Li-Cycle Holdings Corp. (NYSE:LICY) Q3 2023 Earnings Call Transcript November 13, 2023
Li-Cycle Holdings Corp. beats earnings expectations. Reported EPS is $-0.19, expectations were $-0.22.
Operator: Good day. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2023 Li-Cycle Holdings Earnings Call and Webcast. [Operator Instructions]. I will now turn the call over to Nahla Azmy, Head of Investor Relations. Please go ahead.
Nahla Azmy: Thank you. Good afternoon, and thank you, everyone, for joining us for Li-Cycle’s business update and review of financial results ended September 30, 2023. We will start today with formal remarks from Ajay Kochhar, Cofounder, President, and Chief Executive Officer; Tim Johnston, Co-Founder and Executive Chair; and Debbie Simpson, Chief Financial Officer. We will then follow with a Q&A session. Ahead of this call, Li-Cycle issued a press release and a presentation, which can be found in the Investor Relations section of our website at investors.li-cycle.com. On this call, management will be making statements based on current expectations, plans, estimates, and assumptions, which are subject to significant risks and uncertainties, most of which are difficult to predict and many of which are beyond the control of life cycle.
Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect including because of factors discussed in today’s press release, during this conference call, and then our past reports and filings with the U.S. Securities and Exchange Commission and the Ontario Securities Commission in Canada. These documents can be found on our website at investors.li-cycle.com. We do not undertake any duty to update any forward-looking statements, whether written or oral, made during this call or from time to time to reflect new information, future events or otherwise, except as required. These forward-looking statements should not be relied upon as representing Li-Cycle assessments, as of any date subsequent to the date of this call.
With that, I’m pleased to turn the call to Ajay.
Ajay Kochhar: Thank you, Nahla, and good afternoon, everyone. Beginning with Slide 3. We announced in late October I’ll be pausing construction at the Rochester Hub to conduct a comprehensive review of the project. Today, I’ll discuss the rationale for that decision. Tim will provide an update on the Spoke & Hub network, and Debbie will review liquidity management and our financing strategy. Turning to Slide 4. I’d like to provide context on what drove our decision to pause the construction work for a comprehensive review. At a high level, it came down the convergence of two factors, namely an escalation in actual construction costs versus prior indicative bids and delays in complex financings. Let me walk you through some of the details as you can see here by the time line.
Starting with the Rochester Hub construction milestones and costs, as shown in the blue part of the time line. We recently started to recognize actual costs significantly higher than previously estimated based on recent subcontractor agreements for packages of remaining work. This was specifically related to installation costs for mechanical equipment, hiking, structural steel, electrical, instrumentation for measurement, and process control devices. This cost pressure was exacerbated by the timing of nearly $4 billion of other major construction projects in new region, starting and ramping late 2023 and early 2024, driving general contractors to draw construction workers from the larger regional area. Reflecting these escalating construction costs, we arrived at forecasts that result in the aggregate cost of the current scope of the project substantially higher than previously disclosed budget of $550 million.
For reference, the project CapEx to date was approximately $301 million on the project through September 30, 2023. In terms of the financing, as shown in green on the top of the timeline. With our capital growth needs, we’ve been successful in timing strategic and competitive financings such as with Coke, LG Chem, LG energy solutions, and Glencore over the course of 2021 and 2022. After 2021, we submitted our application and began a rigorous process with the DOE. We achieved a significant milestone when we received the conditional loan commitment for gross proceeds of $375 million in late February 2023. While we worked closely with the DOE to progress to the final stage, we were delayed from our initial target close from the end of June to September 2023.
Also, at September 30, 2023, the company had contributed approximately $92 million for the construction of process buildings and a warehouse for the Rochester Hub. This spend was incremental to the Hub project budget of $560 million. The company was anticipating a refund of a substantial portion of this contribution upon completion of a building’s leasing arrangement. Through the complexities of bringing together arrangements for the DOE loan and the buildings lease arrangements, both financings were further delayed into October. Subsequently, we’ve decided not to pursue the building’s lease arrangement, which is expected to simplify the DOE loan closing process for the Rochester Hub. In summary, the escalating construction costs, combined with continued delays and closing contemplated financing were leading to lower current and projected cash balances.
As we made the swift, and prudent determination and announced a pause of the project to complete a comprehensive review. The review is examining expected capital costs, timing of completion and go-forward compression strategy options for the Rochester Hub project. Turning to Slide 5, for a snapshot of our current portfolio immediately following the Rochester Hub project pause. The company is undergoing a comprehensive review for bringing on additional Spoke & Hub capacity in the near term. Until the go-forward strategy work is completed, the company will be slowing operations at its most American spokes as it reviews the timing and black mass needs of the Rochester Hub. The company is reviewing plans, bring on additional Spoke capacity in both North America and Europe.
And we’ll discuss both the hubs and our focus on the Generation 3 Spokes in more detail later in the presentation. Turning to Slide 6, for an overview of the key considerations for our ongoing comprehensive review. As I already discussed in early October, we announced a pause on the construction work at the Rochester Hub for a comprehensive review of Spoke, timing, and capital. Additionally, we’re evaluating our levers to optimize cash and liquidity including cost spend initiatives, optimization strategy, and timing financing needs to support our Go-forward plans. I’ll now turn it over to Tim for a more detailed update on our Spoke & Hub network.
Tim Johnston : Thanks, Ajay. Turning to Slide 7, for an overview of the options being considered as part of the Rochester Hub project review. The view is examining a phased approach that ties black mass production from our Spoke network to support the battery industry for precursor and cathode production. In Phase approach, the first phase, as depicted by the green arrows, the black mass is processed to produce a mixed hydroxide precipitate or MHP, a combination of nickel, cobalt and manganese metals. MHP could be sold through a refiner ahead of supplying to the battery precursor industry. In the second phase, per the original plan as depicted with the gray arrows black mass would be converted directly to nickel, and cobalt sulphate ahead of supplying to the battery precursor industry.
Both approaches maintain the production of battery-grade lithium carbonate. The MHP process was part of Li-Cycle’s large-scale pilot program completed in 2019 to 2020 and is included in Li-Cycle’s patterned technology portfolio. The key factor for this approach is the ability to reduce immediate construction Spoke to phase development with project financing. Turning to Slide 8, to discuss our initial assessment of the Rochester Hub project. As previously disclosed, engineering and procurement of the Rochester Hub project are largely complete. With focus having shifted to construction installation activities. As Ajay discussed earlier, the project has experienced escalating construction costs substantially higher than what was anticipated in the previously disclosed $560 million budget.
Additionally, we had contributed approximately $92 million towards an expected total cost of $140 million for the construction of process buildings and warehouse for the Rochester Hub. We had previously anticipated a refund of a substantial portion of this contribution upon completion of building lease arrangements. For background, the decision for entering into the building leasing arrangements were based on an initial intention to focus capital expenditure on core project requirements specifically not real estate assets. This is aligned with our general approach to project execution. However, we decided not to pursue the building leasing arrangements which is expected to assist in simplifying the DOE loan closing process for the Rochester Hub.
In terms of the Go forward for the Rochester Hub, we have performed an initial analysis of options for completion of the Rochester Hub. Based on the initial analysis and depending on the option selected, we determined that the revised project cost could be in the range of approximately $850 million to approximately $1 billion. This range includes the cost of the process buildings and warehouse for the Rochester Hub of approximately $140 million. This total project range based solely on an initial analysis is subject to a number of assumptions and will likely change as we continue to complete our comprehensive review work and determine which options to pursue accordingly. Turning to Slide 9, for an update on the Portovesme Hub, which has a similar flowsheet and benefits to the MHP option are just covered with a phased approach for the Rochester Hub.
Just as a reminder, together with our partner, Glencore, we are repurposing part of their existing hydrometallurgical site in Portovesme, Italy. This project contemplates competitive long-term financing from Glencore to fund Li-Cycle’s full share of the capital investment. Once operational, this facility is expected to be one of the largest producers of battery-grade lithium carbonate in Europe. I would like now to hand it over to Debbie for a review of our liquidity management and financing strategy.
Debbie Simpson : Thank you, Tim. Turning to Slide 10, for a review of the steps we are taking to maximize liquidity and preserve our cash on hand. Since paving the project in late October, we’ve taken action to optimize cash while also pursuing financing options and strategic alternatives. First, on our cost-cutting actions. We have reduced our workforce, eliminated other nonessential operational funds, and are implementing working capital initiatives, have sold operations at our North American Spoke network, including a pause in production at our Ontario Spoke. Slowed production at the New York Spoke and the installation of Line 2 in Germany, under reevaluating the plans and timing of our Spokes in Norway, France, and Hungary.
Turning to Slide 11, for an update on our Spokes. With a review of timing and Spokes for the Rochester Hub, we are now primarily prioritizing our operations on the Generation 3 Spokes, specifically Arizona, Alabama and Germany. Consequently, we are revising our 2022 annual production outlook for Black mass from 7,500 tonnes to 8,500 tonnes down to 5,500 tonnes to 6,500 tonnes. As a reminder, we started up the Germany Spoke Line 1 in early August and are excited to report that the ramp-up is tracking our expectations. The Generation 3 is advanced novel technology that can sustainably process full electric vehicle battery packs without the need for discharging, dismantling our thermal processing. Additionally, they benefit from economies of scale.
Turning to Slide 12, for an update on our cash position. Since June balance is $289 million. The majority of the cash outflow has been for capital expenditure related to the Rochester Hub project. We ended the third quarter with approximately $137 million of cash on hand which is now approximately $100 million at November 10. With current cash on hand, our spin cuts, and additional cost-saving initiatives on DOE, we anticipate needing additional funding in addition to the DOE loan before restarting the Rochester Hub project. As an immediate step, the company, in conjunction with its financial advisers is exploring options to support near-term liquidity needs. The company is actively engaged and continues to work closely with the DOE to satisfy conditions precedent to financial close for gross proceeds of $375 million as it undertakes its comprehensive review of the Go-forward strategy of the Rochester Hub.
In addition to the condition’s precedent to financial close, the company will need to meet additional conditions precedent prior to the first advance including obtaining additional financing to fund the required base equity commitment before restarting the Rochester Hub project. In parallel, we are exploring additional long-term financing options as well as strategic alternatives. Turning to Slide 13, to conclude. We continue to believe Li-Cycle is uniquely positioned with its Spoke & Hub network and remain poised to benefit from strong secular trends and supportive government policy. We remain committed to our mission to recover critical battery materials to create a domestic battery supply chain for a clean energy future. Operator, we are now ready for questions.
Operator: [Operator Instructions]. We’ll take our first question from Brian Dobson with Chardan Capital Markets. Please go ahead. Your line is open.
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Q&A Session
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Brian Dobson : Thanks so much for taking my question. As you contemplate this strategic pause in development outside of the United States in the European countries, so you’re looking to build Hubs and Spokes, what do you think is the likelihood that those projects will simply be halted by understandably concerned partners and investors?
Ajay Kochhar: Brian, it’s Ajay here. And you’re a bit hard to hear, but I think you’re asking the effect on our European projects to what we’ve just decided to do or we start to do with the Rochester Hub. I’ll turn it over to Tim to cover it.
Tim Johnston: Yes. No. Brian, nice to talk to you. So, when it comes to European assets similar to the balance of our projects is it’s all part of this broader comprehensive review that we’re doing with the exception of Portovesme, which is the DFS timing is under review, but otherwise is continuing in connection with partnership. And I think that was part of your question with Glencore. I want to highlight that our partners and our customers have been extremely positive and supportive throughout this process.
Brian Dobson : That’s good to hear. As it pertains to the Department of Energy, I understand that you retained an investment bank to seek out strategic alternatives and financing opportunities. As management is contemplating receiving funds from DOE, how likely do you think that is if you had to handicap it?
Ajay Kochhar: Yes, I’ll take it, it’s Ajay. Look, so let’s be very clear. And I think there was a lot of Mitch Miller out there in articles and other aspects that we saw publicly. To be clear, we are in quite period. So, we want to ensure that we’re being prudent. Look, the fact haven’t changed. We have a conditional commitment from the DOE. We still have a conditional commitment from the DOE. That was issued back in February of 2023 of this year. That come in for gross proceeds of $375 million. They are great to work with through this process. We’re very close to engage. We’re not just saying that as random language. It’s obviously in partnership with them in terms of whatever we put out there. What I would say is we definitely have some work still to do.
And I think Tim covered in the body here. Different options associated with the potential phasing of the project and also around construction strategy. As you can imagine, that’s very important for us to be working through with the DOE. And so, as we get through the full review and we get to the best path forward, it’s going to be in concert with that DOE package. Today, we’re not ready to comment about how that may change or how they may differ. What I can tell you is the fact remains that we have a commitment and programmatically from the DOE, this is public, you can find it when they give a commission payment, they actually earmark the funds. So, what we need to do is work through our review, work with them and then we’ll be able to give more clarity vis-a-vis timing and other aspects.
Brian Dobson : Okay. And then just one final follow-up. Local news reports have indicated that several contracting firms had outstanding bills that have not yet been paid. Would you care to comment on that? Is that because you’re negotiating those firms? Or what’s going on there that those pertain to the Rochester Hub facility?
Ajay Kochhar: Yes, Tim you can take that.
Tim Johnston: Yes, no worries. And Brian, we can’t comment specifically on individual contractors. I’d just say that we’re working closely with all stakeholders as part of this review process.
Operator: We will take our next question from Jeff Osborne with TD Cowen. Please go ahead. Your line is open.
