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spk01: Hello, everyone, and thank you for joining the Q1 2022 Albemarle Corporation Earnings Conference Call. My name is Darius, and I'll be moderating your call today. Before I hand you over to your host, Meredith Bandy, I'd like to remind you, if you would like to ask a question during a Q&A session at the end of the call, please press star followed by one on your telephone keypad. I now have the pleasure of handing you over to Meredith Bandy, Vice President of Investor Relations and Sustainability. Please go ahead, Meredith.
spk00: All right, thank you, and welcome everyone to Albemarle's first quarter 2022 earnings conference call. Our earnings were released after the close of market yesterday, and you'll find the press release and earnings presentation posted on our website under the investors section at albemarle.com. Joining me on the call today are Kent Masters, our Chief Executive Officer, Scott Tozier, Chief Financial Officer, Rafael Crawford, President Catalyst, Nessa Johnson, President Bromeen, and Eric Norris, President Lithium. As a reminder, some of the statements made during this call, including our outlooks, guidance, expected company performance, and timing of expansion projects, may constitute forward-looking statements within the meaning of federal securities laws. Please note the cautionary language about forward-looking statements contained in our press release and earnings presentation. That same language applies to this call. Please also note that some of our comments today refer to non-GAAP financial measures. A reconciliation to GAAP financial measures can be found in our earnings release and the appendix of our earnings presentation. And now I'll turn the call over to Kent.
spk14: Thanks, Meredith, and thank you all for joining us today. On today's call, I will highlight our results and achievements during the recent quarter. Scott will provide more details on our financial results, outlook, and balance sheet. I will then close our prepared remarks with an update on our growth projects and sustainability before opening the call for questions. Albemarle's leadership positions in lithium and bromine and our team's ability to execute have enabled us to generate increasingly strong results. In the first quarter, we generated net sales of $1.1 billion, up 44% compared to prior year, and that's excluding fine chemistry services in the comparison, which we sold in June of last year. This fundamental strength allowed us to more than double our EBITDA year over year. The supply-demand balance remains tight in the markets we serve. This has enabled us to significantly increase our 2022 outlook based on continued pricing strength in our lithium and bromine businesses. Scott will dive into the key elements of that outlook later in today's presentation. In terms of operational highlights for the quarter, the restart of our Wajana lithium mine and our marble joint venture is progressing well. First spodumene concentrate from train one is expected in May. We've agreed with our partners to accelerate the restart of train two with first spodumene concentrate from that train in July. Together, these two trains can feed conversion assets with annual capacity of around 70,000 tons of lithium hydroxide. Now I'll turn the call over to Scott to walk through our financials.
spk13: Thanks, Kent, and good morning, everyone. I'll begin on slide five. During the quarter, we generated net sales of $1.1 billion, a year-over-year increase of 36%, including the FCS business, which we sold in June last year. This is due primarily to increased pricing, as well as higher volumes driven by strong demand from diverse end markets, especially for our lithium and bromine businesses. For the first quarter, net income attributable to Albemarle was $253 million, up $158 million from the prior year because of the strong net sales, partially offset by inflationary cost pressures. THIS INCLUDES THE IMPACT OF NATURAL GAS PRICES IN EUROPE ON OUR CATALYST BUSINESS. ADJUSTED DILUTED EPS FOR THE FIRST QUARTER WAS $2.38. THE PRIMARY ADJUSTMENTS TO EARNINGS WERE A 7-CENT AD BACK FOR A LOSS ON PROPERTY SALES AND A 19-CENT AD BACK FOR TAX-RELATED ITEMS. ON SLIDE 6, I'LL WALK YOU THROUGH OUR FIRST QUARTER ADJUSTED EBITDA. FOR THE FIRST QUARTER, our adjusted EBITDA was $432 million, up 107% year-over-year. Their primary driver was variable price pricing, driven by the move to index-referenced variable price contracts and higher market pricing. lithium also benefited from the sales of lower-cost inventories, including a one-time sale of spodumene stockpiled during the initial startup of Wajana. Bromine was also favorable year-over-year, reflecting higher pricing driven by tight market conditions and a slight uptick in volumes that was partially offset by raw material and freight inflation. Catalyst was down relative to the prior year, primarily driven by higher raw material costs and lower volumes. That was partially offset by pricing. And lastly, corporate expense and foreign exchange were mostly flat year over year. Moving to slide seven, we have meaningfully increased our 2022 outlook, primarily to reflect continued strength in our lithium business. I'll discuss our lithium outlook in greater detail in just a moment. For the total company, we now expect 2022 net sales to be in the range of $5.2 to $5.6 billion, up about 60 to 70% versus prior year. Adjusted EBITDA is expected to be between $1.7 and $2 billion, reflecting a year-over-year improvement of 120% at the midpoint of the range. This implies a total company EBITDA margin in the range of 33 to 36%. And together, this translates to updated 2022 adjusted diluted EPS guidance in the range of $9.25 to $12.25 compared to $4.04 in 2021. Additionally, we are maintaining our CapEx guidance range of $1.3 to $1.5 billion as we drive our lithium investments forward to meet increased customer demand. You may have noticed that we widened the range of our outlook to prudently reflect greater volatility in pricing for sales and inflation for cost of goods sold against the backdrop of a turbulent macro environment. And regarding the quarterly progression of sales at EBITDA, on our last call, we indicated that we expected Q1 to be our strongest quarter of the year, primarily due to higher pricing and sales of low-cost inventory. Given the continued strong pricing and rising volumes, we now expect our second half results to be about 55% of the total year. Turning to the next slide for more detail on our lithium outlook. Lithium's full year 2022 EBITDA is expected to be up 200 to 225% year over year, up from our previous outlook for growth of around 75%. We now expect our average realized selling price to be about double last year. This is the result of our efforts to move toward index reference variable price contracts and a significant increase in index prices. We also have better line of sight to price in the full year. From the beginning of the year to today, indices are up between 85 and 125 percent. We're also assuming that our expected Q2 selling price remains at that level for the rest of the year. If current market prices remain at historically strong levels for the balance of the year, there would be upside to this guidance. There could also be additional upside if we transition additional existing contracts from fixed to variable pricing. However, if we see material declines from current market pricing or volume shortfalls, there would be downside to this guidance. There's no change to our lithium volume outlook for the year. We still expect year-over-year volume growth in the range of 20% to 30% as we bring on new conversion assets, particularly La Negra 3 and 4 and Kemerton 1. For bromine, we are raising our full-year 2022 EBITDA expectations with a year-over-year improvement of 15% to 20%. This revised guidance reflects higher pricing related to strong fire safety demand supported by macro trends such as digitalization and electrification. We also expect higher volumes following our successful expansion last year in Jordan. For catalyst, 2022 EBITDA is expected to be flat to down 65% year-over-year. This is below our prior outlook due to significant cost pressures primarily related to natural gas in Europe and certain raw materials and freight, partially offset by higher pricing. The large outlook range for Catalyst reflects increased volatility and lack of visibility, particularly related to the war in Ukraine. Given the extraordinary circumstances and the resulting changes in oil and gas markets, the business is aggressively seeking to pass through higher natural gas pricing to its customers. As previously discussed, we continue to expect the strategic review of the catalyst business to be completed later this quarter. The review is intended to maximize value and position the business for success while enabling us to focus on growth. I will now turn to slide nine for a deeper dive on our lithium contracts and pricing. With a change in guidance, you can now see we have more exposure to changing market indices. Our segmented approach gives more flexibility to customers while still allowing Albemarle to preserve its upside and returns on our growth of investments. This slide reflects the expected split of our 2022 revenues updated for current pricing. Battery grade revenues are now expected to make up 70 to 80% of our 2022 revenues. of which 20% is expected to be from purchase orders on higher short-term pricing. About half are expected to be from contracts with variable pricing mechanisms, typically index referenced with a three- to six-month lag, and the remaining 30% is from fixed price contracts. These fixed contracts also have price opener mechanisms to change prices over time. We continue to work with these customers to transition to contracts with variable index reference pricing. These negotiations are ongoing and progressing well. If we are successful, this could provide additional upside to our current outlook for the lithium business. Following our last earnings call, we received a lot of questions regarding our expected lithium margins. So I wanted to provide some additional color on the moving pieces on slide 10. We expect lithium margins to improve in 2022, driven by higher pricing, partially offset by the progressive commissions we pay in Chile under our core flow contract. Another item to consider is the impact from higher fixed costs related to the startup and ramp of our new facilities, such as the Wajana mine and our La Negra and Kemerton conversion assets. as well as the potential acquisition of the Chinjo conversion plant. These plants are expected to more than double our lithium production. Over time, the impact of fixed costs on margins will diminish as production ramps and costs are absorbed. As a reminder, Albemarle calculates EBITDA by including joint venture equity income on an after-tax basis. This year, because of higher spodumene transfer pricing from our green bushes mine, this tax impact is much more meaningful than it has been in the past. This is simply a result of the line item where the tax hits our income statement. Albemarle remains fully integrated from resource to conversion. So effectively, we pay ourselves this higher spodumene pricing. On a completely pre-tax basis, lithium EBITDA margins are expected to be between 55% and 60% in 2022. Slide 11 highlights our expected volume ramp as our new lithium conversion facilities are completed. Last year, we converted 88,000 metric tons LCE, including conversion at Silver Peak in Kings Mountain, Xinyu in Chengdu in China, and La Negra 1 and 2 in Chile. We are in the process of more than doubling conversion capacity with the expansions at La Negra and Kemerton, plus the acquisition of the Chinjo plant. We typically expect it to take about two years to ramp to full capacity at a new plant, including roughly six months for customer qualification. Tying all of this together, we expect to achieve $200,000 in 2025. Total lithium volumes are expected to be higher than that, including technical grade spodumene sales of about 10,000 tons per year, tolling volumes of anywhere between 0 and 20,000 tons per year, depending on market dynamics, and plus any additional conversion capacity we buy or build during this period. Finally, let's turn to slide 12 to look at our strong balance sheet and cash flow. Our 2022 revised operating cash flow guidance is $650 million at the midpoint. Relative to 2021, you can see incremental cash flow driven by the higher net income adding back higher depreciation. This is partially offset by higher working capital related to higher sales volumes and pricing, plus higher costs of raw materials and inventories. As a reminder, working capital typically averages about 25% of net sales. Our balance sheet is in great shape with $463 million of cash and liquidity of almost $2 billion. Current net debt to adjusted EBITDA is approximately 1.9 times. With rising EBITDA from higher pricing and volumes, we expect leverage to remain at or below our target range of 2 to 2.5 times. Our balance sheet supports the capex for our lithium investments to meet growing customer demand. Following our equity offering early last year, we repaid debt with the intention of relevering as needed to fund capital projects. We are actively evaluating options to do just that. We are planning to be in the debt market this quarter if market conditions are favorable. We remain committed to maintaining our investment grade credit rating and the debt markets provide a favorable avenue of acquiring additional capital. With that, I'll turn it back to Kent for an update on our projects on slide 13.
spk14: Thanks, Scott. First, let's look at a few of our expansions in Asia Pacific. Albemarle is focused on expanding global lithium conversion capacity to leverage our low-cost resource base. The acquisition of the Tenzo conversion facility is now expected to close in the second half of this year as we continue to work through regulatory approvals. We look forward to closing this transaction to bring an additional 25,000 tons of lithium to the market. The commissioning process at Kimmerton One is progressing well. We have introduced spodumene into the process and we expect to achieve first product by the end of the month. Kimerton 2 remains on track for mechanical completion later this year. At our China Greenfield expansions, we have broken ground at Meishan to construct a 50,000 ton per year hydroxide conversion facility. There are also options to expand that facility. The second China Greenfield project at Zhangjigang is currently in the engineering phase, and we are looking at options to produce either carbonate or hydroxide. Importantly, with our ownership stakes at the Wajana and Greenbushes lithium mines, we already have access to low-cost spodumene to feed these conversion facilities. As I mentioned previously, the restart of the Wajana lithium mine by our JV partner, Mineral Resources, is going well, and we continue to negotiate agreements to expand and restructure the Marble Joint Venture, and we'll update the market when we have more information. We also have a 49% stake at Greenbushes, one of the highest quality lithium resources in the world. The Taliesin Joint Venture is ramping up CGP2 and has approved construction of CGP3, and that's expected to begin later this year. In addition, construction of the tailings retreatment plant was completed during the quarter and commissioning is progressing to plan. Our intention is to ramp lithium resources in advance of conversion assets, in which case, in the near term, we could be net long spodumene. If so, we may elect to toll or sell spodumene. The expansions in Australia and Asia are just a portion of the globally diverse lithium projects we have defined to meet growing customer demand. We remain focused on growing our global conversion capacity to leverage our world-class resources in Australia, Chile, and the United States. Our Wave 3 projects should provide Albemarle with approximately 200,000 tons of additional lithium conversion capacity, which is higher than the 150,000 tons that we originally planned. Additionally, we continue to progress our growth options for Wave 4, which is expected to bring an additional 75,000 to 125,000 tons of capacity. This includes continued evaluation of options to restart our Kings Mountain lithium mine and build conversion assets in North America and Europe. Our high degree of vertical integration, access to high-quality, low-cost resources, Years of experience bringing conversion capacity online and a strong balance sheet provide considerable advantages for the foreseeable future. Looking now at slide 15. As you can see, Albemarle is executing a robust pipeline of projects all around the world. Our bromine business is pursuing incremental expansions in Jordan and the United States. These high return projects leverage our low cost resources and technical know-how to support customers in growing and diverse markets like electronics, telecom, and automotive. In Chile, the Solar Yield Improvement Project is progressing and is expected to allow us to increase lithium production without increasing our brine pumping rates, utilizing a proprietary technology to improve recovery, efficiency, and sustainability. We also have access to a lithium resource in Argentina called Antifaya. We anticipate restarting exploration of Antifaya later this year after securing all necessary permits. In Australia, we continue to progress study work on Kimmerton expansions to leverage greater scale and efficiency with repeatable designs. Finally, in the United States, The expansion of our Silver Peak facility in Nevada is on track to double lithium carbonate production. This is the first of several options to expand U.S. production. In Kings Mountain, North Carolina, we've begun a pre-feasibility study to evaluate restarting the mine. And at our bromine facility in Magnolia, Arkansas, we're evaluating process technologies to leverage our brines to extract lithium. This robust pipeline coupled with our industry knowledge and strong balance sheet provides significant growth opportunities for Albemarle. Moving on to our sustainability initiatives on slide 16. Creating sustainable shareholder value requires our company to continue to drive progress on our own ESG and sustainability efforts. And I'm proud of what we are achieving on that front. We will publish our 2021 corporate sustainability report on June 2nd. In that report, you will see strong progress in our work towards hitting our target reductions in greenhouse gas emissions and fresh water usage. Our initial scope three emissions assessment and our first full life cycle assessments for lithium products. You will also see further definition of our sustainability related targets, including diversity and inclusion. In addition to publishing our new sustainability report, we will host a webcast on June 28th, and I hope you will join to listen in. In that presentation, we will discuss next steps, including full CDP disclosure with TCFD goals and disclosures and third-party IRMA assessments at the Salarda Atacama. As you can see, we have accomplished a great deal, and we are committed to continue that progress. So this concludes our prepared remarks, and now we'll open the call for Q&A. Thank you.
spk01: So if you would like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. Also, please bear in mind this Q&A session is limited to one question and a follow-up per person. Our first question comes from . Please go ahead, .
spk11: Yes, good morning. Good pricing initiatives. You know, given that your leverage is down substantially, you know, it's a real advantage for you right now. Would you consider more M&A in lithium or getting into recycling or potentially going downstream? How would you view those options from a 60,000-foot view?
spk14: Well, so PJ, I think, I mean, we've always, we're looking at M&A on a regular basis. So I don't think I really, our view has changed. So we do want to be in recycling and we feel like we have a plan. We're working toward being in the recycling business. We look at resources on a regular basis for acquisition and we look at conversion assets as well. So our strategy has not changed. We may have a little more firepower now than we did in the past, but I think the strategy is the same areas, and we're pretty focused on those areas.
spk11: Also in Argentina, in Antofaya, what are the permits or hurdles that are remaining before you proceed? And similar for Kings Mountain, what could be some environmental concerns there which has impacted other projects in the region?
spk14: Thank you. Yes, I'll just comment at a high level. I mean, it's all the permits that we need. I think we're closer in Argentina than we are in Kings Mountain, but we're early in the process in North Carolina. But Eric can talk about more details there.
spk15: Yeah, but these are classical studies, PJ, this is Eric here, that you would do for any pre-fusibility work. There are, the Antifias site is a greenfield site. It has not ever been mined before. So there are a host of different permits from environmental onwards that would have to be achieved and those are underway. And then we would progress from there. In the case of Kings Mountain, this is a brownfield site. And so much of the work has to be done. And similarly on testing groundwater, testing environmental, there's a lot of work we're doing also with the community. We've engaged them very early on and did so earlier this quarter to participate in that process. And so, as Ken said, that's a little earlier on, but it's also a brownfield site, so it'll have a slightly different trajectory than, say, a greenfield site like Hennepiah. Thank you.
spk01: Our next question comes from Jeff Zakuskis from JPMorgan. Please go ahead, Jeff.
spk06: Thanks very much. You have a very clear idea of the capacity expansions you wish to execute over the next five years. What's the trajectory of capital expenditures from the $1.3 to $1.5 billion level?
spk14: I'm not sure. You mean over past the next five years?
spk06: Yes, exactly right. How do you expect your capital expenditures to change over that period?
spk14: Yeah, I think we expect them to be in that range over the next five-year period and going forward. I mean, it depends on opportunities. So resources, if we had additional resource, that would change that profile. If we were able to acquire or identify additional resource, that could change that. But I think our baseline, which we've laid out in our investor day, is kind of capital in that range over the next five-year period.
spk06: So lithium prices have really moved up. And, you know, are there limits to what cathode manufacturers or battery manufacturers can absorb? Or, you know, do you see any ceilings or, you know, we'll just see what the market brings?
spk14: Well, it's difficult to call what the market's going to do, so I think we have to see what the market is going to bring. I think there are economic factors that come into play, but when you look at the overall cost of a vehicle, I mean, there are a lot of components that go in there. Lithium starts to become a little bit material, but it's still a small percentage of that overall cost. So, I mean, look, our view is that prices – Yeah, the market is moving. They have recently just come down a little bit. I suspect that's because demand in China is off because of COVID-related issues. So it has softened recently. But we're trying to structure our contracts. We've talked about this for a while. So we move with the market. So we're not dislocated to the market either in an up market or a down market.
spk06: Okay, great. Thank you so much.
spk01: Our next question comes from David from Cohen. Please go ahead, David.
spk03: Think about expansion and your growth projects in North America. You discussed accelerating some activity at Silver Peak, growing out the Kings Mountain facility and restarting the mine there, and looking at, obviously, the Magnolia Brine operations. One, is there an interest or should we expect Albemarle to be filing any loan applications to look for some low-cost financing with any of these projects? And then my second part with that would be, do you anticipate building out conversion facilities in and around the Kings Mountain that would be sort of greater than your U.S.-based resource on the upstream side?
spk14: Okay. So there were a couple, uh, questions in there. So, uh, I think first, I mean, loans, I think we'd be interested if we can get, uh, economically viable loans better than we can do on our own. We're definitely interested in that to help us build out the battery supply chain in North America. And we would be looking to build conversion capacity locally. Our customers want local conversion, compact, local resource and conversion capacity. And then I think your question would be outsized conversion vis-a-vis the local resource that we have. So we'll have to work that out over time. But the way we see it, we've got to convert the local product. We'll probably have to supplement local product with product coming from outside the U.S. And then we want to make sure that as we do this, we're considering recycling as well. So we want to have not only virgin lithium coming from the resources in the United States and outside the U.S., but capacity for recycling as well. And we see that as an integrated facility that does that.
spk03: I appreciate the color on that. And then just my follow-up quickly. Maybe if you could just characterize the situation. You know, you reiterated your outlook around volumes and obviously increased the outlook around pricing. Are you seeing any impacts, I guess, from some of the shipping woes that we hear getting into China or getting product into China? Are you anticipating that and have you experienced, you know, little friction moving spodum and concentrate into your converters in China? And how do you see that situation kind of progressing throughout the year?
spk14: Well, I mean, we see that in all of our businesses, right? So we're fighting the supply chain, as you hear in the news and with every other business. We're fighting it, but we've been able to manage through it. Today, we can't say we don't have issues, but we've managed through it. But maybe, Nefta, Eric, you guys could comment a little bit on specifically what you see in, I guess, really around China and spodumene in and out.
spk15: So relative to China and the lithium business, just recall that we are an exporter as well as an importer. So a lot of the hydroxide production that we make in China goes to that market, and then a chunk goes outside and surrounding Asia countries as well. And in addition, as you point out, we're bringing Spodum in from Australia entirely to support those operations. We've experienced some customer impacts where we haven't been able, due to logistics, to hit certain timelines, but we haven't had any material impact to our revenues or to our contracts with these customers. And it comes down to just a very active supply chain team that is constantly managing various ports across the east coast of the eastern seaboard of China to find the right way in and out for those products. But, you know, there are thousands of ships sitting off the coast of China now, so it's no small task. And so we'll manage it on a day-to-day basis. The COVID crisis and how it's being managed there in China has definitely made this challenging. And we expect to continue to have to have that challenge and be very astute in how we manage it. But no impact of material damage. variety so far.
spk10: And I think for us in Bromine, China, we're a net importer. So for us, getting material in is the same for Eric, an extreme challenge. But we're also getting it on the back end, seeing containers return from China to allow us to load up our facilities in America and in the Middle East. That's probably the bigger issue. And that's part of the macro supply chain challenge and container movement around the world. We've got a great logistics team here at Albemarle and supply chain with a brand-new leader, and we're excited about what they're doing to manage this difficulty. But, again, no material impact. We've got a great team, and they're managing that very well for us.
spk03: Thanks, Eric, and thanks, Kent.
spk01: Our next question comes from Vincent Andrews from Morgan Stanley. Please go ahead, Vincent.
spk04: Thank you. Scott, I just was wondering if you could give us a bit more color on the working capital and how it works, just given so much of the increase in guidance was price-related. So is it just a question of receivables are going to spike for a period of time as these prices flow through, or is there anything going on on the inventory side as well?
spk13: Yeah, Vincent, I think you've nailed it. So as prices go up, obviously the receivables go up. We're generally averaging between 55 and 60 days as a total company. So you basically have two months of receivables and the impact of that. So that's a driver. The second one is on inventory, rising costs and inflation. We're seeing obviously our inventory costs go up as well. even though the quantities are about the same or actually a little bit lower from what we saw last year. So those are the two big drivers. We see a little bit of benefit in the payables to offset that inventory, but that's what's going on. Okay.
spk04: And just as a follow-up, you mentioned that there's some contracts that might be renegotiated mid-year off of fixed to variable. Do you have a rough idea of what percentage of your mix that could be, or that's at least in discussion?
spk13: Yeah, so if you actually look at the chart that we put in the presentation that breaks down our revenue, those fixed contracts make up about 30% of our battery grade revenue. And those are the ones that are in discussions right now. So we'll see. If we're successful, there would be additional upside. to the guidance as we move this to variable pricing.
spk04: But it's all the 30%, not a subset of it. That's in play.
spk13: Eric, do you want to provide some additional detail there?
spk15: Yeah, I would, just knowing the mix of business we have, Vincent and I would say it's a subset. We'd still have a double-digit percentage there. It wouldn't go to zero, but it could come down from 30% if we prevail. Okay, excellent. I appreciate the help.
spk01: Our next question comes from Joel Jackson from BML Capital Markets. Please go ahead, Joel.
spk16: Hi, good morning, everyone. I want to ask a question, and it's not just you, it's obviously the business and your peers, what you thought pricing would be and margins with a lot different look only three months ago, but into February, into that quarter, into Q1, and suddenly the way your contracts are working with index pricing, suddenly now It's a lot higher pricing. It's a lot better margin. The store is really different. So I want to ask, you know, what really changed and if things could change so quickly in three months, how can you be confident pricing, you know, in your base case can stay flat for the rest of the year?
spk14: Yeah. So, I mean, we've been talking about moving to these variable price contracts for over a year. And coming into the year, I mean, we're basically in the same position that we were at the beginning of the year. Most of the discussions that we've done, what most happened that changed our contract structure happened at the end of last year, toward the end of last year. But what's changed is pricing. The indices have moved up. Market has tightened. The market has gotten stronger from an EV demand standpoint, and particularly in China. So that's really, I think, was the driver. Those were the first prices to move, and other prices followed that. And it's a tight market. I mean, the demand is strong, and the supply is tight. It's a little bit of an imbalance, and that's what's driven pricing. will it, how it stays there. I mean, we have, you know, but there are lags on our contract. So we feel like we understand the second quarter pricing very good and we don't see it dropping dramatically. That's why we were comfortable giving guidance, holding what we see for the second quarter for the balance of the year. Um, what it does going forward after that, it's difficult, it's difficult to call, but it, uh, The market is still tight. It's gotten a little soft because the demand is off in China over COVID issues. Some of the EV plants were shut down. They're mostly back up now, but they are at lower rates. So demand is a little bit slower, which has caused a pause in the market, and pricing has come off a little bit. It's hard to see how that comes down over time. I mean, it can, but it's hard to see that happening very quickly.
spk16: Okay. If I follow up on that, so we should, if you're now more exposed to spot and not as much as six or price moving around a lot more, how does that change how you manage the business? Because you can have a view right now, like you just said, but obviously that could change in a month or two. And that may, that may change how you look at things, your risks, how you handle working capital, uh, what, what, what level, you know, how comfy you are with leverage. Um, cause it seems like your business now is going to be more variable. with spot price of lithium, which have surged and they're way more volatile than they were in the past. How does that change how you view the business month to month, quarter to quarter, how you plan for it?
spk14: Yeah, so our contracts, I mean, they're not all spot. So these are contracts that we have. Some are shorter term in the variable category. Some are short term that are indexed to the market. The longer term contracts we have are indexed to the market but tend to have collars on them with floors and ceilings. So that takes some of that variability out. So this is, I mean, it's a evolution of our strategy around pricing. We are more indexed to the market today than we were a year ago, definitely. And that was by design. And I think, you know, but we're confident in the volume growth and then pricing will, it will move up and down, but we have a very good cost position with the resource base that we have and our cost position, uh, we still think that we can invest capital to grow for this business and have confidence in that. Thank you.
spk01: Our next question comes from Alexi from KeyBank. Please go ahead, Alexi.
spk12: Thanks. Good morning, everyone, and congrats on renegotiating the contracts. Question on volumes, you're raising your Wajna production goals for this year, and yet your overall volumes are about the same for this year. Could you kind of explain what's going on with your volume assumptions in lithium?
spk15: Good morning, Alex, and thanks for your words. The volumes that we have guided to are 20% to 30% above last year's numbers of about 88,000. That's described to you in the chart on page 11. We had already contemplated in our guidance that some form of Wajna 1 would be used to support that volume growth. Wajna 2 coming on is to follow the strategy that Kent indicated of having an excess of resource capacity to conversion growth. And we will look, potentially, there could be some possible upsides. If that goes smoothly, it won't come on until the second half of this year, there's some possibilities to toll or sell that, as we indicated during our prepared remarks. So that would be certainly in excess to the 20, 30% of the range, which is our internal production.
spk12: Okay, I understood. Thanks a lot. And the second question on pricing, I mean, you indicate three to six months lag effect for half of your battery grade revenues. So if we take second quarter, for example, your expectation for second quarter pricing, and then we assume that these indices kind of stay flat where they are today, does that imply that third quarter price and perhaps fourth quarter price go up sequentially? Would that be right logic given these lags?
spk15: If, yes, given the lags, we only can see out, as Ken said, clearly out three months because of the nature of these lags. But if market prices stay where they are, yes, there's upside. Very clear there's upside. I think we said in our guidance that there'd have to be a material decline in market prices. And what we've seen in the past couple weeks in China does not represent a material decline. So there'd have to be a much more significant decline before that would have a downward impact on our guidance. Great. Thanks a lot.
spk01: Our next question comes from Matthew Toy from Bank of America. Please go ahead, Matthew.
spk02: That's a new one. Morning, everyone. So questions on Minres Marble joint venture. One, have they paid you for the 10% stake yet? Two... You know, who controls the decision to run Wajna and at what pace? Is that min-res? Is that you? Is that a joint decision? And then when you move to 50-50, is that going to establish after-tax accounting for that business as well? Yeah.
spk14: So let me try and take that. So they've not paid us for anything, and it's a concept, and we're negotiating that at the moment. So we're operating at a 60-40 structure that we had previously. So we're under discussions and, I would say, negotiations around expanding that JV, and that expansion would move it to be 50-50 at Wajina. But we've got to conclude all of that, and none of that will change until we we conclude the discussions and get the final documents. So the accounting, Scott, I'll leave that to you.
spk13: Yeah, so on the accounting, some of this depends on how those negotiate. So with a 50-50 joint venture, there's some complex accounting rules around control that we'll have to go through and evaluate that once those agreements are there. So there's two potential options there. One is that it is a consolidated joint venture on our books with minority, similar to what we do with JBC, or with no control, and it'll just run through equity income, which would then create that tax impact that you asked about. So more to come on that all depends on how the negotiations and the final contract comes out.
spk02: All right. That's helpful. And then what are you, or what are the assumptions for second half 2022 spodumene internal transfers? If I were looking at sizing that impact, is it still 1770 or have you moved that up?
spk13: No, no, that that's moved up. It's almost doubled. It's almost doubled from that. So I think it's Eric. Yes. Yeah.
spk15: Or we'll double. Right. It's, it's based on a formula with, um, that we've agreed to, the JV has agreed to, with the authorities in Australia for tax and royalty purposes, and then it's based upon a lagging basis of how spodumene prices in the market, several different indices, have fared. So based on that, what you see with spodumene prices rising, certainly with the salts prices as well that we talked about earlier, that average price is probably going to be on the order of double where it's been.
spk02: Yeah, understood. Okay, thank you.
spk01: Our next question comes from Christopher Parkinson from Mizor. Please go ahead, Christopher.
spk17: Hi, this is Harris Fine. I'm for Chris. Thanks for taking my question. So your competitors have been discussing that there has been a noticeable step change in your customers' willingness to enter into contracts and more of an acknowledgement that the world will be short lithium in the coming years. I was wondering if you could give your perspective on that based on what you're seeing. And I know it's early, but what that implies for the setup for 2023 pricing, you know, is it reasonable to expect that you would be able to maintain these levels?
spk15: So, Harris, this is Eric. I'll start and maybe others will add. So the market, there is certainly a very big concern about security supply. With the significant commitment that automotive manufacturers are making towards EVs and the excitement that that brings with it, there's a concern as well that whether the industry can spool up quickly enough to meet that demand. And in one regard, that might be why the spot prices are so high. It's just a fundamental concern in that regard. And that's leading to long-term partnerships discussions. And fortunately, that falls squarely in a strategy we've had for years now, which is picking the right partners, partnering with them long term, leveraging our world-class resources and our ability to execute well to give them comfort that we're the right partner for them to ease that concern around security of supply. Price is, as we've discussed at length in this call, is a function of what happens with the market indices for a large measure of our revenue. Currently, 50% of our battery grid revenues are going to be impacted by that. And that's going to be what the market does. So there will be structures we take on with these sorts of partners that, as Ken earlier said, will probably be index-based and have some collaring on either side of them. and a long-term commitment from these customers to buy and for us to supply, where that price is is going to be a function of the market. So hard to call that right now. Got it.
spk17: And piggybacking off that, in the past, we've been looking at sort of a 40% long-term EBITDA margin bogey for lithium. And 1Q looks like a little bit of an anomaly, but Given the current price setup that you're seeing is there any meaningful change to your long term normalized margin outlook it's a bit higher in 2022 and and. If you could also talk about helping us, you know come up with a framework for quantifying how startup costs are going to play into that over the next few years, that would be really helpful.
spk13: Yeah, so I would say that our long-term view, as we laid out last year in our investor day, was in the mid-40s for the lithium business at mid-cycle pricing, so through the cycle. And I would say that our view really hasn't changed at this point in time. We'll continue to evaluate that and adjust as we need to as we better understand the long-term pricing outlooks. James Ingram, Of course, as you mentioned, our plant startups do have an impact on that it's bigger today because we're doubling our capacity. James Ingram, versus as you go forward in time, you know that the next increment is going to be a smaller and smaller percentage and eventually just be part of just part of our normal operating activities.
spk01: Our next question comes from Aaron Biswama from RBC Capital Markets. Please go ahead.
spk07: I mean, first off, I guess I just wanted to go back to the pricing discussion. So, you know, we have had some majors announce, you know, some new capacity announcements. I think Yan Feng and some others, as you know. And that would kind of potentially signal some confidence that we are in a new price regime. You've also taken up your guidance for the full year. I'm just curious what you think the new level of peak to trough pricing in lithium is as you move into 23. Do you think you can build off of the space that you're at right now?
spk14: So we're not going to call lithium pricing going forward. What we've done is we've structured our contract so we move with the market and we've given ourselves a little bit of stability. That's been part of our plan for some time. And it gives our customers visibility of what the price is relative to the market. I mean, they have the same visibility going forward as we do and as you do. So it's difficult for us to say where it goes in 23. We think the market is tight. When we look at the demand from EVs and demand on lithium and what we see as capacity coming on, the market is tight for years. So for at least through our planning period, which I would call it five years. So we see it being pretty tight. Now, there'll be periods where there's some oversupply, but the growth in the market, it catches up very quickly. So we think the market is tight, but we're not going to call lithium prices for 23%. Understood.
spk07: And then I guess, you know, we haven't really asked about bromine yet, so maybe I'll just ask quickly there. Maybe you can just provide a couple more details on your thoughts there. Do you expect continued price upward momentum there? And, you know, what's the outlook, I guess, from a demand standpoint?
spk10: Yeah, Roman, in terms of pricing, I think we should see pretty stable pricing. You know, we're pretty fortunate that the applications and digitalization electrification continue to grow and that those applications are growing slightly faster than supply can come on into the market. So similar to what we saw in our investor day last fall, we expect this market to be fundamentally undersupplied for the next five years or our planning period. And we're adding capacity. So we expect the pricing to stay relatively strong for the foreseeable future. Thanks.
spk01: Next question is from Ben Carroll from Bird. Please go ahead.
spk09: Hey, good morning, y'all. Just two questions. First, hydroxide versus carbonate, and how do you decide on where to make the investment on the two? And then geopolitical risk, just as you invest in countries. There was a headline out yesterday about Mexico nationalizing their lithium resource. But as you look to Argentina making that investment and Chile, we get a lot of questions about that. So how do you think about that going forward? Thanks, guys.
spk15: Ben, hey, this is Eric. I can take the hydroxide, and myself or Ken can address the geopolitical risk one. So first on hydroxide versus carbonate, the prior question was about the trend towards long-term partnerships and security of supply. One of the benefits of the customer partnership approach is to leverage their commitment to us in making a commitment firmly to the product form that they wish it. There's also, and this does relate to the geopolitical risk side of things, in that there's also a discussion around where they want it, and increasingly a concern and a desire to have localization of supply. So we leverage the commitments we're trying to get in these contracts, all these customers, to narrow down those two issues, the product risk and the regional risk for the two. As an added comment, we currently are seeing that maybe carbonate is a where LFP chemistries are about maybe 20%, 25% of the market. That's our current view. We continue to monitor that carefully. Kent, do you want to comment just on how we think about risk?
spk14: Yeah, I would say, I mean, it's important for us given the locations where – and we look at it kind of at a macro level and by country, and we look at it for – particularly kind of we get deeper and deeper as we make a new investment but we monitor that so a lot happening in chile as you know we talked about on these calls before uh argentina as we make investments there we'll have to make sure that we're we're looking at those risks and monitoring that uh australia less of an issue china you know another area that we have to focus on and make sure we have our um our risk assessments but we monitor those we try and combine it with uh active government relations, making sure that we're doing the right thing in the country so we're seen as a good actor, and that we're bringing value to them as well that others can't necessarily bring. So that's a big part of how we feel like we mitigate the risk in some of those geographies.
spk10: Thank you.
spk01: Our next question is from Colin Bruch from Oppenheim. Please go ahead, Colin.
spk05: so much, guys. Could you talk a little bit about the potential for incremental customer deposits or customer-funded CapEx? You guys are spending a ton of money to grow capacity, and I'm just wondering about some of the alternative strategies for financing that.
spk13: Yeah, Colin, I think that's a good question. I think given the environment that we're in and the concern around supply from our customers and We're exploring all sorts of options, you know, partnership type of options like Eric talked about, prepayments. There's a variety of different things there. I think the key for us is to ensure that those types of agreements are giving us incremental return versus what we could do on our own. So clearly our strong balance sheet, strong support from investors give us – plenty of capacity to be able to do it on our own. But if we can get incremental returns, we'll take a look at it.
spk05: Okay. And then just given the expertise that you guys have around cathode materials and formulation, I'm wondering about your willingness or interest in additional vertical integration. Obviously, you don't want to compete with your customers, but it seems like you guys have enough expertise that you could do some real work in that space.
spk14: Is that a cathode question or just trying to make sure I understand the question?
spk05: Yeah, no, you're cathode. I'm wondering if you're verbal integration there.
spk14: Yeah, so we look at the different options, but we look at it from a material standpoint. Our interest in batteries and cathodes is to make sure that we're producing and developing the right chemistries that go into our customers' processes. So we're not looking to be in the cathode business, but we're looking to be an excellent supplier to those cathode makers and the OEMs that have a vested interest in the battery and the cathode technology.
spk15: Yeah, and I'll just expand, Colin. Part of doing that is being able to understand that application very well, but not integrate forward into it. And I would also say, though, that as we look at other advanced forms of lithium that we'll look at, again, question exactly how we want to play in that. It'll still be a material player, but what material are we supplying? And so we're looking at, as you look at solid-state chemistries, there's a variety of different ways we can play in that area, and we're doing a lot of work currently with partners and customers in that area to determine the future.
spk05: That's super helpful. Thanks, guys.
spk01: That's all the time we have for today's Q&A session. I'm now going to hand you back to Kemp Master for any final remarks. Please go ahead.
spk14: All right. Thank you, Darius. And thank you all again for your participation on our call today. Our success in 2021 combined with the momentum we are experiencing in 22 strongly positions us for profitable growth. I'm confident in our team's ability to drive value for all of our stakeholders by accelerating our growth in a sustainable way and to lead by example. Thank you, and thanks for joining us.
spk01: This concludes today's call. Thank you for joining. You may now disconnect your lines.
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