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Edited Transcript of ORE.AX earnings conference call or presentation 23-Jul-19 11:15pm GMT

Q4 2019 Orocobre Ltd Earnings Call

MILTON, QLD Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Orocobre Ltd earnings conference call or presentation Tuesday, July 23, 2019 at 11:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Barber

Orocobre Limited - IR Manager

* David Hall

Orocobre Limited - Business Development Manager

* Martin Perez de Solay

Orocobre Limited - MD, CEO & Director

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Conference Call Participants

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* Bria Murphy

BMO Capital Markets Equity Research - Associate

* Nick Herbert

Crédit Suisse AG, Research Division - Research Analyst

* Reg Spencer

Canaccord Genuity Corp., Research Division - Mining Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Orocobre June 2019 Quarterly Market Update. (Operator Instructions) I would now like to hand the conference over to Mr. Martin Perez de Solay, Managing Director and CEO. Please go ahead.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [2]

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Thanks, Jesse. I would like to welcome you all to Orocobre's quarterly activities briefing for the June 2019 quarter. I would like to open the call with some comments on safety. I am pleased to advice that there were no lost time injuries recorded at Olaroz during the June quarter. We are continuing to work together with DuPont to develop and foster the company's safety culture and improve our overall performance and safety. Olaroz have now achieved 111 days without an LTI. The number of safety observations and audits has been increased to ensure that all proper safety procedures are being fulfilled by both Sales de Jujuy staff and contractors.

At the end of the June quarter, Borax Tincalayu mine had achieved 795 days without an LTI, and the Sijes mine has achieved 137 days without an LTI, a single LTI was recorded at the Campo Quijano plant at the start of April, since then, Campo Quijano have achieved 89 days without an LTI.

Moving on to the results for the June quarter, the Olaroz Lithium Facility achieved a total production of 3,455 tonnes. This was down 4% on the previous corresponding period, following our continuing strategy of managing brine quality, new pond preparation and slightly lower-than-average of operational grades that we experienced during the quarter. Production for the year was up marginal from fiscal year '18 to a new record of 12,605 tonnes. Quarterly sales revenue was $27.8 million, which was down 17% quarter-on-quarter with a realized average price achieved of $8,220 per tonne on a Free on Board basis. Our June quarter product pricing was below that of the March quarter due to market softness. Sales volume for the quarter was down 4% Q-on-Q to 3,387 tonnes. Gross cash margins excluding the Argentinian export tax of $3,727 per tonne were down 29% Q-on-Q, mainly due to the lower average price received.

Cash cost for the quarter on cost-of-goods-sold basis were $4,493 per tonne, up 7% on Q-on-Q, excluding the export tax of $572 per tonne. Our operational strategy continues to focus on safety and quality.

Quality improvement projects have been implemented to improve product packaging, which will address some customer's requests. Plant equipment availability is also under review with the aim of decreasing plant downtime due to unplanned maintenance. A review of soda ash use have identified opportunities to reduce consumption through a more detailed and frequent monitoring of soda ash dosage during processing. Moving on to the lithium growth projects. During the quarter, we announced that the Orocobre, Toyota Tsusho and joint venture boards have approved the final investment decision for the Naraha lithium hydroxide plant to be built in Japan. Orocobre will hold a 75% economic interest in the project with operations to be managed by TTC. The construction of the Naraha lithium hydroxide plant will further cement our position as a global lithium chemicals producer operating at the bottom quartile of the lithium cost curve. This plan will be the first of its kind in Japan and will provide us product diversification, suitable for different battery technologies and the potential for significant margin growth on our primary lithium carbonate being converted to battery-grade lithium hydroxide.

Construction of the Naraha lithium hydroxide plant is expected to commence early in the second half of 2019, with commissioning to commence during the first half of 2021. Construction of key items of Stage 2 expansion of the Olaroz Lithium Facility, such as evaporation, ponds are secondary line in plant, camp infrastructure and accommodation upgrades have continued to advance during the quarter.

Moving on to the lithium market, market conditions remains subdued, impacted by macro factors, including slowing down economic activity and the ongoing China-U. S. trade dispute, lithium markets specific factors such as the change in Chinese EV subsidy policy and the recent interruption to the manufacturer of energy storage system batteries had directly impacted the battery supply chain. On the demand side, the removal of the approval list of EV suppliers potentially opens the Chinese market for international companies and the tightening of emission targets in both China and Europe should bode well for future resales. We'll continue to build relationships with our customers for long-term supply. This involves product qualification, following which discussions can focus on pricing, volume and timing.

We expect the establishment of long-term strategic relationships and continuous improvement in product quality will ultimately deliver improved product pricing.

Moving on to Borax Argentina. Borax have continued to demonstrate improved sales performance with the business development projects being converted into sales growth. Unit cost continue to be controlled at or near record lows. The June quarter saw Borax deliver another good performance with 11,758 tonnes sold. This is an increase of 10% Q-on-Q after the spot sale of 2,312 tonnes of low value mineral products in the March quarter was removed. Total sales revenue was up 12% Q-on-Q, and the average price received after adjusted for the low value mineral sale was up 3% Q-on-Q.

On the corporate side, at the quarter-end, Orocobre corporate had available cash of $248 million after expenditure, mainly related to Olaroz expansion activities, Naraha lithium hydroxide plant joint venture equity contribution, corporate costs and our Cauchari joint venture expenditure, including Sales de Jujuy and Borax cash and project debt, net group cash at 30 June 2019 is $191 million.

Moving on to our Cauchari joint venture. During the quarter, Advantage Lithium announced the engagement of WorleyParsons, Chile to complete the pre-feasibility study and in accordance NI 43-101 technical report on the Cauchari lithium project. The pre-feasibility study will level with processing options and complete arrange analysis for up to 30,000 tonnes per annum, final lithium products, including lithium hydroxide. Overall, this has been another good quarter for Orocobre, with a solid operational result with good progress being made on the Olaroz Stage 2 expansion and construction of the Naraha lithium hydroxide plant expected to commence early in the second half of this calendar year. I will now hand back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first telephone question comes from Joel Jackson with BMO capital Markets.

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Bria Murphy, BMO Capital Markets Equity Research - Associate [2]

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This is Bria Murphy on for Joel Jackson. I'm just wondering if you can talk about your price realization so far in July? I know it's early in the quarter, but what's your outlook for pricing for this quarter?

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David Hall, Orocobre Limited - Business Development Manager [3]

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Bria, it's David Hall here. Just in relation to pricing now, it's a little bit too early for us to comment on that, given that we're still finalizing negotiations and delivery schedules with customers. But in regard to the general market condition, at this stage, we don't see any imminent market change in the way of improvement at this time.

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Bria Murphy, BMO Capital Markets Equity Research - Associate [4]

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Okay. Great. And then just on the battery-grade production, can you just speak about when that came back online? And give us a sense of the mix between battery-grade and technical-grade this quarter?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [5]

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We went back to production of battery-grade product during the month of May, and [this was around] 80% primary product, 20% battery-grade product.

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Operator [6]

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Your next question comes from Nick Herbert from Crédit Suisse.

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Nick Herbert, Crédit Suisse AG, Research Division - Research Analyst [7]

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I wonder if you just probably give an update please on sales, I think, just how you're seeing that order book develop? Whether you are expecting to continue to be able to sell or you produce? And then also just on that technical versus battery-grade product, if you're seeing any changes in the level of demand or interest for either of those products? That's question 1.

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David Hall, Orocobre Limited - Business Development Manager [8]

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Okay. In relation to the product split during the June quarter, it was 20% purified, 80% prime in terms of sales. In regard to the overall market and how we see it, at a very high level than we've seen a downturn in economic activity in China, which has obviously been exacerbated by the China-U. S. trade situation. The impact of that in the domestic market in China or in the consumer market has been quite marked in the respect that there's quite a degree of uncertainty, particularly in that consumer market, which is constituted by privately owned companies. So when you have government stimulus coming through from the Chinese central government, it tends to go more into the infrastructure.

So all of the things which got authorized consumptions of things like iron ore that we've seen evidence of recently. But within China itself, the privately owned companies are quite conservative in the way that they run their business. So hence, on their inventory policies, they tend to run a -- more of a just-in-time inventory system. And what we've seen as a result of that downturn in China is our lithium supplies have tended to concentrate on building inventory at customers in locations like Korea, Japan and also Europe. What we're seeing right now is a reentry or more activity from those suppliers in the Chinese market. So that's basically the summary of the market conditions as we'd see it at the moment. I'm not sure whether I've actually answered all your questions with that though.

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Nick Herbert, Crédit Suisse AG, Research Division - Research Analyst [9]

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I asked -- well, some of it. I'm just trying to get a handle on, I guess, the way you're thinking about achieving sales versus your production, whether you have confidence that you'll be able to continue to sell all that you produce, say, in the next half or so.

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David Hall, Orocobre Limited - Business Development Manager [10]

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Yes. Look, we've still got a split between contracted versus uncontracted or spot business of approximately 70%, 30%. So in terms of having confidence on whether we can sell everything that we produce, we're confident we can.

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Nick Herbert, Crédit Suisse AG, Research Division - Research Analyst [11]

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Okay. Great. And secondly just on sort of the production side of things and outlook, appreciate you're not going to give formal guidance until August. I'm just wondering how we should be thinking about production for next year at this point particularly in the context of the pond upgrade works that you've put through over the last year and some of those plant optimizations. And I know obviously no one knows what the weather's going to do, but should we be expecting some incremental improvement from those changes? Or is it really a (inaudible) improvement that's possible next year?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [12]

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Well, we expect -- despite we can't give you a guideline on production at this point in time, as we said before, we expect a positive outcome from the changes that we made in -- on management and in the operation itself. However, as you did mention in your questions, you never know the climate and (inaudible) year that is every year has been worse than the previous one in -- about the operation rate.

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Nick Herbert, Crédit Suisse AG, Research Division - Research Analyst [13]

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Okay. Yes. Wait for August. And then finally just on the Stage 2 expansion, overall, it seems to be progressing pretty well. I'm just wondering has the formal review of the design and the equipment specifications concluded now. And is there any change in the CapEx estimate or timing on that project?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [14]

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Well, we'll continue to have that along with the [said plans] with it. We have -- we'll continue in detail the technical stage -- the technical review of the plant has been completed. We haven't encountered surprises there. And we're trying to work on a detailed timetable and detailed CapEx for the plant. But it -- as I said before, yet haven't found significant suppliers from what was communicated before.

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Operator [15]

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Your next question comes from Reg Spencer with Canaccord Genuity.

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Reg Spencer, Canaccord Genuity Corp., Research Division - Mining Analyst [16]

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Just a question on pricing for me. I know you guys are not looking to provide any formal guidance at this stage, but just maybe a more directional comment. SQM have guided to 20% lower pricing in second half calendar '19, which based on last quarter's pricing could imply 11% to 12%. Now obviously another way is to sell product to that meaningful premium to what you guys have been able to achieve for a bunch of different reasons. But based on the visibility of your order book and I know you commented earlier days, but have we seen the worst in pricing for Orocobre? Or might there be some further weakness or further fall that we could expect in the back half of this calendar year?

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David Hall, Orocobre Limited - Business Development Manager [17]

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I think the answer I can give you to that, Reg, is -- in relation to the SQM example, is that we're -- Orocobre is a bit of a leading indicator here on market pricing in terms of being the first mover, I suppose. And that's partly due to the fact that we believe SQM last year had contracts in place where they managed to hold their weighted average price up quite successfully in the 2018 calendar year. And that even rolled into January of this year. So it's only been post that, that they've started to experience, I suppose, the market reality of the current market conditions.

So in terms of the magnitude of decrease that they got into, I think there's probably an element of catch-up in that in percentage terms. I look -- at this time, I can't really give you any guidance in percentage terms or otherwise on how we see the quarter panning out at this stage. It's just a bit too early.

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Reg Spencer, Canaccord Genuity Corp., Research Division - Mining Analyst [18]

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But from that...

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [19]

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Yes, adding to David's comments, it boils down to know how we are managing the company and we are managing the company to continue to improve the current 45% gross margin that we enjoy. I think that Orocobre is a company that even in the low-price environments, enjoys a very good operating margin. And we're also looking into ways to further reduce it and improve the efficiency. So that's a key here. Never know once we have the alternative prices, we all hope it is. We'll go there, but the market continues to further develop in a way you'd never know. So the strategy is to be the lowest cost producer so as to be able to not only keep the current margin but improve them.

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Reg Spencer, Canaccord Genuity Corp., Research Division - Mining Analyst [20]

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Now I understood. Does this feed into your strategy? Obviously, some of your peers are managing sales volumes and all. I think it's a follow-on from Nick's earlier question, but given your position on the cost curve, you may not necessarily need to manage your sales volumes and control your inventory levels, and as you said, you'll continue to look to sell everything you produce.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [21]

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That's true. Inventory levels, of course, may change slightly because we've changed the way we produce in the fields in which we have low operation rates [prime concentration], we'll focus more on prime production. And when the prime concentration is how we focus on purified production. So that's the -- that's -- that made a ton of inventory but we are not doing any sales management.

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Reg Spencer, Canaccord Genuity Corp., Research Division - Mining Analyst [22]

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Okay. And just one last question again on pricing. Second half, I know, David, you made your comments that you're not in the position to provide guidance at this stage. Are you in a position or would you be willing to provide some sort of directional guidance on how much purified product you're looking to sell in the second half? And whether that could have a slight positive impact on your average pricing?

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David Hall, Orocobre Limited - Business Development Manager [23]

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Reg, it's a little bit too early for that because not only are we finalizing deals with customers in terms of pricing but also delivery schedule. So yes, look -- now obviously depending on where the purified volumes sits across the second half, it will have an influence on the price. But yes, just not in a position to give you any clarity on that just now.

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Operator [24]

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(Operator Instructions) The first webcast question comes from [Jacob Gunther] from [Almarty]. The question reads, what is the cost difference between producing primary grade and battery grade?

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [25]

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When we add the cost difference between producing both (inaudible) is the primary product that we produce, battery grade is a product that we (inaudible) qualifications. The cost difference is the cost of the purification that we'll have and (inaudible) [contributes with having some this] to the market.

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Andrew Barber, Orocobre Limited - IR Manager [26]

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That's it. Jesse, it's Andrew Barber. Martin's line was dropping out a little bit there, so I might just answer that question myself, if that's okay. We traditionally have had a cost difference of roughly about $2,000 per tonne between primary and purified battery grade. We're obviously working constantly on reducing that margin. And typically, it reflects the revenue difference that we see between those 2 products as well. So we see similar margins on an EBITDA basis between those 2 products. So thank you.

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Operator [27]

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There are no further questions at this time. I will now hand it back to Mr. Martin Perez de Solay for closing remarks.

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Martin Perez de Solay, Orocobre Limited - MD, CEO & Director [28]

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Well, I wanted to thank you all, all of you, very much for participating in this call and for your continued support as investors in our progress. The little market has -- have been going through some difficult times in terms of pricing. What we think is the key strength of our recovery is the ability to support the -- at this [trending] conditions and continue to have a good growth margin on its production. It's also the right time to continue and go ahead with the investment in Stage 2 and the lithium hydroxide plant that we are moving ahead in Naraha in Japan jointly with our partner, TTC.

Thank you very much, and we'll join you soon in our annual release at the end of the May -- the month of August. Thank you.