Liontown Limited (LTR) Earnings Call Transcript & Summary

Welcome to the Liontown September quarter results call. [Operator Instructions] I will now hand you over to Tony Ottaviano, Managing Director and Chief Executive Officer of Liontown.

Thanks, Oliver. Good morning, and thank you for joining us at Liontown's September quarter results. With me this morning are Ryan Hair, our Chief Operating Officer, and Greg Jason, our Chief Financial Officer. Over the next short while, I will set out the quarter's key outcomes and where we sit regarding our strategy. Ryan will take you through the safety, the underground ramp-up, processing, and where the expansion has got to. Greg will cover the financials and the balance sheet. I will come back and then provide a market outlook, reinstating of our FY '27 guidance and a short summary. Then we will take questions. I will take you to the next slide, which is our disclaimer, and take it as read. Now we move into our strategy in action. We run the business on three pillars. All three moved forward in the September quarter. The first is ramp up. We are safely ramping up Kathleen Valley to 2.8 million tonnes a year. Underground mining ran at 1.6 million tonnes a year rate through the quarter, consistent with our guidance in March and June. We are stepping this up to 1.9 million tonnes a year rate in the December quarter, where we expect to mine between 450,000 to 500,000 tonnes of underground ore. We remain on track for that 2.8 million tonne run rate exiting June '27. Ryan will expand on this further in his section. The second is delivering Kathleen Valley's full potential. In September, the board approved the final investment decision for the expansion and early works already in execution. From that point, we will have two ore bodies operating independently, which gives us genuine operational flexibility. The third is growth. We completed the initial stage of our farm-in at the Centenario brine project in Argentina, our first dip into brine, and our studies in Buldania are advancing. Underpinning all three, we finished the quarter with AUD 502 million in cash and an underlying operating cash flow of AUD 69 million. A combination of these two helps underpin the funding for the next phase of growth for the company. If we now move to the next slide, please. As previously guided, we used the last two quarters to invest heavily in preparing the underground for the next step up in production and productivity. The numbers reflect that. Underground development advanced 4,021 meters, a record for the operation and up 21% for the June quarter. We prioritize opening new ore access ahead of production tonnes. Development is what opens the new mining fronts and new mining fronts are what lifts the mining rate. We produced 78,000 dry metric tonnes of spodumene concentrate, which we completed processing in the last of the open pit stockpiles, drawing them down from 239,000 tonnes to 81,000 tonnes. The final open pit material was more variable, which affected recovery, and recovery will benefit as underground feed takes over, and we can blend more material more consistently. The plant was also paced to the ramp up and the stockpiles we had available. It ran at its best availability to date, at 94%. We sold [83,000] tonnes across five parcels. Sales reflected previously guided shipment timing at the port, with one shipment moving into the December quarter. Unit operating costs were AUD 1,259 a dry metric tonne on an FOB basis, reflecting the sales timing and what we expect unit costs to come down as new volumes build. Our realized price was AUD 1,966 a tonne on an SC6 basis. Underlying cash flow was AUD 69 million, but after accounting for a one-off customer settlement, we recorded a statutory operating cash flow of AUD 46.6 million. We closed the quarter with AUD 502 million in cash and 16,000 tonnes of saleable con. This quarter is where we invested in the ramp up. Our guidance is unchanged, and the work we did in this quarter is what delivers the rest of the year and underpins our 2.8 million tonne a year run rate. The market has moved since the quarter is closed. I will come back to that at the end when I read out and discuss the market analysis. Ryan Hair will now take you through the safety and operational in detail.

Great. Thanks, Tony. Next slide. Thanks, Oliver. Starting with safety, our total recordable injury frequency rate rose from 11 to 14 over the quarter. Each of those injuries means someone was hurt on our site, and we are committed to ensuring everyone goes home safely. The recent injuries are mostly hand injuries and strains concentrated in contracted work groups at a time when we are bringing new crews and equipment onto site. We have been working closely with our contract partners to ensure everyone is set up to work safely. Our key response to this is the Safety Culture Program, which started this month. It is a two-year program built on the evaluation we undertook last quarter, focused on three things: leadership in the field, critical risk management, and a strong reporting culture. Our lost time injury frequency rate held at one, and safety observations rose to just over five per thousand hours. People are reporting, which is exactly what we want to see. On power, renewable energy penetration held constant at 71%. Next slide. Thank you. Next, again. As Tony indicated, development is the story of the quarter again, with just over 4,000 meters developed in the quarter. A record up 21% on the prior quarter. That is more than double the rate from the same time last year. The image on the right-hand side shows where those meters went. Each color is a quarter. Purple and orange are quarters three and four from last financial year, and green is the quarter just gone. You can see the mine development down and out from the Mount Mann box cut, opening new levels and new mining fronts. As we have noted before, this is the point of the meters. Every level we open is somewhere we can mine from. Our investment in development is opening up the mine to support the ongoing ramp up in production. Next slide. Thanks, Oliver. We have presented a version of this slide previously. Getting from 1.5 to 2.8 million tonnes per annum comes down to two things: more places to mine and more equipment to mine with. On work areas, we are unlocking seven new mining levels over the course of the FY. The lower levels, which are being developed now, carry somewhere between 2 and 5 million tonnes of ore each, with room for several work areas on a level. By the end of the quarter, we have grown from four work areas to 14, setting the mine up well for the rest of the year. On equipment, we added two jumbos, two loaders and three trucks in the quarter, taking the fleet from 21 to 28. We are bringing equipment on in stages, growing to a fleet of 41 by the end of the financial year. More places to mine and more equipment is what underpins the step up from here. Next slide. Thanks. Underground ore mined was 389,000 tonnes at 1.4% lithium, up 9% on the June quarter. Annualized, that is approximately 1.6 million tonne per annum, in line with the 1.5 million tonnes per annum we guided through to this quarter. We said in March and again in June that development would be prioritized, and it was. That development has opened up the next levels, which significantly increases the tonnes per vertical meter and productivity. For Q2, we expect between 450,000 and 500,000 tonnes of underground ore at a rate of approximately 1.9 million tonnes per annum. From there, we will continue building towards the 2.8 million tonnes per annum run rate by the end of FY '27. Moving now to the plant on the next slide. Starting with reliability that Tony mentioned, our availability was 94%, our best quarter, up from 92%. Throughput was mainly set by ore supply, not the plant. With stocks going down from 240,000 tonnes to around 80,000 tonnes, we matched the plant to the underground mining rate, resulting in ore processed of 508,000 tonnes. Notably, the plant processed just shy of 650,000 tonnes in the June quarter, so it has room for the ramp up tonnes. Recovery was 60%, down from 63% in the prior quarter. Feed this quarter included high levels of contamination in the open pit stockpiles, and with limited stocks for blending, feed consistency was not optimal. As a reminder, when we have fed the plant clean ore, it has delivered 70% recovery. So the work from here is managing what goes into the plant, especially feed consistency, which we expect to improve as the mine ramps up through the course of the year. As a result, recoveries will improve, and with the mine ramp up progressing well, we expect production to increase through the remainder of FY27 and as such, production guidance is unchanged. With that, onto the expansion. Next slide. Thank you. In late September, the board sanctioned a Kathleen Valley expansion. It is a staged AUD 389 million investment that delivers capacity incrementally, increasing processing capacity from 2.8 to 4.2 million tonnes per annum and lifting concentrate production by more than 50% to a five-year average of around 780,000 tonnes a year from FY '30. This is a mine expansion and a plant evolving project. I would like to highlight four things. Firstly, the two ore bodies, Mount Mann and Kathleen's Corner underground, operate independently, which gives us operational flexibility. Second, capital intensity of AUD 1,619 per tonne is the lowest of recently announced brownfields expansions. Third, scale lowers unit cost. Unit operating costs of AUD 840 to AUD 920 a tonne in today's dollars averaged over five years from FY '30. Lastly, payback is around 2.5 years from the end of construction. As shown in the plant images, the core upgrade is a new ball mill and the rest are upgrades to the existing circuit. We are expanding a plant we already know, it is not building a new one. Next slide. We are moving at pace. Most of the owners team that will deliver the expansion is engaged or identified and working from new project offices at site, and that is the pre-start in the top left image. The ball mill has been manufactured and on track for delivery in Q3 of FY '27. Bottom right is the pinion ready to ship. The mine services area is taking shape as shown in the bottom left image. Engineering and procurement are underway across mining, processing, and non-processed infrastructure, and contractors are on the track to mobilize. Top right is the progress at Kathleen's Corner, and we remain on track for first ore in Q1 FY '28 and completion of the expansion by the end of Q2 FY '29. With that, I will hand back to Tony.

Thanks, Ryan. Can we move to the next slide, please? Okay. We are now talking about the third pillar, which is growth. In September, we signed a binding farm-in with NEXT Lithium Corporation to earn up 100% of the Centenario Lithium Brine Project in the Salta Province. Initial completion occurred on September 2. Kathleen Valley remains the core focus, however. Brine is one of two principal sources of the world's lithium, and Centenario gives us an early low-cost access to a prospective brine district alongside a partner that knows lithium, knows brine, and knows Argentina. We paid $15 million US upfront with $5 million in cash and $10 million in Liontown shares. Phase 1 is $15 million of project expenditure over the next two years, which earns us up to 49% of the interest. Beyond that, we can move to 100% by funding another $40 million of project expenditure over four years, together with milestone payments linked to resource success. Every stage is a decision point, not an obligation. We fund the next tranche only if the results and the market justify it. This is how we take a position on a frontier basin without putting significant pressure on our balance sheet. Alongside that, we have Buldania advancing. We have designed the infill drilling program and engaged contractors during the quarter. RC drilling and diamond drilling begins in the December quarter, and we will feed the geotechnical and waste characterization studies as part of the overall assessment. We have completed heritage surveys with the Ngadju people, and I will now hand over to Greg to take us through the financials.

Thank you, Tony. Slide 17, please, Oliver. We generated AUD 69 million of underlying operating cash flow in the quarter, and that came from AUD 193 million of sales receipts, which was supported by stronger realized price and backward-looking QPs. Production and other operating cash costs increased 3% to AUD 130 million, as we prepare for the ramp-up through the rest of FY 2027. We had a AUD 22 million outlay in settlement of a disputed shipment from the March quarter of this calendar year, and that takes us to an overall operating cash flow of AUD 47 million. We had AUD 82 million of CapEx, with AUD 14 million of that sustaining CapEx. That is clearly less than 25% of the full year guidance that we provided a few months ago. The time phasing of projects is not uniform through the year, and sustaining CapEx will ramp up during the rest of the year. We had AUD 68 million of growth CapEx. AUD 23 million of that was underground development to ramp up Mount Mann to 2.8 million tonne per annum run rate, and AUD 38 million was spent on optimization and expansion projects, including the mine services area, Kathleen's Corner underground capital development and infrastructure, the new ball mill, paste plant upgrade. We had a significant step-up in the financing cash flows this quarter because we commenced the principal and interest payments on the Ford facility and the principal-only payments on the LISP. Overall, our net cash flow was negative AUD 58 million, and we closed the quarter with just over half a billion dollars in the bank, 16,000 tonnes of saleable concentrates. Next slide, please, Oliver. Looking at some of the other financial metrics, we generated AUD 199 million of revenue from 83,000 tonnes of sales. We had a 10% increase in the Aussie dollar realized price. The increase in the Aussie realized price was driven by two factors. One was the higher product grade, which went from 5% to 5.2%, and the other factor was the increase in the USD SC6 price going up to $1,966 a tonne. That reflects the customer mix on a variety of QPs, some forward and some backward-looking. Moving to the unit operating costs. We provided guidance that we were delivering in the range of AUD 1,050 to AUD 1,250 for the full year. We guided that Q1 would have flat mine production compared to Q4, and quarters 2 to 4 will have incrementally higher production than their preceding quarter. We planned for lower tonnes in Q1, and we budgeted the Q1 unit operating costs to be at the upper end of the guidance band, and that's exactly what we're seeing come through. We're maintaining full-year guidance, and we will see unit cost reduce as the year progresses. Moving to the next slide, please, Oliver. As part of the FID announcement for the expansion that we made at the end of September, we said that we could fund the capital program from existing cash reserves and operating cash flow, given consensus pricing. Current prices are obviously below the September consensus, and they dropped quickly. Naturally, we're watching to see how and when the market rebounds, but we aren't managing a business based on a price drop that's occurred in a matter of weeks. There's a number of levers that we can pull to manage liquidity. Of course, we got a starting point with half a billion dollars in the bank at the end of September. We've got capacity to raise additional debt capital, as illustrated on this slide. We've got uncommitted expansion tonnes that we could commit under an offtake agreement with a prepayment arrangement. Finally, we could defer CapEx, but the expansion is highly accretive, and therefore it's not the first lever that we would pull to manage liquidity. I'll now pass you back to Tony, who is going talk you through the market outlook.

Thanks, Greg. I did want to spend a little bit of time on the market outlook, given the variability and the drastic changes we have seen in the last 28 days. If we can have the next slide, please, Oliver. There is no question the market has moved since the quarter closed. Given our recent growth announcements, we have continued to review the fundamentals to give us a better perspective and look through this volatility and the sentiment that the daily trades on the futures [range] are creating. This chart shows the latest forecast from six investment banks for calendar year 2026 and also '27. They average in '26 a deficit of 121,000 tonnes of lithium carbonate equivalent, about 6% of the overall supply. For 2027, they average a surplus of 28,000 tonnes, a little over 1%. For me, the telling points are the variances. If we think about what this implies, the average forecast swing in 2026 from the average to the other average in 2027 is 150,000 tonnes. That is three Kathleen Valleys in 12 months, all arriving in that single year. If I go one step further, one prominent bank goes to the fact that they say there is 404,000 tonnes of deficit in 2026 to an oversupply of 193,000 tonnes next year. That is a turnaround of 600,000 tonnes, nine Kathleen Valleys or four Pilgangooras in one year. What is the insight here? The insight here I think is obvious, that the market is tightly balanced in our view. Small changes in sentiment have a large impact on price. Our view is that, that is exactly what is happening when we look at the fundamentals. Firstly, inventory. Stocks lean right through the chain. Stocks are lean right through the value chain, from spodumene to cat chemicals to cathode. [Carbonate] in the exchange-owned warehouses is below 20,000 tonnes, the lowest since March. Part of that is deliberate because buyers expect plenty of supply next year, so they are leaving themselves open with very little buffer. So most forecasts assume inventory does not change, then we are going to see a massive fly-up in the restock when that happens. The last time we saw a restock like that was in 2022, and prices spiked. The second is demand, which is more diversified than it ever has been, both geographically and by sort and end use. While EV penetration in China has moderated, we have seen penetration rates in Europe and the rest of the world grow significantly. Global sales are up 3% year to date. In August, China's battery output was up more than 50%, and energy storage output more than doubled. Demand for electric heavy trucks in China has doubled this year, and each heavy truck needs roughly 10 times the lithium of a car. On storage, the industry builds to order. The gap between shipments and installments mostly reflects how long large storage projects take to build. We do not see a large overhang of unsold batteries. The third is supply, which is harder to deliver than the forecasts assume. Most of next year's growth relies on China and Africa. In China, it depends on mine licenses being renewed, and the largest of these mines are still working through the approvals. Zimbabwe bans concentrate exports from 1 January before its local processing is ready. A lot of volatile prices makes each new project harder to fund. We landed a deficit to balance in 2027 with the surprises more likely on the upside, our response is to lower our cost, lift our scale, and keep a balance sheet that lets us hold our course through every part of the cycle. If we move to the next slide, please. Our FY '27 guidance is unchanged, and we are reaffirming that again this morning. If we move to the next slide, please. I will close where I started on the three pillars. On ramp-up, we mined 380,000 tonnes of ore, up 9%, and we developed a record 4,021 meters, up 21%. We are targeting a mining rate of about 1.9 million tonnes a year in the December quarter, which equates to 450,000-500,000 tonnes of ore in that quarter. We are on track for our 2.8 million tonne mining run rate by the end of FY '27. On full potential, we approved the AUD 389 million investment in the expansion, which takes us to the 780,000 tonnes of concentrate by FY '30. We closed the quarter with AUD 502 million of cash, supported by AUD 69 million of underlying operating cash flow. On growth, the Centenario farm-in is complete, the capital is staged to results, and phase 1 drilling is designed and likely to start early next year. We are advancing the Buldania studies. Finally, Kathleen Valley is a tier 1 asset. We have managed through a low price environment before, but today we are investing through the cycle to build a larger, lower cost operation that is resilient and ready to capture the upside. This is how we build long-term value for our shareholders. On that point, I am happy to take questions.

[Operator Instructions] Thank you, Tony. [Operator Instructions]. Our first question comes from Hugo Nicolaci at Goldman Sachs. Please go ahead.

Morning, Tony and team. Two questions from me, if I can. Firstly, just on that near-term production piece, is it fair to maybe presume you've seen the mining rates going reasonably well and you've decided to clear that remaining contaminated material in the September quarter and taken that recovery hit, but effectively then letting you dial in the plant to that 100% underground feed from here? If so, can you maybe just correct or adjust previous comments where you expected 1Q and 2Q production to be similar? Do we now expect the 2Q to see a bit of a step up in production on that plant performance going forward?

I'll hand that over to Ryan.

Thanks, Tony. Thanks, Hugo. So yeah, a couple of points in the question. The first is, you will have noted, I think that we've got circa 80,000 tonnes of stock that we haven't processed, and there's probably two buckets to that. First is that, there's a, I guess, a working amount of stock, and that's probably about half of that amount, and that's underground material. The second half is some remaining open pit. The intent for us is to campaign that through in this quarter. So that's the first point. The second is that you're absolutely right in saying that our intent now, going forward, is to take that underground material and use that to continue to dial in the plant. I [guess] as we've discussed in previous commentary, we have been feeding the plant a variety of different feed types, and so that has made it more difficult to dial in the settings for the plant. So we get an opportunity to do that now that we are fully underground, extending my comment around the campaign that we'll do on that remaining open pit stockpile. With that in mind, we give that consistent feed. I think also noting the commentary around stocks for blending. As the underground mine ramps up with more active stocks, more tonnes, opportunity to kind of blend from multiple sources out of the underground mine, will also give a bit of tailwind to recovery. So we expect not only tonnes increase through the year, but the direction of travel on recovery is up.

Great. That's helpful. Next one, just on growth and balance sheet. You called out that you have borrowing capacity available, and you highlighted three times FY '27 EBITDA. Your headroom's approaching AUD 1 billion, and that's off current ramping up to EBITDA. Should we interpret that as your capacity for future acquisitions to go beyond the recent initial toe dipping in Argentina [indiscernible] ? How should we think about what headroom you'd realistically look to use? If you're making that acquisition, do you perhaps need a pathway back to, say, a one times leverage target on a certain timeframe to support that?

Great. Hugo. Great. There's a number of things in that. I wouldn't read directly into the chart about intentions around acquisitions. Naturally, acquisitions, if they come up, can take different forms, and we would consider the capital structure according to the nature of it, the size of it, the time frame, generating operating cash flows and development asset. The chart was really more there in reaction to softening of price that we have observed and being able to address any concerns around liquidity and us continuing with the expansion in Kathleen Valley and talking about the levers that I pulled before. You made some reference about different leverage ratios at different points. Yes, you can extend your balance sheet, of course, for a particular project or acquisition and then seek to bring it back in line. Those ranges on the chart are indicative. Naturally, it comes down to discussions with financiers and what's acceptable, whether it's direct commercial lending or out in bond markets, for example. I won't give you a specific number today about what is our target leverage ratio.

The next question comes from Stuart Howe at Bell Potter. Please go ahead.

Thanks, Tony and team. Firstly, I have two questions. Firstly on cost guidance, crude oil has obviously snuck up quite a bit since you last put that guidance out. Could you just remind us what you factored in for that guidance in terms of pricing? I guess anything you can talk around crude oil and diesel price exposure would be helpful, although obviously you are less exposed than [indiscernible].

Yes. Stuart, maybe taking the second point first, and I might hand to Greg. As you have noted, we are less exposed than others for two reasons. One being, a lot of our equipment underground is powered by electricity and not diesel. We do have some diesel exposure there, clearly, but proportionally lower. Secondly, because of the renewable energy penetration we have, obviously that power comes at very low incremental cost. In terms of, I think, overall exposure, I think when we have spoken about this before, it is circa AUD 1.3 million [indiscernible] so that is [indiscernible] a year kind of exposure was what we had said before with the incremental cost up. I will let Greg talk more about the variance, but I think it was around 4% of the cost base, was probably the best way of thinking about it.

Yeah. We were playing pin the tail on the donkey back when we were budgeting and thinking about what price per liter to put on diesel and what to put onto the Jet A-1 fuel that comes through the flight cost. We had budgeted to be on a trend that was coming back down closer to AUD 1 because that is when the prices were easing a fair bit, and I cannot remember at the time, it was maybe back down to like AUD 1.50, AUD 1.30. We had assumed that for a period and then coming back closer to AUD 1. That is not what we have realized. It is higher. You can all see that when you go to the [indiscernible]. We did some work and talked at one of the previous announcements. It probably was the end of Q3, and we talked about sensitivity of, say, AUD 25 to AUD 30 per tonne of concentrate per AUD 1 per liter. Therefore, I do not have any concerns about the higher diesel price and the Jet A-1 fuel price pushing us outside of the guidance band that we gave of AUD 1,050 to AUD 1,250 overall.

Great. Thank you. Just on the ramp up to 2.8 million tonnes per annum. Obviously, 1.9 in the current quarter and exiting June at that 2.8 rate. Is that a linear ramp up that we should expect or factor in going forward? I guess, just on slide 8, it points to 13 pieces of kit added before the end of June. Can you just talk to the status of that equipment? Is much of that now contracted and on-site, or is there any risk to that arriving and ramping up on time?

Thanks, Stuart. I will cover that. I think it would be fair to say nothing goes in a straight line in mining. Broadly speaking, what we have kind of said before is a good approximation is that it will step up from here from the notional 1.5, 1.6 rate to 2.8 by the end of the year. In a straight line is not a bad approximation, but obviously month to month, quarter to quarter will look a little different to that, which is why we try to provide a little bit of color in terms of what the Q2 looks like. In terms of your question about equipment, the third jumbo is due to arrive any day now. The other equipment, particularly loaders and trucks, will step up, particularly as that next jumbo, A, starts to do its work and, B, as we start to get into more of the [indiscernible]. So we have sequenced that equipment to come, I guess, fairly staged through the course of the year. Obviously front end with the jumbos because the development needs to be done early and before you do the other activities. But they will stage through the rest of the year. So this kind of increment that you have seen in this quarter, broadly speaking, you will see happen in the next few quarters. We have no concerns about the delivery of the equipment. It is, again, one of the advantages we have working with our contract partner, Byrnecut, is that they have got a big network to be able to access what we need.

The next question comes from Elaine [indiscernible] at Bank of America. Please go ahead.

Hi. Thanks, Tony and team. As you noted, prices have moved quite sharply after the quarter. Regarding your contract book, could you remind me on the lag for your spodumene and chemical contracts? Is one month lag fair to assume? And how should we think about the provisional pricing in the coming quarter? Thanks.

Yeah, you are going to find it hard to model because we have got such a range of quotation periods. We have got a contract that looks back four months price to shipment through to two months price to shipment. So I mean, it is a three-month average. We have got others that look back a month. We have got some that include the month of shipment and the month following shipment. So very hard to unpick that.

Yeah. I think in the past, what Greg has said is just assume it sort of averages out to about in the month, I think, or maybe a lag of a month.

Yeah. It depends on the customer mix.

Yes. Of the quarter. Yeah.

We don't necessarily ship to every customer every quarter.

Yeah.

Thanks. That's helpful.