Li-Cycle Holdings Corp.

Q3 2022 Earnings Conference Call

9/14/2022

spk02: Good day. My name is Katie, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2022 Lifecycle Holdings Earnings Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If you need operator assistance, please press star 0. Thank you. I would now like to turn the call over to Nala Azmi, Head of Investor Relations. Please go ahead.
spk10: Good morning and thank you everyone for joining us today for Lifecycles review of our third quarter 2022 results ended July 31. We will start today with formal remarks from Ajay Kochhar, Co-Founder, President and Chief Executive Officer, Tim Johnston, Co-Founder and Executive Chairman, and Debbie Simpson, Chief Financial Officer. We will then follow with a Q&A session. Ahead of this call, Lifecycle issued a press release and a presentation, which can be found on the Investors Relations section of our website at investors.lifecycle.com. On this call, management will be making statements based on current expectations, plans, estimates, and assumptions, which are subject to significant risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect, including because of factors discussed in today's press release, during this conference call, and in our past reports and filings with the U.S. Securities and Exchange Commission and the Ontario Securities Commission in Canada. These documents can be found on our website at investors.lifecycle.com. We do not undertake any duty to update any forward-looking statements whether written or oral, made during this call or from time to time to reflect new information, future events, or otherwise, except as required. With that, I'm pleased to turn the call to Debbie.
spk09: Thank you, Nala, and good morning, everyone. As we will discuss on today's call, we are very excited by the opportunities that we see in front of us and remain laser-focused on the execution and rule-out of our integrated SPOC and hub network. We continue to make meaningful strides in positioning Wi-Cycle as the long-term preferred recycling partner and supplier of lithium-ion battery materials, particularly in North America and Europe, with strong commercial connectivity into Asia. Starting with our key near-term updates, we are pleased to report that our Rochester Hub project remains on schedule, our European Spokes projects continue to advance, and our new spokes in Arizona and Alabama are benefiting from our recent optimization project. With regards to our mid- to long-term strategic focus, We are capitalizing on strong secular market and government policy momentum for localizing supply of critical battery materials. We maintained our first mover advantage in battery recycling in North America and Europe, which is underpinned by commercial contracts and strategic partnerships, with the Rochester Hub as a key future value driver. And we are sufficiently funded to complete our current project pipeline with potential for debt financing from both traditional and government sources in support of future growth. Beginning on slide 3 was quarter highlights, which Ajay, Tim and I will cover in more detail later. On the financial front, we ended the quarter with approximately $650 million cash on hand including $250 million in investment proceeds from LG and Glencore, providing sufficient liquidity for our current project pipeline. On the commercial front, our expertise in logistics, handling and processing know-how have allowed us to expand our sources of battery materials from diverse customers across the supply chain, including battery manufacturers and OEMs, Two recent examples. Lifecycle was selected for one of the largest energy storage decommissioning projects in North America. We completed a two-phase decommissioning project in July, which amounted to more than 1,400 metric tons of battery materials, which served as backup to renewable energy. an emerging electric vehicle OEM with a manufacturing facility in North America named LifeCycle and its selected global lithium ion battery recycler. On an operational level, we completed optimization projects at our Arizona spoke and our August to September run rates are now tracking to target through goods, with the Alabama spoke expected to start operations by the end of the fourth quarter. Our Rochester hub remains on track to commence commissioning in stages in calendar of 2023. Now, I'll provide a more detailed discussion of our financial results, specifically regarding black mass production, revenues, adjusted EBITDA and cash flow. Beginning on slide four for black mass production. We continue to generate higher product sales volume with the startup of our new Arizona Spoke. Black Mask production during the quarter of 961 tons was more than 80% higher than the same quarter last year and up more than 30% from the second quarter driven primarily by the startup of the Arizona Spoke. While our third quarter volumes reflect favorable programs relative to our first-half workmates, BlackBank's production was lower than our original target as we took some temporary downtime at our Arizona spoke to complete optimization projects. In addition, we intentionally paced the startup of our Alabama spoke to implement the same process improvements. Ajit will discuss this in more detail. As a result of these actions, we are behind our original production targets by approximately one to two quarters. We are updating our full 2022 black mass production guidance from our initial range of 65% to 510% to a range of 35% to 3,800%. We're pleased to report that since successfully completing the optimization projects in Arizona, our August and September runways are now tracking near target throughput. Turning to slide five for a discussion on revenues. By way of background, and as a reminder of our discussion on our last earnings call, aligning with our contracts and IFRS reporting requirements, We recognise revenues on product sales at the point of delivery to our customers, based on product sales volume and prevailing market rental prices. Our customers take title of the materials and we retain pricing exposure until the related receivable is fully settled. As a result, fair market value adjustments are booked to revenues. A gain is recognised when metal prices, nickel and cobalt in particular, increase and a loss is recognised when metal prices decrease. Also to add, we are currently paid for cobalt and nickel content and not for the lithium in our black mass sales due to the lack of black mass refining capacity available in the market. As a reminder, part of our competitive differentiation will be our ability to extract lithium from black mass once our Rochester hub is operational. Revenue from product sales and recycling services of $5.4 million increased from $1.3 million in the third quarter of 2021. Total revenue was negative $2 million compared with a positive $1.7 million for the same period last year. The decrease in total revenue was primarily driven by a non-cash fair market value adjustment of $7.3 million in the third quarter of this year versus a fair market value gain of $400,000 in the comparable period last year. This was as a direct result of declines of 32% and 37% for Nicholas Cobalt prices, respectively, during the quarter, which impacted approximately 3,200 unsettled tons related to prior period black mass sales. As shown here, This negative fair market value adjustment in non-cash and largely a reversal of fair market value gains through the first half of the year when middle prices were rising. The cumulative fair market value adjustment for the year was a negative $1.6 million. Total revenues for the first three quarters were $10.5 million versus $3 million for the comparable period last year. As nickel and cobalt prices continue to change, we would expect further fair market value adjustments to revenues with potential for increases or decreases. Just to close on what is most important here, during the third quarter, when excluding the fair market value adjustments, our revenue from product sales and recycling services increased fourfold, relative to the same period last year, which demonstrates the underlying growth in our business as we continue to expand our network. Turning to slide six for adjusted EBITDA, both for a year-on-year and sequential comparison. Compared to last year, adjusted EBITDA loss was approximately $31.6 million versus $5.3 million. This reflects increased operating expenses for the ongoing expansion of operations in North America and Europe. Specifically, these are largely related to higher employee compensation for operational, corporate, commercial, and engineering resources as we continue to support the expansion of our network, particularly the Rochester House. Costs associated with becoming a public company, given the timing of our listing in August 2021. Rising raw materials and supplies attributable to our increased black mass production from our spoke operations. I would also note that the course included non-cash stock-based compensation of $4 million versus $300,000 this time last year. And a non-cash fair market value pricing loss of $7.3 million during the quarter, which compares to a gain of $400,000 in the prior year. On a sequential basis, compared to last quarter, adjusted EBITDA was primarily impacted by the non-cash fair market value. Turning to slide 7 for a review of the strength of our balance sheet and liquidity. Lifecycle ended the third quarter with approximately $650 million in cash on hand. As previously disclosed, we enhanced our balance sheet during the quarter with $250 million in combined investment proceeds from LG and Glencore. This strong balance sheet position is expected to provide sufficient liquidity for capital and operating needs to fund our current pipeline projects and developments. During the quarter, we invested $82 million in capital expenditures, with the majority of this investment allocated to securing equipment for the continued construction of our Rochester Hub, alongside equipment expenditure and lethal improvements for our North American and European people. With much of our procurement needs having now been met, we expect the majority of our future capital expenditures will be focused on construction for the continued build-out of our Rochester house. We anticipate providing an initial capital expenditure outlook for 2023 early next year. We remain committed to our balanced approach to operating spend and investing in corporate infrastructure that will support our expanding network to drive significant economics in years to come. Finally, we continue to explore additional debt funding opportunities from both traditional and government sources that will optimize our capital structure and provide flexibility. This is intended to enable additional rules to meet significant customer demands beyond the current pipeline. Now, I'll turn things over to Ajay.
spk06: Thank you, Debbie. I will discuss the continued favorable market and regulatory secular trends and provide an update on our spoke and hub network. Turning to slide eight, we continue to see favorable trends for early movers in the battery supply chain. With tight supply-demand dynamics, these trends underscore the importance of incorporating recycled materials into the supply chain to help augment reliable domestic supply. Our total addressable market, or TEN, for lithium-ion batteries available for recycling in our focus regions is driven by increased battery manufacturer-megafactory investments, which is expected to grow by more than 16 times by 2025 from current levels. As a result, this is projected to drive combined TAN growth in terms of lithium ion batteries available for recycling in North America and Europe by more than five times by 2025 from current levels. It is a dynamic that is causing many global supply chain participants to lock in commercial recycling arrangements, which we continue to see benefiting Lifecycle as we expand our network capacity. Turning to slide nine, We continue to see favorable tailwinds from a number of new public policy programs in the U.S. aimed at providing financial support to facilitate domestic expansion of the battery supply infrastructure, essentially getting this to be a critical strategic industry. The recent enactment of the Inflation Reduction Act, or the IRA, should provide significant benefits to the EV battery recycling industry beginning in 2023. The IRA comes on the heels of the bipartisan infrastructure law which calls for $6 billion in grants across the battery sector supply chain. As well, the presidential determination is carving out $500 million in investment to support critical materials for battery production. We believe the IRA recognizes recycling as an accelerator for the domestic supply of battery materials to support the increasing demand for EVs and energy storage. These programs will reduce the cost of building new facilities to produce domestic critical materials and help bring down manufacturing costs for batteries. We highlight here key IRA benefits broadly for the recycling industry and our business, namely up to $250 billion in clean energy loans to the DOE Loan Programs Office, or LTO. Up to $60 billion in five-year production tax credits, which provides for 10% of the cost of producing critical materials, including lithium, cobalt, and nickel. And up to $10 billion in advanced energy product tax credits, which allocates up to a 30% investment tax credit for developing clean energy facilities in the U.S. And importantly, this includes recycling facilities. Additionally, it is worth noting that the IRA is pushing for building EV batteries using materials sourced in the U.S. or free trade agreement countries. New vehicles placed in service next year need at least 40% of battery-critical minerals to come from the U.S. or free trade agreement countries to qualify for the Clean Vehicle Tax Credit, and this increases to 80% by 2027. We believe this push for domestically sourced critical battery grade materials will incentivize automakers to incorporate a higher percentage of recycled material. This is why it is critical to be a first mover with environmentally sustainable technology. Our patented technologies are proven in the North American market as a leading way to recycle lithium ion batteries. And we have two key advantages. One, Lifecycle has the opportunity to explore these government funding opportunities to potentially benefit our Spoken Hub network growth. And two, we have the capability to assist automakers in achieving the Clean Vehicle Tax Credit conditions by meeting their production requirements for domestic content via recycled material. Turning to slide 10. Here we depict the current portfolio of Spoken Hub projects in North America and Europe that are expected to come online in 2022 and 2023. We will review these in more detail. Turning to slide 11, as we've discussed on prior earnings calls, in order to be a reliable secondary source of battery-bearing materials, it is important to secure sustainable feedstock for the intake of battery materials for recycling. Here, we show the competitive advantages of our spoke network that make Lifecycle a go-to leading recycling strategic partner for battery supply chain participants. First, we are battery and form factor agnostic with the capability to process entire EV and energy storage battery packs with no disassembly. This has provided Lifecycle with a further edge As EV battery packs have continued to become larger and automakers are implementing cell-to-pack architecture with minimal ability to dismantle. Hence, our full-pack processing capabilities that are proven at our Arizona spoke and are being implemented in subsequent spokes, such as our Alabama spoke, provide lifecycle with a strong competitive edge. Second, we are also processing with an increasingly efficient, environmentally sustainable footprint with minimal emissions and wastewater discharge. This provides significant accelerated advantages in terms of permitting. And third, to facilitate an adequate intake of battery materials for recycling, we are locating our spokes close to battery and automotive manufacturers as well as EV penetration, thereby minimizing transportation risk and cost. To reiterate, we are positioning the SPOPE network to capture growing volumes of manufacturing scrap to provide a strong base load of materials for operations. Supplementing this will be end-of-life battery volumes, which should continue to rise steadily in the coming decade. Turning to slide 12 for an update on our European expansion. Similar to our strategy in North America, we are strategically targeting spoke locations in close proximity to battery and electric vehicle manufacturers and EV penetration. We expect that spoke capacity will be easily absorbed by robust European demand. In particular, from EV-related battery supply and energy storage systems, given high renewable energy use in the region, which is resulting in additional commercial partnerships. We have secured strategic sites and have initiated the equipment fabrication with a local industrial partner. In Norway, our site is located with favorable access to logistics networks. Further, this site will meet most of its energy needs through sustainable sources, making our business an attractive commercial partner in Europe. In Germany, our site is located near various cell, battery, and EV manufacturing facilities and also has access to renewable energy sources. Similar to the Arizona and Alabama spokes, we are taking a staged approach to the startup of these facilities, with Germany planning to be online first, followed shortly by Norway. We expect both of the European spokes to be in production by the second half of fiscal 2023. This is a modest shift from the first half of the year, based on a more conservative lens for additional commissioning and startup time, as we continue to implement the best operational practices and learnings from the North American spokes. Turn to slide 13 for an update on our new North America spokes, namely Arizona and Alabama. As Debbie discussed earlier, during the third quarter, we took deliberate steps to optimize operations of these spokes facilities, which are the first of their kind to process entire EV and stationary energy storage battery packs without a dismantling. In order to make these improvements, the pace of operations at our Arizona Spoke were temporarily affected and we moderately postponed the startup of our Alabama Spoke, which is a carbon copy of the Arizona Spoke. Since completing these low capital cost optimization projects, the Arizona Spoke is now renting successfully to near target throughput and is demonstrating higher recovery yields of black mass relative to our first generation plants in Ontario and New York. We are leveraging the key learnings and process improvements from the Arizona SPOKE for the role of the Alabama SPOKE and European SPOKE locations. Lastly, we continue to work with LTN on the development of the Ohio SPOKE and are validating the optimal execution path. Now, I'll turn it over to Tim to provide an update on our Rochester hub.
spk04: Thank you, Ajay. I'll provide an overview and update of the Rochester Hub, which is expected to be the first commercial battery resource recovery facility in North America, positioning Lifecycle as a leading domestic supplier of battery-grade materials. Starting with slide 14 for the key attributes of the Rochester Hub. While our facility will produce a range of end products, we have focused on the production of lithium carbonate, nickel sulfate, and cobalt sulfate as key value drivers. We estimate that the hub will process battery material that is equivalent to approximately 225,000 electric vehicles per year. We strategically selected the Rochester Eastman Business Park for the location of our hub to leverage existing infrastructure for power, steam, and cooling water. Also worth highlighting is that our proprietary technology has been developed to minimize air emissions and applies a zero liquid discharge technology where liquid streams are collected and treated on site. This process provides a sustainable pathway for critical materials and contributes to the circular economy. This has proven to be an advantage for obtaining key environmental permits for the construction of the Rochester Hub. Turning to slide 15, just to take a step back briefly, I would like to discuss our pilot plan, which underpins the design for commercializing the Rochester Hub. We proved out the process of our hub with a large-scale pilot plant in Kingston, Ontario, which operated for over one year, primarily between 2019 and 2020. We tested our flow sheet with known equipment and proven chemical processing technologies. The scale of the individual unit operations exceeded that of industry standards for piloting this type of equipment, giving us added confidence regarding our ability to scale up. Finally, we tested and qualified the end products with key customers in the global battery supply chain, many of whom we are working with today. Turning to slide 16, you'll see the layout of the Rochester hub. The numbered buildings refer to different processing areas. Starting with area 100, here we received one ton bags of black mass from our warehouse. The black mass is unloaded into leaching tanks, which are used to dissolve the metals in water and acid, leaving behind the graphite, which is dried and packaged for shipment. The liquid solution containing the metals is called the pregnant leach solution, or PLS. Moving forward, the PLS solution then goes through two stages of impurity removal for elements such as copper, aluminum, and iron in areas 200 and 300. Following impurity removal, the PLS enters the heart of the plant. Three solvent extraction circuits in areas 400, 500, and 600 are used to selectively recover manganese, cobalt, and nickel before crystallization, drying, and packaging of these products. The PLS solution now contains mostly sodium and lithium. In Area 800, the sodium is recovered through crystallization ahead of lithium carbonate production. The Rochester Hub has two stages of lithium production, shown in Area 900. First, a crude lithium carbonate is produced by adding sodium carbonate. Impurities are removed in a second step called bicarbonation, which provides significant flexibility to produce a battery-grade lithium carbonate product. The linear design of the process provides flexibility to handle a wide variety of inputs from black mass with tight controls on product quality. As part of our goal to set the bar for environmentally sustainable refining of battery-grade materials, the hub also includes a zero-liquid discharge circuit, which recovers trace impurities and produces fresh condensate water. Turn to slide 17 for an update on the construction of the hub. To recap, our team has achieved significant milestones today. We obtained key environmental permits which enabled us to move forward with the project construction. We completed key commercial contracts for engineering and procurement with Hatch and for construction management with MassTech Industrial. And we locked in the delivery schedule and pricing for the majority of the long lead equipment and made progress purchasing construction materials. During the third quarter, we have maintained our procurement momentum, providing enhanced confidence in material and equipment pricing to keep our projected timeline and costs within target. Additional highlights include the warehouse structural building is near complete and on track to receive black mass by the spring of 2023. Construction has advanced for areas 100 associated with black mass leaching and areas 400, 500, and 600 solvent extractions with concrete foundations underway receiving of building steel materials and significant progress on underground utilities. While we continue to monitor supply chain labor costs and seasonality conditions in Rochester, New York, the Hub remains on track to start commissioning in stages in 2023. Turning to slide 18, I would like to close with a recap. We are accelerating growth based on a strong secular market and government policies that support a localized supply of critical battery materials. Underpinned by commercial contracts and strategic partnerships, we are continuing our first mover rollout of our spoken hub network in North America and Europe, with the Rochester hub being a key value driver. We have sufficient liquidity to fund our current project pipeline and operating needs. In addition, we continue to evaluate multiple capital sources, including debt financing alternatives from both traditional and government sources in support of the next phase of growth beyond our current project pipeline. That concludes our formal remarks. Operator, we are ready to take questions.
spk02: Thank you. At this time, if you would like to ask a question, please press star 1 on your touchtone phone. If you wish to remove yourself from the queue at any time, you may do so by pressing star 2. We remind you to please pick up your handset for optimal sound quality. Thank you. Our first question will come from Robin Bedler with BMO Capital Markets. Your line is now open.
spk08: Hi. Good morning. My first question is on the hub commission guidance. so is only a portion of the 90 000 time hub then can be starting up initially uh and then maybe you can walk us through the cadence uh timing uh to get to the full operating rate hey robin good morning and uh i'll turn it over to tim who will provide some color there good morning robin so when we're talking about uh commissioning uh
spk04: Now that we're further advanced on the project overall, we're now starting to build out our detailed commissioning plan. And what we're talking about here is that effectively commissioning is done in what we're gonna refer to as three stages. stages one through to three, starting with completion checks. We will then do leak testing, instrumentation, and work in terms of calibration before the final stage of commissioning, which is ultimately the introduction on black mass. What you'll see on slide 17 is that commissioning actually overlaps with construction. So what's important is that as we go through the startup of the plant, It's not the sort of plant that you just turn everything on all in one go. It's actually important to tie in the sequencing of commissioning with construction because you want to have certain circuits available so that you can actually start up and progressively move through the plant and doing those checks as part of the end of construction. So that's all we mean by that. We want to sort of start to provide this sort of framework because as we get closer to this milestone, we expect to be able to come back to you with more color in relation to how we're progressing in relation to these different stages and what we're doing. We want to set up the framework in terms of terminology early.
spk08: Okay, maybe just to follow up. So, I mean, I appreciate that there are different steps associated with the commissioning phase itself, but as far as the wording of a staged commissioning, I just want to be sure that that doesn't mean that the 90,000 times is going to be introduced in stages as well as from like a volume or an output perspective. Like I just want to clear that stage commissioning, but once you have completed, it's 90,000 times run right thereafter. Is that correct? Correct?
spk04: Yeah. So I'm not sure what you're thinking. Like, it's 35,000 tons per year of black mass. And so just to The stage is just to break it down in more detail. Stage one is really about confirming satisfactory completeness against the engineering design. This is the checks and balances, basically the sign-off on the end of construction or mechanical completion across the different stages. Stage two is where we're now energizing equipment. We're doing leak testing and water testing through the system. We'll be doing instrument calibrations and the like. And then stage three is the introduction of black mass. It's not actually, so we're not talking about starting it up in terms of like stages of production throughput. It's really about stages of activity in terms of how we sequence the different parts of commissioning.
spk08: Okay, that's clear. And then just based the graphic on slide 17, am I right that to assume that maybe the commissioning step number three, the black mass introduction, kind of more, you know, Q124, maybe even spring? Or is it too early to give specific timing on that?
spk04: Yeah, I'd like to just hold off on giving specific timing for now, Robin. I want to get further through construction, but I do want to lay it out so that we can come back to you and talk about how we're going to sequence commissioning as we roll out the end of construction.
spk08: If I could just sneak one more question in. I did want to touch on the Inflation Reduction Act. I just want to be clear. I know you outlined some of the different benefits that you could receive. So on the 10% production tax credit and potential of the investment tax credit, is that something you guys expect to receive? Is that something you've been told you will receive, or is it still – I guess, to be determined. You just would assume that you would be in line for something like that, but maybe not quite definitive yet. Is that fair or just want to be clear on?
spk06: Yeah, I would say, you know, we can't speak specifically to anything that's not firm and ready to be public, but I would just say, you know, the strategy here was outlined. There's a lot of different programs through different legislature and an admin to various things that obviously come through. So I wanted to, one, describe it. I think, two, vis-a-vis the tax credit, So our understanding is that that's going through the Treasury Department, and it would come through and it would be available starting for next year, but there will be a process associated with that to assess and allocate appropriately. So really just wanted to help purposefully slide this to help distill all this relatively confusing information out there sometimes into what's applicable potentially for us.
spk08: All right. Thanks a lot. Thanks, Roland.
spk02: Thank you. Our next question will come from Ben Kolo with Baird. Your line is now open.
spk01: Hey, guys. Maybe just first, thanks for the explanation of the fair market value, but just how does it relate to cash? And then is there any way that you can kind of mute that volatility going forward in the way that you structure your contracts. And then, Tim, I have some questions on a follow-up from the previous caller, too.
spk06: Yeah. Hey, Ben. Thanks for the question. So, on the F&B side and financial side, Debbie will take that, and then Tim will take the first indebted.
spk09: Good morning, Ben. So, the fair market value takes fair market value adjustment is non-cash. It impacts your cash to the extent that you're settled on the market value at settlement time, but the ups and downs in the in-between time for the adjustments are non-cash adjustments. If we look forward, I think maybe just a reminder that we We're in this world right now where we're selling black mass, and that's not the world we're going to be in. So there's a long settlement period associated with the way black mass trades. Eventually, that black mass will be produced in our spokes, and it will go to our hub for further refining into the bathroom materials. And the settlement periods on those types of contracts will be much shorter. So when we get to that stage, the window of exposure for us will be much reduced.
spk06: Just to add to that, again, it's been from a near-term modeling standpoint, which we've talked about offline, but in the MD&A, under the revenue discussion, we've actually provided even further disclosure regarding kind of an aging analysis of black mass that's being settled. So we can talk about that separately, but just to flag that we've enhanced disclosure on that.
spk01: Okay, great. And just on the different steps of the solvent extraction, And I don't know if it's in the timeline here, but it looks like there are several steps of different solvent extractions. How long does it take to get, I guess, the correct formula, for the lack of a better word, of solvents extracted? um before you know you're up and running uh i mean don't you have to kind of tweak that and that can take take time to figure out you know the the different mixture that you need i'm just wondering how that ramps into the previous question about uh the the ramp up of you know how that extends because because of the several steps there
spk04: Yeah, no worries. And happy to answer that. So basically, so we know the formulation of the solvent extraction reagents that we'll be using. They're the same, it's the same process that we ran through our demonstration plan. So same extractants, same diluents, same processing conditions. And so from that perspective, we're not expecting to make any changes there. So we don't expect to expect that. in itself will affect our commissioning or ramp up. The number one thing about commissioning is on the salt extraction side is really about getting the solutions moving through at the right flow rates. And so it's all about volumetric flow rates through salt extraction ultimately. That's what you're targeting, which is much more mechanical than it is processing in nature.
spk01: Okay, that's good for me. Thank you, guys. Thank you, Phil. Thanks, Bob.
spk02: Thanks, Ben. Thank you. Our next question will come from Brian Dobson with Chardon Capital Markets. Your line is now open.
spk05: Hi, good morning. Do you think that you could speak to your expected total capacity during each of the three quarters and then further what you expect your capacity utilization rates to be in each of those quarters?
spk06: Hey, Brian, I'm sorry. Do you mean just to be clear this past year? Sorry?
spk05: You know, moving forward over the next several quarters, what do you expect your capacity utilization rate to be?
spk06: Yeah, so we're – so I would just say we're – you know, I think there is some broad indication there also reaching our year end, and then we'll have a year end call in January. So don't want to get ahead of ourselves, but there will be some preview of the business outlook for the year. So don't want to get ahead of ourselves. What I would say is just high level, and then maybe Debbie or Tim want to add on. So we – I mean, obviously, on the surface of it, it looks pretty drastic in terms of the change, to be frank about it. But at the end of the day here, as Debbie articulated and I did, it's really a shift of approximately one to two quarters relative to where we wanted to be. And we took the tough decisions to fix these low capital cost optimization projects. Yeah, it added some time, but it's the right thing to do before we go rolling out a whole bunch of additional assets. And we're seeing the benefits of that now, as you saw in the slides, even with the August results just preliminarily that we put in the slide deck. So just speaking to the in-quarter and what we're seeing right now, that's a bit of a qualitative direction.
spk04: Yeah, and further to that – Brian, we don't expect it to impact the hub. I mean, at the end of the day, what we're trying to do is get our SPARC network optimized between now and when the hub starts up to make sure that we can generate the black mass that we need to generate. But we believe that we're still well on track for that.
spk06: Yeah, and then lastly, Brian, on page 10, you'll see what we put out there vis-a-vis broad timing for the different assets in the slide deck.
spk05: Excellent. And I guess just to clarify, so it seems like your guidance is implying that 30%, 35% increase in black mass production in the fourth quarter from the third quarter sequentially. Can you just hit on the key items that are driving that increase?
spk04: Yeah, no worries. So the number one driver of that is really the recognition of that Arizona spoke, and it's starting to now hit its target throughput capabilities, and then there's a small influence there as well in relation to Alabama starting up, which is imminent, and that will have an additional positive increase in terms of our run rates quarter on quarter for black mass production.
spk05: And do you expect the momentum of those facilities to continue into 2023 or to 2023? Yeah.
spk04: So, you know, with Arizona, we're very close to our target throughput rate for Arizona. We expect to be able to continue to improve upon that and maintain it. And then ultimately it's about the ramp up of Alabama. But given that the lessons learned from Arizona, we are anticipating that that facility will ramp up well.
spk05: Great, and as you're thinking about projects in Europe, would you expect those facilities to open with higher utilization rates than the U.S. facilities, given the greater adoption in Europe, or do you think it should be similar in terms of modeling those facilities?
spk04: Yeah, so we expect that the throughput rates of these new plants, like Arizona, Alabama, Germany, and Norway, So we'll have very similar utilizations. And as I said, Arizona is an early indicator, is doing very well in that regard. We are seeing strong demand in Europe from a commercial perspective, and so we expect that trend will continue as well.
spk05: Yeah, excellent. Thank you. And just as a final question related to the Inflation Reduction Act, do you have any color on the timing of when the federal government might make those funds available?
spk06: Yeah, broadly speaking, a lot of those programs are really 2023 onwards. So I think they've gone through the enactment and that's really getting through the operationalizing of those programs and bulk of them are really 2023 onwards.
spk05: Great. Thanks for the additional color. Very helpful.
spk00: Thanks.
spk02: Thank you. Our next question will come from PJ Juvicar with Citi. Your line is now open.
spk03: Yes. Hi. Good morning. You know, the black mass production decreases seem drastic, like you said, but you just delayed by one to two quarters. You mentioned optimization of the Arizona hub. You know, what kind of process improvements did you do there? Does that lower your cost or does it just like de-bottlenecking? And, you know, are you seeing all those benefits in your current production?
spk06: Yeah, thanks, Vijay. Go ahead for Tim.
spk04: Yeah, absolutely. So most of the aspects that we were dealing with in Arizona were around materials handling. You can think of things like shoots, for example, just making sure that we can get the material to flow through at the rate that we need it. That's all now being addressed and incorporated into our standard design. In terms of the long-term implications, we don't see any negative implications in terms of the cost of these plants from these changes. I would say that one of the benefits of our overall business model is the carbon copy nature of our spoke plants. So the lessons that we've learned here, we can roll out into that standard design and optimize those facilities going forward. So overall, we think it was definitely time well spent. We learned a lot. We're happy with the progress that we've now made and looking forward to continue to roll out these future sites.
spk03: And do you have any approximate timing on future sites? You mentioned Alabama start by end of 4Q. Anything on Ohio's site as well as Norway and Germany?
spk06: Yeah, APJ, I think page 10 is a good, broad timing there. And I'll pick again in the early next year and then look for there. We'll see what else we add to that potentially. But that's really a bit of a pipeline view of our buildup.
spk03: Okay. And then? lastly you know you mentioned potential laws through doe but besides that you know you mentioned the sort of locally sourced clean vehicle program and credits associated with that how does how does battery recycling fit into that which i'm sure it's a critical part by end of the decade that you need recycling but how do you benefit from that particular program
spk06: Yeah, good question, BJ. Just to clarify. So, it's an indirect benefit for us. So, that's, of course, for the purchase of EVs. But to get that credit, there are a range of increasing domestically supplied content requirements. So, starting at a 40% and growing to much more than that in the years thereafter. So... The whole question is, how does somebody meet that requirement with domestic supply? Where is it going to come from? Especially with, as you know, the very long lead for domestic mining. So what we've seen from a demand pool perspective is even more accelerated interest from automakers, cell makers, trying to see how they can meet these requirements. And recycling is a much quicker pathway to get that supply. And hence, we can help them meet those requirements to then make sure their vehicles are eligible for it as much as possible. Okay, thank you.
spk07: Thank you.
spk09: Thanks, CJ.
spk02: Thank you. Once again, if you would like to ask a question, that is star 1 on your touchtone phone. Our next question will come from Jeff Osborne with Callen and Company. Your line is now open.
spk07: Good morning. Just a few questions on my end. On the optimization, it's helpful to appreciate that it was more material handling and low capex. Is there a way of quantifying what the improvement in yields would be on black mass recovery, especially relative to the spec merger deck?
spk06: Yeah, thanks, Jeff, and go again for Tim.
spk04: Yeah, so, I mean, we don't provide specific guidance in terms of yield improvements, but notably, you know, we've noticed a remarkable improvement in terms of overall recoveries through the new generation plan. But I can't provide specific details.
spk06: Yeah, and just to add to that, Jeff, and I know where you're going, but just as a broader comment, when Tim was answering the previous question regarding People might say, hey, these are 10K, you have 5K, so what's the big difference? I spoke to fireworks, but I just want to emphasize it. So we've upped the form factor that we're actually processing. So we're taking in full packs as opposed to the modules, which are like the building blocks of the packs. That's very advantageous for us as automakers move towards bigger and bigger packs and sell-to-pack architecture, no dismantling. But it also then does change, obviously, what the plant's doing, right? So we have multi-stage shredding, a little bit different, same core technology, but a little bit different in a few areas. So that's really what we were working through. It's nothing major. But now with that under our belt, it's great for us because, as Tim said, it's our carbon copy approach for the future plants.
spk07: And do you anticipate rolling that out in Rochester as well, or any battery-related recalls or requirement for full form factor would have to be done in Ohio, Arizona, or Alabama?
spk04: Yeah, so in Rochester, we do plan on doing an upgrade to the front end of the plant. It's a nominal capital investment, but it will give us enhanced capability to take larger form factor materials through the plants as well as improve overall recoveries and yield. All future plants at this point in time all these what we consider our new generation full pack plants. So when you look at our forecast for new facilities, they are all based on that full pack capability plant.
spk07: And just, Tim, given that'll be one of three operational plants in the spring of 23 in the U.S., if you're doing it in the first half of the year, should we assume some downtime for that?
spk04: It's normal. It's really, you know, what we're doing is – collectively with our partners in Rochester is we're actually doing the construction and assembly of the equipment alongside the existing operating plant, and then we'll be basically doing a hot change, which will have a very, very small impact in terms of the quarter from downtown perspective as we swap over some of the key pieces of the plant.
spk07: My final question that's very helpful, and the slides are very helpful, so I appreciate the transparency on the process steps and the commissioning timeline. I just wanted to reconcile two comments you made. One, I think it was Building 100 in the map would be operational in the spring of 2023, which was the receiving for the black masks. And then the commissioning and the introduction of the black mass would be in late 23 through early 24. I'd imagine at some point in time you're going to have to start building inventory and you wouldn't have black mass sales and any revenue would be tied to non-battery metals or plastics or maybe recall fees that you're paid to disassemble recall batteries. How do we think about the timing, especially with the warehouse opening up in the spring season? Do you need to build three to four quarters of inventory to sort of feed the beast? Or how do we think about that as you, I would imagine, slowly introduce Black Mass as you commission the first two steps and move to phase three as you articulated?
spk04: Yeah, as you rightly point out, we'll have our warehouse complete in the spring of next year, ready to receive black math. I'll let Debbie provide some commentary in terms of our current disclosure around where we might stand on inventory building.
spk09: Hey Jeff, I love your terminology, feed the beast. So I would start by saying we haven't made any commitments yet to a definitive plan on building inventory. I think there's a couple of things that are worth noting though. It would be smart for us to have some inventory on hand as we go through this startup and we will certainly put a plan around that. As we go through our planning for next year, it's definitely something that's on our list to work through. So that would be a smart move on our part. To mention earlier, our job with our spokes right now, the delay may seem a little bit drastic, but really think of this as a lead time in terms of getting our spokes ready to be producing for our house. And so if you think of that, it'll pretty much in the end be a continuous operation where we won't need a lot of inventory on hand. Materials will feed through our spokes and they'll go directly to our hub. But in that interim period, while we go through startup, it would be wise for us to have some material on hand. And then the last part is really I keep reminding everybody of this. Selling black mass is not our business. And actually, it's not the most economic use of the material either. So to the extent that we can shift sooner versus later, on extracting lithium from these materials. It's a far better economic story for us. So that sits in the background. It's a little bit of economic pressure to get to the end and to have black masks available for that end formula versus intermediate sales.
spk07: Excellent, Debbie. Just a very quick follow up on the last comment there. Leaving lithium on the table, would you say you're leaving 50 cents on the dollar, if not more, per kilogram or ton of black mass that's sold? Or how do we think about quantifying that economic dilemma that you're in?
spk06: Yeah, it moves all around, right, obviously, with pricing, so we'd love to take your own views on that. But yeah, for sure, I mean, this is really the core essence. And sometimes I think it's missed a better story that our Rochester hub will be producing between 7,500 and 8,500 tons of lithium carbonate. And if you take today's prices, that's a substantial amount of economics, obviously, for the company. So on a per-time basis, it moves around, but your math, I would say, is directionally right. And it's pretty interesting because four or five years ago, and even a year ago, you would have heard it say, like, it's a third, a third, a third, you know, roughly equal contribution. And often we would be told, hey, like, why are you even focusing on lithium, like, six years ago? But this is the core of it, and the bottom line is that market is severely – in deficit of supply versus increasing demand. So we are a near-term relatively versus mining solution for that, and it's super important, you know, from a financial perspective for the value of the company in the future and how that, you know, correlates through to the present. Perfect. Thanks so much. That's all I had.
spk09: Thanks, Seth.
spk02: Thank you. Our next question will come from Robin Settler with BMO Capital Markets. Your line is now open.
spk08: Thanks. Just maybe curious to have a high-level discussion on how you're thinking about the Hub 2. I know it's – your hands fall with Hub 1 right now. But, you know, with the IRA bill, how much of that influence were you thinking about the second hub location – would there be enough feedstock, let's say midterm feedstock, for you to justify a hub to location in North America to receive these OPEX and CAPEX benefits that you could receive from the IRA bill? Or is maybe some of your partnership obligations are still going to make you focus on Europe for maybe Hub 2 or would you ever, and this might be getting greedy, but would you ever consider sort of a parallel expansion for 2 and 3 kind of around the same time? Trying to get a sense of how you think about that as the policy changes are occurring kind of in real time.
spk06: Yeah, great question, Robin. I'll keep it to what we can say. I would say, look, I mean, the IRA is super exciting. I think it's a great step in the right direction. Long time coming, so it's good to see it. Same time, Europe, we see tremendous tailwinds for our business, similarly commercially, similarly from regulatory perspective. So, you know, we'll assess all options. And as we said before, you know, there are longer lead, low dollar, really just time-oriented activities that we can progress. be it site selection, be it permitting once it's ready, et cetera. So we'll continue down that track. Look forward to being able to give an update on that when we can. But I would say we don't see really necessarily an overtilt either way. I would say it's interesting. It's probably pretty equal. So we'll have some interesting decisions ahead of us.
spk00: Got it. Thanks. Thanks, Rob.
spk02: Thank you. It appears there's no further questions at this time. I'll now turn the call back over to Ajay for his closing remarks.
spk06: Thank you. So in closing, we continue to execute on our spoken hub network growth objectives and strengthen our position as a long-term preferred recycling and reserves recovery partner to global strategic participants in the battery supply chain. We have sufficient liquidity for our capital and operating needs to fund the current pipeline of projects and development, and we are evaluating ways to further optimize our capital structure to support future growth. Finally, our integrated Spoken Home Network is uniquely positioned to capitalize on the accelerating electrification trends, as well as favorable tailwinds from increasing government policy support to translate into significant earnings and cash flow. Thank you. We appreciate your time and interest in LifeCycle. We look forward to continued updates regarding our ongoing bill of execution.
spk02: Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.
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