Piedmont Lithium Inc. (NASDAQ:PLL) Q3 2023 Earnings Call Transcript November 7, 2023
Piedmont Lithium Inc. misses on earnings expectations. Reported EPS is $0.88 EPS, expectations were $1.51.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference call operator today. At this time, I would like to welcome everyone to Piedmont Lithium’s Third Quarter 2023 Earnings Call. Today’s call is being recorded, and all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. And I will now turn the call over to Erin Sanders, Senior Vice President of Corporate Communications and Investor Relations. You may begin.
Erin Sanders: Thank you, operator and good morning, everyone. Welcome to Piedmont Lithium’s third quarter 2023 earnings call. Joining us today from Piedmont Lithium are; Keith Phillips, President and Chief Executive Officer, who will provide the introductory remarks. Michael White, Chief Financial Officer, will then review our financial results, followed by Patrick Brindle, Chief Operating Officer, who will offer an update on our project. Keith will then provide closing commentary before we transition to a live Q&A session. As a reminder, today’s discussion will contain forward-looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the company’s actual results to differ materially from these statements are included in today’s presentation, earnings release and in our SEC filings.
In addition, we have included non-GAAP financial measures in this presentation. Reconciliations to the most directly comparable GAAP financial measures can be found in today’s earnings release and the appendix to today’s slide presentation. Please note, that references to shipments are lithium concentrate and metric tons are dry metric tons. Copies of our earnings release and presentation will be available on our website at piedmontlithium.com. With that, I’ll turn the call over to Keith Phillips. Keith?
Keith Phillips: Thanks, Erin and thank you, all for joining us today for Piedmont Lithium’s very first earnings call. Q3 2023 has been transformational for Piedmont on many levels. First and foremost, seven years since our founding, we are transitioning from an explorer to a developer to become a lithium supplier and generated our first revenue, huge milestones. I’ll note that this is our first earnings call, we will take a little time throughout the discussion to provide some background for those who are newer to the Piedmont’s story. Some of the areas we’ll cover today. Most importantly, production is ramping up at North American Lithium, our joint venture operation in Quebec. We made our first two shipments of spodumene concentrate in the third quarter.
We achieved strong gross margins and positive earnings per share, despite a difficult lithium pricing environment. We have an exciting development pipeline and a strong balance sheet. And as we think about future growth, I’ll spend some time at the end of our remarks discussing our disciplined approach to funding along with our outlook on lithium markets. To that point, I thought it would be helpful if I start it with a quick overview of Piedmont Lithium, our mission and strategy. Piedmont is one of only three US-domiciled lithium companies. And our mission is to be a leading supplier of lithium resources for the US EV supply chain, supporting US efforts to reduce our reliance upon foreign nations for critical materials and strengthening our national energy security.
Underpinning Piedmont’s mission, there’s a strategy to focus on Hard Rock production by processing spodumene concentrate from assets we own or in which we have an economic interest. We believe the execution risk in spodumene concentrate is far lower than for some of the more exotic resources or chemical flow sheets that others in the industry are pursuing. We have been fortunate that the first two of our spodumene development projects have relatively low CapEx and potentially high returns on invested capital, North American Lithium, because it’s a brownfield project, Ewoyaa in Ghana because of the simple DMS-only flow sheet. We ultimately aim to convert our spodumene concentrate production into lithium hydroxide for the US market with planned projects in Tennessee and North Carolina.
We believe American consumers will continue to prefer larger vehicles, SUVs and trucks and they want to continue to drive long distances, all leading to a requirement for more lithium hydroxide production in the US. Over the last several years, we have strategically assembled the global portfolio of four capital projects to build an integrated business. Our joint venture investments in Quebec and Ghana provide low CapEx upstream resources and our planned projects in Tennessee and North Carolina are aimed at providing downstream and integrated operations. Through the development of this portfolio, we expect to one day produce an estimate of the 60,000 metric tons per year of lithium hydroxide that is compliant with the Inflation Reduction Act.
To put that in perspective, there is only about 20,000 tons per year of lithium hydroxide produced in the US today. But first and foremost, we’re focused on a Hard Rock spodumene’s strategy and revenue generation, which centers on our control of resources that ultimately will produce about 525,000 metric tons per year of spodumene concentrate. Patrick will talk more about our projects in a little bit. With that backdrop, let’s segue the highlights of our third quarter. Our key news, of course, is that we made two customer shipments this quarter from NAL, our JV operation in Quebec with operating partners Sayona Mining. NAL began production in March of this year, joining a fairly exclusive group. By our count, there are only about 10 significant spodumene-producing companies in the world today, based principally in Western Australia.
NAL was the largest operation in North America and obviously is very well positioned strategically. We own approximately 12% of Sayona Mining and 25% of Sayona Quebec, the joint venture we formed with Sayona in 2021, that includes North American Lithium. We are not only an investor in the NAL operation, we are also its largest customer. Our offtake agreement with Sayona Quebec provides us with a greater of 50% of production or 113,000 metric tons per year, again, whichever is higher, of spodumene concentrate at market prices with a floor price of $500 a ton and a ceiling price of $900 a ton for the life of the mine. In some ways, the agreement is analogous to a metals’ royalty or stream. So with respect to our Quebec partnership, we benefit in two ways.
We recognize revenue and cost of sale through our offtake agreement, and we separately record our 25% share of the JV’s profit or loss as an equity method investment. In Q3, we generated a revenue of $47.1 million through our offtake agreement and income through our equity investment, resulting in an adjusted net income of $17 million and adjusted earnings per share of $0.88. While we are pleased, Piedmont is now making physical deliveries of lithium concentrate and achieving positive earnings, our results were materially impacted by the roughly 40% decline in spot lithium prices during the quarter. The majority of our offtake tonnage will ultimately be sold under long-term contracts announced earlier this year, but our initial shipments are being made on the spot market.
And contract pricing traditionally occurs on a lag-basis. So if you ship in September, you price the shipment based on the pricing and the months leading up to the shipment date depending on what the parties negotiated. In the spot market, shipments are increasingly priced on a look-forward basis with the final pricing based on market parameters at or around the time of delivery rather than shipment. Spodumene concentrate prices fell from over $3,500 a ton in early July to approximately $1,900 today directly impacting our quarterly results as our spot shipments are price settled around the time of the customer receipt. In other words, we’ve had to bear the full brunt of falling prices in Q3, largely due to timing, but Michael will provide more details on the financials in his presentation in a moment.
As we’ve been growing our business, we’ve been able to build a stellar team of experienced professionals to support our mission. From mining and process engineers to safety, environment and health experts and the legal financial and other professionals needed to support our growing business, we’ve increased our team by more than 50% to 65 employees this year. And we’re developing a culture of success, safety and commitment to sustainability. In fact, we issued our Inaugural Sustainability Report in June of this year, which governs our ESG efforts as we develop our operations and advance our equity interests. With that, let me turn it over to Michael to discuss our third quarter financials and fourth quarter outlook.
Michael White: Thanks, Keith. Good morning, everyone. Let’s begin with our third quarter highlights on the next slide. Revenue was $47 million on sales volume of 29,011 metric tons, as we made two customer shipments associated with Piedmont’s offtake agreement with NAL. Our realized price and realized cost of sales on a per metric ton basis were $1,624 and $805, respectively. Gross profit was $24 million, reflecting a gross profit margin of 50%. Third quarter GAAP net income was $23 million or $1.19 per share. Adjustments this quarter included $0.41 related to gain on dilution of our equity method investments, and $0.10 related to tax adjustments and to a much lesser extent, other costs. Including these adjustments, we reported third quarter adjusted net income of $0.88 per share.
Operating costs were $12 million and included $3 million of non-cash expenses. Adjusted EBITDA was $16 million, reflecting an adjusted EBITDA margin of 34%. Let’s move to sources and uses of cash. We ended the quarter with $95 million of cash on hand, up from $89 million at the end of the second quarter. We generated $25 million in cash from operations as we collected cash from our first sale. As part of a disciplined capital allocation approach, capital expenditures were $16 million and $45 million for the quarter and year-to-date, respectively, and relate mainly to our Tennessee Lithium and Carolina Lithium projects. We invested $2 million and $35 million during the quarter and year-to-date, respectively, and our equity investments, which includes Sayona Mining, Sayona Quebec and Atlantic Lithium, as well as in cash advances for the Ewoyaa project in Ghana.
This brings us to our fourth quarter outlook on the next slide. In the fourth quarter, we expect to purchase and ship approximately 27,500 metric tons from our agreed upon offtake allocation from NAL. This puts us on track to deliver full year volume guidance of approximately 56,500 metric tons. Capital expenditures are expected to be in the range of $18 million to $22 million primarily for capitalized engineering costs and land purchases for our lithium conversion facilities and landfill for Tennessee Lithium, which Patrick will further discuss. Investments in and advances to affiliates are expected to be between $10 million to $14 million. Turning briefly to the Quebec structure on the following slide. We thought it would be helpful to provide additional clarity regarding our ownership interests in Sayona Quebec and Sayona Mining and our offtake agreement rights from North American Lithium.
Keith previously discussed our offtake rights and I covered our expected 2023 allocation of approximately 56,500 metric tons. There are two key points of emphasis I’d like to make on this slide. First, revenue and cost of sales as reported by Piedmont, reflect only those shipments made by Piedmont to its direct customers and purchases made by Piedmont from an NAL. Second, Piedmont does not consolidate the financial results of Sayona Quebec or Sayona Mining. Piedmont reports its share of income or loss from its affiliates on a one quarter lag. As such, our third quarter 2023 results include our share of the second quarter 2023 results from Sayona Quebec and Sayona Mining. Sayona Quebec made three joint venture shipments, totaling 48,211 metric tons during the three months ended September 30, 2023.
However, Piedmont will report its share of the financial results of these three shipments as part of its fourth quarter 2023 results. Now turning to Patrick.
Patrick Brindle: Thanks, Michael. We can now turn to an operational update and a discussion on the projects in our global portfolio, including our now producing North American Lithium mine in Quebec. Our growth plan is to become a leading North American producer of lithium hydroxide within the 2020s. Fundamentally, we aspire to be a fully integrated lithium chemicals producer, using spodumene concentrate from mines that we own and operate, or in which we have a significant equity interest. We’ve completed the first stage of our plan with a successful restart of the North American Lithium mine in Quebec, Canada in March of this year, and we continue to support our joint venture in the ramp up of the NAL operations. NHL shipped 48,211 tons during the period, including just over 29,000 tons shipped to Piedmont Lithium under our offtake agreement.
NAL produced 31,486 tons of concentrate during Q3, a 6% quarter-on-quarter increase as the ramp up at NAL continues. Through the end of Q3, NAL produced 64,000 DMT of lithium concentrate on a year-to-date basis. Utilization at the NAL concentrator reached an average of 72% during the quarter, and global lithium recovery was 58%. NAL is targeting between 140,000 to 160,000 dry metric tons of concentrate production during the period from July 2023 to June 2024. And this target assumes the NAL process plant reaches full production levels by mid spring 2024. A number of capital projects are also being advanced at NAL to increase plant availability and process efficiency. A capacity increase is in progress for the tailings storage facility. This work should be completed by the end of 2023.
A new crushed-ore dome is currently under construction with expected completion in spring 2024. Completion of the dome will be fundamental to achieving full run rate production throughput at NAL. The crushed-ore dome should allow for improved overall availability in the operation and allow management to achieve their target mill availability of greater than 90%. Much of the NAL concentrator is vintage 2010 control technology which dates to the original construction of the mine. The site team is currently working to upgrade a number of these control systems. I’d like to take this opportunity to commend the efforts of the management team at NAL and their ongoing efforts to bring NAL back into production as scheduled and the results that have been achieved to-date.
Shifting now to exploration activities, we are very encouraged by recent drilled results at NAL. The 2023 drill campaign thus far has returned some exceptional drilled results in the northwest direction of the current pit shell, including several thick, high-grade pegmatites discovered at depth. Lastly, we continue to evaluate the potential for completion of the lithium carbonate plant at NAL with our partner, Sayona Mining. Now, I would like to move the presentation forward to Ghana and activities at Atlantic Lithium. I should briefly note, that I became a Member of the Atlantic Lithium Board of Directors in June of this year. Atlantic Lithium’s flagship project, Ewoyaa is located in the Cape Coast region of the country approximately 70 miles from the Port of Takoradi, which provides accessible low-cost logistics for transporting lithium concentrate to the United States.
Ewoyaa has relatively low CapEx and low OpEx project, with estimated annual reserves-based production target of 340,000 tons per year of spodumene concentrate. We hold offtake rights for 50% of the annual production from the mine on at-market base prices for life of mine, which we plan to utilize as feedstock for our Tennessee Lithium project. We recently achieved together with our partner several important milestones. In August, we exercised our option to acquire our initial 22.5% interest in Atlantic Lithium, Ghana. In September of this year, the Minerals Income Investment Fund of Ghana or MIIF agreed to acquire a 6% interest in Ewoyaa for USD 27.9 million. In October, Ghana’s Ministry of lands and Natural Resources granted Ghana’s very first lithium mining lease to the Ewoyaa project.
The issuance of the mining lease represents a major milestone in the advancement of Ewoyaa. This lease grants Atlantic Lithium the exclusive rights to carry out mining and commercial production activities over the application area for an initial 15-year term, and is subject to parliamentary ratification and to the securing of the remaining environmental permits for the project. Under the terms of the mining lease, the government of Ghana will be entitled to a 13% free carried interest in Ewoyaa and a 10% royalty rate. These terms combined with MIIF’s 6% equity stake results in a project level earning interest of 40.5% each for Piedmont and Atlantic Lithium, but this does not impact our offtake right to 50% of annual production. Atlantic Lithium expects the Ewoyaa permitting and approvals process to be finalized in the second half of 2024, with first production expected in the second half of 2025, from our modular DMS plant, and full commercial production to begin in 2026.
Moving back to the United States. In Tennessee, we are designing the world-class lithium hydroxide conversion facility, the Tennessee Lithium project, which we believe will play a key role in increasing the domestic production capacity for battery grade lithium products. At steady state operations, we expect to produce 30,000 tons per year of battery quality lithium hydroxide. We now hold all the material permits that we need to begin construction at Tennessee Lithium, and we’ve exercised our option to purchase the project site. Also, we’ve entered into purchase agreements for an adjacent foundry and an associated landfill. The landfill is expected to provide long-term disposal capacity for the operations inert tailings if we cannot find a commercial outlet for this material.
A foundry idled earlier in 2023 gives us the opportunity to potentially reduce capital costs through Tennessee Lithium, through substantial reuse of existing infrastructure. Due to these acquisitions, we now plan to undertake a strategic review of the Tennessee Lithium project, which we expect will take several months. In North Carolina, we continue to advance plans for our foundational asset, the Carolina Lithium project. Our goal in North Carolina is to establish a fully integrated mining, spodumene concentration and lithium chemicals manufacturing campus that will be designed to produce 30,000 tons per year of lithium hydroxide at steady state operations. Our principal focus at this time continues to be working towards approval of our state mining permit application, which we submitted to the North Carolina Department of Environmental Qualities Division of Energy, Mineral and Land Resources or DEMLR in August 2021.
We continue to work on our response to ADI number 3 received from DEMLR earlier this year. And our response may require us to submit an extension request in order to finalize the containment plans for a waste rock stockpile. Looking forward, as we prepare to enter the rezoning and local approval process, which would follow receipt of our state mining permit, we have expanded our engagement with government officials and community stakeholders. We remain optimistic about the Carolina Lithium project and its ultimate value for shareholders and all stakeholders and we’re very pleased with the strong support we’ve received from many local, state and national political figures for this project. This concludes my remarks today. And at this point, I’ll turn the conversation back over to Keith.
Keith Phillips: Thank you, Patrick. I’d like to conclude with some thoughts about the market and our funding strategy. To borrow a bit from Mark Twain, we believe reports of the lithium markets demise are greatly exaggerated. Despite some of the gloom and doom out there, 2023 has actually been a strong year for the EV market and for lithium demand. EV sales are headed for another record year globally. China, record sales; Europe, record sales; US, record sales. And while US sales are further behind China and Europe, they have crossed the $1 million mark for the first time and are on pace to record a 40% increase from 2022. Bloomberg expects Tesla’s Model Y to become the world’s best-selling vehicle of any type this year.
These are huge milestones for the industry. Nearly every EV manufacturer has begun deliveries of a mainstream electric vehicle, consumers now have a variety of choices, which is supported the growth in volume. You can see in the next chart on this bar chart, the size of batteries within the vehicles are also growing. People want that longer range particularly in a market like the US, where customers prefer larger vehicles and regularly drive long distances. This has led to a nearly 50% increase in gigawatt hours deployed, which includes a significant growth in energy storage systems or ESS now representing approximately 13% of total battery demand and growing rapidly. We remain very bullish based on this data, combined with our conversation with OEMs and cell providers.
And the EV revolution is really just getting started in the United States. We’ve led China and Europe for several years in the sector, and now we’re scrambling to catch up. But we’re ready to take off over the past two years, more than $80 billion worth of battery manufacturing projects or expansions have been announced, $80 billion just in the US alone. These projects would require nearly 40 times the amount of lithium hydroxide capacity currently in the US to fill demand domestically. And current planned capacity, including ours doesn’t come anywhere near that mark. There have been a few announcements in recent weeks about shifting development timelines, but we believe these are short-term adjustments related to current market dynamics and not the deterioration of long-term strategies.
And new investments continue to be announced. Just last week in North Carolina, Toyota announced it is doubling down on its EV battery manufacturing project here, adding another $8 billion to its investment. Like most revolutions, the electrification of transportation would not follow a smooth path. Demand will have cycles and surges. Supply will come online in lumps, not straight lines, the supply-demand tension may experience some temporary relief, and then shift again. Now, let’s look at the supply story for a moment. On Slide 25, we borrow a chart from Canaccord Genuity’s Equity Research team. I’ll let you dig into the details on your own. But our industry has a history of delays and extended timeframes whether due to permitting or funding or development or ramp delays.
It’s safe to say that we expect many of the current development projects in the pipeline to come on stream later than currently planned, especially in an environment with capital cost inflation, higher interest rates and now, lower lithium prices. Next, I’d like to touch on recent M&A activity in the sector. Most of this is occurring in Australia. So US investors may not be as current on the topic, Albemarle, SQM, Hancock, Mineral Resources, these are industry leaders, and leading Australia mining entrepreneurs. These are some of the most knowledgeable folks in lithium business and based on their recent M&A moves, they appear very bullish. Just in the past six weeks, we’ve seen six different aggressive moves by Hancock and Mineral Resources all around consolidation on the spodumene sector.
Surely these folks feel the environment for lithium producers, particularly in spodumene is constructive for the foreseeable future. Before we close, I want to touch on the important topic of funding, specifically how are we planning to fund our growth. Our strategy centers on maintaining financial strength, while pursuing low-cost capital. Priority one is to build a strong upstream business on a capital efficient basis, with NAL being a brownfield operation and Ewoyaa being DMS-only, the total capital Piedmont will invest here will be very modest relative to the economic upside we see. Downstream projects are different. They tend to require significantly more capital and have a higher level of execution risk. Our plans are to derisk these projects for our shareholders by combining support of US government funding with the support of highly capable strategic partners.
Now let me get into a little more granular on Slide 27. Our final slide for today’s presentation. We start from a strong financial position with $95 million in cash and about $84 million in shares of Sayona and Atlantic Lithium. We also expect to generate substantial free cash flow through our NAL offtake agreement. Even at current prices, we’re at around a 50% gross margin. Our next development project is likely to be the Ewoyaa spodumene project in Ghana. The capital requirements for this project are modest, and we’ve commenced discussion with various government entities to assist with the process. As an example, the DFC, the Development Finance Corporation in Washington, has recently expressed its helping to fund critical minerals projects in Africa.
And we believe Ewoyaa is a poster child for that process. More to come on that in 2024. For our larger projects, an important consideration is some of the provisions within the Inflation Reduction Act. The 45x manufacturing tax credit in particular will be a game changer for projects producing domestic lithium resources by Tennessee and Carolina Lithium. Separately via the Bipartisan Infrastructure Law, we were fortunate to be selected for negotiation of a $141.7 million grant last year by the US Department of Energy for our Tennessee Lithium project. However, as our detailed engineering plans have evolved, and inflation across the capital equipment sector has grown, we’ve taken a fresh look at our funding plans for Tennessee and decided to pivot away from the DOE grant to pursue an ATVM loan through the DOE’s Loan Programs Office.
If awarded, the ATVM loan would be expected to cover a significantly larger share of the capital required for the project, enhancing the opportunity for strategic parties to partner with Piedmont on the project. We are also currently in the midst of an ATVM loan application process for the Carolina Lithium project as well. With respect to partnering, we’re working with our financial advisors at J.P. Morgan on a strategic partnering process for Tennessee. It is early days, but as one might expect, there was robust strategic interest in a large well-located lithium hydroxide project in the southeastern USA. This process will take some time and we will be patient in pursuing the best arrangements for Piedmont and shareholders. Transactions can ultimately take many forms, joint ventures, prepaid offtake, equity investments, et cetera.
Before I conclude, I want to express my sincere gratitude to the entire team at Piedmont Lithium. We are a young company and an exciting sector and have recruited some exceptional people to our team. We’ve now announced our first quarter with revenue and positive earnings and that wouldn’t have been possible without these great folks. Thank you, all. That concludes our presentation portion of the call. Thank you for your time and attention. We’ll shift to Q&A.
Operator: [Operator Instructions] And we will take our first question from David Deckelbaum with TD Cowen. Your line is open.
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