Jervois Global Ltd
ASX:JRV
Earnings Call Analysis
Q4-2023 Analysis
Jervois Global Ltd
In the face of declining cobalt prices with a decrease from USD 14.50 to USD 13 per pound through the quarter, Jervois's Finland operations managed to contribute a substantial USD 46.1 million in operating cash flow for the year, keeping the company financially grounded despite the industry's cyclical downturn. In response to the oversupplied market, primarily due to Chinese activities in the Democratic Republic of Congo, the company has strategically reallocated resources and initiated partnership negotiations to distribute the portfolio's holding costs more evenly.
The United States Inflation Reduction Act has catalyzed a surge in demand for IRA-compliant cobalt material, necessitating a ramp-up in Jervois's production plans starting 2025 to meet the projected needs of Western automakers. Additionally, Jervois benefits from an ongoing partnership with the US Department of Defense, which funds 100% of drilling efforts in Idaho, as well as a cobalt refinery bankable feasibility study, further solidifying the company's strategic position and potential for growth.
The company endeavors to maintain sustainability across volatile market conditions by focusing on cost reduction and improving asset performance despite historically low cobalt prices. The focus areas for 2024 include revising sales and production planning, optimizing purchasing, and streamlining site management and admin activities, all of which are aimed at enhancing operational efficiency.
Although the cobalt market suffered throughout the last quarter of 2023 due to persistent oversupply and weak pricing, there are signs of stabilization in the market going into 2024, with positive trends in customer inquiries and pricing in China, signaling a potential upswing in the cobalt market.
Jervois maintains a disciplined approach to balance sheet management, having successfully managed physical cobalt inventories and repaid part of their debt, keeping loan balances sustainable for the market's current state. This approach, combined with strategic initiatives including partnership negotiations and commercial engagements, reinforces their financial prudence and strategic reach.
Jervois has set forth their 2024 guidance, retaining the focus on serving high-quality customers and preserving the flexibility to upscale production close to 6250 maximum capacity should market conditions improve. With inventory levels maintained at the lower end of target ranges, the company is also exploring further reductions in working capital for its Finland operations.
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Thank you for standing by. Welcome to the Jervois Global Q4 2023 Results Call. [Operator Instructions].
I would now like to hand the conference over to Mr. Bryce Crocker, CEO. Please go ahead.
Thank you very much and a pleasure to be here with James May, Chief Financial Officer, again this quarter. Turning to Slide 2. Please note the usual disclaimers and let's move to the highlights slide, please, moderator.
On Slide 3, the Q4 2023 highlights. Jervois Finland contributed USD 4.7 million in operating cash flow for the quarter, which rounded out the calendar year at $46.1 million. Fourth quarter prices -- fourth quarter results continue to be driven by low cobalt prices, with the price starting the quarter at USD 14.50 per pound and finishing the year at USD 13 per pound. We estimate global cobalt demand to have risen by approximately 15% in 2023, a healthy rise under normal circumstances. Unfortunately, Chinese oversupply from the Democratic Republic of Congo or DRC continues to overwhelm market balances and weigh down pricing.
Jervois ended the year with USD 45.4 million in cash and our negotiations on various partnership transactions continued across the year-end and into January. Selectively introducing partners who can share the holding cost of our portfolio across this cyclical downturn is a top priority, whilst also ensuring Jervois shareholders remain exposed and can benefit from the inevitable recovery.
Consistent with the strategic foundation on how Jervois has built out its portfolio of assets under this management team since 2017. Geopolitics are increasingly flowing through into our commercial reality. The recent inflation Reduction Act or IRA legislation in the United States has represented a step change in how Western automakers are viewing future supply of cobalt needs for the [indiscernible] electric vehicle market in that country. Since the issuance of Treasury and Department of Energy regulatory guidelines on the IRA, we have seen a significant pickup in customer inquiries for IRA compliant cobalt from the start of 2025 across our current key market, Japan and increasingly South Korea and obviously, the United States. Encouragingly, our Department of Defense or DoD partnership continue to advance with initial Jervois drilling undertaking a sunshine historical resource, which you will see the announcement today, an underground drift development continuing to set up new drilling pads better able to target step-out mineralization of the main ramp deposit by the second quarter.
A reminder that the DoD is funding 100% of our drilling efforts in Idaho.
The DoD is also fully funding a cobalt refinery Bankable Feasibility Study, called BFS. Our study team has worked with AFRY and their subcontracted [ Newmark ] on final site selection, we are down to a limited number of attractive options with each potential site having the ability to succeed. Final technical analysis and trade-offs is well underway together with commercial discussions with the respective host governments. We will determine in the coming months, which ought to proceed into full BFS to underpin our existing Department of Energy, ATVM or advanced technology vehicles manufacturing loan application.
If you could turn to the following Slide 4, delivering on the key priorities, please operator. The overarching focus remains on implementing our strategy to ensure Jervois sustainable and self-funding across the commodity and asset development cycle.
Jervois Finland continues to generate strong operating cash flow as lower prices allow the release of working capital. The Jervois Finland team has increased its focus on the pursuit of further cost reduction and asset improvement initiatives to counteract historically low cobalt prices. Targeted improvements in 2024 are in areas such as a revised approach to sales and production planning, given the change in cobalt market dynamics, purchasing, including reagents and spares, plant and equipment maintenance together with streamlining of site management, finance and administration activities.
Partner negotiations on asset level funding are continuing across our portfolio, all 3 core operations in the United States, Finland and Brazil, respectively, have received proposals from third parties. Moving these discussions to a conclusion is management's highest priority.
As I noted earlier, at Jervois, we are pleased with the constructive tone and tempo of the initial USD 15 million award from the United States Department of Defense, with work continuing a pace irrespective of what China does to the cobalt market. Encouragingly, a bipartisan recommendation from the House Congressional Select Committee on China proposed to reserve or price floor for United States sourced cobalt in December. We look forward to working with legislators in both [indiscernible] to bring this into effect.
Also encouraging was a recommendation to further expand EXIM's mandate in critical minerals. A reminder here that Jervois had early received confirmation from EXIM ICOs eligibility for its domestic financing initiatives. We continue to work toward integrating the agencies involvement for the mines restart.
If you could please turn to Slide 5 on the cobalt market, operator. Across the last quarter of 2023, the health of the cobalt market continued to deteriorate with the market remaining weak. Prices continue to be burdened by supply from Chinese operators in both PRC and Indonesia. As I outlined earlier, demand has risen significantly, but not adequate to outpace or match supply.
Thus far in 2024, we have seen the early signs of stabilization, destocking, particularly in the cobalt's largest country of consumption in China has now been underway for a long time in most industries over 18 months. We are starting to see an uptick in customer inquiries prices for both raw materials and final refined product are both spending in China across January, leading into their Lunar new year.
At the last quarterly results, we spoke about early signs of LCO precursor demand returning via cell phone sales and exports, the pricing gap between cobalt chloride and LCO and sulfate in the [indiscernible] chemistry is [indiscernible], another indicator of LTIs, LCO's rising fundamentals.
With regard to our sales, catalyst continues to be a steady business, and we are optimistic on the outlook for 2024, chemicals demand and copper electrowinning, coding, rubber adhesive applications like last quarters continues to trend higher. Ceramics is linked to construction, and this sector in China has gone through a significant correction in 2023.
In batteries, as I mentioned, the U.S. United States Inflation Reduction Act remains a key focus for our customers servicing the American autos market. Kokkola is the leading global cobalt refinery outside of China, and this position has now led to new REM or carmaker inquiries for volume commitments starting in 2025 and beyond.
And closing out on powder metallurgy, demand unfortunately continues to be subdued with automotive, oil and gas drilling, construction engineering sectors all down from historical levels. Again, aerospace is very strong, and this is unlikely to subside or moderated anytime soon given the geopolitical situation with rising defense budgets.
I'll now pass across to James to comment on the balance sheet.
Thanks, Bryce. On the balance sheet, we continue to deliver on our commitment to maintain a disciplined approach to working capital management in the quarter. We remained at 1,300 tonnes in total physical cobalt inventories at the end of December, broadly in line with the end of the prior quarter. Further cash released from working capital contributed to the positive cash flow result for the quarter. We made a single repayment of the Mercuria loan of around USD 5 million with the balance of the loan at 31 December, sitting at USD 44 million.
The loan balance remains within a range that we would see as sustainable for this part of the price cycle and taking account of recent and planned... [Technical Difficulty] [Audio Gap]
[indiscernible] lost connection of the speaker line. Please continue to hold. The conference will begin shortly.
Apologies. Just confirming, moderator, can you hear me okay?
James, Bryce. I believe you dropped out. Would you like to continue or shall I?
No, let me continue on the balance sheet. So look, just finishing on the balance sheet, our key objectives for 2024 remain to maximize cash generation from Jervois Finland in an environment where we expect short-term weakness in the cobalt market to continue and to deliver on our key portfolio initiatives that we outlined earlier.
A significant number of activities occurred in the quarter in relation to those strategic initiatives. This incorporated both counterparty due diligence and detailed commercial engagement on alternative partnership frameworks. We are focused on introducing high-quality partners at our key assets, and this work is continuing in Q1 2024.
Turning to Page 7 on guidance. Pleasingly, we have delivered on our 2023 sales volume guidance that we initially published 12 months ago in a backdrop of a challenging market environment. Actual sales volumes of 5474 metric tons for 2023, sit just above the midpoint of our published guidance range for the year.
For 2024, we have again formulated our guidance to take account of a range of market scenarios. Our commercial strategy will continue to focus on serving profitable, high-quality customers across a range of our new segments while preserving the optionality to increase our production and sales to a level closer to the [ 6250 ] maximum capacity when market conditions allow. On inventories, as noted, we are operating at the low end of our prior target range.
We expect to continue to operate at similar levels in early 2024. A review of opportunities to achieve further structural reductions in working capital for our Jervois Finland business has commenced.
[Technical Difficulty]
Operator, we lost James again. Okay. Why don't I step in and I believe he was going to reference the holding cost of both sites, which are running at prior run rates, and we expect that to remain consistent with the guidance. And I guess just to reiterate, similar to the observation I made earlier on Jervois Finland, certainly, ICO, SMP and corporate costs across the organization are under review, and we're going to update the market in due course on any revisions that do occur to the cost structure associated with the transactions or management decisions across 2024. . So if you -- if I surmise in the absence of James, I think that -- so our focus remains on establishing and strengthening partnerships with both industry and governments.
I do believe our portfolio will look different across 2024. Clearly, the cobalt price continues to disappoint, as I mentioned. Destocking has been underway now for a long period in a historical sense. Should prices start to rise in conjunction with demand. The reality is inventory levels are [indiscernible] supply and potentially pricing shocks good result. The importance of cobalt for the West energy transition in National Security remains unchanged, and we are proud of Jervois expanding role in this area. Operator, I'll close here and open it up to any questions.
[Operator Instructions] There are no questions at this time. I'll now hand back for closing remarks.
Okay. Well, thank you very much all for dialing in. Appreciate the time and look forward to updating you again in coming quarters. Thank you.