Sigma Lithium Corporation
Q3 2023 Earnings Call Transcript

Published: 15 Nov 2023

[Operator:]

Good day, everyone. Welcome to Sigma Lithium's Third Quarter 2023 Earnings Conference Call. Today's call is being recorded and is broadcast live on Sigma's website. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Matthew DeYoe, Executive Vice President of Corporate Affairs and Strategic Development at Sigma. Please go ahead.

[Matthew DeYoe:]

Thank you, Jason. Good morning, everyone. Thank you for joining us on our 3Q earnings call. On the call with me today is company's CEO, Ana Cabral. This morning, before the market opened, really actually last night, we posted our 3Q '23 financial results as well as SEC filings. Before we begin, I'd like to cover two items. First, during the presentation, you'll hear certain forward-looking statements concerning our plans and expectations. We note that actual events or results could differ materially from changes in market conditions and in our operations. And additionally, earnings referenced in this presentation may exclude certain noncore and nonrecurring items. Reconciliations to the most comparable GAAP financial measures and other associated disclosures, including descriptions of adjustments, can be found in the back of the release. With that, I will pass the call over to Ana. Ana?

[Ana Cabral Gardner:]

Yes. Hi, everyone. Thank you, Matt. Well, first of all, it's a pleasure to be here with all of you to present our third quarter 2023 financials. We are delighted to present to our very first operational quarter, and we are profitable right at the onset. So with that, I'll go straight into the first page with the operational highlights. Well, we're now a large producer. We are a force for good in the lithium industry. And we basically achieved what many believed to be impossible. We are delivering zero carbon, zero tailings, lithium produced without toxic chemicals. We have basically been producing the very best product in the lithium industry as far as concentrate. We have always managed to do that, delivering a very successful ramp-up. As you can see, our Greentech Plant has reached 90% throughput. We've been consistently shipping monthly 20,000 tonnes of the Triple Zero Green Lithium concentrate. Our fourth shipment is expected by the end of November, which is going to be sized minimum 20,000 tonnes. It goes to Glencore. In fact, on that, I just came back from almost two weeks in China, Chengdu, all over, where we ascertained on the ground the fantastic receptivity of our product as far as behavior throughout the refining. We'll talk a lot more about that. As a result, we are moving forward with the detailed engineering for the expansion. I mean there's not enough of this material to supply the demand for what we are bringing as value-added. So the selection of the design engineering comes in as connected to the strategic review conclusion. Depending on the strategic review, partner of choice or winner of choice, we are going to select an engineering company. But we're going ahead of expansion because we can basically sell every gram of this product. And there's more. There's going to be a lot more of this lithium. We have also delivered, in this quarter, a substantial potential increase of the mineral resource. We got Phase 4 that's going to be approximately 30 million tonnes and then a Phase 5 for another approximately 20 million tonnes. So we expect Sigma's total mineral resource, all the way through Phases 1 to 5 to reach 130 million tonnes. With that, I'll move to the next page, financial highlights. Every financial target has been delivered. We are profitable on the first operating quarter, which means that we have an incredible degree of operational efficiency and discipline. We are the second lowest-cost producer of lithium concentrate globally, which means we will thrive in any price environment for lithium. And that is the key message of these financials. We're crystallizing our position as second lowest-cost producer of lithium concentrate. And that's the result of tremendous financial discipline. I mean we are profitable, and we also have a superior product. I mean we do things that no one else does, such as not having a tailings dam, and we deliver a zero-carbon lithium. And despite that, we are profitable, and we are low cost. This basically demonstrates our resilience to the lithium cycles. We're going to strive in any pricing environment for the commodity. And depending on where the cycle goes, we even have the ability to capture market shares with this Triple Zero lithium. This material is the material of choice for any downstream clients all the way up to car makers, which are procuring batteries bound for the European Union. This is all in preparation for the EU battery path for 2026, no matter in the world where these batteries are produced. A bit of the highlights of the numbers. We posted a Q3 revenue of $96 million. We also produced to date 71,650 tonnes of the high-grade product. The low-grade product is 100,000 tonnes. We also have delivered an adjusted EBITDA of $54 million. Our unit operating cost, FOB port, is $577 per tonne. And we have a very sound net income at $36 million in the third quarter. So very profitable, with significant recurring cash generation and liquidity. The next slide shows our production highlights. We have the Triple Zero lithium as a commercial success. In other words, there's not enough of our Triple Zero Green Lithium to satisfy demand. Some of the highlights of the third quarter and production to date. We produced 38,500 tonnes of this 5.5% Triple Zero Green Lithium. Year-to-date production is 71,650 tonnes. We have also successfully ramped up the Greentech Plant without a tailings dam, which means we have 62,000 tonnes of Triple Zero Green By-product, year-to-date 100,000 tons of Triple Zero Green By-products. In other words, the next target will be to sustain the plant recoveries at the design level, which basically shows global recoveries, including ultrafine losses of 65%. We have three shipments at sales. We have a fourth shipment on the way, sailing at the end of November. Scale will be approximately 20,000 tonnes to 22,000 tonnes on that shipment, which means we're maintaining guidance because amongst all of our products, we're going to hit 130,000 tonnes in equivalent revenues of Triple Zero Green Lithium and By-products. So for a company that just became a producer, getting there, having successfully ramped up, if you multiplied 22,500 by 12, it means we got there. You get to 270,000 tonnes a year. So the plant work, the dry stacking work, tailings of by-products have been successfully commercially sold. There's spectacular demand for that product, given its purity. And in the picture on the right of this slide, you can see the third module, which is something that only Sigma Lithium has managed to achieve. Dry stacking at ultrafines at 12%. So here we are delivering on our promise to make this supply chain a whole lot more sustainable and paving the way for the zero-carbon battery. The next slide shows the resilience. It shows that Sigma can generate cash at the bear of the cycle, at the bare - at the bottom of the lithium cycle. In other words, we have low cost, and therefore, we have been delivering consistent revenues in large volumes, both in by-products and also in the main concentrate. More importantly, as we have one of the lowest costs in the industry, we are able to essentially maintain this operational resilience and generate cash flow, no matter what. So we have in front of you with simulation, hypothetically showing the lithium prices for concentrates reaching 1,500. But because of our low cost, we are able to get to a significant cash generation, both for Phase 1 and also with the expansion. And then you have the by-product credit, which we're keeping separate just for the sake of transparency and clarity. Now why do we have such low cost? Well, basically, because of decisions we made early during the development, we chose the dense media separation, the DMS. And at that, we powered with very, very inexpensive renewable power. So the combination of a simpler processing flow sheet and low-cost renewable power leads us to this spectacular results right out of the gate in our first quarter with financials. So we are clearly extremely proud of what we've achieved here. Another interesting point on the second - on the next slide, we'll show you why. I mean - the product is actually better. So despite us selecting dense media separation, which back in the day seemed like a very unique, riskier selection. We actually made it mainstream again in the industry because it preserved the integrity of the mineralization of the product, and it allowed us to deliver this incredible superior quality. It's visual. When you look at the slide, the next slide, with the quality, we have a unique high-grade, high-purity and coarse-grained products. So you don't even need a laboratory analysis to ascertain that the coarse product is different than the ultrafine that is produced by our peers. And then, it's a much - in the light green color, so purity, so our purity matches [Taliesin] and green bushes. Then you look at the bottom, you have products of inferior quality, which are the powdered product with - loaded with iron oxide and other impurities, sometimes even mica. So it's a picture that says a thousand words. And this product drives cost savings to clients of up to 30%. The next page is a bit more on quality, on low cost and on this tremendous competitive advantage, which translates into commercial success and also on low cost and cycle - lithium cycle resilience as far as generating free cash flow. Essentially, the chemistry of the high purity, the Triple Zero, plus low alkaline, you see low iron oxide, low mica and then low alkaline here, which are low potassium oxide and low sodium oxide. So the product is better, and it's also environmentally competitive, which is an advantage for the European Union-bound batteries. And again, we'll get to it, batteries are produced all over Asia, the cells, and they're shipped to the European Union packing factories. We have a tremendous advantage when supplying to these cell makers in South Korea, Japan, China, everywhere with this product. Why is that? The next slide shows the cost-saving math to clients. We bring significant cost saving to downstream clients. It matters a lot, especially in a tight market, where the downstream is trying to squeeze cost out of the supply chain, specifically on the refiners. So when you look at the slide here, you can see that there's a potential of up to $6,000 per tonne of hydroxide for the downstream, for the refiner, which is part of a downstream supply chain, which is perhaps tolling, which represents a 26% higher margin for that refiner or battery maker that's tolling through the refiner. And that is Sigma. And we've been working with Glencore and their customers to premiumize that product in the market. So even a 9% price of lithium hydroxide, our premium lithium concentrate can drive measurable savings to converters, to downstream in the current market, which is a tremendous competitive advantage on quality, on value in use. I'm stressing that point just to demonstrate how our product comes first because we have a chemical, physical, technical, measurable cost savings and we're delivering the best or the most sustainable Triple Zero lithium product, and we're not charging for it. The environmental zero carbon, zero tailings, low chemicals is for free, right? So it's a fantastic attribute for clients delivering their sales up into the European Union. On this slide here is actually a fascinating exercise that we've produced. In other words, our product will always have demand at premium prices because of the chemical attributes. This chart compares the margins our clients would achieve the efficiencies vis-a-vis buying the competitor's product on spot market. You can clearly see the gains. The spot margin in light green is lower, and Sigma's customer margin, even at 9%, is actually higher. Why? Because the 9% premiumization doesn't capture the full cost savings that the client has. So it's a win-win situation. That's why the demand and acceptance of the product has been so spectacular. I mean, I was in China for almost two weeks. I brought my whole [technical difficulty]

[Operator:]

Pardon me, everyone. It looks like the speaker line has disconnected. Please stand by while we reconnect. Thank you for your patience. Thank you for your patience. We have reconnected with the speakers. Ana, you may please proceed.

[Ana Cabral Gardner:]

Yes. So I got disconnected accidentally. So I was talking through the slides where we have the chart with the demonstrated efficiencies driving demand for Sigma product in any market. And I think basically, wrapping up that slide with that chart, comparing the premium product driving measurable efficiencies for the client, you can clearly see why the clients with the spot - the client today has two choices

[Operator:]

[Operator Instructions] Our first question comes from Joel Jackson from BMO Capital Markets. Please go ahead.

[Joel Jackson:]

Hi, good morning, Anna, everyone. Ana, I think I read in your disclosure that you still expect 500,000 tonnes of spodumene production or sales next year, That will be about double what 20 - what your run rate is now, means - can you talk about the milestone you've got to hit? Because you haven't put the feasibility study out yet for Phase 2, 3. So what do you have to hit? What needs to be in production? How do you have to ramp? How have lessons learned that you can get to 500,000 tonnes of production for next year [Technical Difficulty].

[Operator:]

Pardon me, everyone. It appears the speaker line has again dropped. Please stand by while we reconnect. We thank you for your patience. We have reconnected with the speakers. Ana, you need to proceed.

[Joel Jackson:]

Do you want me to repeat the question again?

[Ana Cabral Gardner:]

Yes. Can you please repeat the question cause I...

[Joel Jackson:]

Sure. I would love to. In your disclosure, you talked about 500,000 tonnes of spodumene production in 2024 to next year. We're there about double the run rate right now. So what has to happen - you haven't put the feasibility study out yet for the expansion. What has to happen for you to ramp up, get in production and get to 500,000 tonnes next year? Maybe you could talk about lessons learned from Phase 1.

[Ana Cabral Gardner:]

Absolutely. Well, we learned quite a lot, as you all know, specifically when it comes to the trans-packing of the tailings, which significantly delayed us reaching nameplate capacity of the production. So we refined that circuit, we learned a lot on flatulation in chemicals that we could use in order to make that circuit very efficient. Again, it's the first circuit in the world, is an innovation, we've pioneered it. But we get it down to a stream now, it's dry stacking beautifully. So that was factored into the new engineering. So I think this was actually a very important learning because all the learnings from actually commissioning this plant and enhancements to the flow sheet, we're going to be - or were factored already on the design. And so we think we are very confident that what we have now is a fantastic flow sheet because it comes battle tested by all the pain and all the lessons we've been through in the commissioning.

[Joel Jackson:]

So what milestones you have to hit? Like would you have to be commissioned - you would have to be commissioned by this state to hit 500,000 tonnes next year? What's the milestone? Maybe walk through that.

[Ana Cabral Gardner:]

We basically - it's interesting because we use the same slash and cut that we applied to Phase 1, even though we don't foresee waiting like April, May, June, July to get to the stride, I mean, because with the dry stacking circuit that works from the get go, we can actually unleash and turn on plant 2, which is the dense media separation, immediately because now we know what is the right flow sheet for actually getting to the 12% moisture, which is the ideal moisture to be maintained in the case that goes into the main brains of the dry-stacking filter and hence, go into the conveyor belt into the dry stack. So that was actually the one black box we had to solve. Again, it's innovation, right? And this is why we've been here as financial sponsors and investors for six years. We promised that to our stakeholders in Brazil, and we delivered it. So we're not going to have that weight anymore. So that cut commissioning significantly. I mean, four months is quite a lot. And then more importantly - yes, more importantly, we also know what the issue is with the water. When we first started this, we didn't realize that the water was actually sewage grade and we had to build a sewage treatment station to actually get the water from the river and remove the solid [pico] residues and make it suitable for the plant. So there is a myriads of lessons here that factor - that we actually incorporated into the design of these two new plants. And therefore, we see a construction time line, giving a lot more streamlined way more than the first construction timeline to be a lot more streamlined, way more than the first construction timetable. And then I think on the bigger picture, when you look at that page, and I can go back to that slide, that is like - if the moderator could please go back to the slide, which is Page 18, visually, you can see that we have to do a lot less industrial site preparation than we had to do for Phase 1, because we built Phase 1 from scratch. So we had to prepare one square kilometers of industrial area, which we don't anymore, given that the fixed Greentech and infrastructure are already here, the piping of six kilometers that brings this water, the sewage water from the river into the treatment stations already here. So a whole lot of what we call industrial site infrastructure here were licensed. As you can see in the expansion, a little square of that slide - again, moderator could go to slide - sorry, Slide 18. That will be very helpful. We're actually tackling the earthworks on faster areas, which, again, to shorten earthworks by four months because we don't have to do any more capture, we don't have to do what we call vegetation classification. There's a whole lot of steps that are skipped because we're going into what we call anthropophytes vegetation area. So a lot of savings, a lot more streamlining. So what is the key piece of the puzzle now that we get all the work teed up, who is going to drive engineering? Because, obviously, each strategic partner, buyer, potential M&A counterparty here has a preference, and we don't want to impose our preferences to them. And given that we're now literally in the last leg of it, there's no point in gun jumping with an engineering company. Promon will be there. That's the Brazilian company that's done a marvelous job, marvelous job in managing over 1,000 people we had on site during construction. So they're the experts of executing on the ground. And then we'll pair them up with an engineering company, which will drive equipment procurement. I mean equipment procurement can be basically concentrated in different parts of the world, depending on the strategic potential acquirer, counterparty of Sigma. And we'll do this together. We'll be here helping the next guardian of Sigma to succeed. That's what we want. The success of the next guardian is the success of Brazil.

[Joel Jackson:]

Just following up on that, and then I'll pass over the baton. But as you talk about the strategic review and you're talking about words like guardian, counterparty, a lot of broad different terms there, how - maybe you can give us a sense of sort of how has the process gone, the range of bids, the range of kind of plans or proposals? And how are you managing this in an environment of, okay, yes, lower lithium prices, but it's a commodity, things go up and down, people can now handle that? How do you manage it in a time of clearly lower lithium multiples in the industry across the year?

[Ana Cabral Gardner:]

Look, this screen is not a benchmark for a strategic buyer. I mean it's sort of they don't think quarters, you don't build a resilient business on a quarter-to-quarter basis. I'll give you an example. When it gets to 2028, it isn't like someone is going to appear two quarters earlier and say, oh, now I need to figure this out. I mean these discussions are happening now. Battery test for Euro 2026 is a reality, and it affects battery makers all over the world. Batteries made in China - cells made in China, cells made in Japan, cells made in South Korea, cells made everywhere are affected by it. So there's going to be a lot of lithium needed into the materialization of the plan of some of these giga factories that have been announced and are being built all over or are operating right now. I mean, so ultimately, it's 2024, practically speaking. So the plans for the remainder of this decade, which is a decade of lithium, are happening as we speak. And I mean, I'll give you an example. CATL announced this year in the Shanghai Auto Show that they're going to deliver the zero-carbon battery. They will be zero carbon in '25, zero-carbon battery comes in 2035. That just shows that this is a global concern. It isn't something that just affects the Western because as you all know, CATL supplies the world. So this is a global conversation. And what is Sigma? And just - let's leave commodity cycle aside for a moment because, again, we demonstrated that we'll thrive, no matter what, right? Sigma is a company that has a clean shareholder registry. There's not a single strategic year. It's basically financial investors with a financial sponsor, so we can deliver a transaction without the interloping that's been plaguing recent strategic movement. Two, we have an encumbered, sizable thousands - hundreds of thousands of units, which means we are easily integratable for massive top line M&A synergies. So we are almost like the perfect target. And we are in a country that is extremely welcoming to mining. The population wants it. We actually managed to demonstrate that there's a new model for the industry of mining processing to be followed in terms of lifting the people and sharing prosperity and not being less profitable. I mean, come on, we posted a profit, right? So I think we represent quite a lot for the industry. So this is just a long way to say that the process is going incredibly well. And I can't say much more, given sort of the imminence of it, right? The release is very self-containing.

[Operator:]

[Operator Instructions] We have a question over the webcast from [ Marcelo ] at Everest Capital. Good morning, everyone, and congratulations for the results. Does the company expect EBITDA margins and net margin to improve over the next few quarters? Does the company expect net margin to reach 75%, as reported in institutional presentations?

[Ana Cabral Gardner:]

We do. We do. And I think it's part of the process of leaving this period of commissioning. You can tell by the bridge of EBITDA we posted on the institutional presentation on our website, the further we move, the less clouded by nonrecurring items our financials become. So we will become more streamlined and more clear the ability to deliver superior margins. Obviously, that we need to - we're now showing simulations against a price backdrop that has gone down, and that obviously affects our margins, right? So when you - we were not running in so many at $1,500 per tonne of Triple Zero lithium concentrate. We are achieving right now 1,800, 1,900, this was the price for shipment calculation using the formula on spot hydroxide of 23,000. But again, what we are trying to show is that we are profitable - structurally profitable because our cost is so low. We're well below the marginal cost required for the industry to meet the supply expectations of demand. Even when you look at softer demand backdrop, even when you look at what we call the full bear cave, we're always going to be here. We're going to make more profit, less profit, it's a commodity after all. But we are resilient to cycles, and that's what makes Sigma very special, a fundamental asset, fundamental company here. We're here, no matter what. So we are the super major in volume that has managed to keep costs very low. And I think connects to the previous question. Going forward, as we expand, our cost will go down because the G&A is a bit of what happens to Taliesin. They're so big, the G&A gets diluted over. They are now at 1.4 million tonnes of concentrate. So it's a giant number, that is about 5x our size. So we're tripling. So the more we increase the scale of production, the less the G&A matters because it gets diluted down. So when you look at the fundamentals of the cost, it just gets better by simply basically diluting down the fixed cost over a larger number of units, right? So essentially, this is actually the demonstration of the resilience of the business. I mean we can expand confidently because the costs actually decreased.

[Operator:]

There are no more questions in the queue. This concludes our question-and-answer session. I'd like to turn the conference back over to CEO, Ana Cabral, for any closing remarks.

[Ana Cabral Gardner:]

Well, I want to really thank all of our investors that have believed in us, that have stayed with us. We have a very steady roaster of top investors that have stayed with Sigma over the cycle, almost right financial sponsors that we are. And the fundamental investors, you have seen through the value. And what we are hoping to do is to reward them beautifully with the execution, the flawless execution, the strategic vision, the execution of the strategic review. We do see Sigma as a key instrumental player in the global lithium industry, a real force for good because we brought the conversation of zero carbon, zero tailing and environmental sustainability and social sustainability in lifting the people and achieving social goals, achieving climate goals while delivering sheer profitability on the metrics, while delivering an incredibly profitable and incredibly resilient business. So it has not affected us at all to be the most sustainable lithium company in the world as far as metrics, which shows the way forward for the industry. It's a matter of will, right? It's a matter of cost discipline, operational efficiency. And then you become where we are, which is the bedrock of the zero-carbon battery. So we're very, very proud of this quarter. We're very, very proud of being profitable in the first operating revenue quarter, and that's thanks to you all into your unwavering support over the years. So I'm very honored to have the investor base that I have. And with that, I'll close my remarks.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.