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Good morning and welcome to the First Quarter 2020 Earnings Release Conference Call for the Livent Corporation. [Operator Instructions]
I will now turn your conference over to Mr. Daniel Rosen, Manager, Investor Relations, for the Livent Corporation. Mr. Rosen, you may begin.
Thank you, Tina. Good evening everyone and welcome to Livent’s first quarter 2020 earnings call. Joining me today are Paul Graves, President and Chief Executive Officer and Gilberto Antoniazzi, Chief Financial Officer.
The slide presentation that accompanies our results, along with our earnings release, can be found in the Investor Relations section of our website. The prepared remarks from today’s discussion will be made available after the call. Following our prepared remarks, Paul and Gilberto will be available to address your questions.
We would ask that any questions be limited to two per caller. We would be happy to address any additional questions after the call. Before we begin, let me remind you that today’s discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including but not limited to those factors identified in our release and in our filings with the Securities and Exchange Commission.
Information presented represents our best judgment based on today’s information. Actual results may vary based upon these risks and uncertainties. Today’s discussion will include references to various non-GAAP financial metrics. Definitions of these terms, as well as a reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP, are provided on our investor relations website.
And with that, I’ll turn the call over to Paul.
Thank you, Dan, and good evening everyone. There are a few key topics we want to address today, all of which will be discussed in the context of the novel coronavirus pandemic and its current and potential future impact on Livent.
Before doing so I would like to give a special thanks to all of our Livent employees around the world. Their hard work and resilience have allowed us to maintain a safe and healthy working environment, while continuing to operate and serve our customers. We have asked a lot of them, and truly appreciate their focus and commitment during these challenging times for us all.
To begin, we are pleased to state that all of our production facilities around the world are fully operational. Apart from a two-week stoppage in Argentina due to a mandatory national quarantine, and an extended lunar new year break in China at the beginning of the COVID-19 outbreak, all of our sites have continued to operate, albeit with additional health and safety protocols.
Our ability to operate through the pandemic has been a testament to the strong and dedicated teams we have in place around the world. Second, as the coronavirus began to spread outside of China, it became clear to us that the potential impact on our business, as well as the broader market, would require us to take a more disciplined approach to cash flow management and liquidity.
In March, we made the decision to suspend all capital expansion work globally. This action allows us to cut our forecasted capital spending in 2020 by half, to approximately $115 million. While we remain fully committed to our long-term capacity expansion plans, temporarily suspending all capital projects was the prudent decision to take in the current environment.
In addition, we worked closely with our relationship lenders to amend our credit facility and increase our maximum allowed net leverage to six times EBITDA through 2020, versus 3.5 times previously. We believe this amendment to our revolver will provide ample liquidity through the challenging near-term environment. Gilberto will provide more details in his comments.
And third, we will share our latest views on the lithium market. Specifically, what the coronavirus pandemic has done so far, what we expect the impact to be in 2020, and potential longer-term implications.
Starting on Slide 3 of our prepared slides, given Livent’s presence in China, and Asia more broadly, we have been addressing the coronavirus outbreak since early February, when we formed a regional pandemic response team and implemented various actions to keep our employees safe. By taking decisive early steps and diligently monitoring the situation, we were able to safely resume operations in China following the extended lunar new year holiday.
This early start also meant we could react quickly and confidently at our sites outside of China once it became clear that we needed to do so. We maintain the same safety protocols today and have been able to run without any major issues in China since then. Even during the period when there were significant logistical challenges in moving people and products across provincial borders in China, we were able to leverage our global supply chain to minimize disruption in delivering products to customers.
Informed by our experience in Asia, Livent was able to quickly form a Global Pandemic Response Team in early March when the worldwide spread and severity of the virus became clear. Since then, we continue to prioritize the safety and well-being of our employees, customers and communities around the world.
We also took actions to safely keep all of our manufacturing sites running. Many of the lithium products we make are essential, not only in energy storage, but in critical applications that the world needs now more than ever; from pharmaceutical ingredients and industrial disinfectants, to components used in vital medical equipment.
To ensure that we could continue operations without compromising on health and safety, we worked closely with local and national authorities and our employees to develop and institute strict procedures on a site-by-site basis. These includes visitor and medical screenings, essential person designations, split shifts and social distancing measures.
Our collaboration with the provincial and federal officials in Argentina during the mandatory countrywide quarantine reflects Livent’s level of preparedness and commitment to responsible operations. We worked closely with the Argentine government to develop and administer a safe and practical set of protocols to resume local operations after only two weeks of downtime.
Since then, we have been operating at the Salar and our processing facilities without incident. We have also used this pandemic as an opportunity to further engage with and support our local communities. From donating Personal Protective Equipment in the UK to providing support for medical personnel and ambulance services and essential air transportation in Argentina, we are grateful to be in a position to help those in our communities.
Now on to the current impact of COVID-19 on the lithium industry. I will attempt not to speculate too much, but will instead focus on what we are actually seeing today. First, there is reduced visibility in our ability to forecast near term lithium demand. And by this, I mean the remainder of 2020.
A large part of this can be attributed to the broad disruption to the auto market and the implications of prolonged OEM plant shutdowns. World passenger vehicle sales declined by 24% in the first quarter, and while electric vehicle penetration rates have been notably higher, total volumes were negatively impacted.
The timing, duration and overall impact of the coronavirus has also varied greatly by region. For example, in the final week of April, Chinese retail auto sales improved to roughly flat year-over-year after being down as much as 40% earlier in March. Further, China’s new energy vehicle sales surged just over 300% month-over-month to 53,000 units in March, despite being down roughly 55% year-to-date versus last year.
Meanwhile, many OEM plants in Europe and the U.S. remain shut down due to government restrictions, with the second quarter expected to be the most impacted. Just as important, the average consumer is clearly not spending at anything like pre-COVID levels, and this is especially true for larger items such as autos.
It is difficult to predict how quickly consumer spending will rebound, or when manufacturing and supply chains will return to prior levels of activity. While we remain in close contact with customers regarding volume needs for the remainder of this year, it is still unclear whether some demand will be recovered in the second half of 2020 or pushed out further.
This is amplified in an environment where there is understandably more focus on managing working capital than building inventory at our customers. Delays in restarting manufacturing plants may result in upcoming electric vehicle launches being delayed by several months. However, from a fundamental standpoint, we have not seen any evidence of OEMs pulling back from their electrification objectives, or substantially altering their line-up of EVs for launch.
In fact, we have seen certain OEMs use this as an opportunity to engage more directly on key aspects of their electric vehicle supply chain, from taking a greater interest in the location of sourcing and manufacturing sites to setting more stringent standards for quality and sustainability.
With a heightened focus on managing capital and R&D spend, we are seeing OEM development efforts go towards platforms that will be attractive and sustainable over a long period of time. Put another way, we see OEMs allocating their own scarce resources towards future EV platforms rather than historical ICE technologies or projects with uncertain commercial models, such as autonomous driving.
Moving to the lithium market, we entered this year in a general state of oversupply, albeit with a wide range of quality capabilities on the supply side. The near-term slowdown in demand, driven by the coronavirus, put additional downward pressure on pricing. This was particularly evident in shorter-term uncontracted markets such as China, which was fed by a continued oversupply of spodumene concentrate, especially that shipped in prior quarters which has been sitting in China waiting to be processed.
There was also little urgency from customers to take their share of annual volume commitments in the first quarter, or enter into new agreements, given the broader market uncertainty. We expect this dynamic to continue through the middle of this year as customers resume production and work to assess the impact on their own near-to-medium term end-market demand.
Last quarter, we discussed industry-wide postponed or cancelled lithium capacity expansion projects, as well as announced output reductions as a result of weaker pricing. This trend continues, with sustained lithium pricing pressure and near-term demand weakness due to the coronavirus.
Production declines to date have still been relatively modest, reflecting the incentive for many higher cost producers to continue covering their cash costs in the hopes of remaining in operation until the market improves. However, we believe this is not feasible over an extended period and we expect to see further reductions in production in the coming months.
Additionally, there have been challenges for lithium projects already in development, with coronavirus-related supply chain and government restrictions further delaying the time expected to bring them into production. More importantly though, the growing number of cancelled or postponed expansion projects will have broader implications for the industry as we move beyond 2020.
These announcements have come from all geography and resource types, as well as new and established industry players. In aggregate, we have seen over 400 thousand tons worth of expansion delays or cancellations in both lithium carbonate and hydroxide over the last few quarters.
Current lithium prices have severely challenged any reasonable investment return hurdles, and several notable distressed lithium assets have illustrated the limited to non-existent financing options in today’s market. While near-term lithium demand forecasts have significantly widened due to the current uncertainty in the market, positioning from governments and global OEMs continues to support demand levels in 2022 and beyond that have not materially changed from prior expectations.
So as demand picks up as the global business environment normalizes and electric vehicle production accelerates, we believe there will be a much more rapid tightening of the supply demand balance than we would have predicted just a few months ago.
I will now turn the call over to Gilberto.
Thank you, Paul, and good evening, everyone. Turning now to Livent’s first quarter performance. For the first quarter of 2020, we reported revenue of $69 million, adjusted EBITDA of $9 million and adjusted earnings per share of $0.02. Our results reflected a challenging operating environment for both Livent and the lithium industry as a whole. The decline in revenue was driven by lower sold volumes, most notably in China, and lower average pricing. There were some deferred purchases from customers as they work to limit inventory build-up, while assessing the impact of the crisis on their end-market demand.
Margins were 15 impacted by lower pricing and hydroxide sales using third-party purchased lithium carbonate. We expect the margin impact from hydroxide sales using third-party purchased carbonate to be notably higher in the first half of 2020 as we work through the roughly 4,000 tons of hydroxide inventory carried forward from 2019.
Moving now to Livent’s liquidity position. As Paul mentioned earlier, when the coronavirus began to spread outside of China, Livent recognized the inherent uncertainty impacting the global economy and the need for an increased focus on liquidity and cash flow management. Our first public action was in March, when we announced the suspension of all capital expansion work globally. We cut projected capital spending for 2020 in half, to approximately $115 million, reflecting the decision to pause expansion work in both Argentina and Bessemer City, North Carolina.
Quarterly spending for the rest of the year will come down significantly from the first quarter. The decision to halt expansion was not made until well into the first quarter. And since then we have been focused on stopping key project items at strategic points that will allow us to resume work as quickly and cost effectively as possible. We remain confident in continuing to fulfill orders from our customers in the interim and remain committed to our long-term capacity expansion goals. While we cannot currently provide a specific date for when we intend to resume expansion, it’s unlikely that it will be before the industry returns to more normalized conditions.
Moving to Slide 8 with respect to our balance sheet, we worked closely with our relationship lenders to amend Livent’s existing credit facility to provide sufficient liquidity to support operations during this time of uncertainty. We have increased the net leverage covenant limit on our revolver, allowing for up to 6 times EBITDA through 2020, versus 3.5 times previously. This higher leverage limit provides a safeguard against COVID-19 stress-case scenarios that we have evaluated. We will also remain focused on reducing spending in all non-essential areas, while diligently managing working capital.
Looking beyond 2020, we continue to work with our lenders to evaluate alternative debt structures beyond our existing $400 million revolver maturing in 2023 that better supports Livent’s long-term capital requirements.
To conclude my remarks, I want to address the topic of guidance. In light of the evolving impact of coronavirus pandemic and the broader uncertainty in the global economy, Livent withdrew its previously issued full year 2020 guidance in early April. Following the two weeks of stoppage in Argentina, we now expect lithium carbonate production volumes to be flat in 2020 year-over-year. We plan to sell all 4,000 tons of hydroxide inventory that we carried into 2020, and we’ll run our hydroxide operations this year with the intention of meeting all customer demands while minimizing third-party carbonate purchases. We will not look to build any inventory in speculation of a rebound in demand. We intend to provide an updated financial outlook once we have a greater visibility.
With that, I will now turn the call back to Paul.
Thank you, Gilberto. I want to conclude by looking beyond the near-term challenges to focus on some of the longer-term themes that continue to hold true in our industry. While there is uncertainty around near-term lithium demand and the implications of a coronavirus-led downturn on electric vehicle sales, there is no indication that the longer-term push to electrification has meaningfully changed. We do not believe the key fundamentals that are driving the shift to electric vehicles have changed. These fundamental drivers include strong regulatory support around the world, for cleaner air and to fight climate change, as well as advancements in battery technology and increased manufacturing scale that will bring EVs towards cost parity with internal combustion engine vehicles.
In another display of commitment to the industry, the Chinese government recently announced that new energy vehicles bought in 2021 or 2022 will be exempt from federal purchase taxes. The government also extended the NEV subsidy program through 2022 from its previous 2020 expiration, although it is stepping down subsidies over that timeframe. And in Europe, despite auto sales being down significantly year-to-date, EV penetration rates are at all-time highs as we move closer to CO2 emission compliance dates. The shift to increased use of lithium hydroxide also continues, in both the cathodes of electric vehicles and energy storage more broadly.
With respect to high nickel cathode technologies, which require lithium hydroxide, there has been an increased focus on chemistries beyond NCM 811. Additional developments and success have come from the use of NCA, NCMA and other blends incorporating higher nickel content. There have been recent announcements of several new electric vehicle models in China using LFP-based cathodes. However, higher use of this legacy cathode, which can use carbonate or hydroxide, is in no way contradictory to the trend of higher hydroxide demand. We have always stated that not all energy storage applications will have performance specifications requiring high-nickel cathodes. This can include shorter-range and commercial vehicles, mobile devices or stationary storage applications, to name a few.
As battery technology continues to improve, and premier global OEMs roll out larger electric vehicle platforms, we still project that hydroxide demand will grow at a higher year-on-year rate than carbonate and make up an increasing share of the energy storage market. With that said, we continue to operate and plan under the assumption that both products will be of critical importance for long-term energy storage solutions.
Finally, given the significant reduction in announced development and expansion plans, there is greater uncertainty over where the supply of lithium to meet future demand will come from over the medium- to long-term. While near-term demand uncertainty is the current issue that most industry players are focused on, the debate will ultimately be drawn back to supply. And this period of depressed lithium pricing over the last few quarters has made clear the challenges that the current industry-wide business model is creating for the future of our industry.
As auto OEMs have become more directly involved in the electric vehicle supply chain, there has been a heightened focus on ensuring that not only are supply partners fully integrated between lithium chemicals and resource, but that there is a path to increasing capacity to meet higher qualified demand needs over time.
However, at current average market prices, and by that I mean the blend of prices across all geographies, not just the unsustainably low prices we see in the China market, there are little to no lithium development projects out there that can be considered economically viable when looking for a reasonable return on invested capital. In fact, at these prices the majority of lithium projects do not even cover their cost of capital. In order to ensure that lithium supply continues to grow and keep up with accelerating future demand, there must be greater predictability in pricing or firmer longer-term commitments from customers before our industry can start to invest for growth again.
In addition, OEMs have placed greater importance on where their lithium is being produced for a number of reasons. The disruption to global supply chains from the spread of the coronavirus has reinforced the importance of not being reliant on a single region to meet supplier needs and the benefits of localizing parts of production. China and greater Asia represent a significant portion of the energy storage supply chain today, so the impact on the lithium industry has been more visible from the onset of the pandemic.
Livent’s ability to serve customers with lithium products from a global manufacturing network, with hydroxide from both the U.S. and China, as well as the security of supply that comes from our ability to use third-party material in our hydroxide production, has been particularly valuable to our customers. And while most recent lithium compound production capacity has been built in China due to lower capital cost, the importance of alternate EV supply chains that do not run through China is growing.
The localization element of OEM focus is also rooted in sustainability objectives, and we expect this to be magnified as EV models are rolled out on a larger scale, and especially as the number of electric vehicles sold in Europe increases. And with carbon-conscious principles in part behind the transition to electric vehicles, we believe there will be a bigger push to reduce the carbon-intense practice of shipping unfinished raw materials or intermediate products to multiple locations around the world. Livent has been sharply focused on its own global footprint as a standalone company since the time of its IPO. As part of these efforts, we will be launching our revised sustainability program, as well as outlining our broader ESG framework, as part of a series of releases to be provided throughout this year.
In closing, as Livent looks beyond current market conditions, we believe that our core advantages, the low cost and sustainable nature of our brine-based operations, our partnerships with leading battery producers and automotive OEMs, and our continued investment in developing next generation engineered lithium products, position us to be a prime beneficiary of the return to improved lithium market dynamics.
I will now turn the call back to Dan for questions.
Thank you, Paul. Tina, you may now begin the Q&A session.
[Operator Instructions] And your first question is from Bob Koort with Goldman Sachs. Please go ahead.
Good morning. This is Dylan Campbell on for Bob. Last week one of your competitors noted that second quarter as battery manufacturers catch up on backload orders there would be somewhat insulated and most of the impact from the shutdown of OEMs would hit the second half of 2020. Are you seeing something similar?
Look, it’s a complicated question because ours is not – it’s not an industry where all the dynamics are the same amongst our customers. There is certainly been an issue in our industry of a shortness of finished materials in the supply chain. I mean, we’ve seen many conversations about not enough battery cells being available, but it’s not as simple as just simply using this downtime to build more capability. We’ve seen certainly battery factories closed down because of the coronavirus in the U.S. and large parts of Asia at times as well, and that certainly had an impact.
We’ve also seen some tension between the ultimate consumer, the OEM, who was buying these products, who started to look at their own cash flows, not being particularly willing to fund a buildup of inventory back through the supply chain. So, well, yes, we have seen that trend at work, we’ve certainly seen battery producers take the opportunity to build some inventory. I’m not sure that it’s a particularly sustainable practice that will continue for much, really more than a couple of months in the current environment.
Got it. And could you talk a little bit about the options for bearing your evaluation of alternative debt structures? And then I guess is there a pathway for some type of agreement with some type of downstream player?
Let me talk about the debt piece first. Look, we’re at the very early stages of this, but it’s clear using a revolver with covenant restrictions that really wasn’t designed for long-term capital projects. Look, frankly, was never designed to be the permanent capital structure that we wanted to put in place. And I think what we’re seeing now is likely just going to have to accelerate the process of putting in a debt structure that’s makes more sense for business, with a capital and financial profile of ours. We will focus much more on longer duration and greater certainty around that, less liquidity challenges to what we do from the debt profile.
And the second part of your question, maybe you could just clarify what you’re asking me there.
Yes, I mean, I guess is there any type of pathway for pre-purchase with the end product or some type of agreement with downstream EV or battery producer given kind of that emphasis of securing supply for the feature that you were referencing?
Yes. Look, it’s an interesting question. The challenge you have with that is if you’re a downstream consumer or a downstream producer, you have some pretty significant calls on your capital yourself, right, whether that’s to expand, whether that’s to fund new technologies, whether it’s to build new battery plants. And so while you can certainly look around and see the logic to that and we can look at some very large consumers of lithium. It’s also sometimes a little difficult to understand whether the right thing for them is to deploy capital in this way in order to take the price of the lithium down or is it better to frankly just allow the lithium industry to finance itself by offering greater price certainty and more investible economics at those prices. And I think the jury’s still out on that thing.
While ever we keep having these demand disruptions, while ever things like COVID-19 are going on and while ever our industry is overbuilding on the supply side, it’s a conversation that that can be pushed further down the street. At some point, there’s going to have to be a reckoning for anybody who wants to growth in the lithium industry, you either going to have to provide capital to an industry such as ours or you’re going to have to provide prices that are high enough to enable us to go out and get third-party financing. And I think I’m not sure we’re in a place yet where either of those is quite ready to happen, but one of them will for sure.
Thank you.
Our next question comes from Chris Kapsch with Loop Capital Markets. Please go ahead.
Hey, Chris, if you’re there, we can’t hear you.
Why don’t we move on to the next question?
Your next question is from Chris Parkinson with Credit Suisse.
Hey, Chris, you there? Hey Tina, are we having some technical challenges on your side or is this just lines of the question asker that we have a problem with?
I believe we may be having a technical issue. One moment.
Okay. Chris Kapsch, can you participate? Your line is open.
Yes. Hi, it’s Chris Kapsch.
Hey, Chris. We can hear you now. Great.
Sorry about that. I don’t know what’s going on. So I don’t – I was blanked out for like 15 minutes, so apologies if somebody has addressed this already, but, so one of your larger integrated lithium competitors characterized the industry demand curve has been pushed to the right. You mentioned like you see the fundamental drivers as very much in place. So maybe there were just talking about semantics here, then maybe focus a little bit, just more on near-term disruption. Could you – would you concur that, like at least near-term, that the demand curve has pushed to the right, or do you feel based on your insights with your relationships that it’s business as usual?
I would never disagree with such a love and eminent competitor of mine on such matters. I think there’s – the shape of the curve is different today for sure. I don’t know whether it’s pushed out a year, eight months, six months. I just don’t have enough data to point to that. I’ve characterized 2020, sometimes I’ve heard it characterized by others and I think it’s a valid one, will 2020 turn out to be a bit of a lost year and it’ll kind of skip a year of growth in 2020. I think that’s an absolutely plausible scenario. Although, again, it’s just early to really see because it’s hard to know because the back end of this year is going to largely be driven by how people feel about the first half of 2021 and maybe even the second half of 2021.
What we have heard though is generally speaking a quite vocal commitment to 2022, 2023 and beyond volume commitments by some of our customers. So while they’re saying, look, we may be a little delayed in taking material, you should not assume that we will want any less material by the time we enter 2022 because I think most of them think that they are just going to be under just as much pressure to launch these EVs. It’s an interesting dynamic that when they are capital constraint, they look down all of their own projects and say, where do we deploy this capital?
And it becomes increasingly clear to us that they’re saying, look, electrification has to happen for whatever reason, and as changing our spending or reinvesting in internal combustion engines or putting a lot of capital towards maybe less certain revenue generators like autonomous driving maybe aren’t the right things to do right now and we should be doubling down on where the future inevitably lies, which is electric vehicles. And I think that’s what probably – while they’re looking at their near-term patterns, obviously their plants are closed in many cases. I think they’re starting to realize that it probably accelerates their portfolio transition even more rapidly towards a predominantly electric fleet.
Got it. And then the curtailment of your, with the halting or suspension of your CapEx expansion, how do you feel about fulfilling those demand requirements, which you just mentioned, albeit, more pushed out maybe a little bit in terms of ramping of their demand, assuming it happens, generally to magnitude that you’re referencing in sort of 2022 timeframe.
Yeah. It’s – maybe it was the single largest question we ask us. I’m going to put the capital piece and the ability to finance piece to one side for a moment, but from a pure construction and engineering perspective, now there’s two elements to what we’ve been trying to do, build on more carbonate, build on more carbonate in Argentina and then line up the hydroxide expansions with that either at the same level or maybe a little bit behind to go a little bit longer carbonate.
I think one thing that we’re looking very closely at right now is while phase one in Argentina clearly is now delayed, other there opportunities for us to combine phases one and two so that we still get instead of 9,000 tons and then a year is too late, or another 9,000, 10,000 tons, we try and bring it all on at once. And so that we have a bigger step up in a single go than trying to do it in smaller increments.
And we’re taking a long, hard look at the practicality of that. It’s difficult today, frankly, because we’re doing this in Argentina. Argentina is in enlarging a complete lockdown. There’s no movement between provinces. It’s very difficult to move people around. You can’t – certainly can’t fly in and meet people. So we have to sort of get through this short-term restriction on our activities so that we can start to ramp up and then we can start to answer the question now what does the shape of the expansion look like. We will certainly expand and our plans haven’t changed, but again, just like the demand curve is quite likely to take on a different shape.
And our next question is from Chris Parkinson with Credit Suisse.
Great. Thank you. You hit on this a little, but can you hit a little bit more about just kind of the net effect on the cost curve, just given the magnitude of the expansion deferral, which honestly it’s been going on for quite some time now, or basically almost a year. So you’ve seen a lot of things to kind of keep that down to the right. And if you could hit on that in the context of both carbonate and hydroxide and just how you believe regard – your beliefs in a product quality, you should also plan your estimates? Just where do you see the current cost curve? Forget 2020, but for kind of 2021, 2022, how has your thought process changed around that? Thank you.
Yes. Thanks, Chris. I’m not sure our thoughts on the cost curve have really changed that much if I’m completely honest. I think you’ve really got and continue to have in both carbonate and hydroxide, two very different producers. You have a fully integrated producer and then you have a non-integrated producer. The non-integrated producer today is able to take advantage of some very low – in my view, at least very low spodumene prices. When you at spodumene prices of $400 and $450 a ton and you look at some of the miners out there with the exception, probably Greenbushes, nobody can produce close to that level continuously as they move through different parts of their mines.
And so really the profit pressure has been on the raw material and there’s no reinvestment economics at these prices at the spodumene. I personally find it fascinating that in an environment where a non-integrated future has had its single biggest input cost for by 50% from about $800 to $400 a ton, they’ve also allowed their profitability to fall at the same time because there’s been a desire to bring on conversion capacity in China, but what you find is that’s for a heavily leveraged play on the spodumene cost and other frictional costs. We’ve also found because of the way that they are operating, they’ve found it increasingly difficult to meet tight-knit and tighter quality standards that are being imposed upon them as we move through these next generation of batteries.
And so we found that become more and more clear as we’ve been through the last six or nine months that really the usual crew of two or three or maybe four people actually getting qualified remains the case. There were very few customers that we’ve seen new entrance coming and successfully qualifying them to or whether that’s in carbonate but especially in hydroxide.
The second point that I think people have to understand, I mean, when we see lots of comments on a cost curve, but that cost curve is always a marginal cash curve that people look to. But if you look through the commentary from various producers or you frankly just sit down and do the math yourself, the breakeven price of production is typically about 50% higher. And when I say breakeven, I mean to report operating profit of zero because by the time you brought in depreciation, by the time you brought in the distribution, logistics, duty, freight as well as corporate costs that we all bury – that we all bear, you need about 50% higher to breakeven at an operating profit level, which may sound okay, that’s still a low price. You can’t finance with zero operating profits. So that’s fine if you’re just going to run your assets and do nothing more, not grow, not expand. Now you need to earn more than that to cover your interest, expense, et cetera.
So when we look at the curve, we’re trying to define a curve that’s appropriate for reinvestment and reinvestment level that’s in line with the demand patterns that our customers and independent observers keep telling us we’re going to need. And I think what you find is you’ve sort of got an all in cost that the marginal producer needs to hit that is well in the double-digit per kilo of either carbonate and especially of hydroxide, and that’s again assuming they can meet the quality requirements. So it’s not so easy as maybe an iron ore or copper just building a simple cost curve because it’s a very, very fluid market and have multiple steps in it that can distort it depending on the conditions of any one of those steps.
That’s a very helpful color. Just understanding, obviously, you can’t give your guidance, but you did hit a little on your thought process regarding the combining the phases of the project. This – from the top down, just given the current scenario, what would you kind of view as kind of your base case scenario in terms of your expectations for getting back on track? And what would be kind of a disappointing scenario from your perspective, just very broadly? And what that would mean for your own cash flow projections? Thank you.
So, when you say – Chris, when you say getting back on track, back on track, whether you’re talking about with the Argentina expansion or –?
Correct.
Okay. Yes. Yes. Well, look, we’re a long way through the first phase of expansion in Argentina. And the first thing I would say is we cannot do anything in Argentina. We’re not permitted to do any construction. We’re not permitted to have people out there working. And so we have not only stopped, but we’ve actually started the process of demobilization of projects from the Salar.
So when we do start up, it’s not just going to be flicking a switch, we’re going to have to go through the whole process of remobilizing. It’s clearly not going to happen in the Southern hemisphere winter. And frankly until we get great to clarity about 2021 and what our level of profitability in 2021 is going to be, it’s certainly going to be hard to convince anybody to extend capital to us on normal commercial terms in order to allow us to start that back up. So I expect that the decision is more likely to remain in the back half of 2020 and early 2021 than it is in the next couple of months.
If we can successfully reengineer the product or the project, I would expect that it will still take us more than a year, well more than a year possibly double of that to bring the extra volume online that will though mean that will bring a lot more on when we do it, but right now it’s a highly uncertain environment. I think to ask me what would I be disappointed by, I’m disappointed already. I’m disappointed that we’re in this place. I’m disappointed that we’re not able to continue. Argentina operations remain one of the lowest cost producer of lithium product in the world. And it’s just disappointing to me that we’ve had so many external factors that have created these problems for us with that expansion.
Thank you.
Our next question is from the line of Kevin McCarthy with Vertical Research Partners.
Yes. Good evening, Paul, I was wondering if you could run through your portfolio of lithium products and comment on what you’re seeing here today with regard to a demand for, A, hydroxide, B, butyllithium and C, lithium metal. What are the similarities and differences in the patterns there?
Sure. Well, I mean, lithium metal delivers small business today, it’s used in a couple of small applications that are just fundamentally different, right. The most of the high priority metal that we sell is going into non-rechargeable lithium ion batteries and again it’s a small business. The butyllithium business as I’m sure is a much more diverse application business, but it is largely a GDP-driven business.
It’s largely a general industrial business, but it’s also a product that frankly customers don’t hold any inventory for very good reasons. And so there’s not a lot of slack in the system whatever people continue to produce, and when people are producing pharmaceuticals and are producing rubber products for medical devices and other areas, we’ve certainly not seen major, major issues or major, major indications that that demand is going to be the lower this year in the butyllithium business. We have seen some noise in the automotive tire space driven by plant closures, but even there they’ve really been relatively small.
So that’s a business that’s frankly so far and I stress so far because it feels to me it’s still very early in 2020. It’s held up reasonably well. Lithium hydroxide I think is a frankly more complicated business. What we’ve seen is continued commitment towards many of the battery platforms that we’re, talking to our customers around.
But frankly, what I might call a reluctance on the part of the battery producers to pull the trigger and get on with the building process and place the orders for the product. Because I think they themselves are still waiting for guidance and some leadership from the automotive OEMs about how aggressively they should go with their build outs.
It’s certainly not, it’s not a market today where you look at it and see a tightening of supply and demand. But again, that’s probably as much because the demand side feels so distorted right now. And especially because we have such a big drop off in January, February time with the COVID in Asia. And now we’re starting to see it pick-up again while the rest of the world slows down. It’s very difficult to read the hydroxide energy storage hydroxide market at the moment.
Thank you for that. My second question relates to potential for industry consolidation. You’ve probably seen press reports out of Australia, indicating that Tianqi made divestures stake in Talison. If you look out over the next few years, do you think that the industry needs to consolidate? And if you do, what does that path look like? As I look at it, the incumbents aren’t exactly swimming in pools of excess capital. Energy companies are constrained, do you think new entrants will come in and catalyze the process or how do you think it’ll play out?
How long we got left on the call? Okay. Let me try and do that reasonably quickly. I think one thing I would say is when you have a single company that is in financial distress, and a big important company in financial distress, if that is as a result of both specific factors related to that, but that company that I can imagine that that a stronger competitor comes along, but frankly I’m not sure that’s entirely the case. I think there’s a, there’s some company specific but also some pretty significant industry headwinds that drives challenges.
We all face them right now. We all face them. I don’t think anybody in this industry who is subject to normal commercial pressures feels that they have access to anywhere near enough capital that they need to take advantage of the opportunities in front of them. I don’t frankly know that consolidation solves that problem too much.
You can maybe see an argument that if you have consolidation and therefore you take out excess supply as a result, but that’s not really the issue in our industry. Could you see a new entrant with very deep pockets coming into this industry? Possibly. I would say that ours is a difficult industry to predict. It’s a difficult industry to understand and I have a lot of sympathy for anybody who wants to go to their board and say, I want to turn up and buy a lithium company.
Let me present the financial model to you and talk you through what’s been happening in this business over the last five, six, seven years. It’s not an easy story to sell and it’s still a very immature early stage business where maybe waiting two or three more years and see how the industry shapes out might be a more effective M&A strategy for a new entrant.
I say all of that said, no, I don’t really see a lot of consolidation. I frankly see the opposite more. I think I will have far fewer new entrants being able to or being willing to take the risk to jump into the market. I think it’s just going to be financially almost impossible for anybody, regardless of the quality of your resource in the next few years to easily enter into this market.
Okay. I appreciate your thoughts. Thanks.
Our next question is from the line of Mike Harrison with Seaport Global.
Hi, good evening. I was wondering, I understand the difficulty in forecasting the pace of electric vehicle demand or OEM demand from here or macro recovery. And obviously, the consumer situation all very difficult to figure out, but I was wondering if you can shed a little bit more light on, on what you’re seeing in terms of inventory levels and maybe dig on that inventory question a little bit more.
Really just trying to get a sense of how a de-stock or restock cycle could play out and maybe when we get back to a sales number, volume numbers that track demand a little bit more accurately versus having that inventory component there.
Sure. Well, let me try and do that. Again, it’s difficult to talk about inventory levels without a clear view of future demand because what may have been excess inventory one day with a rebounding demand doesn’t feel like excess inventory. But I would say generally speaking, we have seen lithium hydroxide inventory levels at pretty low levels for multiple reasons. That just is not, it does not appear to be a lot of finished lithium hydroxide customers or at the supplier side.
Lithium carbonate, we’ve seen a buildup of lithium carbonate industry at certain customers who had over contracted as well as at some suppliers who have built inventory because carbonate sits for quite a long time clearly. And have built inventory ahead of the future largely because it’s just the most efficient way to run your operations. And so if you can and you can afford it, why not?
We see certainly an excess inventory of spodumene concentrate, sat in China waiting to be processed. It probably hasn’t moved that much because of the lack of activity in China in the last three or four months. And we’ve seen a continued shipping of spodumene concentrate from a couple of suppliers in Australia to China, but that has largely been from their own inventory levels.
So some of this spodumene producer’s own inventory levels have certainly fallen down when you compare their production to that, to their shipments, it’s clearly been the case. So, I think throughout the lithium chain, generally speaking, is a bit of a mixed story. I think if you do get any kind of pickup in demand, I think that most of that inventory will disappear frankly pretty quickly. And the only question then will be which pieces of that supply chain can actually increase their production quickly enough. It’s probably not the carbonate guys, probably not the spodumene side of a rapid piece of time. But I’m not about to predict that that’s going to happen anytime soon.
All right. Understood. And then I was also wondering about the thought process on, getting the additional covenant flexibility. Was there something special about the six times EBITDA number or was that just the largest number? They were willing to give you?
The larger the number, the more special it is when it comes to covenant relief. Because you know, no, look, I think frankly, it’s all part of this, nobody wants to run close to covenant. We don’t want it. The banks don’t want it. It doesn’t create anything, any good dynamic. And so the number one objective on our side and on the bank side is to make sure that covenants and not even the slightest issue. And so that was really the question of what frames our target for what the right amount of covenant relief was going to be for us.
Understood. Thanks very much.
Our next question is from Steve Byrne with Bank of America.
Yes. Thank you. I’d like to follow-up on that covenant relief question. Is the EBITDA, in that ratio trailing 12 months and given 2020, it’s going to be a tough year. Is there not a need for a relief in 2021 is that 3.5 times limits potentially a challenge for you in the first quarter of 2021?
Yeah. Look, you’re right, 2020 there’s a trailing EBITDA number as is always the case with these bank covenants. They’re not quite the same as we report externally. There’s always tweaks and adjustments and changes to them but yes it is a trailing EBITDA number. But frankly our expectation is that the facility that has those covenants in it will be taken out by a different debt, piece of debt before the end of the year, one that’s more appropriate to where we are.
As Gilberto mentioned, we’ve already started the process of conversation with our banks to say, look, let’s structure something that makes more sense to Livent and what our investment profile is, what our earnings profile is because, this is a facility that we inherited from, from FMC. It was designed to be a temporary facility such that it got us through the first phases of liquidity and it was always the intent to put in place a longer term type capital structure than this. And so we would expect to get that done at some point this year.
Thank you for that Paul. And wanted to ask you about this deferral of Phase 1 in Argentina. Does that lead you down a path of at least looking over the menu of other technologies in development that might help you increase productivity of your existing brine management down there? I understand there’s some membrane technologies that can help extract that lithium and lead to less waste. Is there anything on the technology front that, that is, is looking more interesting as an alternative to building another set of evaporation ponds?
No, just to be clear, we’re actually decommissioning our evaporation ponds, not building new ones. I think that’s an important difference. We don’t have a great deal of waste. Our yield from the brine as it comes out and lithium turns is well north of 90% without existing technology. And again, we have four, I think four now evaporation ponds. And part of our plans for the expansion was actually to decommission them because frankly we don’t need them. We don’t really use them. They’re expensive to maintain. They are certainly expensive to build and they, as I said, aren’t really needed for our process.
So, when you talk about, you hear a lot of people talk about direct lithium extraction and some people have different definitions of it. We’ve been practicing direct lithium extraction since we started this facility in the late 80s, early 90s and we’ll continue to use that technology. So no, I don’t see a technology change making a yield on our [indiscernible] was in Argentina.
Thank you.
Our next question is from Joel Jackson with BMO Capital Markets.
Hi, good afternoon. Paul given the challenges right now, I do appreciate the commentary, about wanting to stop the projects, expansion project at a good state to be able to pick them up down the road. But why not just stop right now, save the money, and try to really protect the company, the balance sheet as best as possible here.
So when you say stop the project, I’m not sure it’s Joel. I understand why we’ve stopped all projects.
Well, you say stopped. But you’ve got a $59 million of CapEx left in the last few quarters of the year. $40 million is going to be growth capital. Right?
Right, right. So let’s just, let’s be clear on that. The vast majority of that is paying for stuff we already spent before we stopped. Right?. Because as I’m sure you know, the timing of the cash going out the door is not the same as the contracting or the commitment or the work getting done. We don’t, we don’t pay in advance. And so what you’re seeing there is the runoff of the capital commitments on the project for work already done. So frankly, there is no work being done.
There’s a small amount still being done in China to complete, both the carbonate and the hydroxide units, because they are modular units, they’re largely complete. So, there’s some capital going to go into completing them. But it’s not a huge amount to be perfectly honest, but there will be no new contracts, no new spending initiated and hasn’t been since the start of March now. And so this is just a normal timing like of frankly paying our suppliers, our contractors, our engineers for work that they’ve already done.
That’s helpful. Thanks. And then if you’re going to bring on the two phases for carbonate together, that’s a pretty good chunk of capacity and 19,000 tons in one slug. We’ve seen SQM challenge to really ramp-up their operating rates. It’s Tal building inventory. So what is the, when you think about that strategy, potential strategy change, what are the concerns there trying to dig that much at one time could be too much for that year?
It’s a great question. The reason that we actually did the expansion the way we did it was to try and phase it from a technical perspective and an engineering risk perspective more than a supply perspective. Bear in mind, as I said, it’s now likely to be 2022 before any of that material comes along. I would actually be quite happy if we could do that and bring it all online and not bring hydroxide on at the same level simply because it gives me that balance that I’ve been seeking for a few years now to try and get longer in carbonate.
And we are one of the world’s lowest cost producers of carbonate down there. And so bringing it all in one go from a what will I do with it perspective doesn’t concern me really that much. And I think given everything that we’ve learned and the confidence we’ve built out of our success in the project today, I personally believe that the technical risks of doing two phases at once are probably not as great as that we may otherwise have thought. That’s not to say it’s the same. It isn’t. It’s different execution and it’s different risks. And it certainly does take the risk that maybe the lithium market isn’t where we think it’s going to be in 2022 or 2023 when it does come online.
Thank you.
Our next question comes from P.J. Juvekar with Citigroup.
Hey Paul, how are you? Good to hear from you.
I’m well P.J., you as well, good to hear you P.J.
I got one question but it’s a bit comprehensive question. So you talk about localizing the lithium supply chain and the supply chains away from its heavy lines on Asia and what does that mean? Does that mean you see more hydroxide plants built and being built in Europe and U.S. who sort of spends that money? Is it, you guys or the auto industry and when do you think that will happen? Do you have a timeframe in mind when these plants are – supply chains can move because it’s really important for the lithium industry
But it’s a critical, it’s a critical question, P.J. Like let’s just step back a little and understand what, what you can and can’t do in short order and what the challenges are. The first and single biggest factor is where the resource is, right? If you really want to localize supply, you should frankly put as much of the production as close to the resources you can. But I think we’ve, we know that Argentina and Chile are not going to suddenly develop cathode material businesses. And we’ve seen the challenges in Argentina and Australia, we are building spodumene conversion plants at the mines in terms of capital cost and operating success or otherwise.
And so the first thing you have to start to sit back and think about can we actually come to a different business model that allows us to stop shipping spodumene concentrate around the world. And now clearly shipping carbonate into that form, into hydroxide is one way to do it. But that’s a limited, there’s only so many of us who have actually got the capability to do that and there’s only so many low cost lithium carbonate, brine based lithium carbonate resources available to do that.
And so it’s not easy to see how you localize the production of either hydroxide or carbonate. I think the second challenge, which is maybe a bigger one to be perfectly honest, is what are you localizing against? Cause if you’re localizing it against the ultimate, if you can’t localize with the mine or the resource then maybe you can localize with the consumer, but there’s a step along the way, which is your cathode active materials. And there’s very few cathode active material plants being built outside Asia at the moment. There’s a big one going in Europe or maybe a second one.
So, I think Europe is trying to get there, but still your challenge is this is a supply chain that has remote resources, concentrated geographic cathode material plants, but then a very diverse urban markets, whether it’s the U.S., Europe or various Asian markets. So the real question is what does localization really, really mean? And the short answer to that is I think every environmentally sensitive, consumer sensitive carbon conscious seller of vehicles is wrestling with that question and trying to understand how far can we localize and how long will it take. I don’t have an easy answer for you, P.J. It is a key question.
Great. Thank you very much for that explanation.
And now I will now hand the call back over to Dan Rosen for closing remarks.
Thank you, Tina. That’s all the time we have for the call today. We will be available following the call to address any additional questions that you may have. Thanks and have a good evening everyone.
Thank you again for joining us today. This does conclude today’s conference call. You may now disconnect.