Lithium Argentina AG (LAR) Earnings Call Transcript & Summary

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lithium Argentina Second Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Kelly O'Brien, Vice President of Investor Relations. Kelly, please go ahead.

Thank you, Tiffany. I want to welcome everyone to our earnings conference call this morning. Joining me on the call today to discuss our second quarter results is Sam Pigott, President and CEO. Alex Shulga, VP and CFO, will also be available during the Q&A session. Before we begin, I would like to cover a few items. Our second quarter 2025 earnings press release was issued earlier this morning, and the corresponding documents are available on our company website. I remind you that some of the statements made during this call, including any production guidance, expected company performance, update on the regional development plan, the timing of our projects and market conditions may be considered forward-looking statements. Please note the cautionary language about forward-looking statements in our presentation, MD&A and news release. I will now turn the call over to Sam.

Good morning, everyone. Thank you for joining us. We will begin on Slide 3 with a review of key highlights and milestones from the second quarter. At Cauchari-Olaroz, we delivered strong operational results with higher production volumes and lower costs quarter-over-quarter. With the completion of the first half, we feel confident in reaching our full year production guidance of 30,000 to 35,000 tonnes. We also strengthened our financial position, securing $120 million in new bank facilities at Cauchari-Olaroz to support working capital as operations advanced. Together with our partner, Ganfeng, we made meaningful progress towards consolidating the Pozuelos-Pastos Grandes basins. We expect to give the market an update shortly as we work diligently to position these assets for long-term growth and to develop a platform for what is expected to be one of the largest lithium operations globally. On Slide 4, we delivered solid performance in the second quarter. You can see a summary of the key operating and financial metrics. Revenue increased despite softer market prices, reflecting the benefit of higher output. The team has done an excellent job executing safely and efficiently. And during the second quarter, the operations consistently produced at 85% of nameplate capacity, delivering 8,500 tonnes of lithium carbonate for the second quarter and 15,700 tonnes in the first half. While market prices have been quite volatile in recent weeks, we realized an average price of $7,400 for the second quarter, an 8% decrease compared to the first. We emphasized the reduction of costs quarter-on-quarter and turning to the next slide, we will discuss this in more detail. In the second quarter, we brought operating costs down approximately 8% compared to the first quarter, reaching $6,100 per tonne. This decrease is a function of many different cost reduction efforts across the operation. They are structural, long-term changes and part of our transition to a steady state operator. We are quite proud of these optimization efforts, which bring our current costs below latest feasibility study estimates. The scale and quality of Cauchari-Olaroz, coupled with efficient operations and low production costs reinforces our position as a resilient producer that is able to sustain profitability across market cycles. Moving to Slide 6. In recent months, we have seen increased volatility in lithium prices. Today, prices are just over $10,000 per tonne. We do not believe that these lower prices are sustainable given strong global growth and the need for new supply, which is often significantly higher cost. We have positioned the business to withstand a lower for longer price environment and remain focused on what we can control, namely safe, low-cost and reliable operations. We believe this environment favors low-cost brine operations, which are well positioned on the cost curve and able to execute and grow through the cycles. On Slide 7, we have outlined our platform for growth. As we look ahead, we're excited by the scale of opportunity emerging across our platform in Argentina. Our growth strategy targets over 200,000 tonnes per year of lithium carbonate equivalent capacity, leveraging both expansion at our producing operation and at our regional growth projects with Ganfeng, where through consolidating our projects in the Pozuelos-Pastos Grandes basins, we are targeting approximately 150,000 tonnes of capacity. We've made significant progress in advancing the regional development plan in Salta. Very soon, we expect to combine these 3 high-quality assets that together cover 2 entire Salars, something unique in our industry. This positions us to participate in what is expected to be one of the largest lithium projects in the world with the benefits of scale and advanced technology. This partnership will allow Lithium Argentina and Ganfeng to bring together their respective strengths in large-scale brine development, building on the capabilities and collaboration already proven at Cauchari-Olaroz. We expect to have an update shortly on the consolidation and a feasibility study complete by the end of the year. Both Lithium Argentina and Ganfeng are working together to advance financing plans including project debt and potential minority equity investments from customers. In addition to our regional growth plans, Stage 2 of Cauchari remains a key component of the pipeline expected to contribute an additional 40,000 tonnes. Our approach is to create a more efficient operating structure that harnesses new technologies, economies of scale and builds off our track record of Cauchari-Olaroz. As we advance these longer-term growth initiatives, we are focused on strengthening the balance sheet, while preserving and maximizing shareholder value. In closing, on Slide 8, we remain focused on executing our core priorities, unlocking value, operational efficiency and financial flexibility. Looking ahead to the second half of the year, our priorities are clear. At Cauchari-Olaroz focus is on continuing our efficient operations and maintaining our position as one of the lowest cost producers in the industry. We plan to advance the unified development plan for Pozuelos-Pastos Grandes basins, positioning this world-class asset for long-term scalable growth. At the corporate level, we continue to strengthen our balance sheet and preserve financial flexibility without diluting shareholders. Above all, we will execute with discipline, focus on delivering against our targets and ensure we close out 2025 in a position of even greater strength and opportunity. Thank you for your continued support. And with that, I think we'll open up to questions.

[Operator Instructions] Your first question comes from the line of Katie Lachapelle with Canaccord Genuity.

Sam and team, congrats on good quarter. I just want to talk about the surge in lithium futures we saw overnight on reports of CATL shutting down one of their major mines in China. We've seen a number of news outlets suggest that this is not necessarily a permit-related action but could be part of a broader push by the government to address overcapacity in domestic competition, which has been leading to some price destruction. So I'd just be curious, what's your view on China's anti-involution policies specifically? And how do you see these measures impacting the lithium market and the potential longevity of the recent price move?

Thanks, Katie. I mean we've been following these developments which are fairly recent very closely. Yes, I mean I think this anti-involution policy is not just specific, obviously, to lithium, but looking across industries and trying to reduce the amount of rapid competition that's ongoing. So it's something we're monitoring. I don't think we have anything kind of novel to contribute to the discussion around that. I think from our position and the strategy with the business is that we've set this business up to manage price volatility. I think in Q2, this was evidenced in where our costs came in, really focused on ensuring that we can get through any price environment. So yes. I mean we're very pleased with where our costs are. Obviously, if we have some support from pricing, that's great. But again, we've kind of set this business up to withstand this volatility. I'd say it's like a more general comment, and it's something that I think the industry has been talking a lot about over the past 12 months. It's just a view that pricing that we've experienced so far this year is really unsustainable in the long term. Looking at kind of demand expectations, the need for new supply and where pricing is right now, we just think pricing is long-term unsustainable. As to the short-term nature, I think it's not for us to comment.

Great. And then maybe a follow-up on the regional growth strategy at both Cauchari as well as Salta. Are there specific project milestones that need to be achieved to make a formal investment decision on either of those projects? Or what market signals are you guys waiting on to make a go-ahead decision there?

So I mean, first and foremost, we're still kind of pushing ahead with the feasibility study, which is expected to be complete this year. I think prior to that, we plan to, in the very near term, to disclose a plan for how we're going to consolidate all of these assets with a view to participating as LAR in one of the largest lithium projects globally. So it's extraordinarily exciting. In terms of a formal investment decision, I mean, the feasibility study needs to be complete. Beyond that, we've had preliminary discussions with certain customers, and there is a lot of interest to participate in very large, high-quality brine projects, particularly based on the track record that we've been able to demonstrate at Cauchari. So I think a formal decision on going ahead, we'll have to wait for certainly the feasibility study. But for us, it's important to grow but important to also manage our balance sheet, look at non-dilutive measures in order to finance growth projects.

Your next question comes from the line of Corinne Blanchard with Deutsche Bank.

2 questions. Can you talk about the pricing discounts that you received this quarter? And how that compare for versus Q1 and maybe what you're thinking you could be getting for the rest of the year? And then the other question is on the cost. I mean, you obviously did a great job here and deliver quite significant decrease quarter-over-quarter. How much more can we expect going into 3Q and 4Q and 2026? So do you think you have reached kind of your run rate at 6,000 each per tonne?

Sure. So addressing your first question, the discount to the reference price was approximately $2,000. So very similar to what was achieved in Q1. That reflects, obviously, taxes as well as a reprocessing cost for the material in China. I think this year -- last year was all about ramping up. This year is about operational stability at much higher production volumes. And so we're seeing product stability improve, and we expect that to continue through Q3 and Q4. So there may be room to reduce that reprocessing fee. But I think from our perspective, the focus really is on volumes and costs. And if we can deliver on those, then I think the product quality will also improve throughout the end of the year. I think it's important to note, like we're very much aligned with Ganfeng in terms of being able to supply customers with our product global customers. So these are customers outside of China going into '26 and certainly going into '27. So it is a high priority. And we'll have more to disclose on that, certainly into next year. On the cost side, yes, I mean, we've been very focused on costs. I think every company in the lithium industry has been for very good reason, and we continue to be. Some of -- a lot of these cost reduction efforts are a function of entering into steady-state operations. Last year, during a ramp up, it's really hard to kind of, in a sense, freeze things and really take serious efforts to optimize while you're ramping up. This year, that's exactly what we're doing. And the cost savings we've achieved, they're not -- there's not one single bucket that kind of represents a significant portion. It's kind of spread over a number of different initiatives, and these are structural. So they're long term. I think going forward, there will be probably some volatility through this year. In Terms of where costs are just as a function of these optimization efforts, but the trend is certainly one that we expect to continue through 2026.

Your next question comes from the line of Joel Jackson with BMO Capital Markets.

I understand your answer to the last question. So cash costs were down $600 a tonne, like you said, but reported COGS were about flat. Is that because of reprocessing costs? And then so the $600 a tonne cash cost savings not flow through the end, I'm sort of confused if I missed that, sorry.

Alex, do you want to take that one?

Sorry. Sorry, Joel, your question with respect to...

Sorry -- yes, yes, your COGS, the JV COGS, divided by tonne was flat quarter-over-quarter. But your cash COGS per tonne as you disclosed it, are down $600 a tonne. So I was trying to understand the difference between the 2? Why was the COGS divided by 10, flat quarter-over-quarter, cash COGS down?

Yes. I need to remember that cost of sales of also includes depreciation. We started depreciation in Q4 of last year when reached commercial production. So that's one item. And then in addition, we have some logistics costs and some other costs that are included in cost of sales, but mostly depreciation impacted. The cost was a bit higher in Q2, which sort of resulted in a bit higher cost of sales than I guess, cash costs.

Okay. And then I guess I'm going to sneak in a 2-part question to my second question. So first part would be, what kind of visibility do you have into Q3 and Q4 in terms of your order book? Obviously, as Sam said, prices have been whipsawing all over in China now over the last 1.5 months, including today. So kind of -- and I know you have some reprocessing with Ganfeng. I don't know if that adds a bit of length to your order book, like when -- so what kind of visibility on that? And on cost, should we expect kind of COGS to be similar in Q3 cash and normal? And then the second part of that question would be, Sam, what are your thoughts here, Q2 was the bottom of the market, came in probably the JV came in maybe slightly negative free cash flow. Maybe you can comment on that. What does that think about your business here across the cycle?

Yes. I mean costs -- yes, I think expecting costs with some minor variability in Q3, Q4 on what we experienced in Q2 is probably a fair way to assess it. Cost of goods sold, I mean, Alex, it's really a function of depreciation, the delta between that and operating costs.

Yes. I think cost of sales per tonne will generally follow cash flows per tonne in next quarters.

And then in terms of the order book, I mean, the vast majority of our product is under offtake and the vast majority of that goes to Ganfeng. And so it's all well spoken for. I think there's very strong -- obviously, very strong demand from Ganfeng pulling that material through. So yes...

Is that like a 1-month lag, Sam, a 2-month lag or 3-month lag, how should we think about it?

Just in terms of the pricing flow through like...

The kind of benchmark pricing we can see on the indices and futures...

Alex, why don't we disclose on that?

I think we do have some lag, I would say, several weeks of lag on average.

And how the business did in Q2 at the bottom?

Yes. I mean we're obviously very happy with where the business is today and where we expect it to be over the next 6 months, 12 months, 18 months, like this is a world-class operation that has some of the lowest costs in the industry. And we -- obviously, this -- even with realized pricing being at $7,400 on an operating basis, we were very marginally operating, had a marginal operating profit. I think beyond that, the free cash flow that you referred to is largely tied into working capital, which necessarily higher in Q1 and Q2 given the increased volume production. And I think as we spoke to on the last call in terms of the cadence of production first half versus second half, we still expect the second half to be the larger volume half of the year.

Your next question comes from the line of Mohamed Sidibe with National Bank Financial.

Just a follow-up question on the pricing discount that you've seen. And I know in the past, you've guided to that $2,000 per tonne to $2,100 per tonne. Is that something that we should still expect for 2025? And then just if you could help us reconcile the price realized to, call it, the lithium carbonate average prices of $9,000 per tonne. I think maybe it gets to do with Joel's question around the lag on the sales price received?

Yes. The discount was approximately $2,000. I mean that's comprised of about 50% fixed, 50% variable associated with taxes. I think Ganfeng and LAR very aligned in terms of what we want to accomplish this year, which was really getting volume production up, ensuring that operations stabilize at these higher levels and then driving costs down. So that's been the priority this year. I think that's going into 2026 and 2027, given that we're both aligned in the ability to supply global customers outside of China with our product, the focus will shift. So for the remainder of the year, I think the pricing discount that we're receiving today is likely to continue going into 2026. I think the priorities and the focus of both Ganfeng and LAR will shift to be able to provide those customers ex China with product.

Sounds good. And then just, I guess, maybe a reconciliation between the realized pricing and the average price for lithium carbonate during the quarter. Any color on that would be helpful. And I'm happy to take it off-line if that's more of a question for offline.

I don't know, Alex, do you want to handle that? Or do you want handle it offline?

So I'll just make a comment, as I mentioned, that there is a lag of several weeks between production, pricing and shipments. That's why a change in spot price isn't reflected immediately in our results, the several weeks of the rate. But yes, we're happy to provide some more details maybe offline.

Great. And just a final question on the third-party debt at Exar just $108 million that's due within the next 12 months, what are your expectations around that? Should we expect some potential refinancing of that? Or do you expect to pay that down using some of the available credit that you have?

Alex, feel free to answer that.

Yes, sure. As Sam mentioned, we managed to secure $120 million loan facilities in Q2. So we expect to use those facilities to refinance that short-term debt that is coming due.

Your next question comes from the line of Ben Isaacson with Scotiabank.

So a question on your partner, Ganfeng. Just looking at the slide, it looks like Ganfeng is going to be involved in not only the pipeline but in the retail development plan as well. Can you talk about their financial health as your partner, if prices were not to change from where they've been in the last kind of 6 months in that mid-$800 area. Would Ganfeng be able to continue funding and developing its proportionate share of these projects? Would it -- does it rank other projects higher than the ones with LAR? Can you just talk about what the thought process is with respect to Ganfeng as a partner in a period of sustained pressure on pricing and profitability for them.

Yes. I'll be careful not to put words into Ganfeng's mouth, but I think addressing some of these questions out of order. One, Argentina is probably the most -- ranks extraordinarily high in terms of Ganfeng's focus outside of China. And I think what we've been able to deliver at Cauchari-Olaroz only kind of supports and emboldens that strategy. Obviously, we're very pleased with where costs are coming in Q1 and Q2. Ganfeng is relentless in terms of driving down costs, and they see considerably more to do on that front. And then in terms of -- I mean, in terms of their financial health, Ganfeng does have access to a lot of capital in China. They also have tremendous relationships with their downstream customers, who I think are interested in being able to minimize the risks that I think a lot of people see out 2, 3 years. Certainly, if prices remain where they are now. I think there is a high probability that there could be certainly market balance potentially market shortage. And so some of their customers are very supportive of Ganfeng's efforts to kind of derisk the supply chain, bring on low-cost projects like Cauchari-Olaroz that can kind of be resilient through the bottom of a cycle. So I'd say they do prioritize Argentina as one of their kind of top jurisdictions for investment. I think they do have access to quite a bit of capital in China. And so their appetite is there. Obviously, if prices were to fall dramatically. I think it would give everybody continued pause in terms of investment. But Ganfeng is certainly a tremendous partner to have. They have great relations with global customers, they have a keen understanding of cost curves and where they want to invest. And so I think we're very well positioned with them with our platform in Argentina that has kind of a pipeline that can get us to over 200,000 tones of production of low-cost lithium units.

That concludes our question-and-answer session. Ladies and gentlemen, this will conclude today's call. Thank you all for joining. You may now disconnect.