, and we want to make sure that we do it in the right timing. So back now to your question about cash flow profile. So it means that '25 could be a transition year because we will start to have our first cash flow generation of the first plant. And clearly, it will depend how quickly we potentially start the start of construction of the second phase. But '25 could be, I would say, pretty neutral, if not slightly positive. And after that, starting the production -- the construction of the second phase mean that '26 and '27 could indeed be expected to be negative cash flow because we are expecting to develop the capacity indeed with the second phase.

We foresee the CapEx of the Phase 2 not before '26. On the manganese market, and so when I was mentioning the destocking is in the steel value chain, so manganese alloys and steel producer value chain because clearly, when they saw the slowdown of their production, they stopped buying and stopped buying raw materials, so indeed, manganese. At the same time, because of the peak of price of semi-carbonated ore in -- just before summer, there has been a flow of South African ore being unleashed and coming to China. And with the transportation time, still today, we see arriving in China some volumes that have been sent, in fact, decided and sent end of August. At the time, the prices were still high. So the level of manganese ore stock in the Chinese port, especially low-grade semi-carbonated ore is really high today. But the volume of high-grade ore inventories start to decrease significantly because of the lack of GEMCO. And we think that if the market restarts and now that the gap between high-grade ore price and semi-carbonated ore price has been rebalanced and come to a normal spread, we should see a normal consumption of high-grade ore in China, so back to normal in Q4. So we had this squeeze effect, I would say, in Q3 with, again, a significant slowdown of consumption of our customers. At the time, there were an overflow of semi-carbonated ore coming from South Africa. So that explains why the consumption of high-grade ore has been lower than -- much lower than expected. in China. We expect, again, all this -- the consumption to be back to normal in Q4. But with the steel market that remains relatively low, as you perfectly know, and as I said, lower than it used to be. And we expect the market in China, the production of steel in China to be slightly negative for the full year.

Could I just follow up with a quick one? Thanks very much for those in-depth answers. Just a quick follow-up. If we think about the entry of Rio Tinto into Argentina now in a much bigger way, how do we think about the physical landscape there? Like are there any synergies to be had from all these lithium operations up there in the salar?

Yes. In fact, it could be for the infrastructure, for example, for the acid supply, for example, because there was no acid plant in the area, and this was an issue for the hydrometallurgical plant. With the expansion of this, now there are some utilities projects being planned in the region. So yes, we could share some, again, infrastructure award, utilities, things like that. We are already sharing with Arcadium the gas pipeline for a big part because we are on the same salar. So it's -- there are some synergies. But beyond what you said, I mean, today, we see that a lot of people are investing in Argentina. And Argentina, which was considered to be quite risky country, now with the new regulations, the RE program that incentivizes the investments in Argentina and gives free access to currency for new projects, it's making the investments much more attractive in Argentina right now, and it attracts investors. So I think it's over -- it's good for -- not to be alone in Argentina for this kind of project.

The next question is from Julien Onillon with Stifel.

I got 3 questions on lithium and one on manganese. First, on lithium, when this transaction will be closed? Will it be closed before the end of the year or it's beginning of next year? Just to know in terms of debt when it will come. Second question here, how you will plan to finance these acquisitions because it is quite a significant amount? And third question, why Tsingshan is selling? I'm quite surprising because I saw that they were interested in developing battery and basically to go in this field. Is it a financial problem they have? Is it any specific reason? It will be very interesting to try to understand why they have decided to exit this project, which is great project and good news for you, but surprising to see Tsingshan to leave it. On manganese, I'd just like to see your view and if you feel that you have then done a mistake somewhere commercially, because my feeling is that when you look at the volumes down 37% in terms of volumes sold, that you didn't cut your price early enough, you didn't feel the market or maybe you were expecting the high-grade market to remain strong and the volumes to come back, and therefore, you were very strong on price, and therefore, the price suddenly -- you didn't get any orders. I get this feeling that there was a commercial mistake somewhere made. And finally, you discovered that effectively the volume was not there and you were forced to cut, but maybe too late. And if you had cut your pricing much earlier, you would have much better volumes today. So just to understand how this happened effectively. I'm sure it was difficult to anticipate, but to know that if you have some regrets there.

Thank you, Julien. So I will take quickly your first 2 questions on the deal. So the 2 items are actually mentioned in our press release. So first thing concerning closing, let's put it very quickly. It's done today. So it seems that it's closed and the cash-out is today. So let's be very transparent. And how is it financed? It is financed through the liquidity that we have built up previously. So you may remember that we have had in the last period more than EUR 1.5 billion of available cash and additional liquidity. So this is through the liquidity that we had available that we are making this transaction. And maybe Christel, you want to comment on the question related to Tsingshan?

Yes. Why Tsingshan is selling? In fact, Tsingshan came as a financial partner. You remember that we were -- this asset was 100% Eramet till 2021. And we -- at that time, we needed post-COVID, et cetera, it was still difficult for Eramet, and we needed to have a financial partner to develop this asset. Tsingshan came as this financial partner. They are not so much used to be in -- not in the driving seat in terms of operation and be only a financial partner. And it's -- we have decided that together that now, it was time as we had regained some flexibility that it was time for them to leave. We had those discussions for some time. And I think Tsingshan prefers to be either the operator when they prefer to be the operator when they are in a project in, I would say, a processing project. It's not the case in mining because, as you know, in mining, they don't know what mining is, but they -- and we operate, as Eramet, the Weda Bay mine. But here, it's a processing plant, and we absolutely wanted to keep the majority and the operation for Phase 1, for Phase 2, et cetera. And we decided that it was better to have only one driver, and it was Eramet. So we decided to separate. But it has been done in very good cooperation together with them. And we continue, I mean, to keep very good relationship with Tsingshan. On your question on manganese, it's -- did we make a mistake commercially? Maybe. But I have to remind you that it was a situation very specific to China. And in fact, what happened is that after GEMCO stopped, the price went up significantly, not only the price of high-grade ore, but also the price of semi-carbonated ore. And this has, as I said, unleashed a huge amount of volume that probably we didn't anticipate as much because there were inventories in the mines, in the small mines in South Africa that were not economical to ship at the price of this ore. And suddenly, they found that there was a window to ship these volumes to China. And there was this flow of semi-carbonated ore coming to China. And that was sold -- that was in the inventory in Chinese port and suddenly was sold at a quite low price. And there was a change in the behavior because of the drop in consumption and the huge pressure on margins of manganese alloy producers in China. They changed temporarily the mix in their furnace using much more semi-carbonated ore versus high-grade ore in their mix because it was so cheap and so much available. And this has not been done in any other part of the world. We have not seen that in India. We have not seen that in Europe or North America. We have seen that only in China. And it was not anticipated to be so large and for so long. And it was really because of this huge drop of steel production. So the manganese alloys producer didn't need to have so much production, so much productivity. And at the end, it was okay for them to use a lower grade, much cheaper manganese ore than they used to have. What we have seen with the present drop of now the spread that has come back to a more normal level, we have seen the blend in the mix of the manganese alloys producer coming back to normal level. And we think that this change in the mix of the Chinese manganese alloys producers is over now. But yes, it has created a change in the behavior that we had never seen before.

Just sorry, I forgot another question. On the CapEx reduction, where potentially compared to February, it's EUR 250 million, which is quite significant. Where are the cuts you are making compared to the initial plan?

So it's actually -- it depends to what you compare. So if we compare to February to what we announced at the beginning of the year, so I would say out of the EUR 250 million, EUR 150 million is on growth CapEx and EUR 100 million is on current CapEx. And so the growth CapEx, it's primarily because initially, we are indeed planning to start the Phase 2 quicker for Centenario. And as we discussed earlier in the call, this will be pushed to a later stage and no spend to be expected before '26 now. So this is the first reason. But on top of that, so the EUR 100 million is a big amount because now we are down to between EUR 150 million to EUR 200 million for current CapEx, which is much lower to what we have announced in our CMD, the target on a regular basis for maintenance or current CapEx, which is closer to EUR 300 million. So it's a significant cut and effort. And so it's almost in all areas, in all businesses. And it's really to show that we are conscious of the need to make sure that we are as stringent as we can in terms of capital expenditure. So it's really in all the businesses.

The next question is from Maxime Kogge with ODDO.

So my first question is on Weda Bay. So basically, after the very strong drop in commercial quotas you will get this year, what reasons do we have to think to believe that you will be able to improve this level next year and get closer to the 60 million of wet metric ton you target in the longer term? I think you're not -- I mean, unlike your -- most of your competitors in the area, you're not integrated downstream. With today's deal on Centenario's, you actually have less headroom to build the downstream processing. So isn't there the risk that all the integrated players get the quotas and you're left with no upside on your own production?

So thanks for this question because I think it's an important one. First, we are integrated downstream and heavily integrated downstream. In Weda Bay, especially there is an NPI plant, which is quite small versus the size of the mine. But I remind you that Tsingshan is a key owner of Weda Bay together. And in this consortium that owns today 51% of Weda Bay, there is Tsingshan, there is Huayou, and there is another Chinese company involved in the battery value chain. So all these people are heavily integrated downstream in the IWP park, so the Weda Bay Industrial Park. So you cannot say that Weda Bay and the owners of Weda Bay are not well integrated downstream. Today, those people have built an IWIP park that is consuming twice the production of Weda Bay today. So much more than the mine can deliver. And so it's -- today, it's not really the issue. The issue is that -- is more than first all the small mining companies not integrated downstream and being fully Indonesian, they are benefiting from this restriction of production because it creates premium on the nickel ore price in Indonesia, and they are all benefiting from that. So that's why -- and we are also benefiting from that. That's why Nicolas mentioned earlier that the impact on EBITDA of this restriction of production this year will not be that high because it is compensated by higher premium. But now versus your question on long term, are we sure that we will get revised permitting -- production permitting for '25, '26? No, we are not sure. But yes, we will try and we have good reasons because with, again, the expansion of the park that is at the bottom of this mine, if we have kept at this level of EUR 32 million of production, we will represent less than 40% of the consumption of the industrial park. So which means that the park will have to import from more remote location and at a higher cost, the rest of the ore. So we have good reason to think that there will be expansion, or there could be expansion of this production permitting for the coming years. Now it has not been granted so far, so we will have to reapply. But today, what has happened is that, again, because of the lower nickel price at LME, because of the formula, regulated formula in Indonesia, the small mining Indonesian companies were suffering. And restricting a bit the production of the big mines was giving a bit of relief in terms of pricing for the small miners. So it's probably why -- and again, it's interpretation, but it's probably why our mine and also some other big mines have been restricted in their permitting this year versus what they had asked for.

Okay. So it's not really a question of being integrated downstream according to you, the fact that you didn't have the quota this year. It's really...

No, because again, we are not the biggest owner and the other owner of Weda Bay, highly integrated downstream in the industrial park.

No, okay. That's clear. And just as a follow-up to that. So I think there were plans to -- after the shelving of the downstream plant with BASF, there were plans to consider some expansion there in HPAL notably. Is it still on the cards, or given the big investments you have made in lithium, it's rather something that we...

Yes. There is -- today, developing Eramet in the nickel cobalt for battery value chain is still part of our strategy. We are monitoring the market carefully and looking at opportunities. But we have announced today already a significant step to reinforce this pillar of metals for energy transition. So there is no hurry to make a significant move in this area in the coming months, but we are still, again, monitoring the market and looking for potential opportunities.

And perhaps the last one is on manganese. As this recent increase in supply was very opportunistic, should we assume that your own production can get back to nameplate capacity next year, i.e., closer to...

Yes. And again, this -- for the time being, we have planned to shut down the extraction at the mine. As you have seen, we keep the transformation and the transportation running. But -- so we have planned only 3 weeks for the time being of production cuts because we want to adapt to the market and monitor our cost. We -- as I said, we expect the market to come back to a normal level in the coming weeks. And we have seen that coming already. So we will, of course, adapt to the market conditions. But yes, we should come back to a normal capacity production in 2025.

Okay. So this is the end of the Q&A session of the call. We thank you for joining us today. And as usual, the IR team remains available to answer any other questions you may have. Thank you very much, and have a good day.

Thank you.

Thank you very much. Have a good day.

Bye.