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Operator
Good day. My name is Todd, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2023 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 should need operator assistance, please press star zero. Thank you. I will now turn the call over to Nala Azmi, Head of Investor Relations. Please go ahead.
Todd
Thank you. Good morning, and thank you, everyone, for joining us today for Lifecycles Review of our Business and Financial Results, ended March 31, 2023. 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 Duddy Simpson, chief financial officer. We will then follow the Q&A session. Ahead of this call, Lifecycle issued a press release and a presentation, which can be found on the investor 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, most of which are difficult to predict and many of which are beyond the control of lifecycle. 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 Ajay.
Ajay Kochhar
Thank you, Nala, and good morning, everyone. Aligning our reporting schedule with those of our peers and investors, we're excited to be reporting our first calendar quarter of 2023. This morning, we'll provide a review of our results and the ongoing progress on our Spoke and Hub network. Turning to slide three, we continue to execute on our strategic objectives as a leading solutions provider in the sustainable domestic EV battery supply chain in both North America and Europe. I would like to highlight some of the recent key achievements that we'll discuss in greater detail on this call. On the commercial front, we signed a definitive long-term agreement with Vinny S., a battery manufacturer. Beginning in 2024, Lifecycle will become their preferred recycling partner for Vietnamese-sourced battery materials. In the interim, manufacturing scrap from VDS's presence in Vietnam will be directed to Lifecycle's North American spokes. Over the longer term, we see the opportunity to establish a dedicated spoke near VDS's manufacturing site with a decision anticipated by 2025. From an operational perspective, we continue to grow our network strategically, mirroring customer demand. In North America, our four operational spokes are delivering solid performance, and we are progressing the plan to ensure ample availability of feedstock for our first commercial hub in Rochester, New York, which remains on track to commence commissioning in late 2023. We continue to achieve higher operating rates in our North American spoken network while also exploring a new site in Ontario. In Europe, we are replicating the modular approach to network growth that we've successfully deployed in North America. We have three spokes in development with our Germany spoke on track to commence operations in mid-2023. We're excited to announce a partnership with Glencore to co-develop our first European hub, expected to be the largest resource recovery facility on the continent, producing critical battery materials. Finally, on the financial front, we've progressed the work required to close the U.S. Department of Energy's $375 million loan commitment which we expect will occur in mid 2023. Turning to slide four for a recap of LifeCycle's positioning at the center of the battery material supply chain and an overview of our value proposition. It's important to note that we maintain our flexibility to service all types of customers in the battery supply chain with a pure plain recycling and resource recovery focus that complements and doesn't compete with their businesses. We are providing an integrated battery materials platform for global customers by closing the supply chain loop at a local level. With logistics and handling know-how, innovative and sustainable technology, and a growing network, Lifecycle is advancing as a global partner of choice with diversified customers across the battery value chain, including active material manufacturers, battery, and EV OEMs. Turn to slide five. for an update on the total addressable market, or TAM, for battery materials available for recycling. We continue to see robust demand and expanding market for recycling of all forms of lithium-ion batteries. Near-term growth is largely being driven by Gigafactory announcements through 2025 and supplemented by growth in end-of-life battery feedstock towards the end of the decade. Bolstering the outlook for lifecycle is a limited supply of alternative post-processing capacity coming online in the near term relative to lifecycle's timing and progress and general market development. This is likely to be even more pronounced towards the end of the decade. Turn to slide six to discuss the modular approach that we've implemented to pursue our spoken hub network growth strategy. As we discussed on our transition earnings call in March, our successful template in North America has solidified our position as the leading recycler in the region. To review, we seek to develop a spoke network strategically located near customers to secure sustainable long-term feedstock supply in a manner that reduces handling costs and operational risk. These investments are underpinned by both multi-year intake and offtake commercial contracts. To close the loop, we utilize centralized, large-scale refining hub facilities strategically located to leverage existing infrastructure. Lastly, we optimize our capital structure with strategic financing, similar to the recently announced DOE loan commitment. Notably, this is a replicable and scalable model. We are now extending this model into Europe. Let me now turn it over to Tim for an update on our SPOKE and HUB network.
Nala
Thanks, RJ. Turn to slide seven for key updates on our Rochester hub. The aerial view of the Rochester hub that you see here was taken at the end of April and reflects the significant progress that our team has made in just two months' time. All aspects of construction are moving in parallel and in line with our expectations, which demonstrates the strength and expertise of our team. Turning to slide eight for further details on construction progress. First, as we have consistently shared, the Hub is on track to commence commissioning in late 2023 and is currently tracking at the higher end of the previously disclosed construction cost range. Early on, a key aspect of our construction strategy was to accelerate the procurement of long-lead equipment and construction materials such that they would arrive on site well ahead of when they were anticipated to be needed. Strategically, this has proven to be a significant advantage, both in terms of our ability to maintain our project schedule and our ability to remain within budget, particularly in light of the challenging inflationary and supply chain environments. As a result of our actions in 2021, three of our key process buildings are now nearing completion and the construction of our warehouse is substantially finished. As we discussed in our transition period call, our remaining budget will be influenced by labor costs and productivity. Turning to slide nine for a view of our expanding global footprint with localized networks. As a reminder, our strategy is to be the preferred global recycling partner with a leading domestic supply solution in each of the key growth regions. As illustrated on the slide, there is robust demand in both North America and Europe for recycling services, driven by a significant increase in gigafactory capacity. More to our competitive advantage is our commitment to consistent execution. Expanding our network footprint, we are embarking on a partnership for a definitive feasibility study with Glencore to co-develop a new European hub, which we will discuss in more detail shortly. Turn to slide 10 for an update on our European Spoke network, which is anchoring our growth in the continent. The development of our European Spokes is progressing well. we continue to expand the deployment of our third-generation standardized modular spoke processing plants. To provide a brief update on our three European spokes, in Germany, construction is on track with commissioning of the first processing line expected in mid-2023, with the second line expected to follow in the second half of this year. In France, With site and building secured, coupled with commercial battery source contracts, we are progressing procurement and engineering activities and expect to commence operations in the first half of 2024. In Norway, the construction of the spoke building is on track for completion in the second half of this year. Ahead of installing the processing line, we intend to use the location as a consolidation facility to support our Germany spokes. Turning to slide 11, we're excited to announce our partnership with Glencore to jointly study the feasibility of a new hub at an existing Glencore site in Porto Besme, Italy. In line with our approach, we are extending our modular strategy from North America to Europe by developing the next hub, which will be utilized to close the loop for our regional network in Europe. This project would represent the first significant European resource recovery facility to produce key battery-grade products, including nickel, cobalt, and lithium from recycled battery content. Turn to slide 12 for details on the partnership arrangements. As detailed in our May 9th announcement, Lifecycle and Glencore anticipate forming a 50-50 joint venture to repurpose part of Glencore's existing metallurgical complex in Portovesme, Italy, enabling a cost-efficient accelerated development plant. Lifecycle will lead a definitive feasibility study, or DFS, which is expected to be completed by mid-2024. Subject to a final investment decision, the project is expected to start commissioning in late 2026 to early 2027. The black mass process at the PortAvestment hub is expected to be supplied from LifeCycle's growing European stock network and through Glencore's commercial network. The plant will leverage Lifecycle's state-of-the-art hydrometallurgical technology and is expected to have a processing capacity of up to 50,000 to 70,000 tons of black mass annually, or the equivalent of up to 600,000 electric vehicles per year. Finally, the project contemplates competitive long-term financing from Glencore to fund Lifecycle's full share of the capital investment. In summary, our partnership with Glencore enables an accelerated pathway to a Europe-based refining facility, providing us with the opportunity to benefit from the capabilities of our partners. Turning to slide 13 to conclude on our complementary capabilities. By aligning Lifecycle's sustainable, patented technology and European SPARC network with Glencore's extensive commercial network, we expect the Port of Esme hub to bring Europe one step closer to closing the loop for lithium ion batteries. I would now like to hand it over to Debbie for a financial review.
Glencore
Thank you, Tim. Turning to slide 14. Before reviewing our first quarter financial results, I would like to discuss the evolution of Lifecycle's revenue and financial profile. We source input battery materials at a discount to metal prices from a diverse pool of customers. Currently and for the near term, we produce and sell black mass under contractual arrangements. This results in black mass revenues that are based on current metal prices at the point of sale. What's important to note is that the sale of black mass is only an interim strategy. Indeed, our mid- to long-term goal is to utilize our black mass production as feedstock for the hub, which will manufacture battery-grade materials, including lithium, cobalt, and nickel, unlocking significant incremental values. The operationalisation of our Rochester hub represents a key step change in Lysaico's evolution towards producing these battery grade materials, as seen on the top right chart. Utilising the forecasted underlying metal prices on the bottom right and applying a premium to reflect the production of battery grade finished products should give you a sense of the significant inflection point we anticipate in our revenue profile. turning to slide 15 for a discussion of our first quarter results. As seen on the top left chart, we produced 1,853 tons of black mass, more than double the level achieved in the prior year, driven by the startup of operations at our Arizona and Alabama spokes and the upgrade of our New York spokes. We sold 881 tons of black mass, reflecting about a 14% increase versus the 774 tons sold in the prior year due to the addition of new commercial customers and higher production and sales from our spoke facilities. Moving to revenue for the period. As a reminder, our revenues are influenced by market prices of metals contained in our products, notably cobalt and nickel, with no value attributed to lithium content at this time, as we continue to sell black mass as an intermediate product. Revenue from product sales and recycling services before fair market value adjustments increased by 114% year over year to $7.7 million versus $3.6 million in the prior year. This was primarily attributable to the higher product sales volume from the expansion of our customer base, expanding operations of bespoke facilities, and the benefit of a higher product sales value mix. Total revenue was $3.6 million compared to $8 million in the prior year. This included an unfavorable non-cash fair market value adjustment of $4.1 million on product revenue. driven by lower nickel and cobalt prices versus a favorable fair market value adjustment of $4.4 million in the prior year. Turning to slide 16 for an update on our cash flow and a review of the strength of our balance sheet. Reviewing our favorable track record beginning in March of last year, we had a cash balance of $527 million. During the nine months between March 2022 and year end, we secured key strategic funding of $250 million from LG and Glencore and deployed $177 million towards the construction of a Rochester hub and our spoke facilities. Notably, we ended 2022 with a similar level of cash with approximately $520 million of cash on hand. During the first quarter of 2023, we invested $86 million to fund our network growth, focused on the Rochester hub, ending the period with $409 million of cash on hand. With a conditional loan of $375 million from the Department of Energy, our current pro forma cash balance would be in excess of $780 million. Turning to slide 17, with our first quarter results keeping us on track, we are reaffirming our key business outlook metrics for 2023. And finally, turning to slide 18 for closing, We are advancing the Rochester hub construction remaining on schedule and on track to commence commissioning in late 2023. Expanding our global network of spokes and hubs, specifically replicating our successful North American business model in Europe with three spokes and plans for a new hub and an option for funding and strategic commercial partnerships. enhancing our global position as a preferred recycling partner with going diverse global battery supply chain participants and strengthening our balance sheet and adding flexibility to fund our future network goals with the Department of Energy loan expected to close mid-2023. That concludes our formal remarks. Operator, we are ready to take questions.
Operator
At this time, if you would like to ask a question, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, you may do so by pressing star 2. We remind you to please pick up your handset for optimal sound quality. Again, to ask a question, please press star 1. Our first question comes from Brian Dobson with Chardon Capital Markets.
Brian Dobson
Hi, good morning. Two quick questions on the HUD facilities. So first, in Rochester, we're very excited to see that facility opening. Can you talk a little bit about, you know, the commissioning and approval process that might take place after the opening and, you know, how long it would take to get Black Mass running through that facility, what that process and ramp looks like?
Ajay Kochhar
Hey, good morning, Brian. Let's go in for Tim to handle it.
Brian
Yeah, good morning, Brian. How are you? It's nice to be talking to you. So just quickly in relation to the commissioning process, so we're still on track to start commissioning by the end of this year. As we've discussed previously, commissioning will commence in stages, and then we will gradually be introducing reagents and black masks as part of the final stages of commissioning, which will happen during the course of or into 2024. In terms of additional approvals, there's no additional approvals that are required. It's simply a matter of now completing the project and starting it up. As we get closer to the timing for startup, we will come back to you with a more detailed plan around commissioning and ramp up. We just want to make sure that we are at the right level of definition when we do that. So more to come on that one, Brian. I know it's important to you, but everything is looking good at this point.
Brian Dobson
Yeah, very good. And then, you know, very exciting news in Europe regarding your partnership with Glencore. Can you maybe point to some of the things you learned during the development of the Rochester Hub that could make this a smoother process in opening up a potential new facility or rather retrofitting the facility that you were discussing?
Brian
Absolutely. I'm happy to take that one as well, Brian. And then, you know, Ajay and Debbie, please feel free to add on. as required. So I think a couple of key things, what has worked really well for us in North America that we expect to implement in Italy has been our procurement and execution strategy. So if you think back to what we've been talking about now for almost a couple of years, has been our approach to make sure that we have materials and equipment available on site well ahead of when they're needed. And our plan will be to execute on a similar path. And that really takes a lot of the risk out of the execution schedule. From a technical perspective, we are utilizing a number of the same unit operations that we are utilizing in Rochester. So all the lessons that we've gathered through the detailed engineering phase in Rochester will be able to be rolled directly into the design as part of the base case. for Port of Esme. And I think what's going to be really very beneficial is the fact that by the time we're starting up Port of Esme, we would have already been operating Rochester for some time. So we'll be able to bring across all that operational understanding into the new facility as well. So what we're overall expecting to see is a more expedient, more efficient execution plan for Port of Esme.
Brian Dobson
Excellent. Thank you very much. Thanks, Todd.
Operator
Thank you. Our next question comes from Matthew O'Keefe with Cantor Fitzgerald.
Matthew O'Keefe
Thanks, operator. Good morning, everyone. Busy quarter, so congrats on moving things ahead as you've done. I just had a quick question on the, as we're, you know, as we're building out the hub, how are you feeling about the spoke performance? Maybe you could tell us A little bit there on, you know, is it meeting your expectations with respect to recoveries of black mass, costing as far as, you know, cost of raw materials? I know they've gone up a little bit. Maybe you could talk a bit about that as well. And then also, you know, what we see as far as is there a big – benefit to being at capacity at these folks, or is it fairly relatively a fixed cost operation?
Ajay Kochhar
Thanks, Matthew. Yeah, another one for Tim to address.
Brian
Yeah, no problem. So a few things to address there. So let me work through it systematically for you, Matthew. So first of all, from a recovery perspective, I would say that the spokes are performing very well. We've seen improvements generation over generation of spoke plant, and now we've got Generation 3 plants in Arizona and Alabama, which are, by the way, the same plants that we're installing in Europe. we have our highest recovery rates across any of our assets to date, which is in line with our expectations and doing very well. In terms of costing of raw materials, we don't disclose publicly details around costing of raw materials, except to say that we have seen some price relief for input materials. materials as commodity prices have come down, and that really talks to the fact that we are very much bound on the inbound and in and outside of the business when it comes to commodity price movements, which gives us some protection, as you can imagine, that we benefit by being able to link those two markets together. So from our side, we see this as being a relatively constant margin spread business in the long run. So it doesn't have a big impact on us. Okay. Thanks. Sorry. You go. Just on that, I was just wondering –
Matthew O'Keefe
if the NOC is a disconnect between or a difference between the black mass produced and black mass sold, was that due to timing of sales or are you starting to stockpile now?
Brian
Great question. So no, it was mostly due to timing from our downstream customers and what was happening at their assets. We don't expect to see it continuing into Q2. So you should expect sales in Q2 to reflect the drawdown on this volume. We are planning, as I've said previously, to stockpile some Black Mask this year, but it will be targeted towards the back end of this year.
Ajay Kochhar
Great. And then, Matt, just to address your question as well, I know Tim is going to jump in there around the feed side. And, Tim, I can stress that you should add on. I think, look, at the end of the day, we're operating our assets in lockstep with market demand and customer timing. So, you know, we can flex that as we see fit. Ultimately, these are assets to feed the Rochester hub and are going to be doing some work on the port advice we have in Europe. So that's the focus is making sure that we have ample feed as we've articulated and lockstep with that ramp-up timing for the hub assets.
Operator
Great. Thank you. Thank you. Thank you. As a reminder, if you would like to ask a question, please press star 1 at this time. Our next question comes from Jeff Osborne with TD Cowan.
Jeff Osborne
Good morning. Just a couple questions on my side. On the DOE side, I was wondering what the remaining milestones and conditions are I think you originally were targeting 2Q for that loan, and now I think the verbiage at least is mid-23. Not a big change, but I'm just curious if you could walk us through if there is any delay there, and then what the remaining milestones are would be helpful.
Ajay Kochhar
Sure, Jeff. Good morning. And I can start on that, and then Debbie can add on as needed. So, no, in short, nothing major in terms of hurdles remaining to close. We, as you articulated, we're on track. Look, I mean, a lot of this is just documentation. It's really a core loan agreement, a range of ancillary agreements, closing certificates, legal opinions, you can imagine. So that's the sort of work that's ongoing, which is really a lift on the legal side, primarily. One nuance there around conditions and just broadly speaking about the DOE Loan Programs Office, sometimes for some companies, they do have, for example, conditions on permits to close. In Lifecycle's case, we have our key operational permits for the Rochester house. So that is not a condition for us. Sometimes there's externalities that affect closing timing. For us, it's really just doing the work around the legal documentation.
Glencore
I agree. Actually, it's really just the volume of the administrative tasks and getting it all papered so we can find it on both sides, their side and ours.
Jeff Osborne
Got it. And then maybe just another modeling-related question. On the OpEx side, it was a bit higher than we were expecting on our end at least. How do we think about, you know, were there any one-time issues this quarter, or is this sort of the new run rate, and we should expand that through the second half of the year? What's the cadence of spend there?
Glencore
Yeah, I think we can break it out between kind of OPEX. So if you recall the way you dumped the bottom line of the P&L, you have to separate the fact that – our revenue was maybe a little bit lower than that difference in production and revenue in that time issue. So there isn't really as much of a flow through from that. But if you isolate SG&E and the core spend and back out on non-cash items like share-based comp and depreciation, what you see actually if you look across from about Q3 to Last year, which I indicated kind of Q3, Q4 last year, was a good run rate for the business. What you'll see if you look through Q3, Q4, and then into this year, and I think maybe the fact that we had the transition period that was two months and not three months is throwing a little bit of confusion into the equation. But if you look successfully at those three quarters, then we're really around the sub-$30 million odds. below $30 million a quarter, which is quite consistent.
Jeff Osborne
Got it. And then just going back to the inventory build question, I appreciate it for this quarter, but how do we think about the second half of the year? Do you expect that there would be a period of time where all production is kept to feed the beast, so to speak, when the hub ramps up? Or are you contractually required to sell a minimum amount? I'm just trying to think about how we should model that inventory bill to feed the hub as you're commissioning that?
Glencore
We have some contractual minimums, but that's not a blocker to any of these strategies. I would think of it as a kind of tail end of this year where we'll begin that. But I think we talked about this a little bit in the transition period. I think what's really important is we're being very thoughtful about the pace, right? So we have a plan that takes us to a point where we have sufficient inventory size and enough backup to start that commissioning and that ramp up. And then from there, once we get into that window, what you really see is the majority of production will go to inventory. But what we've actually worked through is a plan to build the inventory, but actually build the production levels at the spoke at the same time to create that level that we need once the hub really starts to kick in.
Ajay Kochhar
Jeff, it's really a gradual, more of a gradual gradient.
Jeff Osborne
Got it. That's all I have. Thank you so much.
Operator
Thank you, John. Thank you. As a reminder, if you would like to ask a question, please press star 1. We'll pause just a moment to allow any additional questions to queue. And there are no further questions in queue at this time. I'll now turn the floor back over to Ajay Kochhar for any additional or closing remarks.
Ajay Kochhar
Thank you, Todd. So we continue to execute on our Spoken Hub strategy, establishing a global footprint with local networks in North America and Europe. Our strategy is supported by a growing portfolio of key battery material global market participants, selecting Lifecycle as their preferred recycling partner, coupled with strategically timed and cost-effective funding sources. The team is focused on delivering significant value to our key stakeholders, with key financial inflection expected upon the operationalizing of our Rochester hub. And, of course, we appreciate your time and support of Lifecycle. We look forward to updating you on our progress as we move forward. Thank you.
Operator
Thank you. This concludes today's call and webcast. You may disconnect your line at this time.
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