Livent Corporation

Good afternoon and welcome to the third quarter 2020 earnings release conference call for Livent Corporation. All lines will be placed on this in only mode throughout the conference. After this speaker's presentation, there will be a question and answer period. I will now turn the conference over to Mr. Daniel Rosen, Investor Relations and Strategy for Livent Corporation. Mr. Rosen, you may begin.

Thank you, Simon. Good evening, everyone, and welcome to LiveIn's third quarter 2020 earnings call. Joining me today are Paul Graves, President and Chief Executive Officer, and Gilberto Antoniaz, Chief Financial Officer. The slide presentation that accompanies our results, along with our earnings, can be found in the investor relations section of our website. The prepared remarks from today's discussion will be made available after the call. Following our prepared remarks, Paul and Roberta will be available to address your questions. We would ask that any questions be limited to two per caller. We would be happy to address any additional questions after the call. Before we begin, let me remind you that today's discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including but not limited to those factors identified in our release and in our filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today's information. Actual results may vary based upon these risks and uncertainties. Today's discussion will include references to various non-GAAP financial metrics, definitions of these terms, as well as a reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP provided on our industrial relations website. And with that, I'll turn the call over to Paul.

Thank you, Dan, and good evening to everyone. First, I'd like to take a brief moment to thank all our employees who continue to effectively manage through the ongoing challenges facing all of us in this difficult environment. When you take all of the distractions that our employees face today and look at the performance of our operating assets, it really speaks to the professionalism and the commitment to the live and workforce. We have a lot to talk about today, including the broad EV trends that are driving optimism for accelerating demand growth, Lyman's participation in a new world-class lithium project in Canada, and, of course, the near-term challenges that we continue to face as an industry. I will address the current lithium market to give some context for Lyman's third quarter performance. we will discuss how, despite the significant near-term uncertainty that our industry is operating in, electric vehicle demand growth is accelerating and excitement for the long-term prospects of electrification are as strong as ever. Also, how the widely reported expansion of charges in the lithium industry are creating a looming supply deficit for all forms of lithium chemicals, whether that's carbonate, hydroxide, or even metal in the longer term. And most importantly, we will discuss what Livent is doing to strengthen its market position over the coming years. The lithium market has been weak through most of 2020, with China being impacted in Q1, and the rest of the world rapidly feeling the effects starting in early March of this year. Despite the reopening of many of our end markets following shutdowns in Q2, the pace of recovery has been gradual and uneven, with a lack of real visibility into how the end consumer is going to behave. and therefore limited confidence as to the shape and strength of the recovery, many customers continue to be focused on managing costs, reducing inventory, and minimizing order volumes beyond what is needed on a short-term basis. This dynamic has resulted in lower demand across all lithium products and end markets, from high-growth energy storage to various other industrial markets we serve. Despite this environment, we still expect total demand for lithium chemicals on an LTE basis to be flat in 2020 versus 2019, which speaks loudly to the underlying growth dynamics in demand for lithium. There have been some particularly impressive electric vehicle sales data around the world in the midst of this broad economic slowdown. In China, which is further along in its COVID-19 recovery than most other countries, passenger electric vehicle sales were up nearly 70% year-over-year in September. This marked the highest number of monthly EV sales since June of 2019, the last month before the Chinese government reduced subsidies. This is a very important achievement. Moving from subsidy-driven sales to a more sustainable sales trend is a critical step in the evolution of EV adoption. EV sales also climbed, increasing nearly 70% month-over-month in September, or 170% year-over-year. And even in the U.S., which is lagging both regions with respect to EV adoption. September marked the strongest EV sales month year-to-day and the first positive year-over-year month in 2020. Putting all of this together, 2020 total EV sales are on pace to be higher versus 2019, despite what will in all likelihood be a down year for the overall global passenger vehicle market. Demand growth is key to the return to sustainable profitability for the lithium industry. and even more importantly, if we're going to create the conditions necessary for expansionary investments. As we have previously discussed, the lithium industry entered 2020 in a state of oversupply, albeit with a wide range of quality capabilities on the supply side. The recent upturn has been positive in one sense, in that it's helped to get more agreement on projecting the point at which supply and demand will return to balance for certain key products. However, it will take time for lithium demand to fully ramp back up, for visibility and confidence to be restored with customers, and for OEMs to take the steps necessary to secure long-term lithium supply commitments. I will now turn the call over to Gilberto to discuss our financial results and provide a business update.

Thank you, Paul, and good evening, everyone. Lightness performance for the quarter. continue to be negatively impacted by COVID-19-related disruption. That's shown in slide four. For the third quarter of 2020, we reported revenue of $73 million, adjusted EBITDA of $1 million, and $0.05 adjusted earnings loss per diluted share. Revenue was higher on a sequential basis versus the prior quarter, driven primarily by an increase in hydroxide volumes sold of nearly 1,000 metric tons. Despite this increase, hydroxide volumes were still down on a year-over-year basis. Pricing was slightly down quarter-over-quarter, largely reflecting geographic mix and, most notably, high lithium hydroxide sales into China. Low-adjusted EBITDA was driven by meaningful cost add-ins we incurred during the quarter, namely higher third-party carbonate usage and increased spending due to COVID-19. We carried forward roughly 4,000 tons of hydroxide into 2020, much of it produced from third-party carbonate, in order to meet higher volumes projected by our customers. The timing of specific customer deliveries resulted in an outsizing impact this quarter. For perspective, the financial impact of third quarter carbonate usage was nearly double of the prior quarter. We now work through the majority of this higher cost inventory. With respect to COVID-19, we have been committed to ensuring our manufacturing sites continue to operate safely and with minimal disruption. Our continued work and engagement with local authorities since the onset of the virus, particularly in Argentina, has allowed us to remain operational. However, in order to implement the necessary safety protocols, we are incurring higher costs at all of our production sites. This additional spending is obviously not only the impact of the pandemic on our businesses, We have been impacted by late customer orders, not just for hydroxide, but also for butyl lithium, where more customers have had prolonged shutdowns. We have also had higher unit costs from producing lower hydroxide and carbonate volumes, to name a few. As long as these extra COVID-19-related precautions remain in place, we expect the higher operating costs to remain. Last quarter, we discussed many of our customers' intentions to honor their full-year volume commitments in 2020. And to pick it up in volumes, it would require in the second half, particularly in the fourth quarter. Now, in early November, and led by lithium hydroxide, we still expect there to be a continuous sequential improvement in volumes in the fourth quarter. As customers continue to express their intent to meet their volume commitments, However, due in part to the potential risk of further business disruptions for resurgence of COVID-19 cases and restrictions across many countries, the time and timing of this increase remains less certain, with the possibility of some volumes pushing to January. With the uncertainty COVID-19 has brought to our customer order patterns, we continue to adjust production plans at our manufacturing facilities. aiming to both reduce inventory of finished products and minimize additional third-party carbonate purchases. This approach has contributed to our decision to pause lithium hydroxide production at our Bessemer City facility in North Carolina for two months in the fourth quarter. During this period, we will be installing additional capabilities in our hydroxide unit. These upgrades are being done to meet increasingly hydro specification requirements from our customers. As we have discussed, the qualification process for battery-grade lithium products is lengthy and challenging, and the physical and chemical specifications demanded vary by customer and continue to evolve. By using this time to improve our production capabilities, we will continue to be an industry leader in battery-grade lithium hydroxide. In addition to our work with customers to meet their technical expectations, We have also been negotiating with them to be sure that we can continue to meet the lithium needs that underpin their long-term growth plans. As part of this, we have announced the expansion of our multi-year lithium hydroxide supply agreement with Tesla to 2021. This will result in a higher committed volumes to them versus 2020. We continue to discuss the framework for a long-term supply partnership with Tesla beyond 2021, and do this as an important step in helping to bridge the gap as we strengthen our longstanding relationship. With that, I will turn the call back to Paul.

Thanks, Gilberto. So let me start by reiterating the importance of what Gilberto finished with, and that's our continued partnership to supply Tesla with lithium hydroxide. in the context of a broader discussion we have with them about how and where Libert can best support their needs beyond 2021. Tesla remains a clear leader in the EV industry and increasingly in the battery industry, with a vision, a technology roadmap, and global investment plan that puts it at the forefront of EV adoption trends. They continue to innovate in all aspects of electrification, and we're proud to be their partner and support their plans to diversify battery technologies, support investment into a more regionally diverse set of lithium resources, and improve the sustainability profile of the EV industry through technological innovation, resource diversification, and supply chain regionalization. So moving on to the broader demand outlook. There's been heightened attention around electric vehicles, energy storage, and the lithium market over the last few months. We've seen thermal commitments being made by major OEMs with respect to qualification plans, despite facing significant challenges in their legacy businesses. These commitments are coming in many forms. We've seen high-profile advertising around new model launches, putting the strongest brands within OEM portfolios, such as Mustang, Hummer, and Porsche, firmly into the EV space. There have been multiple announcements of large investments to either repurpose existing production facilities or to build new ones, and we've seen strategic investments and partnerships across the industry, reflecting the desire to build a portfolio of attractive EV platforms. As OEMs put further brand equity behind new electric fleets, they're also looking to make sure that reliable battery supply chains are lined up to meet their needs. This includes having a clear lithium procurement strategy to ensure it does not become the bottleneck in production plans, as OEMs go from buying no lithium today to very large volumes in just a few short years. We're seeing increased engagement from OEMs throughout the supply chain, although they remain relatively early in the process of developing their battery raw material procurement strategies. Even so, The OEMs most advanced in their electrification plans are starting to make real commitments, and we would expect to see further announcements of supply chain partnerships in lithium in 2021. In addition to heightened concerns around securing enough reliable, qualified lithium, there's been increasing discussion of localizing EV in battery supply chains. Beyond the inherent sustainability objectives, which we'll discuss shortly, there are also political and security of supply considerations that have gained attention following the COVID-19 pandemic. If customers are serious about building a more secure, sustainable lithium supply chain, they will not be able to rely solely on the expansion of non-integrated China-based converters. That will be especially true for anyone looking for both security of supply and certainty of price in the future. In order to meet ambitious EV targets and to avoid potential fines, the auto industry has committed $200 billion to electrification plans over the next few years. And if we add up the announced sales targets of each OEM, the implied lithium demand for getting anywhere close to these levels would exceed even the most bullish of future lithium estimates. And while the longer-term lithium demand consensus has gradually increased, the supply side has not moved in tandem. In fact, the trend has been in the opposite direction. In the current low lithium pricing environment, the number of postponed or canceled expansion plans have only increased. It's important to differentiate between the building of new or larger conversion facilities and the expansion or development of lithium resources themselves. Obviously, a conversion facility itself adds no new lithium to the market if it cannot get enough feedstock. But lithium resource projects, and particularly greenfield assets in more remote locations, take many years to bring online, and the financing options to fund these expansions are extremely limited today. With spodumene concentrate trading around $400 per ton, and larger spodumene miners disclosing cash operating costs of production in the same range, and all in costs well in excess of this, the ability of the Australia-China resource alignment to meet all the growth in demand is highly questionable. All of this is increasing the probability of a material shortage in battery-qualified lithium materials in the coming years. And that is why Livent is so focused on its own global lithium production network. Like others, we will continue to have a strong presence in China, given it has been the largest market for EVs and battery production, and will continue to be for the foreseeable future. However, as the lithium industry continues to grow and expand alongside energy storage globally, it will not be enough for LiveUp to simply build incremental lithium conversion capacity in China, even if that is the lowest capital option. As LiveUp has stated in the past, while we remain fully committed to our long-term capacity expansion plans, they must be supported by a sufficient return on invested capital. Profitability needs to be higher and carry more certainty than today. The restart of our capital projects will be conditional upon improved pricing dynamics backed by firm, long-term volume commitments from customers. Now let me turn to sustainability on slide seven, which is central to our strategy at Leiden. While there was little question about the sustainability advantages of EVs over their ICE counterparts on a life of ownership basis, there was an increasing focus of customers and therefore EV manufacturers and other stakeholders on and the environmental and social impact of the entire EV supply chain, especially regarding critical battery materials. Recent discussions about the merits of localizing electric vehicle supply chains have also brought the topic of sustainability to the forefront of our industry. with a recognition that an industry model that relies on energy, water, and chemical-intensive production of intermediate products and a subsequent carbon-intensive chain of shipping, process, and purification will struggle to meet any reasonable definition of sustainable. We believe Blyvant's credentials and capabilities in this regard are a source of competitive advantage. Blyvant's commitment to sustainability and proven track record as a leading lithium producer for many decades have allowed us to have differentiated conversations with our customers beyond traditional contracting terms. We can point to material differences in how our process balances carbon intensity on local water issues, how we can localize key steps in the supply chain without creating carbon footprint or waste material issues, and how we're making real measurable commitments to improve our performance in all areas. And current and potential customers value this. While the shift to electrification is rooted in green principles, it does not mean that lithium producers can fit their immune and sustainability initiatives. When we have customers that make their own commitments to carbon emission reductions, they increasingly require suppliers who are aligned with those objectives. And if we are unable to keep up with those demands, we will find ourselves at a competitive disadvantage. Put another way, sustainability is good business, and we encourage everyone in the EV market to embrace it as a business model. And given our primary lithium source today is in a remote location in Argentina, operating in a safe and sustainable manner is essential for the future viability of our business. This responsibility is a fundamental obligation of our rights to operate. In today's following our sustainability report, and Green Bond Framework released last quarter, we're proud to announce Livent's commitment to overall carbon neutrality by 2040, with significant carbon intensity reductions across our global operations much sooner than that. While ambitious, we believe that this carbon neutrality goal is both achievable and necessary. Based on our successful track record of delivering on our previous sustainability goals five years ahead of schedule, We believe we have the credibility to set bold new goals and be a part of the process of setting standards that our entire industry is held accountable to. Before year-end, in addition to our carbon reduction goals, we plan to share more details on Leiden's broader set of sustainability commitments as we look to the future. These commitments will address all of the ESG topics that are most important to our customers, investors, community members, employees, and other stakeholders. Now let me move on to our announcement today that Livent will be a part of the new ownership group of the Namaska Lithium Assets. The Superior Court of Quebec approved the acquisition proposal from the consortium which includes Investissement Quebec, or IQ, and the Pallyhurst Group on October the 15th and the transaction is currently waiting for final steps needed to close. This will see New Namaska reorganized as a private company owned jointly by IQ and an entity controlled jointly by Livent and the Powerhouse Group. Many of you are aware that Livent has a long relationship with Namaska and a deep understanding of the specific opportunity that Namaska offers. This has always been one of the largest high-grade lithium deposits in the world, and it has access to an important existing infrastructure, especially low-cost, zero-carbon hydroelectric power. The Quebec government has long advocated for the region to play a leading role in the future of battery materials, and has backed this up with a demonstrated willingness to provide appropriate development capital. We're pleased to be working alongside IQ, the investment arm of the Government of Quebec, to help achieve this in lithium at New Damascus. As part of the transaction structure, Livent has agreed to settle its outstanding claims against Damascus in exchange for payment of an agreed-upon portion of the $20 million claim to the new ownership group. As a reminder, in 2017, Livent provided an advance payment of $10 million to Damascus as part of a proposed lithium carbonate supply agreement. No volumes were ever delivered under this agreement, resulting in an additional $10 million termination penalty claim. On a net basis, including this settlement, the upfront capital commitment required by Libent upon transaction close is small, with less than $10 million net cash outflow expected in 2020 and no further commitments expected until at least the second half of 2021. Palinghurst is the chosen developer and operator of New Damascus, and it is on this basis that it invites a live-in to participate in a joint ownership, development, and operating role. Palinghurst brings significant skills and experience where live-ins are currently limited, especially mine development and mine operations. It also has strong experience and relationships as an investor in Quebec. Pallinghurst provides an impressive track record of responsibly developing and unlocking value in early-stage natural resource opportunities, and we're extremely pleased to be able to partner with them. However, Pallinghurst also recognizes that lithium for battery applications is a specialty chemicals market, an area where they have less experience, and we're keen to add LiDEM's long history in this space to the development and operation of Unimasker. Livant will therefore play an active role in moving the project from planning and development to construction and into commercial production, helping to ensure that all aspects of the chemical conversion operations are optimized for the most cost and capital-effective mine plan. Livant will contribute its expertise in the production of battery-grade lithium materials and in the development of a commercial strategy in a complex and fast-changing market. This will include addressing matters such as the ultimate location of the chemical plant, the decision as to whether to produce lithium carbonate, lithium hydroxide, or both, and identification of the potential customers that will be the best long-term partners for New Damascus. And following closing of the transaction, the new ownership group intends to work closely with the New Damascus management team to undergo an optimization study, building on the important work already completed to date, but without the constraints that prevented the asset from being successfully developed in the past. This will set the framework for determining the optimal path forward and allow the group to make key decisions such as which lithium products to sell, what the total production capacity should be, and what the timing and capital requirements will be. The investment in New Damascus will also better position Livent for some of the inevitable changes receiving growing support in our industry and that we have frequently discussed. The desire amongst multiple constituencies for greater security and supply chains through increased regionalization and resource diversification positions New Damascus as an important lifting supplier in the future. Furthermore, the requirement for demonstrably sustainable, environmentally friendly production processes and the need for reliable, qualified product place New Damascus in a unique place relative to other hard rock resources globally. As a fully integrated lithium chemical project powered by renewable energy, New Damascus will be well positioned to serve a growing customer base in North America and Europe. And specifically for Livent, New Damascus offers the opportunity for complementary resource diversification with our primary resource in Argentina, as well as a second path to lithium chemical production. And because Livent does not have experience today as a traditional miner, the strategic partnership with Paddinghurst allows Livent to focus on its strengths in downstream lithium chemical processing while building new capabilities in hard rock mining and ultimately to de-risk project execution. But in closing, we remain excited about the future opportunities for our business and the markets in which we operate. We believe that our core advantages, the low cost and sustainable nature of our operations, our partnerships with leading battery producers and automotive OEMs, and our continued investment in developing next generation engineered lithium products, position us to be a prime beneficiary of future improvements in lithium market conditions. So I will now turn the call back to Darren for questions.

Thank you, Paul. Simon, you may now begin the Q&A session.

If you would like to ask a question at this time, please press star then the number one on your telephone keypad. Please limit yourself to one question and one follow-up. If you have additional questions, you can jump back into the queue. To withdraw your question, please press the pound key. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Chris Kapsch with Loop Capital Markets. Your line is open.

Yeah, good afternoon. Thanks. On the MASCA, can you just remind us what the scale of that project is, and does your agreement specify what percentage of the anticipated production you'll have effectively a call on? And then if there's any clarity on the timeline in progress, where you anticipate that would be sort of on a cash cost basis relative to your existing backward integration into Argentina?

Chris, let me try and tackle some of those. I'm not going to be sure I have all the answers for you. So the issue with the MASCA historically, frankly, was when you went in to take a close look at it, it wasn't entirely clear, to be honest, that the proposed – scale of that operation was appropriate for the mining capabilities. There's an optimal mining plan which really should drive capacity here, not how much you can sell to off-takers. One of the key questions that we in Paris are starting to tackle and will tackle is what is the right mine plan? What is the most efficient mining plan that allows us to have a constant, stable stream of spodumene concentrate? How big is that? And therefore, we will have a view then as to exactly what the size of the chemical conversion facility would be. I'm sure you know that some of the biggest costs that you have with regard to cost competitiveness ultimately with these mines is the quality and the grade of the lithium, the spodumene concentrate or the spodumene ore itself, as well as energy costs. And so I think in both of those, it's clear that the Namaska resource is a good, solid, you know, advantage resource. It's got pretty high lithium concentrate to start with. and making sure that the mining plant is designed to take advantage of that is obviously important. And with the hydroelectric power and the low-cost power that comes in that basis, it's also going to be well-placed on the energy side as well. I think also fundamentally being relatively close from the chemical plant mix to the mine also helps certainly efficiencies with regard to shipping and transportation, et cetera. We wouldn't be doing this if we didn't think this would be a cost-attractive asset investment. Getting the answers to those questions, though, is what the optimization study is about. And we definitely want to do it as quickly as possible, but it needs to be done pretty thoroughly. And so one of the reasons that we don't believe there will be pretty sure there will be no more capital needed into this project is in the next six to nine months and maybe a little longer. It will take us probably that long to actually complete the optimization study. At that point, we will have a clear idea of the answers to some of those questions that you just asked, Chris.

Okay. Well, then the follow-up would be, as I recall, that project is kind of, you know, there was the carbonate project and then there was the conversion facility, which you referenced, and I think that was a bit of a science project, and you were going to get the agreement, I think, and this may have even predated Wyvent's IPO, but if I remember correctly, you were going to get hydroxide converted back to carbonate before you then converted to hydroxide in your facility. So I guess the question is, is the intent to still – go forward with the conversion, the downstream conversion part of this overall new Nebraska, and then will this, do you anticipate the commitment to this project will influence the timeline, do you anticipate, of your further expansion of the Argentine project? Thanks. Thanks.

You know, the process that the old Damasco management team were trying to put in place is not one that we would have put in place. So, frankly, I wouldn't describe it as a science project, but we weren't as confident as they were that they would be able to produce usable lithium hydroxide. And so because that process created lithium hydroxide solution first, we said, look, before you actually create the hydroxide and... in usable powder form, we'd carbonate and we'll take carbonate instead because frankly that was more use to us than poor quality or unusable lithium hydroxide. That is not the plan that we have today. We believe that the right thing to do with this project is to find a reliable, predictable process by which lithium chemicals can be produced. You have to make sure it's reliable, predictable, and that the quality is good. I think some of this will be driven by customers, and when we get a better understanding of which customers make most sense for this resource and who is the best fit with it, I think it will answer that question whether we need to go down, you know, which path we need to go down. We're open to all questions with regard to technology, but it has to meet. We're not in the business of innovating for the sake of innovation. This is a resource that has to be up, it has to be running, and it has to produce the best quality product at the lowest possible price, period.

Okay, and anything on the influence on the timeline of your Argentine project?

I think it's a somewhat independent question for us. I think the two biggest factors in Argentina are the challenges of operating in Argentina today, particularly with the COVID restrictions they have, but also getting some visibility as to broader economic policy down there. And frankly, access to capital. I think if it becomes a capital allocation conversation, then clearly this will influence it. I don't think it will influence it in any other way. Argentina remains, in our view, one of the world's, if not the world's, best source of lithium carbonate, all factors considered, not just cost, but also sustainability and other factors. And so we're absolutely committed to still expanding that, but it's not an easy process, and we are not unlimited in our capital capabilities.

Thank you very much.

Your next question comes from the line of Chris Parkinson with Credit Suisse. Your line is open.

Great. Thank you very much. You mentioned a bunch of new EV programs. I think you forgot the G-Wagon on your list. And your belief, and I think most people's belief, that overall, because of all these announcements, OEMs are going to need to further commit to supply agreements. But I'm guessing that's still going to require a much higher price point to incent suppliers to ultimately resume a lot of their projects. Can you update us on your broader and general thoughts here? Thank you.

Sure. How long have we got? Okay, I'll be quick. Okay, I think, you know, it's a difficult one, right, because there's a lot that an automotive OEM has to resolve in order to successfully launch an electric vehicle. And I think some of the comments from the leaders of some of these OEMs reflect that challenge that they face. A lot of the skills they've built up over many, many decades aren't necessarily relevant here. But where they do have skills, they tend to apply them here. There's a history of sourcing resources in a particular way. And so the starting point tends to be aligned with that approach, a historical approach to resource for most, not for everybody, but for most. And I think they therefore have to go through the process of understanding why just simply allowing market forces to initiate and trigger lithium production is unlikely to be successful, whether it's the sheer pace of growth, whether it's the lack of capital that we actually have to do that as an industry across the board, or whether it's other factors that are at work. And so... I think the second thing that really matters, a factor that plays in as well, is there isn't really an urgency for some of them today. So for some there's more of an urgency, but for others there isn't because they're frankly not using a lot of lithium. And you look out a couple of years and say, you know, we've got time to deal with this. The more time you spend with them, the more they appreciate that they actually don't have a lot of time to deal with this. And I think they're starting, some of them at least, are starting to realize that waiting will potentially leave you on the sidelines, and it will leave you with an incredibly volatile price. And I think it's not just higher prices. We do need higher prices than today to prevent, for instance, expansion. But what we really need is commitments. We really need commitments to volume and commitments to fixed prices, particularly those of us that are integrated, so that we can actually finance them. I mean, we're not looking here to do anything crazy, but you can imagine turning up to most providers of capital with the trends that you've seen in our industry in the last year or two. it's not the easiest place to go and build a case for the capital raises. And I think the biggest role that the OEMs can have, and maybe even the battery producers too, is to bring some clarity to the volume and the price bands that lithium is likely to be valued at And if they can do that, then I think it becomes much easier for us to start the resource development processes again. But this degree of sheer volatility and, frankly, a desire to take the lowest possible price while we can, regardless of the consequences, is not going to serve the industry well, frankly.

That's very helpful. And just as a quick follow-up, just can you remind us, you know, if and when you resume certain projects or make that decision, can you just remind us of what CapEx requirements that's going to require potentially 21 and just a broad thought process for 22 as that progressively ramps would be incredibly helpful. Thank you very much.

Sure. As we sit here today, Chris, I don't expect that there'll be any capital deployed in 2021 down into Argentina. I don't think the pricing environment is going to support it. I'm not sure that the Argentinian political environment will be much clearer during 2021. Now, I say this today, in November 2020, and maybe six, seven months from now, I'll have a very different perspective. But even if I do, the thought that we would be deploying a lot of capital that quickly into Argentina, I just do not think that is a most likely outcome today. We are sitting here looking at multiple ways to start again. I mean, this is a program and a plan being an existing resource that we have lots of options as to how we do it, the pace that we do it. We could, frankly, roll together two phases and go bigger. We could phase it and stage it more and start to maybe increase production of LCEs in various forms, chloride, for example, first, and carbonate to follow. All of that is on the table, but it's largely going to be a reflection of the Argentine environment and the support that we have down there in Argentina, as well as how confident we are with regard to pricing and volume commitments from customers.

Very helpful. Thank you so much.

Your next question comes from the line of Jewel Jackson with BMO Capital. Your line is open.

Hi, Paul. Paul, you know I know the Nebraska story quite intimately, unfortunately. You do. You do. I do. I've been there. So obviously you had a claim against them. You got the stake somewhat in lieu of that claim, I understand. Is this basically go back to the drawing board and say, okay, the original hydroponic plant, We don't think that works. We're going to go back. We've got all optionality here. Maybe we'll do just like a Chinese conversion plant there, soda ash, sulfuric acid, do new environmental studies, go right back to the beginning, put the plant in Wabuchi, not Shawin again. I mean, is that the way to think about it? Totally, let's go back to scratch, go back to square one, see if we can get value out of it.

Not quite square one. I don't think for one moment that what Namaska did was all entirely useless. I think they actually did a lot of really good work and they've made some valuable investments in there. But I think Namaska had a couple of issues behind it, thank you, Joel. I think the military... To be blunt, the first issue I think that they had was the financing structure, clearly. And that's what drove them into this position. I think the second is that, and maybe linked to that, is they allowed themselves to be overambitious as to what that mine was actually capable of in terms of production. And so you ended up with a mine plan that was creating higher capital spend and a whole bunch of issues with regard to its functional capabilities to operate reliably as a mine, particularly in that relatively harsh environment up there. And then the third area was the entire strategy with regard to the chemical conversion plant. I don't for one minute think the hydromic capability of technology is not something that could work. It could, and we absolutely would love it to work if we could make it work. But we have to get confident that it is going to operate at an operating cost that makes sense. It's certainly more capital-intensive. But it does have some pretty significant environmental benefits. Now, I would also say, just to give you an idea as to the challenges as to that process, it almost certainly doesn't feel like the location that they've selected for it is actually going to work for it for a whole bunch of geological and engineering reasons. And so it may be that unless we change the technology, the plant couldn't even go as far as we wanted it to. And so there's a lot of questions that have to be answered. So while it's not quite a blank sheet of paper, it's certainly not taking the existing plan and tweaking it. It will be a much more fundamental reassessment than that.

Okay, thank you for that. So, Paul, you know, obviously lift-in prices have been really bad this year. We're seeing on the cost curve. We're seeing a lot of pain. We're seeing no turn receivership. We're seeing Oracle be at negative margin. We're seeing live-ins. at basically near zero earnings, you know, in the third quarter here. And so when you look at your business model and what you are, and at this low, at the low part of the cycle, why is it basically near zero or losing money? Does that make you think about, you know, you have to reorganize here so as, you know, lithium prices go through the cycle over time, when this next happens, Lydon will be better prepared, not better prepared, but better organized to have a better full earnings level at the bottom of the cycle.

And what would you do to achieve that? You know, if that's the case. Absolutely. Everything you said, yes. Now, there's only so much you can do. The economics of resource extraction and chemical processing, there's only so much you can do. We are a low-cost producer, but we do have a cost burden of being a public company. If we were reported as a segment of a larger organization, we would look a lot healthier than we do today. And so you've kind of got to break through all of this and get your head around what it really means if we had a lot of, for example, market investments. that were bouncing around in a court and you could take some extra earnings. You know, there's lots of noise when you try and compare lithium companies to lithium companies. However, you're absolutely right. It's hard to grow a business like ours with the profitability where it is. And so we do have to think differently about it. And frankly, Namaska is one of those. You know, we have been, I admit, nonconventional and somewhat creative with our partnership with Palinghurst. But it's a source of capital for them. It's allowing us to operate on a wider plane than we otherwise would have to. We would have had to incur some quite significant costs, maybe one-off, maybe longer, if we weren't part of the pilot test. The expectation over time with Namaska is that we increase our ownership stake and it becomes a... a fundamental part of our portfolio, giving us resource diversification and giving us a differentiated story to serve different markets. I think there's no doubt Europe and North America are looking for supply. chains that are shorter, that allow them to maybe not touch every part of the world before they get to them. And so I think we're taking steps that in theory at least position us well for the future, and we'll keep doing that. We'll absolutely keep doing that. But frankly, everything and anything is on the table to make us more cost efficient, to give us a more differentiated position with customers, and we'll keep doing everything we can. Thank you.

Your next question comes from the line of Pavel Molchanov with Raymond James. Your line is open.

Thanks for taking the question. Nice to be on your call for the first time. I thought I'd start with kind of the broader EV landscape. You referenced in the slides Europe is recovering extremely strongly. Sales are up 3x versus a year ago levels. How long is it going to take for that level of EV growth to rebalance the supply chain in your mind?

That is a difficult question to answer. Let me give you a few perspectives on that. I think the supply chain, if you just take EV demand, right, you've got to be very, very careful aggregating everything, right? So if you go look at the first part of this year, Instead of you looking at EVs and sales in Europe and maybe rebrand in China, instead you look at battery deployment in all electric transportation. it was down in the first nine months of 2020. And you can see people will ask, with such great demand, why is lithium struggling so much? Because the reality is actual battery deployments globally have been down. And that's especially the case for some of the markets that have been using lithium hydroxide, the larger battery components, for example. And so I think the first thing is a broader rebound in all of this has to start pulling demand more strongly than it has. And it's a critical thing that we need to see. We need to see more demand pulling in there. I think the second thing is clarity around supply chains because, you know, I feel like I kind of hark on this a little bit much, but we hear it over and over and over and over again, and we turn up to customers, and there's a member of the sustainability team in the room, right, with the procurement guys saying, we need to tell the story of sustainability, sustainability, sustainability. That's all very well, but what we have today as an industry is, designed to get the lowest possible cost at the highest possible carbon footprint. And that drives a low cost for many people. Many people will supply and buy lithium products in China at a low price. But while ever they think that is the answer, it's going to be difficult for a healthier industry with more predictable earnings and a more sustainable, in every sense, development path to actually start to appear. But it will. I have complete confidence that it will start to appear. And so what I really think is needed, and, you know, I touched upon them earlier, but I think Tesla has a very clear vision. You can all agree with it or disagree with it, but it's a very clear vision of how they are going to produce every aspect of the vehicle. And that involves investments in certain regions, and it involves investments in certain parts of the supply chain and commitments that they will make with regard to volumes and price. I think the rest of the industry could learn a lot from that because it is what is needed to bring certainty to make sure that you don't get left behind. And so I'll keep saying it. They're the key factors in my mind that we need to see more of.

That's helpful. Let me follow up by asking about the COVID-related costs that you mentioned weighed on gross margin. What precisely are they? And how long are they anticipated to persist?

Yeah, good question. There's a bunch of them. I mean, some of them are very simple. You know, we have significant protocols in our remote environments, particularly in Argentina, with regard to moving people around, you know. And I'm sure, you know, we operate remotely. We have employees, and a lot of them, on multi-day shifts. And we have... an obligation to them, an obligation to the local communities, to local politicians, and frankly to ourselves to keep COVID off that site. And that creates some quite significant costs with regard to testing, with regard to quarantining, with regard to moving. It also requires us in many cases to reduce the number of people that we have up there, which has implications for yield and for production rates. Not massive, but enough that you notice them. Now, we have that at almost every site around the world. We have... challenges with regard to specific costs that are designed to keep our employees safe and to keep our, make sure we're not part of a problem in parts of the world that today COVID is, you know, maybe absent, as it is in Catamarca, where we have a largely absent. And so those costs are, you know, they're not so excessive that you couldn't, require separate disclosure, but we're certainly talking millions of dollars per year in incremental costs of running all of these programs.

Thanks very much.

Your next question comes from the line of PJ Jubicar with Citi. Your line is open.

Hey, good evening, Paul. Hey, Paul, clarification on the MASCA. You know, they had a unique electrochemical process to recover lithium, I guess, to convert lithium sulfide into lithium hydroxide. And, you know, although ECU process is well established, it was unique in lithium industry. Was that an issue? And then just on Bessemer City, what exactly are you doing? Are you expanding capacity there?

Okay, good questions. Yeah, it was a unique process to the lithium industry. I'm not sure most chemical engineers would describe it as a unique process. I think it actually used quite extensively in the chloralkali industry. The challenge that you have is lithium is not chloralkali, and so it had two features to it that caused us problems when we looked at it from the outside. The first problem was the capital costs were meaningfully higher. To build it, it was meaningfully more expensive in terms of capital. The second is that to gain the operating cost benefits that people thought it would require, the assumptions with regard to what are usually called consumables in that process, frankly, have never been tested. And it may be that when we do our own testing, we agree with them. But if you got that number wrong, your OPEX would go up significantly. You know, we're talking about membranes and other consumables there. The life of them is a significant factor in that process, and we do not believe that the engineering work was done to prove out that, in fact, the operating cost would be as low as they actually expected it to be. So we will do that. We'll take a long, hard look at it because, as I've said, it carries some meaningful advantages in it. It has advantages with regard to how it deals with them, what the waste streams are and how it deals with them, but also its ability to tap into, unique uh power resource up there which is very low cost hydroelectric uh hydroelectric power now in terms of in terms of better city yes we're putting some extra like you know i'm not an engineer by any stretch of the imagination but we're putting some small pieces of steel in or probably not steel given it's uh it's hydroxide but some small pieces of equipment that allows to be more consistent with how we meet customer battery specifications you know one of the One of the realities of moving forward now into an industry that is more and more and more automotive driven is that having batch selection or lot selection processes or having processes that require a lot of manual intervention are just not going to pass the quality audits of the automotive supply chains. And so putting in place machinery, equipment, and processes that can be demonstrated to be repeatable and are auditable are pretty important. And so we're adding a few bits of machinery that forces to shut the plant down for a few weeks at a time and then spend a few more weeks starting it back up and making sure everything works. And so it's not a huge amount of capital. It's not particularly complicated technology. But it's designed to bring more efficiency, more predictability, and hopefully greater throughput to the Decima City plant over time.

Great. And let me ask you another question, you know, sort of bigger question, bigger picture question. Did the Tesla battery day change your dialogue with either Tesla or any other OEMs, meaning do they just want steady supply or would they be serious about vertically integrating backwards?

You know, I think it's a great question, PJ, and I would characterize it as possible. I think it was very clear that what Tesla wants to achieve with regard to lithium supply is absolutely in the best interests of companies like Libent. It absolutely is. Their intent and their objective, clearly, is to make sure that there's enough certainty, predictability, and clarity over future needs that we can all invest and provide it. And that is absolutely what I took away from it and what my conversations with them afterwards have largely been about, making sure that we can provide the investments needed. I think they brought a lot of clarity to a lot of misunderstandings as well with regard to whether it's hydroxide or carbonate, how they think about supply chains. And I think the model that they have is broadly applicable across other automotive companies. Yes, it does change our dialogue with other companies too. Other companies do look at it and start to, questions themselves. And I don't think anybody's going to turn around and admit that they are reacting to what Tesla said. But I think it forces everybody to stand up and make statements and to take positions as to where they are on some of these key questions that Tesla quite appropriately brought out into the public domain.

Your next question comes from the line of Matthew Dale with Bank of America. Your line is open.

Hi. Yes, thanks. Can you talk a little bit about the type of lag you might see in your demand pull from the EV rebound? I mean, I remember hearing about some excess supply in high nickel metal cathode material as well as some hydroxide itself. But, like, how long does it take – for that to burn out?

You know, I wish I could answer that. I can point to various statistics, right? I can tell you that we're using a lot of hydroxide sitting around just for physical and chemical reasons. You're just not getting a lot sitting around. I can point to what appears to be a level of usage of spodumene concentrate relative to imports and say, well, clearly spodumene concentrate inventory hasn't gone up and may have gone down, and it's not clear how much of it is usable. And I can point to cathode material shipments and production and see some quite meaningful movements year over year in high nickel cathode materials. starting to happen and already happening. And I can point to our typical appreciation of one or two supply chains that take somewhere in the 120 to 160 days from the lithium leaving our factory to finding its way to a sustainable vehicle. But putting all of that together to tell you that it's going to take, you know, three months and two weeks and four days for the product to be pulled through, it's just unfortunately not that easy to do so. I don't know. I think our experience has shown But when it rebounds, it tends to happen really, really quickly. And so it'll probably come on as a pretty quick thing of a surprise when it does. I'm not sure we'll have a huge... We don't have visibility of it today, that's for sure. I'm certainly not looking forward to getting very clear indications in the medium term ahead of me in the next, you know, few quarters. But that doesn't mean it can't happen really, really quickly because it has in the past.

Yeah, no, I think that's fair. I appreciate the added color. And... The Bessemer City outage in 4Q, is that going to impact your cost structure, your operating leverage in 4Q? And then as we look at the declining third-party product usage, what would that be as a tailwind quarter of a quarter, if I just think about your thoughts?

Yeah, there will be some costs, absolutely, going through in Q4. Once you shut the plant down, we'll have some one-off costs related to that. I don't have them to hand right now. I'm sure if you put a call in to Dan afterwards, he or she can help you think about how to model that. And the same is true of the carbonate costs as well. I don't have the exact number, but it'll be a helpful position for us in Q4 for sure.

Okay, thanks.

Your next question comes from the line of Mike Harrison with Seaport Global. Your line is open.

Hi, good evening. Hey, Mike. I was wondering if you could talk a little bit about the conversations that you're having with customers around contracts for 2021. Are they... giving you pressure on pricing? Are you getting any traction with the idea that they need to allow for reinvestment economics? And are they looking for more short-term contracts than you would prefer, or are you still seeing interest in longer-term commerce contracts?

You know, I would say that Probably more conversations today happening with traditional lithium purchases around longer-term fixed-price contracts than we've seen in a long time. And I sort of half-laugh because that tells me that they think this is the bottom. If they're all trying to now lock down the price for the next three years, then clearly there's an expectation there. They're not necessarily the ones, though, that I think you're talking about because I think when you get into the really big users, the guys that today might be using 1,000 or 2,000 tons of hydroxide but not buying it, but in three years' time want to be responsible for buying 25,000 tons a year of lithium hydroxide. They're still trying to figure this out. There is absolutely no doubt that when you run through reinvestment economics with them and you explain to them cost structures and capital costs and go through a great deal with them, they largely get it. They largely get it. But they would also say to you, how am I supposed to go through my organization when I see a corporate selling carbonate, I don't know what they were selling it at, $3 or $4, and I've just signed a contract for the next five years. five years with you, Paul, in the mid-teens. It's a difficult one for them, right? It's a difficult internal process for somebody who may fundamentally understand and agree that to secure the supply that they're responsible for at a price that is reasonable, then they're going to have to pay a premium to what people perceive the price to be today, firmly believing that over time it will be demonstrably lower than what they would have otherwise paid by riding this volatile price structure over that same five-year period. So they do understand it, but I think these are not fast-moving organizations in my experience, and they have to go through their processes to get to that decision-making point. And they are a lot further down that process today than they were a year ago. I see that process accelerating in these organizations and slowly but surely decisions being made.

All right, and then in terms of the 2020 volume commitments that you have from your customers, it sounds like you expect most of them to still honor those commitments. Maybe there are some delays and some of those volumes bleed into January, you said. Are you thinking that – Some of these customers could end up with volume that they don't necessarily need, and maybe that's a drag on your demand you see when you get into Q1. How do you think that's going to play out?

I'm pretty confident that the volume will be needed. I'm pretty confident they absolutely do. One of the challenges in our industry today is the reality is that we could be serving a customer for six months. and delivering it to a specific, you know, cathode material maker. And then we'll get told, you know what, we're not using those next year. We're going to move to a different one. And so now we have to go through a process of quantifying with a different one and then a different one. And we also see different platforms being more or less successful in the same way. So it's not always the case that you just take the looking blocker to a big customer and then they use it. They have very specific applications for it and very specific requirements. partners that they're working with and they are just as susceptible to changes in their own customers' plans as we are as well. So you will never get, I think, perfect predictability at this point in time as to exactly what the volumes are. as these customers get more diversification over their own customers, over their own processes, it does become easier for them to move volume around and say, this thousand tons that was going here, I don't need, but I'll give you extra volume here. And so what we've tended to find is that these customers are generally speaking, first of all, they certainly need the material, and they're generally speaking quite keen to make sure that they take the volume that they've committed to for that reason, because they also recognize once it goes, it may not come back to them in the future.

All right. Thanks very much.

Ladies and gentlemen, this concludes the LiveIn Corporation's third quarter 2020 earnings release conference call today. Thank you very much. You may now disconnect.