Arcadium Lithium plc (NYSE:ALTM) Q2 2024 Earnings Call Transcript

Arcadium Lithium plc (NYSE:ALTM) Q2 2024 Earnings Call Transcript August 6, 2024

Arcadium Lithium plc beats earnings expectations. Reported EPS is $0.07495, expectations were $0.05.

Operator: Good afternoon and welcome to the Second Quarter 2024 Earnings Release Conference Call for Arcadium Lithium. Phone lines will be placed on listen-only mode throughout the conference. After the speakers’ presentation there will be a question-and-answer period. I’ll now turn the conference over to Mr. Daniel Rosen, Investor Relations and Strategy for Arcadium Lithium. Mr. Rosen, you may begin.

Daniel Rosen : Thank you, Jael, and thanks to everyone for joining Arcadium Lithium’s Second Quarter 2024 Earnings Call. Joining me today are Paul Graves, President and Chief Executive Officer, and Gilberto Antoniazzi, Chief Financial Officer. The slide presentation that accompanies our results, along with our earnings release, can be found in the Investor Relations section of our website. Prepared remarks and today’s discussion will be made available after the call. Following our prepared remarks, Paul and Gilberto will be available to address your question. Given the number of participants on the call today, we would request a limited one question and one follow-up per caller. We’ll be happy to address any additional questions after the call.

Before we begin, let me remind you that today’s discussion will include forward-looking statements that are subject to various risks and uncertainties, concerning specific factors, including but not limited to those factors identified in our Form 10-K and other filings with the Securities and Exchange Commission. Information presented represents the best judgment based on today’s information. Actual results may vary based upon these risks and uncertainties. Today’s discussion will include references to various non-GAAP financial metrics, including adjusted EBITDA, adjusted EBITDA margin, adjusted earnings per diluted share, and adjusted tax rate. Definitions of these terms, as well as the reconciliation to the most directly comparable financial measure, calculated and presented in accordance with GAAP, are provided on our Investor Relations website.

And with that, I’ll turn the call over to Paul.

Paul Graves : Thank you, Dan. Arcadium Lithium reported strong results in the quarter, despite market conditions remain challenging and lithium market price indices ending the quarter at lower levels than they started. Our financial performance continues to show the benefit in these market conditions of our low-cost operating footprint and our commercial approach of securing long-term contracts with strategic partners wherever it makes sense to do so. At the end of the last quarter, this helped us to achieve higher realized pricing than we would have [had we been] following a fully market exposed pricing approach. As a consequence, we delivered an adjusted EBITDA margin of close to 40% in the quarter and for the year-to-date.

Arcadium Lithium realized average pricing of $17,200 per product metric ton, by combined hydroxide and carbonate volumes in the second quarter, with our butyllithium and other specialties products achieving a price per LCE that was significantly above this. Our multi-year customer relationships and the wide range of high quality lithium products we produce means that we can continue to focus on operating our network to maximize the value we achieve per LCE wherever possible. We brought significant additional production capacity online at both Olaroz and Fenix this year. And we expect this to result in a 25% increase in combined lithium hydroxide and carbonate sales volume in 2024. The timing of the volume additions as well as the nature of the stock of processes means that we expect 25% volume growth again in 2025 from these already completed expansions given us two consecutive years of above market volume growth.

We continue to make significant progress on cost savings, as we implement various integration efforts across the two legacy businesses. We expect to realize cost savings in 2024 towards the high end of our $60 million to $80 million guidance range. We are also pursuing a program of accelerating the total cost reduction initiatives that we announced with the merger. As a reminder, we previously announced that we expect to achieve total cost energies of $125 million per annum by 2027, and we’re now targeting to deliver these savings faster. It’s increasingly clear that at current lithium market prices, our [industry cannot] invest in capacity expansion at the pace announced to-date. Arcadium Lithium’s expansion projects are forecast to be amongst the lowest cost operations globally when completed, and we remain committed to developing all of them in the coming years.

However, the market today is clearly indicating to our industry that accelerating the delivery of additional supply volumes is not what is needed if the market is going to be in balance. We have therefore decided to slow down the pace of our own expansion plan by pausing investment into our four current expansion projects. Consequently, we will invest in our growth on a timeline that is supported by the market and our customers. This will allow us to reduce our financial commitments during this period of low market prices, reducing our total capital spending over the next 24 months by approximately $500 million while maintaining flexibility to restart these projects at an appropriate time in the future. I will now turn the call over to Gilberto to discuss our second quarter performance.

Gilberto Antoniazzi : Thank you, Paul. Starting on slide 4, Arcadium Lithium reported second quarter revenue of $255 million, adjusted EBITDA of $99 million, and adjusted earnings of $0.05 per diluted share. Total volumes in the second quarter were up slightly versus the first quarter, with higher carbonate and hydroxide sales partially offset by lower spodumene sales due to reduced production at Mt. Cattlin. Average realized pricing was higher sequentially for spodumene, but lower across all other products. This decline was driven by a combination of lower market price for lithium chemicals, the lag impact of price indices on a portion of our carbonate and hydroxide volumes, and changes in both product and customer mix. Adjusted EBITDA margins were positively impacted by lower operating costs while partially offset by some negative effects impacts.

As a result, the company achieved an adjusted EBITDA margin of 39%, demonstrating our leading low-cost position in Argentina and the earnest power of our business in these challenging market conditions. Turning to Slide 5, we provide further detail on second quarter and year-to-date performance from our key product groups. Lithium hydroxide and lithium carbonate together make up the core of our business, comprising nearly three quarters of our total revenue. On a combined product ton basis, we sold roughly 10,800 metric tons at an average realized price of $17,200 per metric ton in the second quarter. While pricing was lower quarter-over-quarter, this is higher than would have been achieved as we pursue a fully spot market-based sales strategy.

We continue to benefit from various price floors and firm annual volume commitments in place with a select group of core customers under multi-year agreements. Average realized pricing across Butyllithium and Other Lithium Specialties was also down versus the prior floor. However, these products continue to deliver very high value for their underlying lithium content, while reducing the overall volatility in our portfolio over time. For Spodumene, we sold roughly 23,500 dry metric tons in the quarter from Mt. Cattlin at an average grade of 5.3%. Volumes were slightly lower, consistent with the reduced mining production plan for the year. We achieved average realized pricing of just $1,000 per dry metric ton on an SC6 equivalent basis, which was up over 20% versus the first quarter.

The cash operating cost of production at Mt. Cattlin remains at approximately $700 per ton due to reduced mining activity. I will now turn the call back to Paul.

Paul Graves : Thanks, Gilberto. I’d like to provide some market observations as set out on Slide 6, beginning with the obvious that continues to be a broad negative overhang on the lithium and energy storage space, as we move into the second half of the year. Lithium prices moved lower in the second quarter and have declined further, third quarter to-date, testing new lows in that cycle. There are a few dynamics we can point to that are contributing to this price weakness. Touching briefly on demand, it’s safe to say that while there’s been some recent pullback in near-term US and European EV demand growth. Demand growth globally remains robust. On a gigawatt-hour basis, total EV and PHEV sales were 20% higher year-over-year in the first half of this year.

Underlying growth in China, where the bulk of lithium demand resides today, remains strong with EV sales exceeding 1 million units in the month of June, and penetration rates continuing to set all-time highs. Additionally, demand growth of stationary storage applications continues to be a rapidly growing part of the future total demand picture. In aggregate, there’s been very little fundamental change to the long-term demand trajectory of lithium. And this growth is going to continue to require meaningful additional supply to come online if the market is going to be in balance. However, we clearly don’t have that balanced market today. Additional lithium supply has come into the market at a faster rate than many of us have expected. Much of the supply growth has come in the form of spodumene out of Africa and lepidolite in China, which is much higher cost than most existing supply.

But much of the investment in these resources is coming from supply chains directly connected to converters or end consumers in China as they seek to become more integrated into upstream resources as part of their strategy of establishing long-term security of supply. This is resulting in lower demand growth for unintegrated spodumene, even as end market demand for lithium chemicals continues to grow. It also reduces the demand for some lithium chemicals, but more consumers or fully integrated converters in China are now producing lithium chemicals themselves. [Put differently] (ph), while the volume of lithium chemicals being processed into the battery supply chain continues to increase at double digit percentages per year, the market for non-integrated spodumene concentrate and lithium chemicals has not been growing at the same rate in recent quarters.

Despite this slower external demand growth for lithium products, we’ve seen spodumene producers in particular continue to increase both their production and shipments of spodumene concentrate. Our own marketing of small volumes of spodumene concentrate from Mt. Cattlin shows that the demand for material remains broad, with over 20 bids received for our latest market testing auction. However, the increase in supply appears to be even greater than this broad demand can absorb, leading to more downward pressure on spodumene prices. And history shows us that when spodumene prices are low, lithium chemical prices in China are also going to be low, and that is certainly the case today. To compound this, we’ve also seen supply of lithium carbonate from South America continue to grow, albeit at slower rates than the growth in spodumene supply.

As a result of this increased supply, we see higher levels of lithium carbonate and spodumene concentrate inventory in the market right now. Much of this inventory is being held by traders and through futures exchanges where activity is increasing rather than at producers or at end customers. The greater customer and converter integration and a greater willingness of intermediaries who buy and hold material combined with the continued [flux] and technology roadmaps of global OEMs is resulting in less visibility for lithium producers into true underlying end-market demand than we have had historically. It’s easy for producers today to see end-use consumption continue to grow, see this as a proxy for market demand for lithium chemicals. However, the evidence suggests that in today’s environment, this connection is not holding true in the short term.

Despite this, we view longer-term lithium prices as heavily skewed to the upside from today’s levels. There’s a limited ability for prices to move much further down from current levels on a sustained basis. In fact, we believe that prices in China today are well below the cost of the marginal producer, significantly below the prices needed to incentivize further investments. The longer prices stay where they are, the greater the likelihood of production detailment from high cost resources and the lower the investments in future supply. We expect that end market demand growth rates and lithium chemical demand growth rates will return to alignment as the pace of back integration slows, and this will result in prices increasing towards reinvestment levels at that time.

While we have seen more announcements today of slowdowns and delays from both incumbent producers and junior developers, we do not expect these to materially impact the market in the next few quarters. However, we do believe that the forecasted supply for 2026 and beyond in most independent models is much too high given the impact of these slowdowns. We expect to see more discipline from producers and less freely available and more expensive capital, especially for those projects that are not backed by existing cash flow or are being developed by companies without a proven track record of success. We also do not believe that the lepidolite or African spodumene volumes continue to expand at the rate we’ve seen in the last few years. And perhaps just as important, financial logic of downstream conversion of raw material into higher value products, especially outside China, will face much higher challenges, resulting in a very tight market for lithium hydroxide that is not sourced from China.

We remain confident in a return to healthier market fundamentals over time, as well as in the world-class development projects available in our portfolio. However, we must adapt to the realities of the market we find ourselves in today and the pace at which we can responsibly invest capital on that basis. Arcadium Lithium has therefore made the decision to pause investment at the Galaxy project in Canada. This remains a world-class resource, leading fundamentals, and a projected operating cost that will be amongst the lowest, [as far as you mean assets] in the industry. However, we do not believe that the market needs us to bring this volume online on a merchant basis within the next two years. And as I just mentioned, the current economics of [building] (ph) carbonate or hydroxide conversion capacity outside China, absent a very strong long-term customer commitment, are not compelling.

We can’t explore it bringing in a partner that is interested in providing capital for the Galaxy project in return for a long-term strategic investment likely backed by a long-term supply agreement. The pause will be structured to minimize the cost and timing disruption when this project is ultimately restarted. Additionally, Arcadium Lithium is revisiting the sequencing of its combined 25,000 metric ton lithium carbonate projects at the Salar del Hombre Muerto in Argentina between Fenix Phase 1B and Sal de Vida Stage 1. These projects are also industry leading with forecasted operating costs firmly in the first quartile of the lithium carbonate production. However, rather than execute both expansions simultaneously as previously announced, the expansion will now be completed sequentially.

Doing this will also provide additional time to evaluate how to optimize future development of the Salar del Hombre Muerto Complex, where the two projects sit within a few kilometers of each other, especially with respect to the additional infrastructure investments that will be needed for future expansions. It will also allow us to spread the capital spending over a longer period of time. We are not changing our plans for the development of Nemaska Lithium, the 32,000 metric ton integrated spodumene to hydroxide project in Canada. The combination of our progress made to date and the strong customer commitments we have in place for the project give us confidence in continuing to push forward towards commercial production. As with our decision to defer investment in two of our four current expansion projects, as well as the process of identifying cost saving opportunities in our remaining projects, we expect to reduce our capital spending by approximately $500 million over the next 24 months.

These decisions do not reflect any change in our view of the attractiveness of these projects, but in today’s environment, we will focus on cost discipline and operational execution that continues to differentiate the performance of our business in this market, as well as on responsible capital deployment that we navigate through low market prices. Our portfolio of operating and development assets remains core to the value and future of this business, and we intend to provide a detailed review of our expansion plans, financial outlook, and broader strategic objectives at our upcoming Investor Day on September 19th with further details on this event to follow. So moving to slide 8, we’re providing a few 2024 specific updates for our Arcadium Lithium.

We recently announced our acquisition of the lithium metal business of Li-Metal Corp were $11 million in cash, which includes intellectual property and lithium metal production assets, including a pilot production facility in Ontario, Canada. This acquisition strengthens our position as a global producer of lithium metal by providing safer, lower cost and more sustainable processes for lithium metal production using varying grades of lithium carbonate as feedstock. This complements the lithium chloride fed process from our operations in Argentina that we use today. It will improve the capabilities of our butyllithium and high purity metal businesses, while increasing the flexibility of our integrated network of assets and our ability to maximize the value of the lithium that we sell to our customers.

Additionally, we continue to make significant progress in identifying and executing on merger integration and cost saving initiatives across the two legacy businesses. As a result, we now expect to realize synergies in 2024 toward the high-end of our $60 million to $80 million guidance range. This is driven primarily by organizational restructuring, operating and logistics savings, and the elimination of third-party and other services across the two companies. Looking beyond 2024, Arcadium Lithium is accelerating its plans to achieve total cost savings of $125 million per year within three years of merger closing. We have commenced the program to accelerate the delivery of these cost savings and will provide further details regarding these plans in the coming months.

With respect to our recently completed capacity expansions, we continue to increase production levels as we move through the [indiscernible] processes. We’re now expecting a 25% increase in combined lithium hydroxide and carbonate sales volumes for full year 2024, with the volume growth becoming predominant in the second half of this year. These expansions will continue to increase their output in the coming quarters, leading us to forecast a further 25% increase in total volumes 2025 compared to 2024. The first 10,000 metric tonne lithium carbonate expansion at Fenix phase 1A, is fully commissioned and operating today, and we expect it to be producing at full operating rates and target quality levels by the end of the year. This rapid move to nameplate operating capabilities is a direct consequence of using the same direct lithium extraction process already in place at Fenix.

The 25,000 metric ton carbonate extraction at Olaroz Stage 2 is producing lithium carbonate that will be slower to increase operating rates and meet design quality standards due to the nature of conventional plant-based extraction processes. We expect Stage 2 to continue to increase production rates throughout the second half of this year, while more consistently meeting design quality and to be well on its way towards nameplate production levels later in 2025. The lithium hydroxide, the 5,000 metric ton unit in Bessemer City, North Carolina, 15,000 metric ton unit in Zhejiang, China, and the 10,000 metric ton unit in Naraha, Japan are all finalizing qualifications with key customers. They are expected to increase commercial volumes as soon as the lithium carbonate production in Argentina increases to feed them.

I will now turn the call back to Gilberto to discuss our updated full year 2024 outlook.

Gilberto Antoniazzi : Thanks, Paul. Turning to Slide 9, you will see our updated 2024 volume growth translating to sales expectations by major products. Combined hydroxide and carbonate sales are now expected to increase by 7,000 to 12,000 metric tons, or 25% higher than 2023 on an LCE basis at the midpoint. We have maintained our projections for lithium carbonate sales this year by reducing the lithium hydroxide sales. This is for two primary reasons. First, the small delays in our carbonate expansion ramp ups meant that our downstream hydroxide production plans were also slightly impacted for 2024. Second, and more importantly, at the current market price, we have found more attractive opportunities to sell additional carbonate volumes to customers versus selling [uncommitted hydroxide] (ph) volumes, particularly when factoring in the additional conversion costs.

We are able to leverage this commercial flexibility to current lithium carbonate hydroxide conversion process. Given we will not be reduced to firm volume hydroxide commitments under our multi-year agreements and we are now expecting to sell fewer remaining hydroxide volumes to customers near prevailing market prices, this will provide a customer and product mix, benefit to us that you will see shortly in our scenario outlooks. We have also slightly lower our projected spodumene sales for 2024, as a result, in second half sales volumes be fairly similar to the first half. On Slide 10, I want to provide some commentary on our outlook for other financial items. We have made no adjustments to our full year outlook for SG&A or diluted share count, inclusive of 67.7 million diluted shares from treatment of the convertible notes outstanding.

With respect to [SG&A] (ph), we lowered 2024 outlook by $45 million. This is due to a combination of lower expected ramp up of new production assets, as well as accounting rules that determine when parts of capitalized spending can begin to depreciate. We have narrowed the range of our adjusted tax rate to 25% to 30%, lowering the midpoint by 1.5%. This is a result of our progress as Arcadium Lithium continues to integrate the combined operating model, as a global business. And for CapEx, we have lowered the high end of our guidance, resulting in a range of $550 million to $700 million. We expect [indiscernible] in the second half of the year to be more in-line with the second quarter spending. On Slide 11, we have provided an updated framework to understand how changes in the market prices for the second half of the year may impact the financial performance of Arcadium Lithium for the full year 2024.

We have shown two scenarios using general lithium market price assumptions of $12 and $15 per kilogram on LCE basis for the second half of the year. We keep constant the midpoints of our latest expected sales volumes, cost savings, and SG&A for 2024, by overlaying our existing commercial agreements as applicable. These scenarios should not be interpreted as a forecast by Arcadium Lithium as to the likely range of Lithium price in the second half of 2024, which they are not. However, they were lower from the initial pricing scenarios we provided in order to be more reflective of where the market is today. You will continue to see that in the lower case where Arcadium Lithium is [much easier] (ph) $12 average price per LCE on its market-based volumes, the business remains highly resilient to more value, quality and low-cost production assets, while offering significant upside to the price rebound in fact, basically.

Back to you, Paul.

Paul Graves : Thanks, Gilberto. So to wrap up quickly before taking your questions, I just want to reiterate the strong performance of our Arcadium Lithium in the first half of the year. We’ve generated over $200 million of adjusted EBITDA at a 40% margin so far this year, even as the price environment has been weaker than we initially expected. And we continue to drive cost and performance improvements throughout our expanded operating network. We’ll continue to invest in responsible growth focused on making sure we position the business to perform well throughout all market cycles. We will look to use our balance sheet sensibly and make sure we’re neither investing ahead of or behind what the market needs. We look forward to speaking with you in further detail about all of this at our Investor Day in September. And I will now turn the call back to Dan for questions.

Daniel Rosen : Great, thank you Paul. Jale, You may now begin the Q&A session.

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Steve Richardson of Evercore ISI. Your line is open.

Q&A Session

Stephen Richardson: Hi, thanks for the time this evening. Paul, I appreciate the context on sounds like, some of the concerns around visibility of the market and underlying demand. As you think about putting some of these projects in care, slowing down some of your CapEx, again, it might be early, but I wonder if you could think forward as to what would make you reaccelerate. Clearly some skepticism about market prices and indexes. Is it going to take kind of direct OEM involvement or [capital producer] (ph) involvement? Maybe just talk about what would get you kind of more excited about reinvesting beyond just obviously a rise in spot-lithium prices?

Paul Graves: Well, look, I think it’s hard to separate the two. I mean, if we don’t have — if the models that we use to assess whether a dollar invested is going to generate a return are dependent on the price, the price has to be high enough by period. Does that mean the short term spot price increases? Is that enough to convince me? Probably not. I think understanding what’s going on in the markets in the dynamics play out and understanding really what the demand patterns look like. What is the demand for hydroxide versus carbonate, how much merchant spodumene is the market actually going to need. I mean, these are factors that are pretty important when we look at each asset on a case-by-case basis. It’s frankly easier to accelerate a project that has a strong commitment from a customer or two, whether they put capital in or not.

If the commitments are there to bring certainty to the volumes and certainty to the pricing in the future, that also will make it easier for us. So look, I think the single biggest factor, certainly for James Bay, for the Galaxy project, is if there is a partner out there that wants to come in and help us develop this by bringing certainty to the project while also bringing some capital today, that’s probably the single biggest trigger that would help us reaccelerate that project again. But we also just have to be confident that the long-term fundamentals are going to be in a place to justify it.

Stephen Richardson: Makes sense. I wonder if I could just follow up and ask Gilberto on cash, the reconciliation, can you just walk us through kind of ending cash at June 30th. And appreciate, I think you indicated that back-half CapEx will be similar to what we saw in the second quarter, at least quarterly. So if you could have me guess what you think ending cash would look like at the $12 kilogram kind of scenario outlook. I think that would be helpful as well.

Gilberto Antoniazzi: Yeah, so we, for the second half, as we said, we expect a [similar CapEx] (ph) spending and we do not expect the same level of on-time costs that we have faced in the beginning of the year. Some of them related to commercial price adjustments and also related to integration and merger costs. So that would be a relief versus the second half. So naturally, we will not have – what we call cash burn in the second half of the year in any close magnitude that we have in the first half of the year. So again, without giving any specific target number for you or a number, you should clearly assume that we will not be spending the same level for the first half of the year. I would say $200 million to $300 million less than that for sure.

Operator: Your next question comes from a line of David Deckelbaum, TD Cowen. Your line is open.

David Deckelbaum: Thanks, Paul. Gilberto, team, thanks for taking my questions. Gilberto, maybe if you could just expand and clarify on that last point you made. It sounded like I was curious on the totality of $500 million reductions, if we should be expecting a capital program next year on the order of $300 million, while your volumes are still guided to expands by 25%, just given, I guess, Fenix 1B commissioning. So it seems like in that scenario, if I’m following your $12 a kilo EBITDA guidance, you shouldn’t have an incremental cash burn in 2025, even amidst the lower environment. And it seems like that is sort of like the base absolute level for capex in 2026 as well?

Gilberto Antoniazzi: Yeah, I think you’re right, David, that in 2025, you’re going to see the bigger portion of this [$500 million] (ph) savings taking place. No question about that. And I think you are right in your math. I think that based on the $12 price, and again, we have — again, I don’t want to go sight that we have all the contract volumes going to 2025, that they might not necessarily have the same price of this year. So don’t assume that we might even have a better prices for next year above market price that we have today. So but yes, I think that $300 million is a relatively good number, but clearly the biggest savings that we’re going to have on this $500 million will be taking place in 2025.

Paul Graves: David, I just want to clarify that and make sure you’re clear on the point as Gilberto just made with regard to prices next year. We don’t have any prices for next year that are lower this year — than this year in the contracts. We actually have more volume going into those contracts next year too, as the contracts naturally grow. And these will all take or pay. All other things being equal, we want to sell more volume under those contract prices next year now. We, of course, add 25% more volume. So it’s a little bit more complicated to model than that. But I don’t want you to read into any of this. There’s a risk to those contract prices being lower next year, because there is.

David Deckelbaum: No, yeah. No, I know that we are dealing with back of the envelope math right now, but it seemed like on the [cocktail ] (ph) you should at least be in a strong fundamental picture next year. My follow-up, if I might. Yeah, sorry. Go ahead, Paul.

Paul Graves: No, no. I was just going to reiterate the point. I think you’re right. Most of the capital savings are 2020, 2025 savings. First half of 2026, but more than half of that $500 million reduction in capital spending will be visible next year.

David Deckelbaum: That’s good to hear. And perhaps, I guess, pivoting a little bit harder here, just on the lithium metal side, with the recent acquisition and obviously, I know you have [indiscernible] in the portfolio, so now you have, you know, it seems like two emergent solutions around converting products into different, or different products into lithium metal. I’m curious from your view, I mean you talk about, you gave us our macro view, when do you see lithium metal being a material source of commercial activity for Arcadium?

Paul Graves: You know, the [semiconductors] (ph) you know, a big chunk of our business today is lithium metal price, it just happens to contribute lithium and other specialties. So don’t forget, we have a pretty large internal demand for lithium metal and just so people recall, we’ve historically either told lithium chloride in China or converted to ourselves. We do make lithium chloride ourselves. Lithium chloride-based processes are not the most pleasant processes to run and from a responsible operations and a safety and an environmental perspective, we’ve been looking for a way to bring more metal production in house, but not using the chloride-based process. And so this acquisition is really all about secure and more supply for our existing business.

If you ask me when do I think lithium metal will be a big piece of the energy storage business, I think we’re probably five, six, seven years away from it being a major volume of the business. It requires, I think, some evolution in solid state technologies or semi-solid state technologies and a broadening of the applications that are being deployed too. When it takes off, it’ll take off pretty quickly, but we’ve been saying for a while, not meaning to before 2030, and that thinking hasn’t really changed yet.

Operator: Your next question comes from the line of Glyn Lawcock of Barrenjoey. Your line is open.

Glyn Lawcock: Good afternoon Paul. Just a couple of quick ones. Just firstly, you’ve obviously got your CapEx guidance that you gave us a quarter ago which was basically I think about [1.6] (ph) over the next three years. So is that the $500 million just comes off that. And then obviously with the slowdown and everything we’re seeing in the market — everything we’re seeing in the market. Is it fair to say that the CapEx numbers will get an update on individual project CapEx which is likely to increase at the Strategy Day next month?

Paul Graves: You will get an update at the Strategy Day next month. I don’t know whether the numbers are going to be higher. There certainly will be probably some slightly different nuances because, as you know, slowing the project down doesn’t make them cheaper typically. But I think the numbers that we have out there for CapEx really reflect our latest estimates on an aggregate basis for the project. So you may be surprised on a project by project basis but it’ll add up to the same number I would guess at the [seasons today] (ph).

Glyn Lawcock: Okay thanks and then just quickly Mt. Cattlin, I mean obviously $700 cost base I assume that’s US with the ad in freight, the quality adjustment, is it worth keeping it open? Is that something you’re actually considering is putting it on care and maintenance?

Paul Graves: Mt. Cattlin is a difficult one because Q2 it definitely made sense to keep operating here. The latest prices we see, the spot concentrate, they’re 30% lower than they were in Q2. You’re touching $700 or so per ton for spodumene right now. It clearly does not make sense to operate anywhere, in Manhattan or anywhere else, if your cash costs are $700 and you know about capital into it to get ready for the next phase of mining as we’re stripping as we go. The question of care and maintenance, it’s got to be active in these market conditions absolutely and I can imagine we are asking those questions pretty intensively internally about is that the right strategy for Mt. Cattlin right now. I don’t want to react to just you know one or two price points that come out of China for spot concentrate but if it looks clear that we’re in a period of spodumene prices that are, you know, three digits and not four digits, then I think the whole care and maintenance question becomes much more acute.

Operator: Your next question comes from the line of Aleksey Yefremov of KeyBanc. Your line is open.

Aleksey Yefremov: Thanks. Good morning. Sorry, good afternoon. Gilberto, I was hoping you could maybe provide us with an idea of how you envision a sort of two finance, whatever capital program is going to happen for the rest of this year and next year. What should we expect to happen on the balance sheet and cash flow statement? I mean, if you can provide us with any specific numbers, that would be great, but if not, maybe just sources of capital would be helpful as well.

Gilberto Antoniazzi: Yes, so I think the source of funding will continue to be, you know, operating cash flow. As I said, initially in the call, we won’t have as much cash requirements in the second half as we had in the first half of the year, as I already mentioned. So, and we’re going to be continuing to generate a lot of operating cash flow. And again, we’re adding more volumes in the second half of the year, which will drive more operating cash flow. Next year, we also added another 25% versus this year of volume. We will continue to drive more operating cash flow. You know, we remain untapped on our $500 million credit facility. So we can always access that as well. So as of this time, you know, we were not expecting to do.

We will continue to monitor the market and how we continue to evolve, but the plan is to be self-funded, our CapEx. And again, this is related to reduce the CapEx investments we have by $500 million in the next 24 months. And I’ll just add, we are also going to be looking in further cost savings and reductions that will also help us from a cash perspective as well.

Aleksey Yefremov: So self-funded meaning you do not anticipate needing the revolver.

Gilberto Antoniazzi: No, I do anticipate using the revolver. I mentioned that, yes.

Aleksey Yefremov: Okay. Thank you for clarification. And then Paul, just I think you made fairly specific comments about pricing already but such an important point I was hoping to clarify. So next year if, let’s say scenario where market indices do not change, you do not expect Arcadium’s realized prices to change as well and serve to stay in a similar premium position as they are today.

Gilberto Antoniazzi: If we have prices staying where they are for all of next year, the average price will be lower. Why? Because the proportion of prices that are under our contracts becomes low. While the absolute tonnage goes up, so does the number of the tonnage that we sell into spot markets as well. So it’s going to be slightly lower than we have achieved in the first half of this year but there’s no scenario where it is because the market price is $12. We’re not going to average $12. It’s almost mathematically impossible for that average price to go to the market based on what we see today.

Operator: Your next question comes from line of Robert Stein of Macquarie. Your line is open.

Robert Stein: Hi Paul, thanks for the opportunity. Just a question on downside scenario. So if pricing were lower than $12, we still expecting a non-linear projection on EBITDA towards the range. So if it was $10, say, we’re not essentially drawing a straight line between the two. I think that we asked the question at the last quarterly and in the ranges between $15 and $25 and it kind of got fobbed off a little bit but obviously we are where we are today so it’d just be helpful to understand the resilience under a price scenario that’s lower than the lower end of the range.

Paul Graves: Yeah, but you know the $15 to $25 range we gave last time and even the $12 to $15 now, $12 to $15, whichever, wherever you are once you get down to that level, it’s below the floor prices that we have in our contracts, which is why it’s not linear when it moves. Because you’ve got a chunk of it that just doesn’t change. If the price goes $15, $12, $10, $5, a piece of that pricing just doesn’t change. The floor prices are in place. Once you get above the flow prices, on the way up, it does become perfectly linear. You can then deal with it that way, but we’re not really that close to getting above those floor prices. So I don’t want to just pop off your question, Mark, and I was just trying to explain that it’s just not — it sort of depends.

The floor prices are between the first, you know, the range we gave last time, $15 to $25, it was harder to answer that question because the floor price sits somewhere between those two prices. But if you’re going $15 to $12 or $12 to $10, the floor price doesn’t come into play. So it’s linear on the additional volumes but you still got to account for the fact that a big chunk of volumes are out of a set floor price under these scenarios that we’ve put out there.

Robert Stein: Yeah okay And I guess another sort of contracting market related question. Can you help us think through how the volume commitments may change into the future, should a downside scenario emerge? So if I understand your contracting strategy correctly, you engage with downstream parties, you get commitment volumes, you arrange floor pricing that sort of underpins returns that are attractive to your growth. So are we essentially seeing a slowdown because we’re just not getting the [bidder] (ph) interest for your contracts at pricing that underpins attractive expansions? i.e., from a capital allocation point of view, we can expect you to generate positive free cash flow generation in lieu of firm test demand up until when that firm demand re-emerges.

I guess your question’s really trying to understand how your downstream customers are interacting with you around their projected demand profiles and is there any risk to future growth scenarios out past this year?

Paul Graves: It’s an interesting world we find ourselves in. So the customers that we have today are continuing to view it. We may be overstating it. I mean, maybe it’s just us and we think we’re better than we are, but customers tend to treat us like a partner in their supply chain conundrum. So they don’t just come to us and say, I want a product. They’re trying to work with us to try and figure out which part of the supply chain it makes sense for Arcadium to be in. For example, with battery technology, which cathode producers or cell producers. And so we work with them about where it makes most sense for our materials to go. And they’re also looking for flexibility from us, particularly as they think about different technologies between hydroxide and carbonate.

And so they’re actually spending more and more time qualifying more and more of our materials so that they have as much flexibility to take product from across our network. And so the single biggest differentiator that we are finding today is our ability to a, have multiple sources of supply, multiple locations, multiple geographies, multiple products. And this is really important, to actually get the qualification versus into their supply chains. All of this means that the existing customers that we have today are all very keen to expand their relationship with us. In most cases that means they’ve brought a product offering, brought a qualification and pretty much all of them slowly increasing volume commitments on their part and on our part as we look into the future.

Now if the question is — are we adding more and more customers like that, in these market conditions, no. I think most of those customers, and this is not because the price is low and so they don’t feel they need to, they’re also trying to figure out their supply change too and who they want their partners to be and what material they need and how important the IRA and how much is going to be LFP or mid-nickel and so on and so forth. So this is what I mentioned in the script about sort of the technology flux and the lack of visibility. It’s more difficult today to bring a potential customer to the table to engage with you and put in place a long-term supply agreement. That doesn’t mean that they’re not all talking to us or that they don’t want to do this.

They’re just frankly just not ready, not in a place yet that they feel they can make those additional commitments. And it’s why in the next two years to three years, we will quite likely have more material being sold not under these contracts and will be truly purely market exposed. The contracts we have, none of them expire in the next three years or four years so they’re not going anywhere but today at least I don’t have a roadmap to adding a ton more you know customer contracts in the next six months to 12 months.

Operator: Your next question comes from Pavel Molchanov of Raymond James. Your line is open.

Pavel Molchanov: Thanks for taking the question. How soon do you anticipate re-evaluating your capital spending plans and what do you need to see to take that next step?

Paul Graves: So it’s interesting. We have a couple of projects that actually have a degree of momentum behind them that I wouldn’t say makes them [inevitable] (ph) to keep moving them forward, but it would take a lot for us to stop them, either because of commitments we’ve made to contractors and construction, or commitments we’ve made to customers and other partners. So I don’t see us changing those. I think when it comes to the other two projects that we’re going to put on hold, and I say put on hold, it is on hold, it’s not perpetual, we do expect to restart them. As I said, rather than doing four projects at once, we expect to do two at once. So as we finish construction and bring online a big project in Canada, in Nemaska, we can then move on to starting James Bay.

And the same is true in Argentina. As we finish one of the two Hombre Muerto projects, we can move on to the other one. We clearly will revisit that second step, depending on what market conditions are between now and then. We’ve got 16 months — 18 months probably to have to make that decision, so I don’t expect a big revisit in the next 16 months to 18 months, but it will absolutely be front and center in our minds as we move through 2025, what conditions are we in and do the markets justify as starting those two projects?

Pavel Molchanov: Okay, following up on that, why is Nemaska kind of protected from the [OpEx] (ph) reductions in other areas of the business?

Paul Graves: Yeah, look, I wouldn’t say it’s protected. It’s just that when you line them up and you look at the economics of the project, we think that a Nemaska project is unusual. Nothing’s unique, but it’s certainly unusual in our industry. Being a non-Chinese, fully integrated hydroxide plant, it has a fantastic environmental footprint with the hydroelectric power that it uses. It’s quite well advanced, quite a long way advanced, particularly the mine, but also even the [Wrecking Co] (ph) chemical plant. And some of you guys will see the chemical plant on when we do the Investor Day, and we head up there. It’s also, frankly, backed by a customer who’s provided both capital and a contract that incentivizes both of us to bring that plant online on schedule.

So it has a bunch of characteristics to it. Although the fact that while it’s a big project, 50% are owned by somebody else, so we’re only responsible for half the capital. So it also has a near-term cash demand profile that’s more favorable as well.

Operator: Your next question comes from a line of Joel Jackson of BMO Capital Markets. Your line is open.

Joel Jackson: Hey, good afternoon. Maybe following up on the Nemaska, so one of your major competitors, you know, is talking about over the last week that, you know, the shift to the West never happened. Conversion assets in Australia don’t make money, they lose money, they’re not competitive to China. You know, even you guys Naraha, you know, taking a long time to ramp up outside of China. We all know what’s happening in Australia with conversion. It’s a long question, sorry. I mean, think of the Nemaska. Does it make sense that can quotes — to do conversion? Does it make sense just to be a spodumene merchant mine there or feed your other network? I mean, are you worried that conversion is a negative margin component?

Gilberto Antoniazzi: Definitely not worried it’s a negative margin component. I mean, you’ve got to bear in mind the nature of the way we’ve structured that plan. With customer contracts, we have a lot of confidence that that is going to be, that it has pricing available to it that generates acceptable returns. You know, it’s kind of interesting. We’ve asked ourselves this question, Joel. I don’t think that being a merchant of spodumene out of China is a particularly attractive model for many people. It’s incredibly volatile. It’s a long shipping distance. Mining in Canada is not as easy as people think it is. A lot of challenges with permits, et cetera. So, you know, I don’t know that being a merchant to a spodumene concentrate from Canada into China, and that is the only hope for it.

It’s something that we would have taken on today if that’s where we sat. And, frankly, it’s part of the challenge that James Bay has when we assess it. But I also think that the hydroxide plant that we’re building there at Bécancour, I suspect, well, I don’t suspect, I’m pretty confident that if we started that project from scratch today, it would be more expensive to build starting today than it’s going to be for us. Just the passage of time, cost of material going up, et cetera. And it is, look, we’ll talk a lot about this on the Investor Day, but I will be you about what regional demand, what the ex-China world looks like, what that demand looks like. There is absolutely going to be a shortage of supply of lithium hydroxide that doesn’t touch China.

Whether that’s important for IRA purposes or whether it’s important for broad resilience of supply chain purposes, we do think that even though that market’s not going to be a 600,000 ton a year market, it’s certainly plenty big enough to absorb the 32,000 tons that Bécancour will produce. So when you think about it that way, think about it as part of a network, think about how far advanced it is, think about the partner that we have, the low-cost hydro. Maybe that can cause not the best representation of what an ex-China downstream conversion plant looks like economically. I certainly do not believe that generally speaking, today, building a North American conversion plant in most locations without significant government help will make sense.

Economically, it is unlikely to make sense.

Joel Jackson: Okay, another big picture question. I know like big picture questions. I think in the lithium industry, obviously evolving quickly, but there’s a lot of irrational behavior going on, right? So we talk about lepidolite producers are definitely producing below cost. The pricing are below their cost, but hey, a lot of that is downstream integrated, so who cares? You’ve got African spodumene ramping up, the grades aren’t great, concerns who’s going to take it, but we’ll see. SQM can’t really stop pumping brine out because of the unique complexities of their arrangements there with [Quota Delco] (ph) yourself 25% increase, I believe in LCE for next year almost take a bit of conversion off the market. No one’s stopping really to produce more and more and more. So Paul, what’s going to give?

Paul Graves: That is a big picture question, Joel. Look, you know, I think I’ve said to a bunch of you, I don’t consider the African spot or lepidolite to be irrational. I think it might be economically irrational, but it’s not irrational when you view it from other perspectives, particularly security supply chain. We’ve spoken about this a bunch of times, I think, you and I, about why I think it makes sense for them to do that. I think though, you know, if you go back a few years, go back to like 2018 and 2019, the hydroxide market was high, pricing was pretty good, and then all of a sudden, somebody brought on a new hydroxide plant and the price collapsed. Why? Because the market was only 150,000 — 140,000 tons a year, so one plant can make a difference.

If you look at what happened going into this year, into 2024, best we can estimate all of the lithium demand growth that happened between 2023 and 2024 on an LCE basis. It was a couple hundred thousand tons of extra demand was needed, was all satisfied by this unexpected wall of the lepidolite and African spodumene. And so what happened is there was no volume, no demand growth for everybody else. It’s a flat market for the rest of us. It’s blindsided, ours is blindsided, and much of the market. But a lot of the investments that are bringing volume on today were made prior to this, right? And you can’t stop them. You’ve been around enough to know once a project is underway, it’s underway, and stopping it can be really expensive and destructive.

And so there’s a tendency to finish what we started. And so what also happens is our reaction time in industry is not quick. It just isn’t. It takes us a while to react. And we get helped for sure just by the fundamental growth patterns that we’ve seen. I mean, despite everybody’s fears of flowing demand, just the EV pool alone, as we just said, on a gigawatt hour basis, which is the best proxy we have for lithium demand, 20% growth year-over-year from the first half of 2023 to the first half of 2024. And this is before we factor in some of the growth in grid storage, especially in storage demand that’s really coming up quickly. So, you know, what needs to happen is this cycle needs to play out and we need to get into the next cycle. There will be a natural tightening of supply and demand just from demand growth and the inability of the last big growth driver, the lepidolite and African spodumene, so it will sort itself out.

It just is going to take a few quarters to get there. I would love to be able to tell you that a whole bunch of people will stop producing, but the truth is, you know, if you run five, six, seven different assets, maybe you can do that on one of your assets, but this industry continues to be populated by single asset companies. Single asset resource companies cannot afford to stop production or massively [retail production] (ph). And so they’ll hold on and hold on and hold on for longer than is rational. But yeah, there’s a lot going on in this industry still. It’s still rapidly changing on both the supply and the demand side, and it just takes time for situations like this to work through.

Operator: Your next question comes from the line of Hugo Nicolaci of Goldman Sachs. Your line is open.

Hugo Nicolaci: Morning. Paul, Gilberto and Dan, thanks for the update. Just one on the projects themselves. Hearing from some of your peers in Argentina that they potentially lost up to 50 days of construction this year alone due to weather impacts, mainly wind in the region. What level of disruption have you seen at Fenix and Sal de Vida this year so far before the deferral and how much buffer have you built into the timelines that you’ve now restated on those projects, thanks.

Paul Graves: Yeah, we’ve not seen any delays on construction from weather or anything else. We do see some delays on startup of Fenix 1A, which were caused by factors outside our control basically infrastructure, masses that were controlled by suppliers that they weren’t able to fulfill their obligation, but sort of a one-off unique issue that we have that’s now resolved. But we’ve seen none in there at all. As for putting buffers in there, I mean, you can imagine that schedule does not end on 31st of March, we tell you guys what we’re going to do on the 1st of April. We do put some buffers in there with regard to the normal delays that we have. Is it going to be enough? I think given where our Argentina projects are, Sal de Vida especially, they’re not three years away from completion.

I mean, Sal de Vida just over 15, 16 months away from completion. So, and it’s quite well advanced, over 40%, 45% complete so far. I’d be surprised if we have major delays at Sal de Vida, as a result of any outside factor.

Hugo Nicolaci: Great, thanks for that Paul. And then just a second one — just around you highlighted that you expect to fill the recently expanded conversion facilities when you have that volume from Argentina. Given that Olaroz feeds Naraha but otherwise that volume is controlled by TTC, that largely then leaves you reliant on the Fenix and Sal de Vida projects unless you look to third party purchases. Even with those current next legs of expansions already in construction, does that give you enough carbonate volume to fill those? And if it did, do you actually expect that to be economic given the current pricing or would you sell spot carbonate instead?

Paul Graves: So you raise a way more complex topic than I can probably do justice to in a soundbite type answer, but let me just say that the volumes that are in partnership with TTC, they are available to us to use in our broader network. They actually make a lot of sense to go into the hydroxide network because they are not battery-grade material and as I’m sure you can imagine, TTC’s objectives, they have many, but some of them are to support their partners in Japan. Their partners in Japan don’t need technical-grade carbonate, any battery-grade carbonate or lithium hydroxide. So we are very aligned with TTC about the best way to optimize the value of the carbonate that comes out of all the rows. So I’m quoting the premise of your question without — won’t be available if it’s unlikely to be true.

Operator: Your next question comes from the line of Kevin McCarthy of Vertical Research Partners. Your line is open.

Kevin McCarthy: Yes, thank you and good evening. Paul, last quarter I think you indicated that about two-thirds of your hydroxide volumes are covered by contracts with fixed floors. My question would be how does that two-thirds ratio change if it changes at all in the back half of this year and into 2025, recognizing that you’re targeting 25% volume growth?

Paul Graves: Yeah, so it clearly goes down later this year because the volumes that we have coming on are not under those contracts. So back-end of this year as the — all the volume under those contracts has been served today. So, adding more volume is not going into those contracts. We do, though, have contract expansion next year. So, some of that volume will, in fact then move into supporting growth in contracted volumes that are already in place. So the ratio next year will be slightly lower than two-thirds, but not massively lower than two-thirds. And again, as the year goes on, don’t forget because the nature of the volume we add them, they sort of ramp up as the year goes on. It’s not a linear day one in 2025 with 25% more volume starting January the 1st. So as the year goes on slowly but surely, the ratio will start to shift to lower the contracted volumes in 2025.

Kevin McCarthy: Okay, that’s helpful. And then secondly, maybe more of a clarification question around what has changed with regards to your project. I think I understand what you said about Galaxy. I did want to clarify, however, exactly how you’re re-casing in Argentina. If I look at the bottom of Slide 7, you showed [25,000 kilotons] (ph) there with a Part 1 in early ‘26 and a part 2 in late ‘27. Can you parse that out in terms of how much is coming on in early ‘26 versus 18 months following that and what exactly has changed with those lines, please?

Paul Graves: Yeah, we’ll touch on this more in the Investor Day, but originally all of it would have come on in early 2026. These two projects are roughly give or take the same size. So in essence, half of it will come on in early ‘26 and the other half will come on in ‘27. So instead of 25,000 tons all coming on in early ‘26, it’s between 10,000 and 15,000 — come on in early 2026 and the other [10,000 to 15,000] (ph) come on in later, 2027.

Operator: We’ve run out of time for questions. This concludes our Q&A session. We’ll now turn the conference back over to Dan Rosen for closing remarks.

Daniel Rosen : Great. That’s all the time we have for the call today, but we will be available on the call if you have any additional questions you may have. Thanks, everyone.

Operator: This concludes the Arcadium Lithium Second Quarter 2024 earnings release conference call. Thank you.