Lithium Argentina AG (LAR) Earnings Call Transcript & Summary

Good morning, and welcome to Lithium Americas General Motors Transaction Conference Call. [Operator Instructions] I will now turn the call over to Virginia Morgan, Senior Director, Investor Relations and ESG. Please go ahead.

Thank you, operator, and thank you, everyone, for joining the call this morning. Before we begin, I would like to remind you that we will be making forward-looking statements during the call. Please refer to the cautionary statements included in the presentation and news release. Our news release issued this morning details the highlights for the GM investment and supply agreement, an update on the Thacker Pass construction plan. You'll find a copy of this news release on our website. It has also been filed on SEDAR and EDGAR. Please also note any amounts discussed today will be in U.S. dollars. After the prepared remarks, we will open the call for Q&A. At that time, we will invite analysts to queue for questions. I will now turn the call over to Jonathan Evans, Lithium Americas' President and CEO.

Thank you, Jenny, and thank you, everyone, for joining us this morning. We're really excited to have Sham Kunjur, GM's Executive Director for EV Raw Materials Center of Excellence joining us today as well. We're pleased to announce today's investment and supply agreement with General Motors. This is a major milestone for Lithium Americas and moving our Thacker Pass Project towards production. Today's announcement also sets the foundation for the company as we transition from a developer to a producer and pursue the strategic separation of our U.S. and Argentine businesses. Together with General Motors, we are committed to responsibly developing Thacker Pass to power Made-in-America electric vehicles and help the United States meet its carbon reduction goals with secure domestic supply of critical battery and raw materials. Before we go through the details of the transaction, I'd like to hand over to Sham to say a few words on today's announcement.

Thank you, Jon, and good morning, everybody. GM is very pleased to have announced this investment and supply agreement with Lithium Americas. We believe that it's a win-win, not only for GM and Lithium Americas but also for the domestic battery industry. According to our advisers, this investment represents the largest ever made by an automaker to produce battery raw materials. We are excited to be working with Lithium Americas to supply lithium in the U.S. for our Ultium battery cells, which is helping power a broad portfolio of EV trucks, SUVs, luxury vehicles, and light commercial vehicles from GM's Ultium platform. Importantly, today's announcement is based on the fact that we have already secured all of the raw materials we need to build more than 1 million EVs annually in North America. Direct sourcing of EV critical raw materials and components from suppliers in North America and free trade agreement countries helps -- makes our supply chain more secure, sustainable and it helps us manage cell costs and it creates jobs. It is all part of our long-term strategy to invest in and create a robust North America focused supply chain for EV raw materials, process material and components to support our EV growth. Moving forward, our future production will increasingly draw from domestic resources like Thacker Pass. So thank you, Jon, for having me join you today and look forward to working with you and the entire team from Lithium Americas. With that, I hand it back to you, Jon.

Thank you, Sham. We likewise look forward to working closely with General Motors and your team to help build the domestic supply chain. For those following along the webcast presentation, we'll start with Slide 3. We view GM's $650 million investment in Lithium Americas as a transformative transaction in the battery raw materials industry, forging a partnership between GM, a leading global Auto OEM in the U.S. and LAC, owner of the largest known lithium resource in the U.S. We expect the investment to meaningfully accelerate the development of Thacker Pass, which once in production will spearhead the U.S. EV transition and building a domestic EV supply chain. Along with the investment, GM will have exclusive rights for Thacker Pass' Phase 1 production designed for 40,000 tonnes per annum of battery-quality lithium carbonate for 10 years with an option by GM to extend it for an additional 5 years. GM will also have Right of First Offer on Phase 2 offtake. We expect Thacker Pass to be one of the largest sources of lithium in the United States, and this is just the next step to moving this project towards production. With this investment, GM will become the largest shareholder of Lithium Americas. As we continue to advance towards the separation of our U.S. and Argentina business units, GM's investment will help set a strong foundation for the development of an independent business focused on Thacker Pass and a North American supply chain of battery raw materials. Lithium produced from Thacker Pass is uniquely positioned to help support EV eligibility for consumer incentives under the clean energy tax credits. The investment has demonstrated a clear pathway to fund Thacker Pass. GM is a very strong offtake partner, and we continue to advance our ATVM loan application process with the U.S. Department of Energy. Moving to the next slide. GM's total investment is broken into 2 tranches. In tranche 1, GM will invest $330 (sic) [ $320 ] million at a subscription price of $21.34 per share into LAC. This initial investment will result in GM holding 9.999% ownership in LAC. The second tranche of $320 (sic) [ $330 ] million is expected to occur following separation into the U.S.-focused business. The price for the second tranche will be based on the market. Following tranche 2, GM is expected to hold a significant interest, up to 30% of the U.S. business and will hold certain investor rights, including entitlement to a seat on our Board. We expect the first tranche to close by mid-2023 once we receive a ruling on the Record of Decision appeal that supports our ability to start construction. With GM's investment, GM will have exclusive rights to Thacker Pass Phase 1 production. The pricing structure is based on a price formula that reflects market prices. Next slide, please. Thacker Pass is eligible for the Inflation Reduction Act credits, both at the manufacturing level and at the consumer level. I will get into project economics in a few slides, but the economics incorporates the 10% advanced manufacturing production credit for the first 10 years of operations. Currently, almost 80% of the world's lithium production comes from Australia or South America, with the majority of chemical processing in Asia. Lithium carbonate from Thacker Pass will be Made-in-America with both the extraction and processing right in the U.S.A. Next slide. As you can see from this slide, the supply-demand deficit for lithium remains a major challenge globally, prices have increased rapidly in recent years as supply has failed to keep up with demand driven by EVs. The market needs to take action now as it easily can take over 10 years to build new mines and processing facilities in North America. Current forecasts predict a supply deficit of over 3 million tonnes by 2040. That's equivalent to 75 Cauchar-Olarozs, which is the largest new lithium carbonate project to be built in over 20 years, which is our joint venture in Argentina. Today's announcement, the largest investment by an automaker is an important step in addressing this global supply chain risk for EVs. Moving on to Slide 6. This slide shows the scale of Thacker Pass and the importance of this project in supporting America's long-term EV battery demands. Thacker Pass is the largest known resource in the U.S. with a measured and indicated resource of 16.1 million tonnes, that's 10x the size of Silver Peak, which is the only producing lithium asset in the U.S currently. Based on our feasibility study, which is based on less than 25% of our defined resources, we expect the lithium produced from Phase 1 at Thacker Pass to support up to 1 million EVs per year for 40 years. Next slide, please. Just a quick overview of the Thacker Pass Project. Thacker Pass is a 100% owned project located in Northern Nevada. It's the only project in the U.S. with a record decision and all state permits to start construction. The plan is to produce 80,000 tonnes per annum in 2 phases of 40,000 tonnes per annum. This includes an integrated lithium production facility, including both the extraction and processing, all at the same site. The reach and scale of Thacker Pass presents an opportunity for future expansion, providing near-term organic growth pipeline. The work our team has done in Nevada at our Technical Development Center is world-class. We are producing battery-grade lithium carbonate samples from Thacker Pass ore. Next slide, please. We've always been committed to going beyond regulatory requirements in all aspects of how we do business, including how we designed and will operate Thacker Pass. Lithium carbonate from Thacker Pass supports the production of EVs and reduces carbon intensity downstream. Production from Thacker Pass is expected to have approximately 40% lower CO2 emissions than competing hard rock mines and conversion facilities. The project benefits from our co-located sulfuric acid plant, which generates steam as a natural byproduct to provide carbon-free power. From a water perspective, we designed our process to be a closed-loop zero liquid discharge system. We converted existing water rights from agricultural to mining uses. The result is less water pumped from the aquifer for our processing uses compared to agricultural uses. Another way to put it, a water drop for Phase 1 operations is equivalent to approximately 4 to 5 alfalfa pivots. For reference, you can see alfalfa pivots in the background of the image on this slide. Overall, at full capacity Thacker Pass will draw less than 2% of the total water pumped from wells in Humboldt County. Other aspects we've adopted to minimize environmental impact include filter stack clay tailings, a best-in-class emissions control system to minimize impact to air quality, and we'll be actively back filling and reclaiming the site. Next slide, please. Lithium Americas is committed to actively engaging with our neighbors and local communities. We're proud to have a Community Benefits Agreement signed with the Fort McDermitt Paiute and Shoshone tribe, the closest native American tribe to Thacker Pass at only 40 miles away. We've been actively engaging with Fort McDermitt tribe for years and the Community Benefits Agreement establishes a formal framework to contribute -- to continue this collaboration and define long-term benefits for the tribe. We're committed to being good neighbors. We hire locally where possible and provide job-ready training for construction at Thacker Pass. The project is expected to hire up to 1,000 people for construction and up to 500 permanent jobs during operations. The Community Benefits Agreement includes building a new community center for the tribe that will include a daycare facility that will enable both parents to be able to work outside the home. We're working with the community of Orovada as well, the school district and the Bureau of Land Management to fund and constructing a kindergarten to grade 8 school. In consultation with the community, the BLM has identified a parcel of federal land, completed the federal permitting and are in the process of transferring the land to the school district. We're working to finalize the design and prepare for the start of the construction of that school. Next slide, please. In July of 2022, we held an inauguration for the Lithium Technical Development Center in Reno. The tech center is a state-of-the-art analytical lab capable of producing and analyzing pure lithium compounds. Since commissioning last summer, the tech center has been making battery-grade lithium carbonate samples from Thacker Pass ore, using our integrated process. For the Thacker Pass flow sheet, we are utilizing processing steps that are commonly used in various other industrial and mineral extraction applications. The process is designed for lower water consumption, to minimize environmental impact and to achieve a lower carbon footprint an alternative lithium mining process is currently used. The front end of the flow sheet is identical to the phosphate industry. We then add sulfuric acid to get a lithium sulfate. From there, it's the same process as what is currently being done for spodumene conversion in Australia and Asia. Now on to the results of the feasibility study. Thacker Pass is a large-scale lithium chemical project integrating both the extraction and processing, all on the same site. The project is designed to be built in 2 stages, Phase 1 for 40,000 tonnes per annum and Phase 2 for a total capacity of 80,000 tonnes per annum over a 40-year mine life. The production capacity for Thacker Pass will be able to support over 1 million EVs per year or approximately 40 million EVs over the course of its mine life. The first years are much more representative of the project operating and economic performance. They incorporate the optimizations in blending different ores to improve leaching and extraction rates, increasing sulfuric acid utilization and the result is producing more with the same footprint and without expanding the sulfuric acid plant's operation. The capital cost for Phase 1 is approximately $2.3 billion, including a 13% contingency and based on costs that were updated in the third quarter of 2022. For the second phase, the initial cost is roughly $1.7 billion. From an economic perspective, using Wood Mackenzie's long-term forecast, we get an after-tax net present value of 8% discount of approximately $5.7 billion with an unlevered 21.4% IRR. Operating costs are approximately $6,700 per tonne, which is largely tied to the cost of sulfur, which has decreased substantially over the past year. We also note that in the initial 10 years, once ramped up, we expect operating cost to be less than $6,000 per tonne, when including a 10% tax credit from the Inflation Reduction Act. And I'll add that, that tax credit is not something that -- over the life of the project, we expect the asset to generate over $1 billion of EBITDA per year on average. On the bottom half of the page, we've broken out EBITDA over the life of mine and show a sensitivity analysis across a range of prices. At $12,000 pricing, we're still making healthy EBITDA. Next slide. Here is a visualization of the processing facilities that we will build at Thacker Pass based on the process we've proven at our tech center. We'll be running the same process as the tech center, but on a larger scale for processing steps that are new to the lithium industry. We tested the process on commercial scale equipment. Next slide, please. Here, you have a subset of a North American executive team that will help lead Thacker Pass into construction. As announced in late 2022, with the news of the strategic separation, I will remain CEO of the North American business. Some of the other folks on the page, Alexi Zawadzki has done a tremendous job for the last 6 years working on -- with both our team and with the local communities to move the project to the construction stage. Going forward, he will continue to lead sustainability and exploration efforts for the North American company. Richard Gerspacher joined our team in early 2022 and was previously at Fluor, leading large capital projects globally which include construction of lithium projects in Western Australia. Over the past year, he has built up the LAC construction and execution teams. Richard will be central to overseeing the construction at Thacker Pass. Additionally, we've recently engaged and contracted with Bechtel, a trusted industry leading EPCM contractor to lead the construction process for Thacker Pass. Next slide. I won't read this slide out in detail, but here we've outlined the execution and construction team for both LAC and Bechtel. The key takeaway is that we've assembled a very experienced team with the expertise to build Thacker Pass. We are excited about our partnership with Bechtel and look forward to working with them to bring Thacker Pass into production. Next slide. We expect to commence construction by mid-2023 once we have a ruling on the Record of Decision appeal. The construction time line is a conservative 3 years. We expect Phase 1 ramp-up and first production to occur in the second half of 2026. The website version of this presentation has more slides on the feasibility study results in the appendix for your reference. Next slide. In summary, putting the GM transaction and Thacker Pass construction plan in the context of where Lithium Americas is today, we see many exciting potential catalysts in the near future that will drive value for our shareholders. Starting with the transformative transaction we announced today, we're excited to have GM as our largest investor and offtake customer to jointly advance the development of Thacker Pass. Together, we are helping onshore Americas transition to an electric economy and generate much needed job growth and economic development. As announced earlier, we're expecting a Record of Decision appeal ruling in the coming months. A favorable appeal outcome will be the next step in advancing the project towards production. We've also been working closely with the Department of Energy and secured funding under the ATVM Loan Program and pleased to have a supply agreement investment supporting the development of a North American supply chain. Also, we've been working towards the separation of our U.S. and Argentine businesses and expect the separation to occur in Q3 2023. As stand-alone business units, the U.S. and Argentina businesses will have the flexibility to pursue independent strategies and focus each businesses representative of leadership teams on the successful execution of business strategies in their own geographic areas. We expect to unlock additional value for shareholders through this separation process. With that, we'll open the line to analysts for Q&A. Operator, if you can please queue the first question.

[Operator Instructions] Your first question comes from Whale MacMurray from Cormark.

Congratulations. Obviously, a lot of -- a culmination of a lot of work. First question is around the process itself. Can you speak to how robust the process was in terms of perhaps other companies that were interested and what made you choose this particular investor?

Thanks, Mac, and thanks for joining us. It was a long process. We started in earnest last spring, and we've talked to a variety of parties, probably more than 50. Right from the very beginning, GM's vision has been aligned with ours on advancing this project. They've done a great amount of due diligence and the strategies and alignments in terms of where we want to go and what the possibilities are at Thacker Pass has resonated with General Motors. Additionally, from a cultural and from a corporate perspective it was just really a great match, right from the very beginning. So we're really proud that we chose GM, and they chose us as well. It's -- I think it's going to be hugely fruitful partnership. We're really proud to be able to work with them closely to develop the product that they need and there's future potential opportunities here for us to continue to modify our business model to supply General Motors as they grow in the North American and global EV market.

And just to follow on that. Is the -- was the process limited to Thacker Pass or it does -- is there any impact here on potential partnerships of similar nature in Argentina?

We kept the process focus on Thacker Pass. This being the next project that we needed to partner and wanted to make sure we have it fully funded. So the process is limited to Thacker Pass.

Okay. And my second question was around the CapEx in the project. Did you explore the ability to bring in other partners for things that you wouldn't really say are core to making lithium carbonate, for instance, the acid plant or cogen plants or whether there's logistics or rail, that type of thing in the CapEx. Is there a possibility that you could bring in partners that you would use to build that and really enter into a sort of an agreement to purchase those services or chemicals, for instance?

Yes. We looked at a variety of different models. There were other, I would say, partners or investors that were interested in particular parts of the flow sheet. General Motors was much more of a holistic solution where it gets more complicated when you get into separate parties deploying CapEx within the operating areas, the model, and I think the breadth of investment that GM offered in exchange for the Phase 1 offtake for the -- at least 10 years of -- option to grow to 5 more, was a lot cleaner. There were parties that were interested, particularly, and we already have a party on the mining side. That's a long-term service contract that we have with Sawtooth Mining, which is a division of North American Resources. But it became a little bit more complicated when you start carving out, say, just the reagent plant or transloading facility and things of that nature. So this is the cleanest and most efficient structure with having a holistic model like this that was with 1 partner.

Okay. I have more questions but I'll jump back in the queue and maybe have a second go around later.

Got it. Well, you prefaced a little bit. I'll keep going on the CapEx here. I know we're going to get a lot of questions on this. And I think what I'll preface before the questions is, I think this group should get used to this type of CapEx intensity, which really you can draw parallels and there are already many projects in Australia that represent what you see right here in terms of the quantum of cost. For a fully integrated project from mine through processing, you can look no further than Australia and projects that are very similar sized to this with this type of price tag. So I know there's lots of feasibility studies that are out there, of course, the publishing time between our pre-feas and our final DFS here was over the course of 5 years. There was a lot of work done in between and a lot of modifications done in the process to reflect things that we've learned, things that we have integrated here to go above and beyond from a permitting standpoint that come out with this final project structure that we have here and costs associated with it.

Your next question comes from David Deckelbaum from Cowen.

Congratulations to you and your team and the GM team.

Thanks, David.

I wanted -- I was hoping that you could maybe illustrate a bit more for us how you're thinking about the unfunded CapEx at this point? You've talked about the ATVM loan process. Should we envision the potential for prepaid offtake coming from GM in the future? And it seems like the timing for, obviously, Phase 2 would be coinciding with full production, I guess, with Phase 1. So if we think about that upfront Phase 1 CapEx of $2.3 billion from now until I suppose 2026, how do you conceptually think about bridging that with all other sources of cash flow right now?

I think I look at the loan being a major component of the remaining capital stack that we have here as I mentioned in the earlier part of the conference call. We're very advanced with the ATVM and the loan office itself. We're at sort of the penultimate step where they would issue a Letter of Substantial Completion. We were very thoughtful about who we picked as a partner in terms of who the party was, and where this initiative was going, but also the quantum of investment. That was the final piece that we've needed to move the ATVM process into the final stage. I think folks can also look that General Motors has already worked for the ATVM loan office to get a loan for their Ultium factories in the Midwest. I think the quantum of that loan was $2.5 billion. And I think you can look at the example of Ioneer, where depending upon how much offtake is accounted for, and in this case, we have 100% of our offtake accounted for, for the first 10 years, with an option to go 5 more. The loan office generally targets between 55% to 75% of the CapEx that they'll consider for a loan. So looking at that range on the high end, even in the midrange, and also considering what we have cash on our balance sheet, and the investment that GM will be investing in the 2 tranches in the company, which will be all dedicated towards advancing this project. You can do the math where we can come up with a funding solution here. If -- we'll look potentially if we have to, at other sources in the outside market. But what we have here really closed the last gap that we need to move the loan process to the final steps, and we'll be working closely with GM to ensure that, that loan gets in place and is on the higher quantum, which I'm very confident it will be just given what this represents and what this project will support, which is 3 of the largest battery factories that are going into the Midwest that GM is actively building with LG. Does that answer your question?

Yes. Yes. Certainly, to the extent that you can right now, but I appreciate that. And just as a quick follow-up, the feasibility, one, it wasn't entirely clear if the economics were including IRA benefits? And is the final flow sheet at this point to produce a lithium carbonate product, or would there also be flexibility to get to hydroxide?

We are permitted to make hydroxide, but the flow sheet and the feasibility study to support it is for battery-grade carbonate. We will work with GM potentially beyond this, if that type of capacity is needed for them. I would say it's probably better not to do it on the site here and maybe do it at a brownfield site somewhere else, but I'm professing myself in terms of future discussions with GM going down the road, but we have the ability to do both here. We can add that conversion capacity on-site if we wanted to. But as the feasibility study and the flow sheet is designed today, it's to make lithium carbonate.

Your next question comes from Steve Richardson from Evercore.

Jon, I was wondering if you could talk a little bit about the pricing mechanism in place here in terms of -- you have mentioned market prices. How should we think about that spa carbonate kind of on the screen or index price or what an alternative contract would be with somebody else? I just wonder if you could kind of talk about that and if there's any kind of floor ceilings that you envisioned in that commercial agreement?

Yes, we have to be careful here not to get into too much detail because a lot of that is confidential, but the pricing formula does reference a market index and then there's a discount formula that's applied to that. I mean, I have a lot of experience with offtake agreements. So I'll say that this agreement meets GM's needs and it certainly meets our need as well, and it's a very equitable and very good compared to what I've seen in the industry in the past.

Understood. You're somewhat limited, but maybe as a follow-up, another question is, can you just talk about GM's involvement in the project as you head into construction phase. So one of the things that strikes us is that the involvement of the off taker from the beginning here will likely speed your time in terms of qualifying the product and getting the product into a cathode. So I'm wondering if you could talk about that and how that's kind of structured as you move forward with a partner.