Sigma Lithium Corporation (NASDAQ:SGML) Q4 2023 Earnings Call Transcript

Sigma Lithium Corporation (NASDAQ:SGML) Q4 2023 Earnings Call Transcript April 1, 2024

Sigma Lithium Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, everyone. My name is Dennis, and I will be your operator today. Welcome to the Sigma Lithium Fourth Quarter and Full-Year 2023 Earnings Conference Call. Today’s call is being recorded and is broadcast live on Sigma’s website. On the call today is company CEO, Ana Cabral Gardner; and Company Executive Vice President, Matthew DeYoe. We will now turn the call over to Matthew.

Matthew DeYoe: Thank you, Dennis. This morning before market opened, we announced a final investment decision for our Phase 2 expansion, as well as preliminary, unaudited 4Q and full-year 2023 financial results. Before we begin, I would like to cover a few items. First, during the presentation, you’ll hear certain forward-looking statements concerning our plans and expectations. We note that actual events or results may differ materially given changes in market conditions and or our operations. Additionally, earnings referenced in this presentation may exclude certain non-core and non-recurring items, and have been based on unaudited financial statements. Reconciliations to the most direct comparable IFRS, financial measures, and other associated disclosures will be made available. The slides will be posted on our website, and following the call, we’ll post additional slides with added financial performance information. With that, I will pass the call over to Ana.

Ana Cabral Gardner: Well. Hi, everyone. Good morning. We are absolutely delighted that we are announcing the final investment decision and the initiation of construction to double our production capacity from 270,000 tons of lithium concentrate per year to 520,000 tons of lithium concentrate per year. 2023 was just a transformational year for us. We became a major lithium producer and as an investor operating team, we own more than 50% of Sigma. So we are all in together with all of you, our shareholders. I’m going to walk you through the key items, the five key competitive advantages that gives us so much confidence to make this investment decision. First, we are large-scale. So we became the fourth largest mineral industrial lithium complex globally.

Secondly, we are the sixth largest global producer, that includes brine and rock. So we got scale. More importantly, we have low cost. We have achieved the second lowest cost in the industry amongst our peers. In parallel, we are producing a premiumizable material, we call Lithium 5.0, which is the Quintuple Zero. It is irrespectively of environmental and social sustainability, physically and chemically is the best chemical grade, and most sustainable lithium in the world. It has unique metallurgical properties. So as a result, we made the final investment decision to build double scale to deliver more of that material. So the Phase 2 is going to be the same build team of Phase 1, which delivered Phase 1 successfully on budget and on time. More importantly, and I think lastly, a key point in this confidence behind the investment decision was that, as a result of the very successful drilling campaign of 2023, we managed to increase the project life to over 25-years.

So we have now permanence and longevity at 109 million tonnes of mineral resource. We have forecasted 150 million tonnes of mineral resource. On the next slide, if you can see, we want to demonstrate quantitatively that we’ve surpassed every lithium industry record, and we’ve achieved full production capacity just at the beginning, just at our second quarter of operations. We reached 270,000 tonnes of material from September 23 to September 24. Meaning, on an annualized basis, we have 12 months — we have reached 12-month capacity and again, within just six months of commissioning. We have managed to produce and deliver in those six months of 2023, 105,000 tonnes of this material. We caught quite a lot steel of the very great market of last year and as a result of the superior properties of the material, we achieved a $1,333 per tonne of average price, premium price for the material.

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Q&A Session

Net-net, we’re getting $1,160 per ton of this material. Again, result solely of the outstanding metallurgical and chemical properties of the product. We have managed to reach a cash cost at plant, which is the second lowest amongst the hard rock lithium producers. And these cash costs get lower as we get bigger, because we dilute our fixed costs by a larger production. More importantly, we’ve done all of this while generating and conserving cash in our typical Sigma discipline. In other words, we have a cash position of $109.4 million sitting in our balance sheet. So theoretically, we have an entire Phase 2 plant right there in our balance sheet ready to be deployed. So as a result, we’re initiating to increase our — initiating Phase 2 to increase our scale in 100%.

We started with all the construction activities, mobilization, contracting promo and will double capacity to 520,000 tonnes. So it is more of the same, because it is working, and it’s working extremely well, irrespectively of lithium price cycle. And I think lastly, again we got to 109 million tonnes of audited mineral resource with an exceptional high grade of lithium oxide, which means that we have over 25-years of life of the project, but our resource lasts longer, because it has higher lithium oxide. So we are a 100% known fourth largest producing industrial lithium complex in the world. And the only one to produce this 5 times — 5.0 carbon lithium, which makes us all very proud, because for us in our team investor operators, it wouldn’t be any point in getting here without being able to be in consistency with the supply chain, that we are honored to be part of.

This green supply chain, that delivers these green electric vehicles. So here’s a picture of this industrial plant, that kind of makes this match. This is the Cleantech innovation where you see in dotted red is this third module of the plant. This was a lot of work to put together, but that is actually the great responsible to deliver the Quintuple Zero lithium, the low cost and green lithium for green cars. And again, it’s green lithium for green cars, not brown lithium for green cars. Why is that? We have zero toxic chemicals is dense media separation centrifugation technology. We achieved zero carbon. We use zero drinking water. We’ve been using sewage-grade quality water. We produce the lithium with zero tailing dams, and we use zero dirty power.

Our power is clean and renewable. On the next page is an illustration of us in the lithium world in general. And you can clearly see numbers. The numbers are quite straightforward. We have our starting point at 85 million tonnes, which is equivalent to 2.7 million tonnes of LCE resources. Then we delivered the first leg of the mineral resource update, which got us to 3.3 million tonnes of LCE resources. And then we have the expected further increase at 4.8 million tonnes of LCE equivalent resources. On this page, you can clearly see where we are in scale. In brown, you see our peers, all of them in Australia, all of them lithium industrial mineral complexes in production. In purple are the non-producing. So we basically are the four largest lithium industrial mineral complex in production.

We are of that scale. And this is just our first year of operation. So it shows that we have permanence because we are as large as the greatest projects in the world sitting in Australia. We joined that club. Here is when we stack us up against all producers, including brine producers. And again, the chart is pretty self-explanatory. We became the sixth largest producer globally, but because we commissioned our operations with the headwinds of the lithium cycle reaching bottom, we never got the opportunity to be repriced as the large-scale producer that we are. And here we’re going to demonstrate visually the disconnect. When you see in dark green is the volume in LCE equivalent of 2024 production. In gray, you can see the market cap current of these companies.

Clearly, when you look at Sigma at 37,000 tons of LCE equivalent of production for 2024 like right now, you look at our market cap, we’re really priced like a developer. So the discrepancy speaks for itself. And the plan for this year and our number one mission is to close that gap, basically doing what we’re doing, demonstrating that we’re here to stay as a large supplier. And this next slide proves it. We’re going into our ninth shipment. We have demonstrated resilience and the sheer metallurgical product quality of this material. We established shipment cadence, basically on month five after commissioning, by reaching capacity — annualized capacity. We’ve done all of that against terrible headwinds. So we now have a track record of being a reliable large-scale supplier to the EV battery chain.

And in the spirit of transparency, we’re showing every shipment and every implied price per tonne of every shipment. So we’ve achieved this on merit, slightly premiumizing over our peers, because the product has what we call value in use, superior metallurgical properties, that deliver measurable, quantifiable cost savings to the customers. So we’re here to stay. We’re large-scale producers. We are force for good in the industry. On this next slide, a bit more on premium pricing. We’ve been achieving a meaningful final premium price. This month we were able to close the gap completely and eliminated provisional pricing. So that once again validates these outstanding metallurgical and chemical properties of the product. The product is better.

It delivers savings. So we’re not capturing all of those savings. We’re capturing some of it, that becomes our premium pricing. So just now for its eight shipments, we’ve achieved $1,333 nameplate price, which included VAT. Net of VAT is $1,160 per tonne. So that’s a very decent premium for the new producer on the block. This price again is final and non-provisional. So it’s a meaningful increase over the previous premium prices we already achieved, we showed you on the previous pages. And if you translate that into a variable price or into a reference, that’s equivalent to 8.75% of the London Metals Exchange lithium hydroxide CIF quote. So it shows that we’re grabbing a significant portion of the value of the supply chain. The price discovery was transparent.

It was driven through close private bidding and the purpose of it is working partnership with Glencore, our marketing and commercial partner to maximize the value of this superior product for Sigma. On this next slide, again more of why do we have value in use? What are these chemical and physical properties that allow us to premiumize, even against headwinds? First, it’s because the product is high purity. High purity means, low iron oxide, low potassium oxide, low sodium oxide. These are three, let’s say impediments to achieving ultra-high pure lithium chemicals at a low cost for our clients. It also has low mica, which again is another stumbling block in the refining process. What’s interesting though, is that when you look at the physical properties of the product, we have a dry coarse.

The dry coarse behaves in the calcination stage at the [keel] (ph) beautifully, as it heats up and it becomes beta-spodiumine. So there are efficiency savings right there in the form of saved energy. So this whole combination delivers a saving that’s measurable. How so? The downstreamers just need 7 tonnes of our product to produce an ultra-high purity lithium hydroxide. When you look at the comparable product, 9 to 10 tonnes of that comparable product is needed. So there’s 3,000 tonnes of savings for our client per tonne of lithium hydroxide, which could technically translate as about $330 per tonne of savings for us, if you look at just 7 tonnes. And again, it’s visual. You can look at the pictures and you can see the difference. Ours is this very light greenish, which means purity, a coarse material versus the muddy, talc-type wet materials from our competitors.

And again, here’s the Quintuple Zero, I’ll be brief, but we are very proud to say that we’ve done all of that staying true to purpose, whether it matters or not, whether we get a green premium or not, that is not why we do it. We do this because 12-years ago, we started on this journey of being investor operators in Sigma to deliver just that. To be at the leading edge of sustainability. Zero carbon, zero chemical — zero toxic chemicals, no tailing dams, no cannibalization of the community portable drinking water with clean power. So we did exactly what we said we did. We didn’t increase our production cost as a result, but unfortunately we do not get a green premium. But again, our product is better. So a bit about — okay, a bit about the numbers, right?

We’re built to last. I mean, we built this company with draconian financial discipline over 12-years. So ironically this is probably one of our best moments, because it’s the first year we have revenues, and more importantly we’re able to quantifiably demonstrate that we are low cost. So we have revenues, we have low cost, we have cash flow, and the consistency of delivery and production of our Greentech plan keeps on driving revenues, keeps on achieving that at very low cost, creating what we call commodity cycle resilience. So irrespective of commodity cycles, we’re generating cash and we have a very robust business. As Jim Collins used to say, we’re built to last. So in 2023, our full-year dollar revenues were $135 million. We shipped 102,000 tonnes of material.

We produced 105,000 tonnes, but the average realized price per tonne of material was $1,321 per tonne. Our FOB adjusted cost at plant was $427 a tonne. FOB adjusted cost at Port of Vitoria meaning taking from the value to the Port of Vitoria was $485 per tonne. So in China, all the way in a Chinese port is $565 per tonne. So very, very close to the guidance we provided to the market, as to expect for the full year as we keep on decluttering or as our friend Joe said, removing the noise out of our financials given that this was a hybrid year, part commissioning, part production. So in margins, the margins are pretty spectacular. Our FOB plant margin is 67%, port margin 63%, cash cost CIF China margin 57%. At what some people consider to be the bottom of the cycle, this is mathematics.

The mathematics of commodity cycle resilience. And as we say, mathematics has no opinion. Mathematics is just a fact. So on the next page is again more mathematics. For the full-year, we’ve already given you the revenues, the shipped amount and the price per tonne. Now let’s move on to EBITDA. We posted an accounting EBITDA cluttered, meaning with the noise of commissioning of $24 million from July to December, because that’s when we earned it, less than half a year. Now we adjusted for non-recurring items, which include things such as RSU expenses and commissioning costs. So the pure EBITDA margin at FOB revenues was 18%, but the adjusted EBITDA margin for the non-recurring items and non-cash items, such as stock compensation is 36%. So again, a very robust EBITDA margin to be expected from us in our very first year.

So it is — and it is this low — the low production cost, that drives our ability to generate free cash flow. As I said earlier, we are draconian when it come — when it comes to cost. We always do more with less. Why? Well, we’re all owners. We’re all investor operators. It’s not somebody else’s money, it’s our money. Every employee, every senior manager is a shareholder. So we look after our money. We look after our expenditures like we look after, you know, the money that goes into our wallets. So the full quarter cash unit operating cost at Vitoria is $442 a tonne. Non-recurring commissioning expenses amount to about $94 a tonne. So the pro forma four quarter cash unit operating cost of concentrate amounts to $455 a tonne. My partner Matt is going to give you a bridge in a lot more detail in a second.

So we’re targeting for the third quarter ’24, an average, you know, very close to the guidance $420 a tonne FOB Vitoria, $370 a tonne Plant Gate. These cost initiatives include a number of things, diversifying suppliers and service providers. We are onboarding contract labor, which was important when we commissioned and that was one of the expenses we adjusted out, meaning the engineers of the construction companies, the engineering companies, that stayed behind to help us operate the plant and commission the plant. They’re no longer with us. We now have our own teams, and we’ve optimized maintenance schedules and we’re running this like a clock. We have predictability and umbrella maintenance contracts with our main parts manufacturers. So, now I’m passing it on to Matt DeYoe, my partner, to go over the bridge for the cost.

Matt, you got it.

Matthew DeYoe: Thank you, Ana. So our reported FOB costs in the fourth quarter as we had highlighted in the release was $549 per tonne. Within 4Q were a number of costs associated with commissioning expenses that were more of a 3Q phenomenon, but booked within the October-November timeframe. They’re real costs and we incurred them, but on a pro forma basis, they didn’t recur in December or January or February. So we feel very confident that those are as we say, non-recurring. That would drive a pro forma FOB Vitoria cost of about $455. If we strip out the $70-ish per tonne in high-grade freight, we end up with a 4Q pro forma Plant Gate cost of about $385 within the fourth quarter. That’s not very far, as we said, from the $370 that we were highlighting for the 3Q average.

And again, we haven’t even really begun to benefit from the transition of contract labor to salary, domestic labor, some of the diversification of our suppliers or the optimized maintenance schedule. So we think we have plenty of room or good line of sight again to hitting that $370 number. Obviously, as you build this back up to get to what we hope is a recurring reported COGS all in, you add back that spodumene, freight, royalties, and DNA, and you should get to a rough ballpark of where we hope to be, at least on a pro forma basis, if you were to think about 4Q. Other items that impacted the fourth quarter, low-grade trucking and warehousing. We’re not trucking our tailings to port anymore at the moment, given market conditions, so we don’t expect those costs to continue.

As we mentioned, those commissioning expenses here and there, and we got some tailwinds from equipment, tax and credit, so that kind of bridges perhaps the other line items just from a quarterly impact perspective. So again, I think we feel pretty good with the direction we’re headed. Ana, I’ll pass it back to you.

Ana Cabral Gardner: Yes, sir. So here we go. Next page. Again, this is the bridge to EBITDA. And again, it’s a very straightforward bridge. We start with sales and we go all the way to the adjusted EBITDA. And I want to make it clear, we’re adjusting for non-cash items and for commissioning costs. So we delivered what we call an adjusted EBITDA of $49 million. So we ended our very first year of production with positive cash adjusted EBITDA and cash operating profit. I mean, considering the downfall in lithium prices, we are all very proud of this accomplishment. So here it is, we start with sales in $135 million. Then we have operating costs, non-recurring, transport and warehousing, we get to the gross profit, right? So at the gross profit, then we have SG&A, ESG and others, and then with cash EBIT.

So then we start moving back into the items for adjustment. Meaning, stock-based compensation gets added back, because it’s a non-cash item, is an IFRS accounting item, then we get the D&A added back, and then we get the EBITA. So all of this is accounting straight from our non-audited financial information. So then we get to the $25 million of EBITDA, which I just showed you on the previous page. And then we add back the non-recurring SG&A, which is part mingled with the operating cost there. It’s mostly related to commissioning costs. For instance, in commissioning engineering costs alone, we have something around $6 million. We have a — we have a series of this one-off items, they’re not going to repeat — to be repeated on an ongoing basis, and as a result, shouldn’t be part of your modeling of the company.

So then we get to what we call adjusted EBITDA of $49 million. So here, a bit of kind of the breakdown of this non-recurring general and administrative expenses that we discussed before. What are these items? What’s in there? It’s a mix of things. For example, as you can see, 25% of these numbers are related to the commissioning team on Phase 1 construction. 29% is legal. I mean we had litigation, we had a strategic review. We were very well advised and very well guided by excellent lawyers, but they are one-off. So more important, we had quite a lot of consulting work, which we’re calling audit and accounting services, which were basically helping us, put our SAP back on track, classified costs properly. I mean we were kindly supported by the folks at various consulting firms to get us put our back office in order.