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Operator
Good day. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2023 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 and 1 on your telephone keypad. If you should need operator assistance today, please press star and zero. I'll now turn the call over to Nala Azmeh, Head of Investor Relations. Please go ahead.
David
Thank you. Good afternoon, and thank you, everyone, for joining us for LifeCycles Business Update and Review Financial Results ended September 30, 2023. We will start today with formal remarks from Ajay Kocher, co-founder, president, and chief executive officer, Tim Johnson, co-founder and executive chair, 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 in 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 then our past reports and filings with the U.S. Securities and Exchange Commission and the Ontario Securities Commission in Canada. These documents can be found on our website at investors.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. These forward-looking statements should not be relied upon as representing life cycles assessments as of any date subsequent to the date of this call. With that, I'm pleased to turn the call to Ajay.
Ajay Kocher
Thank you, Dolla, and good afternoon, everyone. Beginning with slide three, we announced in late October that we were pausing construction at the Rochester Hub to conduct a comprehensive review of the project. Today, I'll discuss the rationale for that decision. Tim will provide an update on the Spoken Up Network, and Debbie will review liquidity management and our financing strategy. Turning to slide four, I'd like to provide context on what drove our decision to pause the construction work for a comprehensive review. At a high level, it came down to the convergence of two factors, namely an escalation in actual construction costs versus prior indicative bids and delayings in complex financings. Let me walk you through some of the details as you can see here by the timeline. Starting with the Rochester Hub construction milestones and costs as shown in the blue part of the timeline. We recently started to recognize actual costs significantly higher than previously estimated based on recent subcontractor agreements for packages of remaining work. This was specifically related to installation costs for mechanical equipment, piping, structural steel, electrical instrumentation for measurement and process control devices. This cost pressure was exacerbated by the timing of nearly $4 billion of other major construction projects in the region starting or wrapping late 2023 and early 2024, driving general contractors to draw construction workers from the larger regional area. Reflecting these escalating construction costs, we arrived at forecasts that will result in the aggregate cost of the current scope of the project substantially higher than the previously disclosed budget of $560 million. For reference, the project capex to date was approximately $301 million on the project for September 30th, 2023. In terms of the financings, as shown in green on the top of the timeline, With our capital growth needs, we've been successful in timing strategic and competitive financings, such as with Koch, LG Chem, LG Energy Solutions, and Glencore, over the course of 2021 and 2022. Also in 2021, we submitted our application and began a rigorous process with the TUE Loan Programs Office. We achieved a significant milestone when we received the conditional loan commitment for gross proceeds of $375 million in late February 2023. While we worked closely with the DOE to progress to the final stage, we were delayed from our initial target close from the end of June to September 2023. Also, at September 30, 2023, the company had contributed approximately $92 million for the construction of process buildings and a warehouse for the Rochester Hub. This spend was incremental to the Hub project budget of $560 million. The company was anticipating a refund of a substantial portion of this contribution upon completion of a building's leasing arrangement. Through the complexities of bringing together arrangements for the DOE loan and the building's lease arrangements, both financings were further delayed into October. Subsequently, we've decided not to pursue the building's lease arrangement, which is expected to simplify the DOE loan closing process for the Rochester Hub. In summary, the escalating construction costs combined with continued delays and closing contemplated financings were leading to lower current and projected cash balances. As we made the swift and prudent determination and announced a pause of the project to complete a comprehensive review. The review is examining expected capital costs, timing of completion, and go-forward construction strategy options for the Rochester Hub project. Turn to slide five for a snapshot of our current portfolio immediately following the Rochester Hub project pause. The company is undergoing a comprehensive review for bringing on additional spoken hub capacity in the near term. Until the go-forward strategy work is completed, the company will be slowing operations at its North American spokes as it reviews the timing and black mass needs of the Rochester Hub. The company is reviewing its plans, bringing on additional spoke capacity in both North America and Europe. And we'll discuss both the hubs and our focus on the Generation 3 spokes in more detail later in the presentation. Turn to slide six for an overview of the key considerations for our ongoing comprehensive review. As already discussed in late October, we announced a pause on the construction work at the Rochester Hub for a comprehensive review of scope, timing, and capital. Additionally, we're evaluating our levers to optimize cash and liquidity, including cost spent initiatives, SPOC optimization strategy, and timing financing needs to support our go-forward plans. Let me now turn it over to Tim for a more detailed update on our SPOC and Hub network.
Dolla
Thanks, RJ. Turning to slide seven for an overview of the options being considered as part of the Rochester Hub project review. The review is examining a phased approach that ties black mass production from our spoke network to support the battery industry for precursor and capital production. In a phased approach, the first phase, as depicted by the green arrows, the black mass is processed to produce a mixed hydroxide precipitate, or MHP, a combination of nickel, cobalt, and manganese metals. MHP could be sold to a refiner ahead of supplying to the battery precursor industry. In the second phase, per the original plan, as depicted with the gray arrows, black mass would be converted directly to nickel and cobalt sulfates ahead of supplying to the battery precursor industry. Both approaches maintain the production of battery-grade lithium carbonate. The MHP process was part of LifeCycle's large-scale pilot program, completed in 2019 to 2020, and is included in LifeCycle's patented technology portfolio. A key factor for this approach is the ability to reduce immediate construction scope to phase development with project financing. Turning to slide 8, to discuss our initial assessment of the Rochester Hub project. As previously disclosed, engineering and procurement of the Rochester Hub project are largely complete, with focus having shifted to construction installation activities. As RJ discussed earlier, the project has experienced escalating construction costs substantially higher than what was anticipated in the previously disclosed $560 million budget. Additionally, we had contributed approximately $92 million towards an expected total cost of $140 million for the construction of process buildings and warehouse for the Rochester Hub. We had previously anticipated a refund of a substantial portion of this contribution upon completion of building lease arrangements. For background, the decision for entering into the building leasing arrangements were based on an initial intention to focus capital expenditure on core project requirements, specifically not real estate assets. This is aligned with our general approach to project execution. However, we decided not to pursue the building leasing arrangements because which is expected to assist in simplifying the DOE loan closing process for the Rochester Hub. In terms of the go forward for the Rochester Hub, we have performed an initial analysis of options for completion of the Rochester Hub. Based on the initial analysis and depending on the option selected, we determined that the revised project costs could be in the range of approximately $850 million to approximately $1 billion. This range includes the cost of the process buildings and warehouse for the Rochester Hub of approximately $140 million. This total project range, based solely on initial analysis, is subject to a number of assumptions and will likely change as we continue to complete our comprehensive review work and determine which options to pursue accordingly. Turning to slide 9 for an update on the Port of Esme hub, which has a similar flowsheet and benefits to the MHP option I just covered with a phased approach for the Rochester hub. Just as a reminder, together with our partner Glencore, we are repurposing part of their existing hydrometallurgical site in Portovesne, Italy. This project contemplates competitive long-term financing from Glencore to fund LifeCycle's full share of the capital investment. Once operational, this facility is expected to be one of the largest producers of barrier-grade lithium carbonate in Europe. I would like now to hand it over to Debbie for a review of our liquidity management and financing strategy.
Glencore
Thank you, Tim. Turning to slide 10 for a review of the steps we are taking to maximize liquidity and preserve our cash on hand. Since pausing the project in late October, we've taken action to optimize cash while also pursuing financing options and strategic alternatives. First on our cost-cutting action, we have reduced our workforce, eliminated other non-essential operational spend, and are implementing working capital initiatives. Have slowed operations at our North American Spoke network, including a pause in production at our Ontario Spoke, slowed production at the New York Spoke, and the installation of Line 2 in Germany. under re-evaluating the plans and timing of our spokes in Norway, France, and Hungary. Turning to slide 11 for an update on our spokes. With our review of timing and scope for the Rochester hub, we are now primarily prioritizing our operations on the Generation 3 spokes, specifically Arizona, Alabama, and Germany. Consequently, We are revising our 2023 annual production outlook for black mass from 7,500 to 8,500 tons down to 5,500 to 6,500 tons. As a reminder, we started up the Germany spoke line one in early August and are excited to report that the ramp up is tracking our expectations. The Generation 3 is advanced novel technology that can sustainably process full electric vehicle battery packs without the need for discharging, dismantling, or thermal processing. Additionally, they benefit from economies of scale. Turning to slide 12 for an update on our cash position. Since June balance is $289 million, The majority of the cash outflow has been for capital expenditure related to the Rochester Hub project. We ended the third quarter with approximately $137 million of cash on hand, which is now approximately $100 million at November 10th. With current cash on hand, our spend cuts and additional cost-saving initiatives underway we anticipate needing additional funding in addition to the DOE loan before restarting the Rochester Hub project. As an immediate step, the company, in conjunction with its financial advisors, is exploring options to support near-term liquidity needs. The company is actively engaged and continues to work closely with the DOE to satisfy conditions precedent to financial calls for growth proceeds of $375 million as it undertakes its comprehensive review of the go-forward strategy of the Rochester Hub. In addition to the conditions precedent to financial close, the company will need to meet additional conditions precedent prior to the first advance, including obtaining additional financing to fund the required base equity commitment before restarting the Rochester Hub project. In parallel, we are exploring additional long-term financing options as well as strategic alternatives. Turning to slide 13 to conclude. We continue to believe Lifecycle is uniquely positioned with its Spoken Hub network and remains poised to benefit from strong secular trends and supportive government policy. We remain committed to our mission to recover critical battery materials to create a domestic closed-loop battery supply chain for a clean energy future. Operator, we are now ready for questions.
Operator
At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. If you wish to remove yourself from the queue, you may do so by pressing star and 2. We remind you to please pick up your handset for optimal sound quality. And we'll take our first question from Brian Dobson with Charging Capital Markets. Please go ahead. Your line is open.
Brian Dobson
Thanks very much for taking my question. As you contemplate this strategic pause in development outside of the United States in the European countries that you're looking to build hubs and spokes, What do you think is the likelihood that those projects will simply be halted by understandably concerned partners and investors?
Ajay Kocher
Hey, Brian, it's Sergio here. And you're a bit hard to hear, but I think you're asking about the effect on our European projects due to what we just decided to do or we decided to do with the Rochester hub. I'll turn it over to Tim, perhaps, to cover that.
Dolla
Yeah, no worries. Hi, Brian. Nice to talk to you. So when it comes to European assets, similar to the balance of our projects, it's all part of this broader comprehensive review that we're doing, with the exception of Porta Vesna, which is the DFS timing is under review, but otherwise is continuing in connection with partnership. And I think that was part of your question earlier, with Glencore. I want to highlight that our partners and customers have been extremely positive and supportive throughout this process.
Brian Dobson
That's good to hear. As it pertains to the Department of Energy, you know, I understand that you've retained your investment bank to seek out strategic alternatives and finance and opportunities. As management is contemplating receiving funds from DOE, how likely do you think that is if you had to handicap it?
Ajay Kocher
Yeah, I'll take it, Sajay. Yeah, look, so let's be very clear, and I think there was a lot of misnomer out there in articles and other aspects that we saw publicly. And to be clear, we were in quiet period, so we want to ensure that we're being prudent. Look, the facts haven't changed. We have a conditional commitment from the DOE. We still have a conditional commitment from the DOE. That was issued back in February of 2023 of this year. That commitment's for gross proceeds of $375 million. They've been great to work with through this process. We're very closely engaged. We're not just saying that as random language. It's obviously in partnership with them in terms of whatever we put out there. What I would say is we definitely have some work still to do, and I think Tim covered in the body here different options associated with the potential phasing of the project and also around construction strategy. As you can imagine, that's very important for us to be working through with the DOE And so as we get through the full review and we get to the best path forward, it's going to be in concert with that DOE package. Today we're not ready to comment about how that may change or how that may be different, but what I can tell you is the fact remains that we have a commitment. And programmatically from the DOE, this is public, you can find it, when they give a commission agreement, they actually earmark the funds. So what we need to do is work through our review, work with them, and then we'll be able to give more clarity and more timing than other aspects.
Brian Dobson
Okay, thanks. Just one final follow-up. Local news reports have indicated that several contracting firms have outstanding bills that have not yet been paid. Would you care to comment on that? Is that because you're negotiating with those firms, or what's going on there? Those pertain to the Rochester Heart Facility.
Dolla
Yeah, thank you for that. Yeah, no worries. And, Brian, we can't comment specifically on individual contractors. I'll just say that we're working closely with all stakeholders as part of this review process.
Brian Dobson
That's very good.
Operator
Thank you. Thank you, sir. We'll take our next question from Jeff Rossetti with TD Cal, and please go ahead. Your line is open.
Jeff Rossetti
Good afternoon. I was just wondering if you could comment a little bit further. You mentioned that you'll need some additional financing before to meet DOE conditions. Could you maybe just elaborate a little bit more about how much may be required?
Ajay Kocher
Sure. Hey, Jeff. It's Ezra here. So we just wanted to make sure that it's clear how the structure works. So let's be very clear. The DOE has always had a face equity commitment, and it's actually, I believe, a programmatic feature for them, and much like usual, project financing, which means as of the overall project size, you have to put in a certain amount of equity first, then followed by the debt coming in. As you can imagine, if the capital cost is different, then the project size is bigger. And with an existing commitment remaining at $375,000, there's an additional funding need. And so on page 8, we went over... Indicatively, initially, where those capital costs would be, depending on the option selected and proceeding with the same approach on the upper end with respect to contracting strategy. I think it's early for us to say precisely what that gap is. You can do math based on this, but I think what we'd like to do is complete the work, the refined level of these numbers, which could change. and then come back and be able to talk about all of that together comprehensively in concert and when appropriate with other financing alternatives that we're going to be working on.
Jeff Rossetti
Okay, thank you. And just on the cash preservation plan, it's helpful that you provided where you stand on cash in terms of November 10th versus the end of the quarter. Just wanted to see if you could maybe provide a little bit more detail on what you see the cash burn being on a monthly basis once you've like fully implemented the cash preservation plan. That's a good for Debbie to address.
Glencore
Hi, Jeff. I appreciate the question. I think what we need to do, and I think you read in some of the materials, I heard it say that we're working with some advisors to help us with that. I think what we do is we really need to work through that plan and then circle back to that in conjunction with a comprehensive review. They're really working in parallel. As an initial step, you know, you saw in the details, we've densified our workforce. We're still in production at our plants. And we're also looking at opportunities to maximize liquidity and our working capital positions. So we're working with suppliers. We're looking at selling Black Maps versus the path that we were on, which was to build inventory for the opening of the hub. And that work will continue, and we'll get deeper into that as it progresses.
Jeff Rossetti
Thank you.
David
No problem.
Operator
As a reminder, if you'd like to ask a question, please press the star and one keys on your telephone keypad. We'll take our next question from Adam Jonas with Morgan Stanley. Please go ahead. Your line is open.
Adam Jonas
Thanks. I was going to ask about the minimum, about the pro firma burn as well, but I appreciate you're not going to answer that right now. But maybe you could answer that. is there any remaining CapEx commitment, or what financial cash commitments are near-term for the Rochester hub, even with the pause? And then I was curious, as a follow-up, if you had an assessment of minimum cash on the balance sheet to run working capital, payroll, and your other operational needs with the pause. Yeah, your questions vote for Debbie.
Glencore
Talking over each other there. My apologies. Hi, Adam. As I said, we've got $100 million as of right now. And as we work through this plan, absolutely working on a minimum that we need and then working around that minimum and to build on your time financial options around that to support it's going to be really important. You asked about capital commitments. So I think there's a couple of things in there. One is we paused on future growth capital projects, so there's nothing thrown out as a result of that. Clearly, everything runs roughly about a month behind any status, so you're absolutely right. There are still bills to be paid with regards to recent work at the Rochester Hub. In addition to that, we've got costs around securing the site, making the site safe. and keeping it in a good, preserved state so that it's in good state for a fast startup when we're ready to do that. So there's a bunch of one-time costs in the next couple of months, including the cost of our workforce reduction to work through in November, December. So I think that will give you an idea of the sort of speed bumps that we need to hit in the next little while. And then as we complete the work around the cash-placed preservation plan, we'll have more of a sense of what the run rate is at the back of that.
Adam Jonas
I appreciate that. Thank you.
Operator
We'll take our next question from Matthew O'Keefe with Cantor Fitzgerald. Please go ahead. Your line is open.
Matthew O'Keefe
Thanks, Operator. Thanks for taking my question. Just a question on, you're changing the flow sheet a little bit here. I understand you want to go to produce MHP in your review of Rochester. Sounds like it'll save some capex, and I can see that. But why are you applying that also to the Port of Esme hub? Is it a significant capex, or is the premium just not there to produce to produce nickel sulfate and cobalt sulfate. What should we be thinking about on this side of things?
Ajay Kocher
Hi, Matt. Both great questions. Good for time to address.
Dolla
Yeah. Hi, Matt. Nice to talk to you. So let me answer the first one, which in relation to Port of Esme, just to make it clear. So the plan for Port of Esme was always to produce MHP when we originally scoped it out. And there was a couple of factors that were driving that, one being the desire to maximize the utilization of existing equipment on site. i.e. the MHP process was much more well tied to the existing footprint of the existing asset on site, making it more expedient and effectively a lower capital project overall. This is a process that we're very familiar with. When it comes to Rochester, part of the rationale for driving that, you touched on it exactly right, and that is that it reduces the near-term capital expenditure associated with installing certain parts of the plant associated with sulfate production. What we have seen from a market perspective, and this is public and you can look up the indexes, is the spread between MHP discounts to metal and sulfates has narrowed. And so the financial impact is somewhat negated by that combination. So it's a decision that's based primarily on construction costs. But there is market factors that you can see that have changed in recent times that are also helping support that.
Ajay Kocher
And on the other side of that, just to add, you know, obviously the input typically to precursor and the input to cathode thereafter, particularly the precursor is the cell phase typically. And so one of the things that's been missing in North America is precursor manufacturing. And there are some clients out there, people can see them publicly, that are coming. But it is taking longer than anticipated. So we don't have an answer today of what, you know, path we would go. We do still see the value in the sulfates to being, you know, more adjacent to pecan production, precursor production. But as Tim indicated, it's really a question of if we go that path, how do you get there? And the salmonella solution, yeah.
Matthew O'Keefe
Okay, got it. Thanks. And if I may, just on the CapEx for the process and warehouse buildings, you suggested that was tied to the DOE loan. Is it just that the DOE needs something more in terms of security, like land, as part of the loan requirement?
Ajay Kocher
Not quite on that end of the subject. Yeah, so as Tim articulated briefly, We usually try to do this, and for our spokes, it's usually much simpler because they're smaller and more typical buildings. So our original approach, and it's been in our FS along the way, our financial statements, is we wanted to do this building leasing arrangement, which would have refunded us a good quantity of the amount that we spent to actually build the buildings. And then the idea was that that would convert it to a lease. So it's a way to basically refund CapEx, and as Tim articulated in the presentation, we're not a real estate company, so we only want to make money off the stuff in the buildings. However, as you can imagine, that arrangement would have a set of creditors, and the DOE is another financing party as part of the project. So it's always been that way along the course. But as you can also imagine, getting the short strokes on documentation, it frankly was very complicated. So that's why we refer to them as complex financings. And having this, you know, it's not ideal the way this happened, but we have an opportunity to rebate and do this in a way that makes a lot of sense. And I mentioned that it would help with simplifying the overall complexity that we were facing as part of the DOE transaction.
Matthew O'Keefe
Okay. Thanks very much. That's it for me.
Operator
Thank you. And we'll take our next question with Ben Callow with Baird. Please go ahead. Your line is open.
Ben Callow
Hey, guys. Thanks for taking my question. I just wanted to understand, maybe just on folks, what – and I think you said in your remarks what was paused and what wasn't. But could you just run me through that? Like, I think Adam asked a question about just commitment, capital commitments for the hub. Are there anything – capital commitments for the spokes that are still out there.
Ajay Kocher
David, yeah, sure. So maybe take the first, and then you could take the second on the spokes.
Dolla
Yeah, no problem. Hi, Ben. Nice to talk to you. And so when it comes to the spokes, we've paused one spoke in Ontario. This was our first Generation 1 spoke. It was the smallest of our network, and so as part of this, strategy, we decided to pause that asset and the other spokes in North America remain operational.
Glencore
Yeah, and on future CAPEX then, so you've heard us talk in our disclosures before. We had plans underway for a second line in mid-Germany spoke, and we've also got plans that you know. We have a location in Norway, and we have plans underway for France, and we were looking at site selection for Hungary. So we paused those initiatives until we complete this comprehensive review.
Ajay Kocher
The hub is the main capital spend for us, though, just relatively.
Ben Callow
You answered the question about black mass sales versus building inventory. And I just want to understand with the operating spokes, if the black mass sales are profitable on those individual spokes. And I have one follow-up.
Ajay Kocher
Yeah, so the way that we've looked at the portfolio is, one, prioritizing customer needs. So we have customer obligations where we need to service batteries that need to be recycled. Two, we've looked at the spokes that have the best economies of scale. So it's focused on low-cost conversion, ability to get to further throughput, further ramp-up, etc., And three, vis-a-vis profitability, I think I'll hold on and comment on that today, maybe outside of RFS, but just suffice to say that the way that we've optimized the network and we'll continue to look at it is intended to be liquidity generating over time and liquidity managing as part of our cash preservation plan.
Ben Callow
Okay, great. And just to follow up on Tim and prepare remarks you said about the Glencore site, the CapEx, because it So does that still proceed even when Rochester might be held up for a little bit?
Dolla
Yeah, Glencore and Lifecycle are both committed to the Port of Esme project. We think that it's critically important for both companies and for the region. And so the key thing that we're just reviewing is the timing. We've had some change in staff, obviously, and so we're just reviewing the timing associated with the DFS, but both companies remain committed to the project. Thank you, guys.
Operator
Thank you, Ben. And it appears there are no further questions in queue. Thank you, everyone, for joining. This does conclude today's program, and you may now disconnect.
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