Q1 2023 Li-Cycle Holdings Corp Earnings Call
Participants
Ajay Kochhar; Co-Founder, President, CEO & Executive Director; Li-Cycle Holdings Corp.
Deborah K. Simpson; CFO; Li-Cycle Holdings Corp.
Nahla A. Azmy; SVP of IR & Financial Communications; Li-Cycle Holdings Corp.
Tim Johnston; Co-Founder, Executive Chairman & Interim Regional President of EMEA; Li-Cycle Holdings Corp.
Brian H. Dobson; Senior Research Analyst; Chardan Capital Markets, LLC, Research Division
Jeffrey David Osborne; MD & Senior Research Analyst; TD Cowen, Research Division
Matthew Dennis O'Keefe; Research Analyst; Cantor Fitzgerald Canada Corporation, Research Division
Presentation
Operator
Good day. My name is Todd, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2023 Li-Cycle Holdings Earnings Call and Webcast. (Operator Instructions)
I will now turn the call over to Nahla Azmy, Head of Investor Relations. Please go ahead.
Nahla A. Azmy
Thank you. Good morning, and thank you, everyone, for joining us today for Li-Cycle's review of our business and financial results ended March 31, 2023. We will start today with formal remarks from Ajay Kochhar, Co-Founder, President and Chief Executive Officer; Tim Johnston, Co-Founder and Executive Chairman; and Debbie Simpson, Chief Financial Officer. We will then follow with a Q&A session.
Ahead of this call, life cycle issued a press release and a presentation, which can be found on the Investor Relations section of our website at investors.li-cycle.com. On this call, management will be making statements based on current expectations, plans, estimates and assumptions, which are subject to significant risks and uncertainties and most of which are difficult to predict and many of which are beyond the control of Li-Cycle. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect including because of factors discussed in today's press release during this conference call and in our past reports and filings with the U.S. Securities and Exchange Commission and the Ontario Securities Commission in Canada. These documents can be found on our website at investors.li-cycle.com. We do not undertake any duty to update any forward-looking statements, whether written or oral made during this call or from time to time to reflect new information, future events or otherwise, except as required.
With that, I'm pleased to turn the call to Ajay.
Ajay Kochhar
Thank you, Nahla, and good morning, everyone. Aligning our reporting schedule with those of our peers and investors, we're excited to be reporting our first calendar quarter of 2023. This morning, we'll provide a review of our results and the ongoing progress on our Spoke & Hub network.
Turning to Slide 3. We continue to execute on our strategic objectives, as a leading solutions provider in the sustainable domestic EV battery supply chain in both North America and Europe. I would like to highlight some of the recent key achievements that we'll discuss in greater detail on this call.
On the commercial front, we signed a definitive long-term agreement with VinES, a battery manufacturer. Beginning in 2024, Li-Cycle will become their preferred recycling partner for Vietnamese-sourced battery materials. In the interim, manufacturing scrap from VinES' presence in Vietnam will be directed to Li-Cycle's North American Spokes. Over the longer term, we see the opportunity to establish a dedicated Spoke near VinES' manufacturing site with a decision anticipated by 2025.
From an operational perspective, we continue to grow our network strategically, marrying customer demand. In Northern America, our four operational Spokes are delivering solid performance, and we are progressing the plan to ensure ample availability of feedstock for our first commercial hub in Rochester, New York. which remains on track to commence commissioning in late 2023. We continue to achieve higher operating rates in our North American Spoke network while also exploring a new site in Ontario. In Europe, we are replicating the modular approach to network growth that we've successfully deployed in North America. We have three Spokes in development with our Germany Spoke on track to commence operations in mid-2023.
We're excited to announce the partnership with Glencore to co-develop our first European Hub, expected to be the largest resource recovery facility on the continent, producing critical battery materials.
Finally, on the financial front. We've progressed the work required to close the U.S. Department Energy's $375 million loan commitment, which we expect will occur in mid-2023.
Turning to Slide 4 for a recap of Li-Cycle's positioning at the center of the battery material supply chain and an overview of our value proposition. It's important to note that we maintain our flexibility to service all types of customers in the battery supply chain with a pure-play recycling and resource recovery focus that complements and doesn't compete for their businesses. We are providing an integrated battery materials platform for global customers by closing the supply chain loop at a local level. The logistics and handling know-how, innovative and sustainable technology and a growing network, Li-Cycle is advancing as a global partner of choice with diversified customers across the battery value chain including active material manufacturers, battery and EV OEMs.
Turning to Slide 5 for an update on the total addressable market, or TAM, for battery materials available for recycling. We continue to see robust demand and expanding market for recycling of all forms of lithium-ion batteries. Near-term growth is largely being driven by gigafactory announcements through 2025 and supplemented by growth in end-of-life battery feedstock towards the end of the decade. Bolstering the outlook for Li-Cycle is the limited supply of alternative post processing capacity coming online in the near term relative to Li-Cycle's timing and progress and general market development. This is likely to be even more pronounced towards the end of the decade.
Turning to Slide 6 to discuss the modular approach that we've implemented to pursue our Spoke & Hub network growth strategy. As you discussed on our transition earnings call in March, our successful template in North America has solidified our position as the leading recycler in the region. To review, we seek to develop a Spoke network strategically located near customers to secure sustainable long-term feedstock supply in a manner that reduces handling costs and operational risk. These investments are underpinned by both multiyear intake and offtake commercial contracts. To close the loop, we utilize centralized large-scale refining hub facilities strategically located to leverage existing infrastructure.
Lastly, we optimized our capital structure with strategic financing. Similar to recently announced DOE loan commitment. Notably, this is a replicable and scalable model. We are now extending this model into Europe.
Let me now turn it over to Tim for an update on our Spoke & Hub network.
Tim Johnston
Thanks, Ajay.
Turning to Slide 7 for key updates on our Rochester Hub. The aerial view of the Rochester Hub that you see here was taken at the end of April and reflects the significant progress that our team has made in just two months' time. All aspects of construction are moving in parallel and in line with our expectations, which demonstrates the strength and expertise of our team.
Turning to Slide 8 for further details on construction progress. First, as we've consistently shared, the Hub is on track to commence commissioning in May 2023 and is currently tracking at the higher end of the previously disclosed construction cost range. Early on, a key aspect of our construction strategy was to accelerate the procurement of long-lead equipment and construction materials such that they would arrive on site well ahead of when they are anticipated to be needed. Strategically, this has proven to be a significant advantage both in terms of our ability to maintain our project schedule and our ability to remain within budget, particularly in light of the challenging inflationary and supply chain environment.
As a result of our actions in 2021, three of our key process buildings are now nearing completion and the construction of our warehouse is substantially finished. As we discussed in our transition period call, our remaining budget will be influenced by labor costs and productivity.
Turning to Slide 9 for a view of our expanding global footprint with localized networks. As a reminder, our strategy is to be the preferred global recycling partner with a leading domestic supply solution in each of the key growth regions. As illustrated on the slide, there is robust demand in both North America and Europe for recycling services driven by a significant increase in gigafactory capacity. All to our competitive advantage is our commitment to consistent execution.
Expanding our network footprint we are embarking on a partnership for a definitive feasibility study with Glencore to codevelop a new European Hub, which we will discuss in more detail shortly.
Turning to Slide 10 for an update on our European Spoke network, which is anchoring our growth in the continent. The development of our European Spokes is progressing well. We continue to expand the deployment of our third-generation standardized module Spoke processing plants. To provide a brief update on our three European spokes. In Germany, construction is on track with commissioning of the first processing line expected in mid-2023, with the second line expected to follow in the second half of this year. In France, with site and building secured coupled with commercial battery source contracts, we are progressing procurement and engineering activities and expect to commence operations in the first half of 2024. In Norway, the construction of the Spoke building is on track for completion in the second half of this year. Ahead of installing the processing line, we intend to use the location as a consolidation facility to support our Germany Spoke.
Turning to Slide 11. We're excited to announce our partnership with Glencore to jointly study the feasibility of a new hub at an existing Glencore site in Portovesme, Italy. In line with our approach, we are extending our modular strategy from North America to Europe by developing the next hub, which will be utilized to close the loop for our regional network in Europe. This project would represent the first significant European resource recovery facility to produce key battery-grade products, including nickel, cobalt and lithium from recycled battery content.
Turning to Slide 12 for details on the partnership arrangement. As detailed in our May 9 announcement, Li-Cycle and Glencore anticipate forming a 50-50 joint venture to repurpose part of Glencore's existing metallurgical complex in Portovesme, Italy and they were a cost-efficient accelerated development plan. Li-Cycle will lead a definitive feasibility study, or DFS, which is expected to be completed by mid-2024. Subject to a final investment decision, the project is expected to start commissioning in late 2026 to early 2027. The black mass process at the Portovesme Hub is expected to be supplied from Li-Cycle's growing European Spoke network and through Glencore's commercial network.
The plant will leverage Li-Cycle state-of-the-art hydrometallurgical technology and is expected to have a processing capacity of up to 50,000 to 70,000 tonnes of black mass annually or the equivalent of up to 600,000 electric vehicles per year. Finally, the project contemplates competitive long-term financing from Glencore to fund Li-Cycle's full share of the capital investment. In summary, our partnership with Glencore enables an accelerated pathway to a Europe-based refining facility, providing us with the opportunity to benefit from the capabilities of our partners.
Turning to Slide 13 to conclude on our complementary capabilities. By allowing Li-Cycle's sustainable patented technology and European Spoke network with Glencore's extensive commercial network, we expect the Portovesme Hub to bring Europe one step closer to closing the loop for lithium-ion batteries.
I would now like to hand it over to Debbie for a financial review.
Deborah K. Simpson
Thank you, Tim.
Turning to Slide 14. Before reviewing our first quarter financial results, I would like to discuss the evolution of Li-Cycle's revenue and financial profile. Resource input battery materials at a discount to metal prices from a diverse pool of customers. Currently, and for the near term, we produce and sell black mass under contractual arrangement. This results in black mass revenues that are based on current metal prices at the point of sale. It's important to note is that the sale of black mass is only an interim strategy. Indeed, our mid- to long-term goal is to utilize our black mass production and speed stock for the Hub, which will manufacture battery grade materials, including lithium, cobalt and nickel, unlocking significant incremental value.
The operationalization of our Rochester Hub represents the key step change in Li-Cycle's evolution towards producing these battery-grade materials as seen on the top right chart. Utilizing the forecasted underlying metal prices on the bottom right and applying a premium to reflect the production of battery-grade finished products should give you a sense of the significant inflection point we anticipate in our revenue profile.
Turning to Slide 15 for a discussion of our first quarter results. As seen on the top left chart, we produced 1,853 tonnes of black mass, more than double the level achieved in the prior year. Driven by the start-up of operations at our Arizona and Alabama Spokes and the upgrade of our New York Spoke. We sold 881 tonnes of black mass reflecting about a 14% increase versus the 774 tonnes sold in the prior year due to the addition of new commercial customers and higher production in sales from our Spoke facilities.
Moving to revenue for the period. As a reminder, our revenues are influenced by market prices of metals contained in our products, notably cobalt and nickel with no value attributed to lithium content at this time, as we continue to sell black mass as an intermediate product. Revenue from product sales and recycling services before fair market value adjustments increased by 114% year-over-year to $7.7 million versus $3.6 million in the prior year. This was primarily attributable to the higher product sales volume from the expansion of our customer base, expanding operations of the Spoke facilities and the benefit of a higher product sales value mix.
Total revenue was $3.6 million compared to $8 million in the prior year. This included an unfavorable noncash fair market value adjustment of $4.1 million on product revenue, driven by lower nickel and cobalt prices versus a favorable fair market value adjustment of $4.4 million in the prior year.
Turning to Slide 16 for an update on our cash flow and a review of the strength of our balance sheet. Reviewing our favorable track record beginning in March of last year, we had a cash balance of $527 million. During the 9 months between March 2022 and year-end, we secured key strategic funding of $250 million from LG and Glencore and deploy $177 million towards the construction of our Rochester Hub and our Spoke facilities. Notably, we ended 2022 with a similar level of cash with approximately $520 million of cash on hand.
During the first quarter of 2023, we invested $86 million to fund our network growth, focused on the Rochester Hub, ending the period with $409 million of cash on hand. With a conditional loan of $375 million from the Department of Energy, our current pro forma cash balance would be in excess of $780 million.
Turning to Slide 17. With our first quarter results keeping us on track, we are reaffirming our key business outlook metrics for 2023.
And finally, turning to Slide 18 for closing. We are advancing the Rochester Hub construction remaining on schedule and on track to commence commissioning in late 2023. Expanding our global network of Spokes & Hubs specifically replicating our successful North American business model in Europe, with three Spokes and plans for a new Hub and an option for funding and strategic commercial partnerships. Enhancing our global position as a preferred recycling partner with [going diverse] global battery supply chain participants and strengthening our balance sheet and adding flexibility to under future network goals with the Department of Energy loans expected to close mid-2023.
That concludes our formal remarks. Operator, we are ready to take questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from Brian Dobson with Chardan Capital Markets.
Brian H. Dobson
Two quick questions on the Hub facilities. So first, in Rochester, we're very excited to see that facility opening. Can you talk a little bit about the commission approval process that might take place after the opening? And how long it will take to get black mass running through that facility, what that processing ramp looks like?
Ajay Kochhar
That's going for Tim to handle.
Tim Johnston
It's nice to be talking to you. Specifically in relation -- sorry, just in relation to the commissioning process. So we're still on track to start commissioning by the end of this year. As we've discussed previously, commissioning will commence in stages. And then we will gradually be introducing reagents and black mass as part of the final stages of commissioning, which will happen during the course of -- or into 2024. In terms of additional approvals, There's no additional approvals that are required. It's simply a matter of now completing the project and starting it up as we get closer to the timing for start-up, we will come back to you with a more detailed plan around conditioning and ramp up. We just want to make sure that we are at the right level of definition when we do that. So more to come on that one, Brian. I know it's important to you, but everything is looking good at this point.
Brian H. Dobson
Yes, very good. And then very exciting news in Europe regarding your partnership with Glencore. Can you maybe point to some of the things you learned during the development of the Rochester Hub that could make this a smoother process in opening up a potential new facility or rather retrofitting the facility that you were discussing?
Tim Johnston
Absolutely. I'm happy to take that one as well, Brian, and then Ajay and Debbie, please feel free to add on as required. So I think a couple of key things. What has worked really well for us in North America that we expect to implement in Italy has been our procurement and execution strategy. So if you think back to what we've been talking about now for almost a couple of years has been our approach to make sure that we have materials and equipment available on site, well ahead of when they're needed. And our plan will be to execute on a similar path. And that really takes a lot of the risk out of the execution schedule.
From a technical perspective, we are utilizing a number of the same unit operations that we are utilizing in Rochester. So all the lessons that we've gathered through the detailed engineering phase in Rochester, we'll be able to roll directly into the design as part of the base case, as for Portovesme, and I think what's going to be really very beneficial is the fact that by the time we're starting up Portovesme, we would have already been operating Rochester for some time. So we'll be able to bring across all that operational understanding into the new facility as well. So what we're overall expecting to see is a more expedient, more efficient execution plan for Portovesme.
Operator
Our next question comes from Matthew O'Keefe with Cantor Fitzgerald.
Matthew Dennis O'Keefe
So congrats on moving things ahead as you've done. I just had a quick question on the -- as we're building out the Hub, how is your -- how are you feeling about the Spoke performance? Maybe you could tell us a little bit there on, is it meeting your expectations with respect to recoveries of black mass, costing as far as cost of raw materials, I know they've gone up a little bit. Maybe you could talk a bit about that as well. And then also what we see as far as -- is there a big benefit to being a capacity at these Spokes? Or is it fairly going to be a fixed cost operation?
Ajay Kochhar
Another for Tim to address.
Tim Johnston
Yes, no problem. So a few things to address that. So let me work through it systematically for you, Matthew. So first of all, from a recovery perspective, I would say that the Spokes are performing very well. We've seen improvement generation over generation of both plants and now with our Generation 3 plants in Arizona and Alabama which are by the same plants that we're installing in Europe. We have our highest recovery rates across any of our assets to date, which is in line with our expectations and doing very well.
In terms of costing of raw sales, we don't disclose publicly details around costing of raw materials except for the say that we have seen some price relief for input materials as commodity prices have come down, and that really talks through the fact that we are very much (inaudible) in and outside of the business when it comes to commodity price movements, which gives us some protection, as you mentioned, that we benefit by being able to link those two markets together. From our side, we see this as being a relatively constant margin spread business in the long run. So it doesn't have a big impact on us.
Matthew Dennis O'Keefe
Just on that, I was just wondering if the (inaudible) disconnect between -- or the difference between the black mass produced and black mass sold. Was that due to timing of sales? Or are you starting to stockpile now?
Tim Johnston
Great question. So no, it was mostly due to timing from our downstream customers and what was happening at their assets, we don't expect to see it continuing into Q2. So you should expect sales in Q2 to reflect the drawdown on this volume. We are planning as said previously, to stockpile some black mass this year, but it will be targeted towards the back end of this year.
Ajay Kochhar
And then, Matt, just to address your question as well. I know Tim is going to jump in there around the feed side. And Tim, I can start that and you should add on. I think, look, at the end of the day, we're operating our assets in lockstep with market demand and customer timing. So we can flex that as we see fit. Ultimately, these are assets to feed the Rochester Hub and has now announced and are going to be doing some work on the Portovesme Hub in Europe. So that's the focus is making sure that we have ample feed, as we've articulated and lockstep with that ramp-up timing for that assets.
Operator
(Operator Instructions) Our next question comes from Jeff Osborne with TD Cowen.
Jeffrey David Osborne
Just a couple of questions on my side. On the DOE side, I was wondering what the remaining milestones and conditions are to hit? I think you originally were targeting 2Q for that loan. And now I think the [verbiage], at least is mid-'23, not a big change, but I'm just curious, maybe you could walk us through if there is any delay there and then what the remaining milestones are would be helpful.
Ajay Kochhar
Sure, Jeff. And I can start on that and Debbie can add on as needed. So no, in short, nothing major in terms of hurdles remaining to close. We, as you articulated, we're on track. Look, I mean, a lot of this is just documentation. It's really a core loan agreement, a range of ancillary agreements, closing certificates, legal opinions, you can imagine. So that's the sort of work that's ongoing, which is really a lift on the legal side primarily. One nuance there around conditions and just broadly speaking about the DOE from our program's office. Sometimes for some companies, they do have, for example, conditions on permits to close. In Li-Cycle's case, we have our key operational permits for the Rochester Hub. So that is not a condition for us. So sometimes there's externalities that affect closing timing. For us, it's really just doing the work around the legal documentation.
Deborah K. Simpson
I agree. Actually, and its really just the volume of the administrative task in getting it all paper on both sides, their side and us.
Jeffrey David Osborne
Got it. And then maybe just another modeling related question. On the OpEx side, it was a bit higher than we were expecting on our end, at least. How do we think about were there any onetime issues this quarter? Or is this sort of the new run rate and we should expand that through the second half of the year? What's the cadence of spend there?
Deborah K. Simpson
Yes. It seems to be breaking out between kind of OpEx. So if you recall the way (inaudible) the bottom line of the P&L, is to separate the fact that our revenue was maybe a little bit lower and that difference between production and revenue and that timing issue. So there isn't really as much of a pull-through from that. But if you isolate SG&A in the core spend, and back out on noncash items like share-based comp and depreciation, what you see actually, if you look across from about Q3 last year, which I indicated kind of Q3, Q4 last year was a good run rate for the business. What you see if you look through Q3, Q4 and then into this year. And I think mainly the fact that with the transition period that was 2 months and not 3 months is throwing a little bit of confusion into the equation. But if you look successively at those three quarters, and we're really around that sub-30 million on, below $30 million a quarter, which is quite consistent.
Jeffrey David Osborne
Got it. And then just going back to the inventory build question, I appreciate it for this quarter, but how do we think about the second half of the year? Do you expect that there would be a period of time where you -- all production is kept the feed to be, so to speak, when the Hub ramps up? Or are you contractually required to sell a minimum amount? I'm just trying to think about how we should model that inventory build to feed the Hub as you're commissioning that.
Deborah K. Simpson
We have some contractual minimums, but that's not a blocker to any of these strategies. I would think of it as kind of tail-end of this year where we'll begin that. But I think we talked about this a little bit in the transition period. I think what's truly important is we've been very, very thoughtful about the pace, right? So we have a plan that takes this to a point where we have sufficient inventory, sorry, and enough backup to start that commissioning and that ramp up. And then from there, once we get into that, we do what you really see is the majority of production will load inventory. But what we've actually worked through the plan to build the inventory but actually build the production level that of spoke at the same time to create that level that we need once the Hub really starts to kick in.
Ajay Kochhar
Jeff, it's really a gradual -- more of a gradual green.
Operator
(Operator Instructions) And there are no further questions in queue at this time. I'll now turn the floor back over to Ajay Kochhar for any additional or closing remarks.
Ajay Kochhar
Thank you, Todd. So we continue to execute on our Spoke & Hub strategy, establishing a global footprint with local networks in North America and Europe. Our strategy is supported by the growing portfolio of key battery material global market participants, selecting Li-Cycle as their preferred recycling partner coupled with strategically timed and cost-effective funding sources. The team is focused on delivering significant value to our key stakeholders with key financial inflection expected upon the operationalizing of our Rochester Hub. And of course, we appreciate your time and support of Li-Cycle. We look forward to updating you on our progress as we move forward. Thank you.
Operator
Thank you. This concludes today's call and webcast. You may disconnect your line at this time, and have a wonderful day.
