Li-Cycle Holdings Corp
NYSE:LICY
Li-Cycle Holdings Corp
NYSE:LICY
Price:
0.6757 USD
2.78%
Market Closed
Updated:
Apr 29, 2024
Section:
Earnings Call Analysis
Summary
Q3-2023
Q3-2023
Summary of Financial Strategy and Operations
The company has paused future growth capital projects, leading to no additional outflows from such activities. To reduce capital expenditure, the decision was made to produce MHP at the Rochester and Portovesme Hubs, which is more aligned with existing equipment and has a narrowed spread with sulfate products in the market, aiding in cost savings. Additionally, the company is optimizing its network for cost-effective operations, intending to generate liquidity in line with cash preservation efforts. The main capital spend remains on the hub, while other operations, such as the initial Generation 1 Spokes in Ontario, have been paused amid a comprehensive review to optimize future capital expenditure commitments.
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Good day. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third 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.
Thank you. Good afternoon, and thank you, everyone, for joining us for Li-Cycle's business update and review of financial results ended September 30, 2023. We will start today with formal remarks from Ajay Kochhar, Cofounder, President and Chief Executive Officer; Tim Johnston, Co-Founder and Executive Chair; and Debbie Simpson, Chief Financial Officer. We will then follow with a Q&A session. Ahead of this call, Li-Cycle issued a press release and a presentation, which can be found in 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, most of which are difficult to predict and many of which are beyond the control of life 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 then 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. These forward-looking statements should not be relied upon as representing Li-Cycle assessments, as of any date subsequent to the date of this call.
With that, I'm pleased to turn the call to Ajay.
Thank you, Nahla, and good afternoon, everyone.
Beginning with Slide 3. We announced in late October I'll be pausing construction at the Rochester Hub to conduct a comprehensive review of the project. Today, I'll discuss the rationale for that decision. Tim will provide an update on the Spoke & Hub network, and Debbie will review liquidity management and our financing strategy.
Turning to Slide 4. I'd like to provide context on what drove our decision to pause the construction work for a comprehensive review. At a high level, it came down the convergence of 2 factors, namely an escalation in actual construction costs versus prior indicative bids and delays in complex financings. Let me walk you through some of the details as you can see here by the time line.
Starting with the Rochester Hub construction milestones and costs, as shown in the blue part of the time line. We recently started to recognize actual costs significantly higher than previously estimated based on recent subcontractor agreements for packages of remaining work. This was specifically related to installation costs for mechanical equipment, hiking, structural steel, electrical, instrumentation for measurement and process control devices. This cost pressure was exacerbated by the timing of nearly $4 billion of other major construction projects in new region, starting and ramping late 2023 and early 2024, driving general contractors to draw construction workers from the larger regional area.
Reflecting these escalating construction costs, we arrived at forecasts that result in the aggregate cost of the current scope of the project substantially higher than previously disclosed budget of $550 million. For reference, the project CapEx to date was approximately $301 million on the project through September 30, 2023.
In terms of the financing, as shown in green on the top of the timeline. With our capital growth needs, we've been successful in timing strategic and competitive financings such as with Koch, LG Chem, [indiscernible] energy solutions and Glencore over the course of 2021 and 2022. After 2021, we submitted our application and began a rigorous process with the [ DOE ]. We achieved a significant milestone when we received the conditional loan commitment for gross proceeds of $375 million in late February 2023. While we worked closely with the DOE to progress to the final stage, we were delayed from our initial target close from the end of June to September 2023.
Also at September 30, 2023, the company had contributed approximately $92 million for the construction of process buildings and a warehouse for the Rochester Hub. This spend was incremental to the Hub project budget of $560 million. The company was anticipating a refund of a substantial portion of this contribution upon completion of a building's leasing arrangement. Through the complexities of bringing together arrangements for the DOE loan and the buildings lease arrangements, both financings were further delayed into October. Subsequently, we've decided not to pursue the building's lease arrangement, which is expected to simplify the DOE loan closing process for the Rochester Hub.
In summary, the escalating construction costs, combined with continued delays and closing contemplated [indiscernible] were leading to lower current and projected cash balances. As you made the [indiscernible], and prudent determination and announced a pause of the project to complete a comprehensive review. The review is examining expected capital costs, timing of completion and go-forward compression strategy options for the Rochester Hub project.
Turning to Slide 5, for a snapshot of our current portfolio immediately following the Rochester Hub project pause. The company is undergoing a comprehensive review for bringing on additional Spoke & Hub capacity in the near term. Until the go-forward strategy work is completed, the company will be slowing operations at its most American spokes as it reviews the timing and black mass needs of the Rochester Hub. The company is reviewing plans, bring on additional Spoke capacity in both North America and Europe. And we'll discuss [indiscernible] and our focus on the Generation 3 Spokes in more detail later in the presentation.
Turning to Slide 6, for an overview of the key considerations for our ongoing comprehensive review. As I already discussed in early October, we announced a pause on the construction work at the Rochester Hub for a comprehensive review of Spoke, timing and [indiscernible]. Additionally, we're evaluating our levers to optimize cash and liquidity including cost [indiscernible] initiatives, optimization strategy and timing financing needs to support our Go-forward plans.
I'll now turn it over to Tim for a more detailed update on our Spoke & Hub network.
Thanks, Ajay. Turning to Slide 7, for an overview of the options being considered as part of the Rochester Hub project review. The view is examining a phased approach that ties black mass production from our Spoke network to support the battery industry for precursor and cathode production. In Phase approach, the first phase, as depicted by the green arrows, the black mass is processed to produce a mixed hydroxide precipitate or MHP, a combination of nickel, cobalt and manganese metals. MHP could be sold through a refiner ahead of supplying to the battery precursor industry. In the second phase, per the original plan as depicted with the gray arrows black mass would be converted directly to nickel and cobalt sulphates ahead of supplying to the battery precursor industry. Both approaches maintain the production of battery-grade lithium carbonate.
The MHP process was part of Li-Cycle's large-scale pilot program completed in 2019 to 2020 and is included in Li-Cycle's patterned technology portfolio. The key factor for this approach is the ability to reduce immediate construction Spoke to phase development with project financing.
Turning to Slide 8, to discuss our initial assessment of the Rochester Hub project. As previously disclosed, engineering and procurement of the Rochester Hub project are largely complete. With focus having shifted to construction installation activities. As Ajay discussed earlier, the project has experienced escalating construction costs substantially higher than what was anticipated in the previously disclosed $560 million budget. Additionally, we had contributed approximately $92 million towards an expected total cost of $140 million for the construction of process buildings and warehouse for the Rochester Hub.
We had previously anticipated a refund of a substantial portion of this contribution upon completion of building lease arrangements. For background, the decision for entering into the building leasing arrangements were based on an initial intention to focus capital expenditure on core project requirements specifically not real estate assets. This is aligned with our general approach to project execution. However, we decided not to pursue the building leasing arrangements which is expected to assist in simplifying the DOE loan closing process for the Rochester Hub.
In terms of the Go forward for the Rochester Hub, we have performed an initial analysis of options for completion of the Rochester Hub. Based on the initial analysis and depending on the option selected, we determined that the revised project cost could be in the range of approximately $850 million to approximately $1 billion. This range includes the cost of the process buildings and warehouse for the Rochester Hub of approximately $140 million. This total project range based solely on an initial analysis is subject to a number of assumptions and will likely change as we continue to complete our comprehensive review work and determine which options to pursue accordingly.
Turning to Slide 9, for an update on the Portovesme Hub, which has a similar flowsheet and benefits to the MHP option are just covered with a phased approach for the Rochester Hub. Just as a reminder, together with our partner, Glencore, we are repurposing part of their existing hydrometallurgical site in Portovesme, Italy. This project contemplates competitive long-term financing from Glencore to fund Li-Cycle's full share of the capital investment. Once operational, this facility is expected to be one of the largest producers of battery-grade lithium carbonate in Europe.
I would like now to hand it over to Debbie for a review of our liquidity management and financing strategy.
Thank you, Tim. Turning to Slide 10, for a review of the steps we are taking to maximize liquidity and preserve our cash on hand. Since paving the project in late October, we've taken action to optimize cash while also pursuing financing options and strategic alternatives. First, on our cost-cutting actions. We have reduced our workforce, eliminated other nonessential operational funds and are implementing working capital initiatives, have sold operations at our North American Spoke network, including a pause in production at our Ontario Spoke. Slowed production at the New York Spoke and the installation of Line 2 in Germany, under reevaluating the [indiscernible] timing of our Spokes in Norway, France and Hungary.
Turning to Slide 11, for an update on our Spokes. With a review of timing and Spokes for the Rochester Hub, we are now primarily prioritizing our operations on the Generation 3 Spokes, specifically Arizona, Alabama and Germany. Consequently, we are revising our 2022 annual production outlook for Black mass from 7,500 to 8,500 tonnes down to 5,500 to 6,500 tonnes. As a reminder, we started up the Germany Spoke Line 1 in early August and are excited to report that the ramp-up is tracking our expectations. The Generation 3 is advanced novel technology that can sustainably process full electric vehicle battery packs without the need for discharging, dismantling our thermal processing. Additionally, they benefit from economies of scale.
Turning to Slide 12, for an update on our cash position. Since June balance is $289 million. The majority of the cash outflow has been for capital expenditure related to the Rochester Hub project. We ended the third quarter with approximately $137 million of cash on hand which is now approximately $100 million at November 10. With current cash on hand, our spin cuts and additional cost-saving initiatives on DOE, we anticipate needing additional funding in addition to the DOE loan before restarting the Rochester Hub project.
As an immediate step, the company, in conjunction with its financial advisers is exploring options to support near-term liquidity needs. The company is actively engaged and continues to work closely with the DOE to satisfy conditions precedent to financial [indiscernible] for gross proceeds of $375 million as it undertakes its comprehensive review of the Go-forward strategy of the Rochester Hub.
In addition to the conditions precedent to financial [indiscernible], the company will need to meet additional conditions precedent prior to the first [indiscernible] including obtaining additional financing to fund the required base equity commitment before restarting the Rochester Hub project. In parallel, we are exploring additional long-term financing options as well as strategic alternatives.
Turning to Slide 13, to conclude. We continue to believe Li-Cycle is uniquely positioned with its Spoke & Hub network and remain poised to benefit from strong secular trends and supportive government policy. We remain committed to our mission to recover critical battery materials to create a domestic battery supply chain for a clean energy future.
Operator, we are now ready for questions.
[Operator Instructions] We'll take our first question from Brian Dobson with Chardan Capital Markets.
As you contemplate this strategic pause in development outside of the United States in the European countries, so you're looking to build Hubs and Spokes, what do you think is the likelihood that those projects will simply be halted by understandably concerned partners and investors?
Brian, it's Ajay here. And you're a bit hard to hear, but I think you're asking the effect on our European projects to what we've just decided to do or we start to do with the Rochester Hub. I'll turn it over to Tim to cover it.
Yes. No. Brian, nice to talk to you. So when it comes to European assets similar to the balance of our projects is it's all part of this broader comprehensive review that we're doing with the exception of [indiscernible], which is the DFS timing is under review, but otherwise is continuing in connection with partnership. And I think that was part of your question with Glencore. I want to highlight that our partners and our customers have been extremely positive and supportive throughout this process.
That's good to hear. As it pertains to the Department of Energy, I understand that you retained an investment bank to seek out strategic alternatives and financing opportunities. As management is contemplating receiving funds from DOE, how likely do you think that is if you had to [ handicap ] it?
Yes, I'll take it, it's Ajay. Look, so let's be very clear. And I think there was a lot of [indiscernible] out there in articles and other aspects that we saw publicly. To be clear, we are in quite period. So we want to ensure that we're being prudent. Look, the fact haven't changed. We have a conditional [indiscernible] from the DOE. We still have a conditional commitment from the DOE. That was issued back in February of 2023 of this year. That [indiscernible] for gross proceeds of $375 million.
They are great to work with through this process. We're very close to engage. We're not just saying that as random language. It's obviously in partnership with them in terms of whatever we put out there. What I would say is we definitely have some work still to do. And I think Tim covered in the [indiscernible] here. Different options associated with the potential phasing of the project and also around construction strategy. As you can imagine, that's very important for us to be working through with the DOE. And so as we get through the full review and we get to the best path forward, it's going to be in concert with that DOE package. Today, we're not ready to comment about how that may change or how they may differ.
What I can tell you is the fact remains that we have a commitment and programmatically from the DOE, this is public, you can find it when they give a [indiscernible], they actually earmark the funds. So what we need to do is work through our review, work with them and then we'll be able to give more clarity vis-a-vis timing and other aspects.
Okay. And then just one final follow-up. Local news reports have indicated that several contracting firms had outstanding bills that have not yet been paid. Would you care to comment on that? Is that because you're negotiating those firms? Or what's going on there that those pertain to the Rochester Hub facility?
Yes, Tim you can take that.
Yes, no worries. And Brian, we can't comment specifically on individual contractors. I'd just say that we're working closely with all stakeholders as part of this review process.
We will take our next question from Jeff Osborne with TD Cowen.
I was just wondering if you could comment a little bit further. You mentioned that you will need some additional financing before to meet DOE conditions. Could you maybe just elaborate a little bit more about how much may be required?
Sure. Jeff, it's Ajay here. So we just wanted to make sure that it's clear how the structure works. So let's be very clear. The DOE has always had the phase equity commitment, and it's actually, I believe, a programmatic feature for them in much like usual project financing, which means as of the overall project size, you have to put in a certain amount of equity first then followed by the debt coming in.
As you can imagine, if the capital cost is different, then the project size is bigger. And with an existing commitment remaining at $375 million, there's an additional funding it. And so on Page 8, we went over indicatively initially where those capital costs would be, depending on the actions, options selected and proceeding with the same approach on the upper end with respect to contracting strategy. I think it's early for us to say precisely what that is. You can do that based on this. But I think what we'd like to do is complete the work, the refined level of these numbers, which could change and then come back and be able to talk about all of that together comprehensively in [indiscernible] and as -- and when appropriate with other financing alternatives that we're going to be working on.
Okay. And just on the cash preservation plan, it's helpful to provide where you stand on cash in terms of November 10 versus the end of the quarter? Just wanted to see if you could maybe provide a little bit more detail on where you see the cash burn being on a monthly basis once you've like fully implemented the cash preservation plan?
I'll give it to Debbie to address.
Jeff, I appreciate the question. I think what we need to do, and I think you read in some of the materials, heard us say that we're working with some advisers to help us with that. I think what we really need to work through that front and then circle back to that in conjunction with the comprehensive review, they are still really working in parallel.
As an initial step, you saw in the details we've downsized our workforce. We're slowing production at other plants and we're also looking at opportunities to maximize liquidity under working capital position. So we're working with suppliers. We're looking at selling black mass versus the [indiscernible] that we were on, which was to build inventory for the opening of the Hub. And that work will continue and we'll get deeper into that as it progresses.
[Operator Instructions] We'll take our next question from Adam Jonas with Morgan Stanley.
I was going to ask about the minimum about the pro forma burn as well, but I appreciate you're not going to answer that right now. But maybe you could answer if is there any remaining CapEx commitment? Or what financial cash commitments are like near term for the Rochester Hub even with the pause. And then I was curious, as a follow-up, what -- if you had an assessment of minimum cash on the balance sheet to kind of run working capital payroll and your other operational needs with the pause?
Yes. Yes, your question is both for Debbie.
My apologies. Adam. Yes, as I said, we've got $100 million as of right now. And as we work through this plan absolutely working on a minimum that we need and then working around that minimum to build on near-term financial options around that to support this, it's going to be really important.
You asked about capital commitments. I think there's a couple of things in there. One is we paused on future growth capital projects. So there's nothing flown out as a result of that. And then -- clearly, everything on -- roughly a better month behind any status. So you're absolutely right, there are [indiscernible] to be paid with regards to recent [indiscernible] work at the Rochester Hub. In addition to that, we've got costs around securing the site, making the site safe and keeping it in a good preserved state so that it's in good state for a fast start up when we're ready to do that. So we went of onetime costs in the next couple of months, including the cost of our workforce reduction to work through in November, December. So I think that will give you an idea of to sort of [indiscernible] that we need to hit in the next little while. And then as we complete the work around the cash preservation [indiscernible] a sense of what the run rate is at the back of that.
We'll take our next question from Matthew O'Keefe with Cantor Fitzgerald.
Just a question on you're changing the flowsheet a little bit here. I understand you want to go to produce MHP in your review of Rochester. It sounds like it will save some CapEx, and I can see that. But why are you applying that also to the Portovesme Hub? Is there -- is it a significant CapEx? Or is it -- is the premium just not there to produce nickel sulfate and cobalt sulfate? What should we be thinking about on your -- on this side of things?
Matt, those great questions. Good for Tim to address.
Matt, nice to talk to you. So let me answer the first one, which in within to Portovesme. Just to make it clear. So the plan for Portovesme was always to produce MHP when we originall Spoked it out. And there was a couple of factors that were driving that. One being the -- desire to maximize the utilization of existing equipment on site. i.e., the MHP process was much more well tied to the distinct footprint of the existing asset on site, making it more experience and effectively a lower capital project overall. This is a process that we're very familiar with.
And when it comes to Rochester, part of the rationale for driving that, you touched on it exactly right in that, is that it reduces the near-term capital expenditure associated with installing certain parts of the plant associated with sulfate production. What we have seen from a market perspective, and this is public and you can look up the indexes is the spread between MHP discounts to metal and sulfate has narrowed. And so the financial impact is somewhat negated by that combination. So it's a decision that's based primarily on construction costs but there is market factors that you can see that have changed in recent times that are also helping support that.
And on the other side of that, just to add, obviously, the input typically a precursor and the input to [indiscernible] thereafter, the precursor is the sulfate typically. And so one thing that's been missing in North America is precursor manufacturing. And there are some plants out there, people see them publicly, that are coming but it is taking longer than anticipated. So we don't have an end today of what pathway would go. We do still see the value in the sulfate to be more adjacent to [ PKN ] production, precursor production. But as Tim indicated, it's really a question of if we go that path, how you get there?
Okay. Got it. And if I may, just on the CapEx for the process and warehouse buildings, you suggested that was tied to the DOE loan. Is it just that the DOE needs something more in terms of security like lands to -- as part of the loan requirement?
Pardon Matt, it's Ajay. Yes. So as Tim articulated and briefly, we usually try to do this. And for [indiscernible] usually much simpler because they're smaller and more typical buildings. So our original approach as seen in our [ FS ] along the way, our financial statements is we wanted to do this building leasing arrangement, which would have refunded us a good quantity of amount -- of the amount that we spend to actually build the buildings. And then the idea was that, that would convert it to a lease. So it's a way to basically refund CapEx, and it's been articulated in the presentation, we're not a real estate company. So we [indiscernible] to make money out the stuff in the buildings. However, as you can imagine, that arrangement would have a set of creditors and the DOE is another financing [indiscernible] project. So it's always been that way along the course. But as you can also imagine, getting the short strokes on documentation, it, frankly, it was very complicated. So that's why I referred to them as complex financings. And having this -- some ideal, [indiscernible]but we have an opportunity to rebase and do this in a way that makes a lot of sense. And I mentioned that, it would help with simplifying the overall complexity that we were facing as part of DOE transaction.
And we'll take our next question is Ben Kallo with Baird.
I just -- I want to understand Ajay, just on Spokes. What -- and I think you said in the prepared remarks what was paused and what wasn't. But could you just run me through that? And then like I think Adam asked a question about just commitment, capital commitments to the hub, and other EVE capital commitment, the Spokes that saw out there?
So maybe to take the first and then Debbie could take a second on the Spokes.
Yes, no problem. Ben, nice to talk to you. And so when it comes to the Spokes with [indiscernible] one spoke in Ontario. This was our first Generation 1 Spokes which is the smallest of our network. And so as part of this strategy, we decided to pause that asset. And the other Spokes in North America remain operational.
Yes. And on future CapEx then. So you've heard us talk in our disclosures before we had plans underway for a second line in Germany Spoke and we've also got plans [indiscernible] we have a location in Norway, and we plan on [ gradually ] in France, and we were looking at site selection for Hungary. So we paused those initiatives until we complete this comprehensive review.
The hub is the main capital spend for us. So just relatively.
You answered a question about Black mass sales versus build inventory. I just want to understand, with the operating spokes, if the Black mass sales are profitable on those individual Spokes? And then I have one follow-up.
Yes. So the way that we've looked at the portfolio is: one, prioritizing customer needs. So we have customer obligations where we need to service battery to be recycled; two, we've looked at -- the spokes that have the best economies of scale. So it's focused on low-cost conversion ability to get to further -- through further ramp up, et cetera; and three, vis-a-vis profitability, I think I'll hold on comment on it to anything outside of our FS, but just suffice to say that the way that we've optimized the network, and we'll continue to look at is intended to be liquidity generating over time and liquidity, managing as part of our cash preservation line.
Okay. Great. And just a follow-up, in prepared remarks, you said about the Glencore site, the CapEx. So is it -- does that still proceed through Rochester will be held up for a little bit?
Yes. Glencore and Li-Cycle are both committed to the Portovesme Hub project. We think that's critically important for both companies and for the region. And so the key thing that we're just reviewing is the timing. We've had some change in Portovesme obviously. And so we're just reviewing the timing associated with the DFS, but both companies remain committed to the project.
And it appears there are no further questions in queue. Thank you, everyone, for joining. This does conclude today's program, and you may now disconnect.