Liontown Limited (LTR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Liontown Resources Limited Kathleen Valley Funding Update. [Operator Instructions] I would now like to hand the conference over to Mr. Tony Ottaviano, Managing Director and CEO. Please go ahead.

Thank you, and welcome to everybody. Today is a very important day for Liontown. I mean the best way I can describe it is it's profound. We have extended our relationship with our foundational customer and LG Energy Solutions, and the best way to describe that relationship is deep and long term. And I've got a few slides, and I want to introduce my team that's going to help me present today and answer any questions that you may have on the announcement. Firstly, I've got our Chief Financial Officer in, Jon Latto; and also our Chief Commercial Officer in, Grant Donald. So if I move to the very first slide, it's the usual disclaimer, and then there's the strategy slide. And the best way to describe this announcement is to link it to our strategy. What's partnering with one of the world's leading battery producer provides for Liontown is it underpins the Kathleen Valley project over the short, medium and long term. It then enables the second horizon of our strategy, which is the downstream expansion through the downstream collaboration agreement. Partnering with a battery producer of the size and caliber of LG Energy Solution, provides tremendous insight to Liontown as to how battery chemistries will evolve over time, and we'll have a seat at the table to understand that through our downstream collaboration. And finally, a combination of maximizing Kathleen Valleys potential, but also embarking on the value maximizing pathway of downstream expansion in our vertical integration enables Liontown to deliver its full potential. And I'm sure the relationship that will build over time with a company such as LG Energy Solution will present more opportunities than we see today in order to grow this company. Now some specific highlights of what we've announced today. Firstly, we've secured a USD 250 million convertible note with LG Energy Solution. The note has a 5-year tenor. More importantly, it's got a conversion price of AUD 1.80 per share, which again underpins the fight that LG Energy Solutions has in the growth of this company. The coupon rate is equal to the reference rate so far. And we've got flexibility built into the way we pay our coupon, either paying it through cash or capitalizing it, or paying it through shares to give us that additional flexibility. The next thing this funding arrangement does is we've got AUD 0.5 billion of cash in the back to see us through ramp up and into steady state. In return, we have extended our offtake agreement with LG by another 10 years. So giving a total of 15 years, which demonstrates the sustained customer demand for high quality, more importantly, IRA-compliant lithium. And finally, as I mentioned before, we've now entered into a collaboration agreement around the feasibility of establishing an IRA-compliant refineries, which has the potential to create long-term value for our stakeholders. Now to give a bit of an update on Kathleen Valley project. The project remains on schedule and on budget, with first production at the end of this month. And that's a tremendous achievement by my team and the company at large. The project folks have done an excellent job in delivering what was our target 2.5 years ago at the end of the DFS study, to say that we will be producing our first production midway through 2024, and that's what the team has done. We're ready to flip from construction and commissioning into production through our operational and business readiness, all the support systems, all the people which we recruited ourselves are in ready to start and take the reins over from the construction and development people. We've got about AUD 120 million worth of planned capital cost to [ deplete ] in order to put a line under the sand on Kathleen Valley's initial construction. What this funding arrangement also does is it preserves our 4 million tonne option by enabling some early works in the underground mine, which is the longest lead time to getting to 4 million tonnes. So we can preserve at this stage the 2027 target base. And the other point that I want to make is the 4 million tonne expansion option that we've got at Liontown is probably the lowest capital intensity expansion option in any lithium project on the globe. Given that we've already invested in a number of projects, a number of key areas of the plan at 4 million tonnes, the next increment of expansion is very low CapEx intensive. The optimization studies continue because we want to ensure that both the 4 million tonne underground design, but also the 4 million tonne plant design are optimal to give us the best bang for our buck. And finally, we will make a decision on the long-lead items for the plant expansion element of the 4 million tonne expansion and the optimization studies by the end of this 2025 calendar year. But it depends on Board approval, but also, more importantly, the prevailing market conditions. That's a snapshot of the convertible note. I've spoken about the size to USD 250 million but also the interest rate, which is SOFR. The conversion price of AUD 1.80 underpins the confidence that LG Energy Solutions has in our ability to grow and the quality of this asset. They are yet another company that's done extensive due diligence before investing into our company. So low interest rates, I've already spoken about the flexibility of the interest payments, the fact that we can capitalize, the fact that we can pay in shares or pay in cash. And the other important feature here is we maintain the current low-covenant Ford facility in place. So this facility augments what is already in place with Ford. The banking facility that we announced in March, I want to thank the banks for their cooperation that they've given us. They have supported us. Without them, we couldn't have probably delivered such a compelling funding long-term option. But we will now proceed to cancel that arrangement with the banks. Now some balance sheet and analysis as to how we will use the funds. As I've mentioned in my opening remarks, we have AUD 0.5 billion of cash. We've got AUD 120 million left to our plan and budgeted spend on the project to put a line under first production. The remaining liquidity of AUD 381 million will be used to wrap up the project of 3 million tonnes steady state. This funding also enables us to do those early underground works that I mentioned early on to preserve the 4 million tonne expansion option. Given mining is the longest lead time. The mine and process optimization studies are continuing, and we will bring a solution to the market once we complete those studies, the Board's reviewed and subject to the market conditions by the end of calendar year 2025. There is also some additional benefits that give us that balance sheet strength. We've got flexibility over the interest payments, which I've spoken about. We've got an additional AUD 100 million indebtedness facility built in to the convertible note that we can exercise. So this is over and above the USD 250 million. And the other attractiveness of this facility is very -- well, it's a less restricted from a debt covenant perspective than a traditional debt facility, which is one of the many attractions of this funding package. It allows us to optimize the ore body, optimize the projects and deliver the best value for the company. I will now turn over to our Chief Commercial Officer, Grant Donald, who will talk through the next few slides.

Thanks, Tony. In conjunction with LG Energy Solutions investment, Liontown has extended the existing 5-year offtake agreement by an additional 10 years as Tony has covered, maintaining the same terms and conditions. This extension is demonstrated here in this graph, which is the initial 5 years remains unchanged. The extension starts with 5 years of 150,000 tonnes and then has the final 5 years, 140,000 tonnes. And the importance of this and significance of it to LG Energy Solutions and to Liontown is that this gives certainty and longevity to the offtake to underpin a downstream refining solution. I think the other thing that I wanted to highlight from this slide is that you will see 25,000 tonne box on top of each of the first 10 years. Effectively, what we agreed with LG Energy Solutions is to provide an additional 250,000 tonnes of material over the course of those initial 10 years. It's illustrative here on an average per year, but that's not necessarily how it will be delivered. There is a recognition on both sides that it may be a little bit lumpy, so to speak, and that is baked into the agreements. It doesn't change our commitment to spot and our intention to make volumes available on the spot market to continue to underpin a more transparent and regular sales through the stock market. On the Downstream joint venture, I think in this market backdrop, it is difficult to consider downstream without considering the geopolitical overlay. I think at the moment, it would be hard to justify building a downstream based on today's prices. And in fact, even my contacts in China said it struggles to build a refinery downstream in China in today's prices. This is commitment and vision from LG and Liontown into the future. As we see ex China our supply chains being developed, it is absolutely critical that more downstream capacity is built outside of China. And what the 2 parties share is a vision to doing this in a way that is competitive, both on a CapEx and an OpEx basis, and proximate to a downstream battery ecosystem. And that work will now continue, a pace with the certainty of the offtake agreement signed today to enable us to move quickly and make further announcements on a downstream joint venture in the near term.

I set the graph and I hope the downstream plan is a little bit bigger than the figure on the [indiscernible], but he assures me, it will be. Okay. If we now move into a short project update. As I mentioned in my opening remarks, we are on track for first production at the end of July. The mining side has continued at pace. We are almost halfway through our open pit mining. And within the next month, that entire floor of the pit will be pegmatite white, so we will be in 100% ore with no waste. We're building some substantial stockpiles in readiness for first production to feed through the mill, and those stockpiles are shown on the second photo. And in the underground, we're maintaining a very good progress there, being both on budget and on time in terms of the development with nearly 3.4 kilometers of development meters already done underground, both at [indiscernible] and in conjunction with Northwest [ platt out ] to ore bodies. If we look at the process plant, as I said, we're bloody close, 99% complete on an earned value basis. And that's a complete process, not mechanically complete or electrically complete or any other definition that I've noticed that script into a number of people's announcements. This is earned value basis. The dry plant has been running for well over a month so we've got stockpiles built, as you can see in the photograph, electrical commissioning in the wet plant is almost at completion. The current focus now is putting water through the system before ultimately putting ore through. The other, I think, tremendous achievement that I'd like to showcase is with our partners delivered. We've now got our 95-megawatt hybrid power station in full operation. I don't think there's a mine site that's ever been constructed or finish constructed permission and then first production on 100% renewal. And we have done that numerous times during the last few weeks, where the whole operations run of renewable power. On the operational readiness side, as I mentioned in my opening remarks, we've got our workforce. We've done that internally. We're building probably industry balanced gender diversity workforce. And I think off the top of my head, it's 23%, I think, of gender balance and we're striving to even push out far north of that figure. So we're prepared. The moment the project guys tell us that it's ready to go, the ops in the winds waiting. Finally, before we conclude, I will just go through a summary of the existing offtake agreements for everybody. And I hand back over to Clint, sorry, to Grant.

Okay, I won't spend too much time on this slide, which is effectively a restatement of what's been public effect was the amendment for LG Energy Solutions now longer-term offtake. We've gone through the terms in a bit more detail on the previous slide. And the only 2 points I would like to highlight from this slide is that as a result of the progress we've made on site in construction, and Tony talked about, we have elected to accelerate the first production under the Tesla offtake. So originally, it was disclosed that commercial production has to commence no later than 1 December '25, with -- in discussions with Tesla, we have agreed to bring that forward to 1 December 2024, given where we're at in construction. The only other point, and this will come as no surprise to people who are in the market, but we continue to receive multiple inbound requests from customers around potential offtake, not only from China, but also globally. And we have highlighted here that we are in advanced discussions around derisking the ramp-up funds to supply them into a short-term offtake.

Thanks, Grant. Okay. So to wrap up, first production imminent, and we're growing our company. We've put in place a long-term flexible funding facility that will see us right through the 3 million fund ramp-up. And it also preserves the 4 million tonne expansion option on a 2027 time frame. The project remains on schedule on budget with first production anticipated end of this month. The mining operations, both open pit and underground, are well underway, and the funding enabled, as I mentioned earlier, for that growth optionality and production flexibility, which is equally as important. The optimization studies around the 4 are continuing. We have been working on the mine for some time, but also the processing plant will now get a review, given the success that we've had with the ore sorting trials that we've been doing on site, which may offer additional benefit. We've entered into a strategic downstream collaboration [ dream up ] with LG Energy Solution, but we've also got ongoing our relationship with Sumitomo. So a combination of both of those will again set us up for a very strategic and ex China supply chain. And finally, our ESG commitment remains. We are delivering a world-class framework by signing up to [ Irma ], but just the start of it, when we say we've committed to a 95-megawatt renewable power station, and we're getting the benefits before we even start production. So I'll conclude the presentation on that point. And again, I'll just summarize by saying it's a tremendous achievement by the team, given everything we've gone through in fairly challenging times, to partner with a world-class operator such as LG Energy Solution is a testament to the project, a testament to the team, and we're looking forward to the future. So I'll now hand over to Q&A.

[Operator Instructions] Your first question comes from Hugo Nicolaci with Goldman Sachs.

Just first one around the funding piece. You touched on the debt covenants being a key advantage. Is it the convertible over the bank funding? Should we interpret that, though, is that the banks were still otherwise happy to proceed with the prior funding package, with how cost updates and the new mine plan we're shaping up? And I'll come back with a second.

Yes. Hold it. I'll let Jon Latto, our CFO, answer that.

Yes. Thanks very much, Hugo. Look, we were basically in a position where we could have drawn down the debt if we chose to do so. But as Tony articulated, there's many advantages to the funding that we're putting in place with LG today, and that's why we've moved down the path that we have.

Got it. And then just around the cost update and mine plan changes, were we still expecting an update there in maybe the coming weeks or this quarter? Or is that maybe something that's still being worked through?

Well, I think, Hugo, the response to that is, look, we've got to focus on ramp up, and we want to be able to actually see what our operating costs are so that we can provide the market 2 things. Firstly, rather than more estimates, we're going to give you actuals and then some guidance. But more importantly, by the time we get to the end of the ramp up, we'll be able to then understand the impact of the optimization study, especially on the underground, to give you a better insight as to what our medium- to longer-term cost structure will be.

Your next question comes from Stuart Howe with Bell Potter Securities.

Tony. Just a quick question around the ramp-up. You're still sort of expecting 6 months to get that throughput rate? And just could you talk a little bit around recoveries and that sort of curve?

Yes, I think we've -- Howe. Yes. Look, we're looking at 7, 8 months on the ramp-up to nameplate throughput capacity of 3 million. And the recovery journey to nameplate will take a lot longer as we described before. We understand what the first generation lithium produces and how they have approached the recovery issue. But we believe, given the strength of our flow sheet design, given the strength of our test work that we've done, that we will look at starting as low as early 40s to target the nameplate recovery over 15 to 18 months. Depends on...

And then just secondly, obviously, the before debt facility remains in place. It's a 5-year maturity from the supply commencement date from memory. You haven't really talked much about covenants around that, but you have mentioned that it's fairly flexible. Could you -- is there any additional information you can provide on sort of what some of the covenants might be on that?

Yes, Stuart, we would have declared any material covenants in our announcement at the time. All I'll say it is very, very flexible.

The next question comes from Adam Baker with Macquarie.

Tony. 99% through construction seems to be going well there. You've highlighted AUD 120 million less in construction CapEx. Just wondering if you could give us some of your color on what that includes? And does that also include the construction of [indiscernible] plant?

I might hand over to Jon? Or -- I'm happy to answer.

No, that's fine, Tony. The AUD 120 million is really just the tail end of the project spend. What we've given there is essentially our cash outflows. So as Tony has mentioned, we're 99% complete on an earned basis. That's just the tail of the spend. I think if I reflect on what some of those items may be, it may be the [ Tasman ] circuit, it may be elements of the tails [ Reglan ] circuit. It's just the ebb and flow of the difference between incurred and the actual payment of the funds out the door and the completion of those 2 items I just mentioned with a few other bits and pieces as well.

Now in terms of those other things like completing the [indiscernible] plant, that will be part of the working capital that we've identified here, that AUD 381 million.

And you highlighted some of that AUD 381 million, that will be going to the underground ramp up. So is that some sort of color that we could get with the upcoming guidance update for maybe some of the sustaining capital cost items going into the underground?

Yes, we'll give that some consideration. But just to give you a sense of that typically some of the work that we will do -- to describe what those earlier [ naming works are ]. I think it's like infill drilling, grade-controlled drilling, some -- ordering some long line items like the massive fans that go into the decline. Those type of things of the mine services area, getting that up and running. That's part of the sort of color behind some of that early enabling works.

Your next question comes from [ Alex Papier ] with Citi.

Tony. Do you need approval from a firm or major shareholders for the convertible notes? I'll come back with my second question.

Yes, we do need -- or LG needs further approval, that's right, but no shareholder approval is required.

And just to clarify on that point, it's for approval related to the security. It's not related to the issue of notes and sales.

Yes. Okay. And I note in your comments around preserving the 4 million-tonne expansion option. Can you clarify if you plan to keep developing the dual declines?

Yes, we will look at continuing that strategy with dual declines, but there will also be additional optionality that we might be able to build into getting into the Northwest platts ore body sooner by looking at access maybe through the open pit. But that's part of that optimization work that the team is currently looking at.

Your next question comes from Hayden Bairstow with Argonaut.

Tony. Well done on that with yourself and Grant and Jon. So it was [indiscernible]. Just a couple of quick ones. Firstly, just on LG. I mean, obviously, pretty keen for the material. Have you looked at cap colors on pricing to provide some certainty on supply for them, whilst giving a little bit of the upside risk away on that front? Or do you need to see where your costs are before you consider doing something like that?

Yes. No, we -- thanks, Hayden, and thanks for the questions. I think the underlying principle that we adopted as part of this was to preserve as much as the current offtake agreements, conditions that we negotiated fairly strongly and fiercely with LG. So the pricings mechanism that we negotiated a year or so ago remained, and we -- which contains no capital [ colors. ]

Okay. And then these discussions with Ford, I mean now we're going to get paid out on this original debt facility. But now aren't. Are they happy to say debt invested for longer? Or did you sort of have more control over when you paid that?

Yes. No,they're happy to continue their relationship with us. The decision to pay out or not pay out was always in our hands, and they were indifferent. So we've continued to -- we've always said, Hayden, that it was a fantastic funding facility. And given that it has first ranking security over the asset, the only way the banks would have got comfortable was to take them out. But otherwise, we really believe how strategic this funding facility is that Ford has provided. So we try to preserve as much as we could. And this current facility that we just announced today, gives us that benefit.