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Edited Transcript of LTHM.N earnings conference call or presentation 11-May-20 9:00pm GMT

Q1 2020 Livent Corp Earnings Call

Jun 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Livent Corp earnings conference call or presentation Monday, May 11, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Rosen

Livent Corporation - IR Manager

* Gilberto Antoniazzi

Livent Corporation - VP, CFO & Treasurer

* Paul W. Graves

Livent Corporation - President, CEO & Director

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Conference Call Participants

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* Christopher John Kapsch

Loop Capital Markets LLC, Research Division - MD

* Christopher S. Parkinson

Crédit Suisse AG, Research Division - Director of Equity Research

* Dylan Scott Carter Campbell

Goldman Sachs Group Inc., Research Division - Research Analyst

* Joel Jackson

BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst

* Kevin William McCarthy

Vertical Research Partners, LLC - Partner

* Michael Joseph Harrison

Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst

* Prashant N. Juvekar

Citigroup Inc, Research Division - Global Head of Chemicals & Agriculture Research and MD

* Steve Byrne

BofA Merrill Lynch, Research Division - Director of Equity Research

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Presentation

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Operator [1]

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Good day, and welcome to the First Quarter 2020 Earnings Release Conference Call for the Livent Corporation. (Operator Instructions)

I will now turn your conference over to Mr. Daniel Rosen, Manager, Investor Relations for Livent Corporation. Mr. Rosen, you may begin.

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Daniel Rosen, Livent Corporation - IR Manager [2]

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Thank you, Tina. Good evening, everyone, and welcome to Livent's First Quarter 2020 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. The prepared remarks from today's discussion will be made available after the call.

Following our prepared remarks, Paul and Gilberto will be available to address your questions. We would ask that any question be limited to 2 per caller. We will 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 release and in our filings with the Securities and Exchange Commission.

Information presented represents our 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. Definitions of these terms as well as a 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.

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Paul W. Graves, Livent Corporation - President, CEO & Director [3]

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Thank you, Dan, and good evening, everyone.

There are a few key topics we want to address today, all of which will be discussed in the context of the novel coronavirus pandemic and its current and potential future impact on Livent. Before doing so, I would like to give a special thanks to all of our Livent employees around the world. Their hard work and resilience have allowed us to maintain a safe and healthy working environment while continuing to operate and serve our customers. We have asked a lot of them and truly appreciate their focus and commitment during these challenging times for us all.

To begin, we're pleased to state that all of our production facilities around the world are fully operational. Apart from a 2-week stoppage in Argentina due to a mandatory national quarantine and an extended lunar year break in China at the beginning of the COVID-19 outbreak, all of our sites have continued to operate, albeit with additional health and safety protocols. Our ability to operate through the pandemic has been a testament to the strong and dedicated teams we have in place around the world.

Second, as the coronavirus began to spread outside of China, it became clear to us that the potential impact on our business as well as the broader market would require us to take a more disciplined approach to cash flow management and liquidity. In March, we made the decision to suspend all capital expansion work globally. This action allows us to cut our forecasted capital spending in 2020 by half to approximately $115 million. While we remain fully committed to our long-term capacity expansion plans, temporarily suspending all capital projects was the prudent decision to take in the current environment.

In addition, we worked closely with our relationship lenders to amend our credit facility and increase our maximum allowed net leverage to 6x EBITDA through 2020 versus 3.5x previously. We believe this amendment to our revolver will provide ample liquidity through the challenging near-term environment. Gilberto will provide more details in his comments.

And third, we will share our latest views on the lithium market, specifically what the coronavirus pandemic has done so far, what we expect the impact to be in 2020 and the potential longer-term implications.

Starting on Slide 3 of our prepared slides. Given Livent's presence in China and Asia more broadly, we've been addressing the coronavirus outbreak since early February when we formed a regional pandemic response team and implemented various actions to keep our employees safe. By taking decisive early steps and diligently monitoring the situation, we were able to safely resume operations in China following the extended Lunar New Year holiday. This early start also meant we could react quickly and confidently at our sites outside of China once it became clear that we needed to do so. We've maintained the same safety protocols today and have been able to run without any major issues in China since then. Even during the period when there were significant logistical challenges in moving people and products across provincial borders in China, we were able to leverage our global supply chain to minimize disruption in delivering products to customers.

Informed by our experience in Asia, Livent was able to quickly form a global pandemic response team in early March when the worldwide spread and severity of the virus became clear. Since then, we continue to prioritize the safety and well-being of our employees, customers and communities around the world.

We also took actions to safely keep all of our manufacturing sites running. Many of the lithium products we make are essential, not only in energy storage, but in critical applications that the world needs now more than ever, from pharmaceutical ingredients and industrial disinfectants to components used in vital medical equipment. To ensure that we could continue operations without compromising on health and safety, we worked closely with local and national authorities and our employees to develop and institute strict procedures on a site-by-site basis. These include visitor and medical screenings, essential person designations, split shifts and social distancing measures.

Our collaboration with the provincial and federal officials in Argentina during the mandatory countrywide quarantine reflects Livent's level of preparedness and commitment to responsible operations. We worked closely with the Argentine government to develop and administer a safe and practical set of protocols to resume local operations after only 2 weeks of downtime. Since then, we've been operating at the Salar and our processing facilities without incident.

We've also used this pandemic as an opportunity to further engage with and support our local communities. From donating personal protective equipment in the U.K. to providing support for medical personnel and ambulance services and essential air transportation in Argentina, we are grateful to be in a position to help those in our communities.

Now on to the current impact of COVID-19 on the lithium industry. I will attempt not to speculate too much but will instead focus on what we are actually seeing today. First, there is reduced visibility in our ability to forecast near-term lithium demand and by this, I mean the remainder of 2020. A large part of this can be attributed to the broad disruption to the auto market and the implications of prolonged OEM plant shutdowns.

World passenger vehicle sales declined by 24% in the first quarter. And while electric vehicle penetration rates have been notably higher, total volumes were negatively impacted.

The timing, duration and overall impact of the coronavirus has also varied greatly by region. For example, in the final week of April, Chinese retail auto sales improved to roughly flat year-over-year after being down as much as 40% early in March. Further, China's new energy vehicle sales surged just over 300% month-over-month to 53,000 units in March, despite being down roughly 55% year-to-date versus last year.

Meanwhile, many OEM plants in Europe and the U.S. remained shut down due to government restrictions, with the second quarter expected to be the most impacted. Just as important, the average consumer is clearly not spending at anything like pre-COVID levels, and this is especially true for larger items such as autos.

It is difficult to predict how quickly consumer spending will rebound or when manufacturing and supply chains will return to prior levels of activity. While we remain in close contact with customers regarding volume needs for the remainder of this year, it is still unclear whether some demand will be recovered in the second half of 2020 or pushed out further. This is amplified in an environment where there is understandably more focus on managing working capital than building inventory at our customers.

Delays in restarting manufacturing plants may result in upcoming electric vehicle launches being delayed by several months. However, from a fundamental standpoint, we have not seen any evidence of OEMs pulling back from their electrification objectives or substantially altering their lineup of EVs for launch. In fact, we've seen certain OEMs use this as an opportunity to engage more directly on key aspects of their electric vehicle supply chain, from taking a greater interest in the location of sourcing and manufacturing sites to setting more stringent standards for quality and sustainability.

With a heightened focus on managing capital and R&D spend, we are seeing OEM development efforts go towards platforms that will be attractive and sustainable over a long period of time. Put another way, we see OEMs allocating their own scarce resources towards future EV platforms rather than historical ICE technologies or projects within certain commercial models, such as autonomous driving.

Moving to the lithium market, we entered this year in a general state of oversupply, albeit with a wide range of quality capabilities on the supply side. The near-term slowdown in demand driven by the coronavirus put additional downward pressure on pricing. This was particularly evident in shorter-term uncontracted markets such as China, which was fed by a continued oversupply of spodumene concentrate, especially that shipped in prior quarters, which has been sitting in China waiting to be processed.

There was also little urgency from customers to take their share of annual volume commitments in the first quarter or enter into new agreements given the broader market uncertainty. We expect this dynamic to continue through the middle of this year as customers resume production and work to assess the impact on their own near to medium-term end market demand.

Last quarter, we discussed industry-wide postponed or canceled lithium capacity expansion projects as well as announced output reductions as a result of weaker pricing. This trend continues with sustained lithium pricing pressure and near-term demand weakness due to the coronavirus. Production declines to date have still been relatively modest, reflecting the incentive for many higher cost producers to continue covering their cash costs in the hopes of remaining in operation until the market improves. However, we believe this is not feasible over an extended period, and we expect to see further reductions in production in the coming months.

Additionally, there have been challenges for lithium products already in development, with coronavirus-related supply chain and government restrictions further delaying the time expected to bring them into production.

More importantly, though, the growing number of canceled or postponed expansion projects will have broader implications for the industry as we move beyond 2020. These announcements have come from all geography and resource types as well as new and established industry players. In aggregate, we have seen over 400,000 tons worth of expansion delays or cancellations in both lithium carbonate and hydroxide over the last few quarters. Current lithium prices have severely challenged any reasonable investment return hurdles, and several notable distressed lithium assets have illustrated the limited and nonexisting financing options in today's market.

While near-term lithium demand forecasts have significantly widened due to the current uncertainty in the market, positioning from governments and global OEMs continues to support demand levels in 2022 and beyond that have not materially changed from prior expectations. So as demand picks up, as the global business environment normalizes and electric vehicle production accelerates, we believe there will be a much more rapid tightening of the supply-demand balance than we would have predicted just a few months ago.

I will now turn the call over to Gilberto.

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Gilberto Antoniazzi, Livent Corporation - VP, CFO & Treasurer [4]

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Thank you, Paul, and good evening, everyone.

Turning now to Livent's first quarter performance. For the first quarter of 2020, we reported revenue of $69 million, adjusted EBITDA of $9 million and adjusted earnings per share of $0.02. Our results reflected a challenging operating environment for both Livent and the lithium industry as a whole.

The decline in revenue was driven by lower sold volumes, most notably in China, and lower average pricing. There were some deferred purchases from customers as they work to limit inventory buildup while assessing the impact of the crisis on their end market demand.

Margins were impacted by lower pricing and hydroxide sales using third-party-purchased lithium carbonate. We expect the margin impact from hydroxide sales using third-party-purchased carbonate to be notably higher in the first half of this year as we work through the roughly 4,000 metric tons of hydroxide inventory carryforward from 2019.

Moving now to Livent's liquidity position. As Paul mentioned earlier, when the coronavirus began to spread outside of China, Livent recognized the inherent uncertainty impacting the global economy and the need for an increased focus on liquidity and cash flow management.

Our first public action was in March when we announced the suspension of all capital expansion work globally. We cut projected capital spending for 2020 in half to approximately $115 million, reflecting the decision to pause expansion work in both Argentina and Bessemer City, North Carolina.

Quarterly spending for the rest of the year will come down significantly from the first quarter. The decision to halt expansion was not made until well into the first quarter. And since then, we have been focused on stopping key project items at strategic points that will allow us to resume work as quickly and cost effectively as possible.

We remain confident in continuing to fulfill orders from our customers in the interim and remain committed to our long-term capacity expansion goals. While we cannot currently provide a specific date for when we intend to resume expansion work, it's unlikely it will be before the industry returns to more normalized conditions.

Moving to Slide 8, with respect to our balance sheet. We work closely with our relationship with lenders to amend Livent's existing facility to provide sufficient liquidity to support operations during this time of uncertainty.

We have increased the net leverage covenant limit on our revolver, allowing for up to 6x EBITDA through 2020 versus 3.5x previously. This higher leverage limit provides a safeguard against COVID-19 stress-case scenarios that we have evaluated. We will also remain focused on reducing spending in all nonessential areas while diligently managing working capital.

Looking beyond 2020, we continue to work with our lenders to evaluate alternative debt structures beyond our existing $400 million revolver maturing in 2023 that better supports Livent's long-term capital requirements.

To conclude my remarks, I want to address the topic of guidance. In light of the evolving impact of coronavirus pandemic and the broader uncertainty in the global economy, Livent withdrew its previous issued full year 2020 guidance in early April. Following the 2 weeks of stoppage in Argentina, we now expect lithium carbonate production volumes to be flat in 2020 year-over-year.

We plan to sell all 4,000 tons of hydroxide inventory that we carry into 2020, and we run our hydroxide operations this year with the intention of meeting all customer demand while minimizing third-party carbonate purchases. We will not look to build any inventory in speculation of a rebound in demand. We intend to provide an updated financial outlook once we have a greater visibility.

With that, I'll turn the call back to Paul.

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Paul W. Graves, Livent Corporation - President, CEO & Director [5]

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Thank you, Gilberto.

I want to conclude by looking beyond the near-term challenges to focus on some of the longer-term themes that continue to hold true in our industry. While there is uncertainty around near-term lithium demand and the implications of a coronavirus-led downturn on electric vehicle sales, there's no indication that the longer-term push to electrification has meaningfully changed.

We do not believe the key fundamentals that are driving the shift to electric vehicles have changed. These fundamental drivers, through the strong regulatory support around the world for cleaner air and to fight climate change as well as advancements in battery technology and increased manufacturing scale that will bring EVs towards cost parity with internal combustion engine vehicles.

In another display of commitment to the industry, the Chinese government recently announced that new energy vehicles bought in 2021 or 2022 will be exempt from federal purchase taxes. The government also extended the NEV subsidy program through 2022 from its previous 2020 expiration, although it is stepping down subsidies over that time frame.

And in Europe, despite auto sales being down significantly year-to-date, EV penetration rates are at all-time highs as we move closer to CO2 emission compliance dates. The shift to increased use of lithium hydroxide also continues in both the cathodes of electric vehicles and energy storage more broadly. With respect to high nickel cathode technologies, which require lithium hydroxide, there has been an increased focus on chemistries beyond NCM 811. Additional developments and success have come from the use of NCA, NCMA and other blends incorporating higher nickel content.

There have been recent announcements of several new electric vehicle models in China using LFP-based cathodes. However, higher use of this legacy cathode, which can use carbonate or hydroxide, is in no way contradictory to the trend of higher hydroxide demand. We have always stated that not all energy storage applications will have performance specifications requiring high-nickel cathodes. This can include shorter range in commercial vehicles, mobile devices or stationary storage applications, to name a few.

As battery technology continues to improve and premier global OEMs roll out larger electric vehicle platforms, we still project that hydroxide demand will grow at a higher year-on-year rate than carbonate and make up an increasing share of the energy storage market. With that said, we continue to operate and plan under the assumption that both products will be of critical importance for long-term energy storage solutions.

Finally, given the significant reduction in announced development and expansion plans, there is greater uncertainty over where the supply of lithium to meet future demand will come from over the medium to long term. While near-term demand uncertainty is the current issue that most industry players are focused on, the debate will ultimately drawn back to supply. And this period of depressed lithium pricing over the last few quarters has made clear the challenges that the current industry-wide business model is creating for the future of our industry.

As auto OEMs have become more directly involved in the electric vehicle supply chain, there has been a heightened focus on ensuring that not only our supply partner is fully integrated between lithium chemicals and resource, but there is a path to increasing capacity to meet higher qualified demand needs over time. However, at current average market prices, and by that, I mean the blended prices across all geographies, not just the unsustainably low prices we see in the China market, there are little to no lithium development projects out there that can be considered economically viable when looking for a reasonable return on invested capital. In fact, at these prices, the majority of lithium products do not even cover their cost of capital. In order to ensure that lithium supply continues to grow and keep up with accelerating future demand, there must be greater predictability in pricing or firmer long-term commitments from customers before our industry can start to invest for growth again.

In addition, OEMs have placed greater importance on where their lithium is being produced for a number of reasons. The disruption to global supply chains from the spread of the coronavirus has reinforced the importance of not being reliant on a single region to meet supplier needs and the benefits of localizing parts production.

China and greater Asia represent a significant portion of the energy storage supply chain today. So the impact on the lithium industry has been more visible from the onset of the pandemic. Livent's ability to serve customers with lithium products from a global manufacturing network, with hydroxide from both the U.S. and China, as well as the security of supply that comes from our ability to use third-party material in our hydroxide production, has been particularly valuable to our customers. And while most recent lithium compound production capacity has been built in China due to lower capital costs, the importance of alternate EV supply chains that do not run through China is growing.

The localization element of OEM focus is also rooted in sustainability objectives, and we expect this to be magnified as EV models are rolled out on a larger scale and especially as the number of electric vehicles sold in Europe increases. And with carbon-conscious principles in part behind the transition to electric vehicles, we believe there will be a bigger push to reduce the carbon-intense practice of shipping unfinished raw materials or intermediate products to multiple locations around the world. Livent has been sharply focused on its own global footprint as a stand-alone company since the time of its IPO. As part of these efforts, we will be launching our revised sustainability program as well as outlining our broader ESG framework as part of a series of releases to be provided throughout this year.

In closing, as Livent looks beyond current market conditions, we believe that our core advantages, the low-cost and sustainable nature of our brine-based operations, our partnerships with leading battery producers and automotive OEMs and our continued investment in developing next-generation engineered lithium products, position us to be a prime beneficiary of the return to improved lithium market dynamics.

I will now turn the call back to Dan for questions.

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Daniel Rosen, Livent Corporation - IR Manager [6]

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Thank you, Paul. Tina, you may now begin the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question is from Bob Koort with Goldman Sachs.

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Dylan Scott Carter Campbell, Goldman Sachs Group Inc., Research Division - Research Analyst [2]

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This is Dylan Campbell on for Bob. Last week, one of your competitors noted that second quarter, as battery manufacturers catch up on backlog orders that will be somewhat insulated and most of the impact from the shutdown of OEMs would hit the second half of 2020. Are you seeing something similar?

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Paul W. Graves, Livent Corporation - President, CEO & Director [3]

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Look, it's a complicated question because ours is not an industry where all the dynamics are the same amongst all customers. There has certainly been an issue in our industry of a shortness of finished materials in the supply chain. I mean we've seen many conversations about not enough battery cells being available. But it's not as simple as just simply using this downtime to build more capability. We've seen certainly battery factories close down because of the coronavirus in the U.S., in large parts of Asia at times as well. And that certainly had an impact.

We have also seen some tension between the ultimate consumer, the OEM who is buying these products, who start to look at their own cash flows, not being particularly willing to fund a buildup of inventory back to the supply chain. So while, yes, we have seen that trend at work, we've certainly seen battery producers take the opportunity to build some inventory, I'm not sure that it's a particularly sustainable practice that will continue for much -- really more than a couple of months in the current environment.

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Dylan Scott Carter Campbell, Goldman Sachs Group Inc., Research Division - Research Analyst [4]

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Got it. And could you talk a little bit about the options regarding your evaluation of alternative debt structures? And then, I guess, is there a pathway for some type of agreement with some type of downstream player?

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Paul W. Graves, Livent Corporation - President, CEO & Director [5]

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Let me talk about the debt piece first. Look, we're at the very early stage of this, but it's clear, using a revolver where -- with covenant restrictions, it really wasn't designed for long-term capital projects. Look, frankly, it was never designed to be the permanent capital structure that we wanted to put in place. And I think what we're seeing now is, look, they're just going to have to accelerate the process of putting in a debt structure, this makes more sense for a business with the capital and financial profile of ours. We'll focus much more on longer duration and greater certainty around that, less liquidity challenges to what we do from the debt profile. And the second part of your question, maybe you could just clarify what you're asking me there.

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Dylan Scott Carter Campbell, Goldman Sachs Group Inc., Research Division - Research Analyst [6]

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Yes. I mean I guess, is there any type of pathway for repurchase of lithium product or some type of agreement with downstream EV or battery producer, given kind of the emphasis of securing supply for the future that you were referencing?

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Paul W. Graves, Livent Corporation - President, CEO & Director [7]

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Yes. Look, it's an interesting question. The challenge you have with that is if you're a downstream consumer or a downstream producer, you have some pretty significant calls on your capital yourself, right, whether that's to expand, whether that's to fund new technologies, whether it's to build new battery plants. And so while you can certainly look around and see the logic to that, and we can look at some very large consumers of lithium, it's also sometimes a little difficult to understand whether the right thing for them is to deploy capital in this way in order to take the price of the lithium down. Or is it better to, frankly, just allow the lithium industry to finance itself by offering greater price certainty and more investable economics at those prices. And I think the jury is still out on that.

I think while ever we keep having these demand disruptions, while ever things like COVID-19 are going on and while ever our industry is overbuilding on the supply side, it's a conversation that can be pushed further down the street. At some point, there's going to have to be a reckoning for anybody who wants growth in the lithium industry, you're either going to have to provide capital to an industry such as ours or you're going to have to provide prices that are high enough to enable us to go out and get third-party financing. And I think I'm not sure we're in a place yet where either of those is quite ready to happen. But one of them will, for sure.

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Operator [8]

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Our next question comes from Chris Kapsch with Loop Capital Markets.

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Paul W. Graves, Livent Corporation - President, CEO & Director [9]

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Chris, if you're there, we can't hear you.

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Daniel Rosen, Livent Corporation - IR Manager [10]

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Why don't we move on to the next question?

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Operator [11]

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Your next question is from Chris Parkinson with Crédit Suisse.

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Paul W. Graves, Livent Corporation - President, CEO & Director [12]

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Chris, are you there?

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Operator [13]

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I believe we may be having a technical issue, one moment.

Okay. Chris Kapsch, can you try to speak? Your line is open.

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Christopher John Kapsch, Loop Capital Markets LLC, Research Division - MD [14]

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Yes. It's Chris Kapsch.

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Paul W. Graves, Livent Corporation - President, CEO & Director [15]

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Chris, we can hear you now. Great.

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Christopher John Kapsch, Loop Capital Markets LLC, Research Division - MD [16]

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Sorry about that. I don't know what's going on. So I don't -- I was blanked out for like 15 minutes. So apologies if somebody's addressed this already. But so one of your larger integrated lithium competitors characterized the industry demand curve as having pushed to the right. You mentioned like you see the fundamental drivers as very much in place. So maybe we're just talking about semantics here, then maybe focus a little bit just more on near-term disruption. Would you concur that, like at least near term, that the demand curve has pushed to the right? Or do you feel based on your insights with your relationships that it's business as usual?

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Paul W. Graves, Livent Corporation - President, CEO & Director [17]

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I would never disagree with such a large and eminent competitor of mine on such matters. I think there's -- the shape of the curve is different today for sure. I don't know whether it's pushed out a year, 8 months, 16 months. I just don't have enough data to point to that. I've characterized 2020, sometimes I've heard it characterized by others, and I think it's a valid one, is will 2020 turn out to be a bit of a lost year and it will kind of skip a year of growth in 2020. I think that's an absolutely plausible scenario, although, again, it's just too early to really see because it's hard to know because the back end of this year is going to largely be driven by how people feel about the first half of 2021 and maybe even the second half of 2021.

What we have heard, though, is generally speaking a quite vocal commitment to '22, '23 and beyond volume commitments by some of our customers. So while they're saying, look, we may be a little delayed in taking material, you should not assume that we will want any less material by the time we're into 2022 because I think most of them think that they are just going to be under just as much pressure to launch these EVs. It's an interesting dynamic that when they are capital-constrained, they look down all of their own projects and say, where do we deploy this capital?

And it becomes increasingly clear to us that they're saying, look, electrification has to happen for whatever reason, and us changing our spending or reinvesting in internal combustion engines or putting a lot of capital towards maybe less in revenue generators like autonomous driving maybe aren't the right things to do right now, when we should be doubling down on where the future inevitably lies, which is electric vehicles. And I think that's what probably -- while they're looking at their near-term patents, obviously, the plants are closed in many cases, I think they're starting to realize that it probably accelerates their portfolio transition even more rapidly towards a predominantly electric fleet.

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Christopher John Kapsch, Loop Capital Markets LLC, Research Division - MD [18]

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Got it. And then the curtailment of your -- the halting or suspension of your CapEx expansion, how do you feel about fulfilling those demand requirements, which you just mentioned, albeit more pushed out maybe a little bit in terms of the ramping of their demand, assuming it happens, generally to the magnitude that you're referencing in sort of 2022 time frame?

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Paul W. Graves, Livent Corporation - President, CEO & Director [19]

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Yes. It's maybe the single largest question we asked ourselves. I'm going to put the capital piece and the ability to finance piece to one side one moment. But from a pure construction and engineering perspective, there's 2 elements to what we've been trying to do. Build on more carbonate -- bring on more carbonate in Argentina and then line up the hydroxide expansions with that, either at the same level or maybe a little bit behind to go a little bit longer carbonate. I think one thing that we're looking very closely at right now is, while Phase 1 in Argentina clearly is now delayed, are there opportunities for us to combine Phases 1 and 2, so that we still get -- instead of 9,000 tons and then a year is too late, another 9,000, 10,000 tons, we try and bring it all on at once.

And so that we have a bigger step-up in a single go than trying to do it in smaller increments. And we're taking a long hard look at the practicality of that. It's difficult today, frankly, because we're doing this in Argentina. Argentina is in largely in a complete lockdown. There's no movement between provinces. It's difficult to move people around. You can't -- certainly can't fly in and meet people. So we have to sort of get through this short-term restriction on our activities so that we can start to ramp up. And then we can start to answer the question now what does the shape of the expansion look like? We will certainly expand and our plans haven't changed. But again, just like the demand curve, it's quite likely to take on a different shape.

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Operator [20]

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And our next question is from Chris Parkinson with Crédit Suisse.

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [21]

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Great. You hit on this a little, but can you say a little bit more about just kind of the net effect on the cost curve, just given the magnitude of the expansion deferrals which, honestly, it's been going on for quite some time now, basically almost a year. So you've seen a lot of things so you kind of keep it down to the right. And if you could hit on that in the context of both carbonate and hydroxide and just how you believe regard -- your beliefs in product quality should also play in your estimates. Just where do you see the current cost curve? Forget 2020 but for kind of '21, '22, how has your thought process changed around that?

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Paul W. Graves, Livent Corporation - President, CEO & Director [22]

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Thanks, Chris. I'm not sure our thoughts on the cost curve have really changed that much, if I'm completely honest. I think you really got and continue to have, in both carbonate and hydroxide, 2 very different producers. You have a fully integrated producer and then you have a nonintegrated producer. The nonintegrated producer today is able to take advantage of some very -- in my view, of this very low spodumene prices. When you look at spodumene prices at $400 and $450 a ton, and you look at some of the miners out there, with the exception probably of Greenbushes, nobody can produce close to that level continuously as they move through different parts of their mines.

And so really, the profit pressure has been on the raw material, and there's no reinvestment economics at these prices at the spodumene mine. I personally find it fascinating that in an environment where a nonintegrated producer has had its single biggest input cost fall by 50% from over $800 to $400 a ton, they've also allowed their profitability to fall at the same time because there's been a desire to bring on conversion capacity in China. But what you find is that's a heavily leveraged play on the spodumene cost and other frictional costs.

We've also found, because of the way that they are operating, they find it increasingly difficult to meet tightening and tighter quality standards that are being imposed upon them as we move through these next-generation of batteries. And so we found it become more and more clear as we've been through the last 6 or 9 months that really the usual crew of 2 or 3 or maybe 4 people are actually getting qualified remains the case. There are very few customers that we've seen, new entrants come in and successfully qualifying their material, whether that's in carbonate, but especially in hydroxide.

The second point that I think people have to understand, I mean, we see lots of commentary on a cost curve, but that cost curve is always a marginal cash cost curve that people look to. But if you look through the commentary from various producers or you frankly just sit down and do the math yourself, the breakeven price of production is typically about 50% higher than. And when I say breakeven, I mean to report operating profit of 0 because by the time you put in depreciation, by the time you brought in the distribution logistics, duty, freight as well as corporate costs that we all bear, you need about 50% higher to break even at an operating profit level, which may sound, okay, that's still a low price. You can't finance with 0 operating profit.

So that's fine if you're just going to run your assets and do nothing more, not grow, not expand. But now you need to earn more than that to cover your interest expense, et cetera. So when we look at the curve, we're trying to define a curve that's appropriate for reinvestment, a reinvestment level that's in line with the demand patterns that our customers and independent observers keep telling us we're going to need. And I think what you find is you've sort of got an all-in cost that the marginal producer needs to hit that is well in the double digits per kilo of either carbonate and especially of hydroxide, and that's, again, assuming they can meet the quality requirements. So it's not so easy as maybe an iron ore or copper just building a simple cost curve because it's a very, very fluid market and have multiple steps in it that can distort it depending on the conditions of any one of those steps.

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [23]

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That's very helpful color. Just understanding, obviously, you can't give your guidance, but you did hit a little on your thought process regarding combining the phases of projects. Just from the top down, just given the current scenario, what would you kind of view as kind of your base case scenario in terms of your expectations for getting back on track? And what would be kind of a disappointing scenario from your perspective, just very broadly, and what that would mean for your own cash flow projections?

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Paul W. Graves, Livent Corporation - President, CEO & Director [24]

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So when you say -- Chris, when you say getting back on track, were you talking about with the Argentina expansion? Or...

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [25]

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Correct.

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Paul W. Graves, Livent Corporation - President, CEO & Director [26]

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Okay. Yes, yes. Well, look, we're a long way through the first phase of expansion in Argentina. And the first thing I would say is we cannot do anything in Argentina. We're not permitted to do any construction. We're not permitted to have people out there working. And so we have not only stopped, but we've actually started the process of demobilization of projects from the Salar. So when we do start up, it's not just going to be flicking a switch. We're going to have to go through the whole process of remobilizing. It's clearly not going to happen in the southern hemisphere winter. And frankly, until we get greater clarity about 2021 and what our level of profitability in 2021 is going to be going to be, it's going to be hard to convince anybody to extend capital to us on normal commercial terms in order to allow us to start that back up.

So I expect that the decision is more likely to be made in the back half of 2020 and early 2021 than it is in the next couple of months. If we can successfully reengineer the product -- or the project, I would expect that it will still take us more than a year, well more than a year, possibly double that to bring the extra volume online. That will though mean that we're bring a lot more on when we do it. But right now, it's a highly uncertain environment. I think to ask me what will I be disappointed by, I'm disappointed already. I'm disappointed that we're in this place. I'm disappointed that we're not able to continue. Our Argentina operations remain one of the lowest cost producers of lithium product in the world. And it's just disappointing to me that we've had so many external factors that have created these problems for us with that expansion.

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Operator [27]

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Our next question is from the line of Kevin McCarthy with Vertical Research Partners.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [28]

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Paul, I was wondering if you could run through your portfolio of lithium products and comment on what you're seeing here today with regard to demand for a, hydroxide; b, butyllithium; and c, lithium metal. And what are the similarities and differences in the patterns there?

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Paul W. Graves, Livent Corporation - President, CEO & Director [29]

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Sure. I mean lithium metal is still a very small business today. It's used in a couple of small applications that are just fundamentally different, right? Most of the high-purity metal that we sell is going into nonrechargeable lithium-ion batteries. And again, it's a small business. The butyllithium business, as I'm sure you know, is a much more diverse application business, but it is largely a GDP-driven business. It's largely a general industrial business. But it's also a product that, frankly, customers don't hold any inventory of for very good reasons. And so there's not a lot of slack in the system that while ever people continue to produce and when people are producing pharmaceuticals and are producing rubber products for medical devices and other areas, we've certainly not seen major, major issues or major, major indications that demand is going to be lower this year in the butyllithium business.

We have seen some noise in the automotive tire space, driven by plant closures. But even there, they've really been relatively small. So that's a business that's, frankly, so far, and I stress so far because it feels to me still very early in 2020, has held up reasonably well. Lithium hydroxides, look, I think it's a frankly more complicated business. What we've seen is continued commitment towards many of the battery platforms that we're talking to our customers around. But frankly, what I might call a reluctance on the part of the battery producers to pull the trigger and get on with the building process and place the orders for the product because I think they themselves are still waiting for guidance and some leadership from the automotive OEMs about how aggressively they should go with their build-outs.

It's certainly not -- it's not a market today where you look and see a tightening of supply and demand. But again, that's probably as much because the demand side feels so distorted right now, especially because we have such a big drop-off in January, February time with the COVID in Asia. And now we're starting to see a pickup again while the rest of the world slows down. It's very difficult to read the hydroxide -- energy storage hydroxide market at the moment.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [30]

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My second question relates to potential for industry consolidation. You've probably seen press reports out of Australia indicating that Tianqi made divestiture stake in Talison. If you look out over the next few years, do you think that the industry needs to consolidate? And if you do, what does that path look like? As I look at it, the incumbents aren't exactly swimming in pools of excess capital. Energy companies are constrained. Do you think new entrants will come in and catalyze the process? Or how do you think it will play out?

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Paul W. Graves, Livent Corporation - President, CEO & Director [31]

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How long we got left on the call? Okay. Let me try to do that reasonably quickly. Look, I think one thing I would say is when you have a single company that is in financial distress and a big important company in financial distress, if that is as a result of those specific factors related to that company, then I can imagine that a stronger competitor comes along. But frankly, I'm not sure that's entirely the case. I think there's some company specific but also some pretty significant industry headwinds that drives challenges.

And look, we all face them right now. We all face them. I don't think anybody in this industry who is subject to normal commercial pressures feels that they have access to anywhere near enough capital that they need to take advantage of the opportunities in front of them. I don't frankly know that consolidation solves that problem too much. You can maybe see an argument that if you have consolidation, and therefore, you take out excess supply as a result, but that's not really the issue in our industry.

Could you see a new entrant with very deep pockets coming into this industry? Possibly. I would say that ours is a difficult industry to predict. It's a difficult industry to understand. And I have a lot of sympathy for anybody who wants to go to their Board and say, I want to turn up and buy a lithium company. Let me present the financial model to you and talk you through what's been happening in this business over the last 5, 6, 7 years. It's not an easy story to sell. And it's still a very immature early stage business where maybe waiting 2 or 3 more years and see how the industry shapes out might be a more effective M&A strategy for a new entrant.

I say all of that to say, no, I don't really see a lot of consolidation. I frankly see the opposite more. I think we'll have far fewer new entrants being able to or being willing to take the risk to jump into the market. I think it's just going to be financially almost impossible for anybody regardless of the quality of your resource in the next few years to easily enter into this market.

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Operator [32]

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Our next question is from the line of Mike Harrison with Seaport Global.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [33]

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I was wondering, I understand the difficulty in forecasting the pace of electric vehicle demand or OEM demand from here or macro recovery, and obviously, the consumer situation, are all very difficult to figure out. But I was wondering if you can shed a little bit more light on what you're seeing in terms of inventory levels and maybe dig on that inventory question a little bit more. Really just trying to get a sense of how a destock or restock cycle could play out? And maybe when we get back to sales number or volume numbers that track demand a little bit more accurately versus having that inventory component there?

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Paul W. Graves, Livent Corporation - President, CEO & Director [34]

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Sure. Well, let me try and do that, again, it's difficult to talk about inventory levels without a clear view of future demand because what may have been excess inventory one day with the rebound in demand doesn't feel like excess inventory. But I would say, generally speaking, we have seen lithium hydroxide inventory levels at pretty low levels for multiple reasons that just does not appear to be a lot of finished lithium hydroxides sat at customers' or at the supplier side. Lithium carbonate, we've seen a buildup of lithium carbonate industry at certain customers who had overcontracted as well as some suppliers who have built inventory because carbonate sits for quite a long time, clearly, and have built inventory ahead of the future largely because it's just the most efficient way to run your operations. And so if you can and you can afford it, why not?

We see certainly an excess inventory of spodumene concentrate sat in China waiting to be processed. It probably hasn't moved that much because of the lack of activity in China in the last 3 or 4 months. And we've seen a continued shipping of spodumene concentrate on a couple of suppliers in Australia to China, but that has largely been from their own inventory levels. So some of the spodumene producers' own inventory levels have certainly fallen down when you compare their production to their shipments. It's clearly been the case. So I think throughout the lithium chain, generally speaking, it's a bit of a mixed story. I think if you do get any kind of pickup in demand. I think that most of that inventory will disappear, frankly, pretty quickly. And the only question then will be which pieces of that supply chain can actually increase their production quickly enough. It's probably not the carbonate guys, probably not the spodumene side over a rapid piece of time. But I'm not about to predict that that's going to happen anytime soon.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [35]

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All right. Understood. And then I was also wondering about the thought process on getting the additional covenant flexibility. Was there something special about the 6x EBITDA number? Or was that just the largest number they were willing to give you?

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Paul W. Graves, Livent Corporation - President, CEO & Director [36]

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The larger the number, the more special it is when it comes to covenant relief, as you know. Look, I think, frankly, it's all part of the sense of like nobody wants to run close to covenants. We don't want it. The banks don't want it. It doesn't create anything -- any good dynamic. And so the #1 objective on our side and on the bank side is to make sure the covenants are not even the slightest issue. And so that was really the question of what frames our target for what the right amount of covenant relief was going to be for us.

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Operator [37]

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Our next question is from Steve Byrne with Bank of America.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [38]

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I'd like to follow up on that covenant relief question. Is the EBITDA in that ratio trailing 12 months? And given 2020 is going to be a tough year, is there not a need for a relief in 2021? Is that 3.5x limit potentially a challenge for you in the first quarter of '21?

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Paul W. Graves, Livent Corporation - President, CEO & Director [39]

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Yes. Look, you're right, 2020. It is a trailing EBITDA number as is always the case with these bank covenants. They're not quite the same as we report externally. There's always tweaks and adjustments and changes to them. But yes, it is a trailing EBITDA number. But frankly, our expectation is that facility that has those covenants in it will be taken out by a different debt, piece of debt before the end of the year, one that's more appropriate to where we are. As Gilberto mentioned, we've already started the process of conversation with our banks to say, look, let's structure something that makes more sense to Livent and what our investment profile is, what our earnings profile is because, bear in mind, this is a facility that we inherited from FMC, it was designed to be a temporary facility such that it got us through the first phases of liquidity, and it was always the intent to put in place a longer-term-type capital structure than this. And so we would expect to get that done at some point this year.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [40]

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And wanted to ask you about this deferral of Phase 1 in Argentina, does that lead you down a path of at least looking over the menu of other technologies in development that might help you increase productivity of your existing brine management down there. I understand there's some membrane technologies that can help extract that lithium and lead to less waste? Is there anything on the technology front that is looking more interesting as an alternative to building another set of evaporation pond?

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Paul W. Graves, Livent Corporation - President, CEO & Director [41]

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And just to be clear, we're actually decommissioning our evaporation ponds, not building new ones. I think it's an important difference. We don't have a great deal of waste. Our yield from the brine, as it comes out in lithium terms, is well north of 90% with our existing technology. And again, we have 4 -- I think 4 now evaporation ponds, and part of our plans for the expansion was actually to decommission them because, frankly, we don't need them. We don't really use them. They're expensive to maintain. They're certainly expensive to build. And they, as I said, aren't really needed for our process. So when you talk about -- you hear a lot of people talk about direct lithium extraction and some people have different definitions of it. We've been practicing direct lithium extraction since we started this facility in the late '80s, early '90s, and we'll continue to use that technology. So no, I don't see a technology change making a yield or an operating difference for us in Argentina.

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Operator [42]

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Our next question is from Joel Jackson with BMO Capital Markets.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [43]

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Paul, given your challenges right now, given your challenges right now, I do appreciate the commentary about wanting to stop the projects, expansion project at a good state to be able to pick them up down the road. But why not just stop right now, save the money and try to really protect the company and the balance sheet as best as possible here?

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Paul W. Graves, Livent Corporation - President, CEO & Director [44]

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So when you say stop the -- I'm not sure it's -- Joel, I understand. We've stopped all projects.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [45]

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Well, you say stopped, but you've got a $59 million of CapEx left in the last 3 quarters of the year, $40 million is going to be growth capital, right?

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Paul W. Graves, Livent Corporation - President, CEO & Director [46]

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Right. Right. So let's just be clear on that. The vast majority of that is paying for stuff we already spent before we stopped, right? Because as I'm sure you know, the timing of the cash going out the door is not the same as the contracting or the commitment of the work getting done. We don't pay in advance. And so what you're seeing there is the runoff of the capital commitments on the project for work already done. So frankly, there is no work being done. There's a small amount still being done in China to complete both the carbonate and the hydroxide units because they're modular units, they're largely complete. So there's some capital going to go into completing them, but it's not a huge amount to be perfectly honest, but there will be no new contracts, no new spending initiated and hasn't been since the start of March now. And so this is just a normal timing lag of, frankly, paying our suppliers, our contractors, our engineers for work that they've already done.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [47]

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That's helpful. And then if you're going to bring on the 2 phases for carbonate together, that's a pretty good chunk of capacity and 19,000 tons in 1 slug. We've seen SQM challenged to really ramp up their operating rates -- or sorry, to sell and building inventory. So what are the -- when you think about that strategy -- potential strategy change, what are the concerns trying to take that much at one-time could be too much for that year?

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Paul W. Graves, Livent Corporation - President, CEO & Director [48]

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It's a great question. The reason that we actually did the expansion, the way we did it was to try and phase it from a technical perspective and an engineering risk perspective, more than a supply perspective. Bear in mind, as I said, it's now likely to be 2022 before any of that material comes along. I would actually be quite happy if we could do that and bring it all online and not bring hydroxide on at the same level, simply because it gives me that balance that I've been seeking for a few years now to try and get longer in carbonate. And we are one of the world's lowest-cost producers of carbonate down there.

And so bringing it all on in one go, from a "what will I do with it" perspective doesn't concern me really that much. And I think given everything that we've learned and the confidence we've built out of our success in the project today, I personally believe that the technical risks of doing 2 phases at once are probably not as great as than we might otherwise have thought. That's not to say it's the same. It isn't. It's different execution and it's different risks. And it certainly does take the risk that maybe the lithium market isn't where we think it's going to be in 2022 or 2023 when it does come online.

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Operator [49]

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Our next question comes from PJ Juvekar with Citigroup.

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Prashant N. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals & Agriculture Research and MD [50]

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I got one question, but it's a bit comprehensive question. So you talk about localizing the lithium supply chains away from its heavy reliance on Asia. And what does that mean? Does that mean you see more hydroxide plants built in -- being built in Europe and U.S.? Who sort of spends that money? Is it you guys or the auto industry? And when do you think that will happen? Do you have a time frame in mind when these plants or supply chains can move? Because it's really important for the lithium industry.

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Paul W. Graves, Livent Corporation - President, CEO & Director [51]

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It's a critical question, PJ. Let's just step back a little and understand what you can and can't do in short order and what the challenges are. The first and single biggest factors where the resources, right? If you really want to localize supply, you should, frankly, put as much of production as close to the resource as you can. But I think we know that Argentina and Chile are not going to suddenly develop cathode material businesses. And we've seen the challenges in -- in Australia, sorry, of building spodumene conversion plants at the mines in terms of capital cost and operating success or otherwise. And so the first thing you have to start, sit back and think about, can we actually come to a different business model that allows us to stop shipping spodumene concentrate around the world?

And now clearly, shifting carbonate into hydroxide is one way to do it. But it's a limited -- there's only so many of us who have actually got the capability to do that. And there's only so many low-cost lithium carbonate, brine-based lithium carbonate resources available to do that. And so it's not easy to see how you localize the production of either hydroxide or carbonate. I think the second challenge, which is maybe a bigger one, to be perfectly honest, is what are you localizing against? If you're localizing against the ultimate -- if you can't localize with the mine or the resource then maybe you can localize with the consumer, but there's a step along the way, which is your cathode active materials. And there's very few cathode active material plants being built outside Asia at the moment. There's a big one going in Europe or maybe a second one. So I think Europe is trying to get there. But still, your challenge is, this is a supply chain that has remote resources, concentrated geographic cathode material plants, but then a very diverse set of end markets, whether it's the U.S., Europe or various Asian markets.

So the real question is what does localization really, really mean? And the short answer to that is, I think every environmentally sensitive consumer-sensitive carbon conscious seller of vehicles is wrestling with that question and trying to understand how far can we localize and how long will it take? I don't have an easy answer for you, PJ. It is a key question.

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Operator [52]

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And I will now hand the call back over to Dan Rosen for closing remarks.

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Daniel Rosen, Livent Corporation - IR Manager [53]

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Thank you, Tina. That's all the time we have for the call today. We will be available following the call to address any additional questions that you may have. Thanks, and have a good evening, everyone.

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Operator [54]

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Thank you again for joining us today. This does conclude today's conference call. You may now disconnect.