AMG Advanced Metallurgical Group N.V.

Good day, everyone, and welcome to today's AMG Q2 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and 1 on your touchtone phone. You may withdraw yourself from the queue by pressing star and 2. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Ms. Michelle Fisher, VP of Investor Relations. Please go ahead, ma'am.

Welcome to AMG's second quarter 2023 earnings call. Joining me on this call are Dr. Hein Schimmelbusch, the Chairman of the Management Board and Chief Executive Officer, Mr. Jackson Dunkel, the Chief Financial Officer, and Mr. Eric Jackson, the Chief Operating Officer. AMG's second quarter 2023 earnings press release issued yesterday is on AMG's website. Today's call will begin with a review of the second quarter 2023 business highlights by Dr. Schimelbusch. Mr. Dunkel will comment on AMG's financial results, and Mr. Jackson will discuss operations. At the completion of Mr. Jackson's remarks, Dr. Schimelbusch will comment on strategy and outlook. We will then open the call to take your questions. Before I pass the call to Dr. Schimmelbusch, I would like to expressly refer you to our statement on the forward-looking statement and the meaning thereof as we have used at all previous occasions and we will use at this earnings call, in which explanatory statement has been published as part of our financial presentation and at our website in all connection with this earnings call. I will now pass the floor to Dr. Schimmelbusch, AMG's Chairman of the Management Board and Chief Executive Officer.

Thank you, Michelle. This is the fourth straight quarter in which AMG has exceeded $100 million of EBITDA. This 32% EBITDA increase over the second quarter in 22 was driven largely by our clean energy material segment, specifically AMG Lithium's Brazilian operation. with an EBITDA contribution of $89 million. AMG's liquidity as of June 23 was $586 million, with $391 million of unrestricted cash and $195 million of revolving credit availability. The company will pay an interim dividend in 2023 dividend of 40 euro cents per ordinary share on or around August 9, 23, to shareholders of record on August 1, 23. AMG Engineering signed 167 million in new orders during the second quarter of 23, driven by strong orders of the remelting and induction furnaces representing at 2.48 times book to bill ratio. AMG's order backlog was 337 million as of June 23, which is the highest in AMG history, which is a 15-year history. This is largely driven by the U.S. aerospace market. Our Q2 23 U.S. order intake has essentially doubled from our second quarter 22 U.S. order intake. We continue to drive our lithium strategy forward and are pleased to announce that we have signed a mandate letter with Germany's KfW IPEX Bank and with Citi Group to structure and arrange the financing for the construction of our proposed technical grade lithium chemical plant in Brazil, with capital expenditure presently estimated to be close to 300 million. The financing structure is expected to cover all the funding requirements and be supported by the Ungebundener Finanzkredit, I'm sorry to say, which means a government-backed program backed by the German government. for projects which deliver critical materials into Germany. This proposed financing is a cornerstone of our lithium strategy to be the premier supplier of battery-grade lithium hydroxide in Europe and another important step towards an independent and sustainable lithium supply chain in Europe. In addition, the project conforms with AMG Brazil's commitment to upgrade its operations to produce a higher value product by significantly contributing to CO2 emissions, to the reduction of CO2 emissions by lowering total volumes shipped materially. Our expansion projects remain on track. The lithium concentrate expansion project in Brazil is progressing as planned. And our hydroxide refinery in Bitterfeld, Germany, is expected to start commissioning for the first 20,000-ton module in the fourth quarter of 2023. This will be the first European hydroxide refinery. AMG is working on a variety of lithium resource projects. Following our principles, we will only comment publicly on those as signatures have happened. We are very satisfied with our project development work, which is critical for feeding additional modules of our hydroxide refinery complex in Bitterford, East Germany. The new spent catalyst recycling facility in Saintsville, Ohio, AMG's largest investment project to date, is currently running at full capacity and targeting full-run reproduction for the second half of 2023. AMG's LIWA battery projects for industrial power management applications outlined at our Capital Markets Day are under various stages of construction. Shell AMG Recycling BV project development in the Middle East are progressing. The so-called Supercenter project in the Kingdom of Saudi Arabia is completing the FEL3 feasibility study later this year. SARBV, Shell, AMG, Recycling PV's activities have already led to material deliverance of spent catalysts to Ohio from overseas. I will now pass the floor to Jackson Dunkel, AMG's Chief Financial Officer. Jackson.

Thank you, Heinz. I'll be referring to the second quarter 2023 investor presentation posted yesterday on our website. Starting on page three, this shows an overview of the financial highlights of the quarter. Revenue for the quarter increased by 4% to $439 million. Q2 23 EBITDA was $107 million, a 32% increase versus the prior year. This increase is primarily driven by a strong performance from our clean energy materials segment and in particular driven by AMG Lithium and its Brazil operation, which generated $89 million of EBITDA. Net income to shareholders increased substantially versus Q2 22 to $43 million for the second quarter of 23, yielding $1.28 of diluted earnings per share compared to 91 cents in the same period last year. Now I'm going to review our three segments and starting with AMG clean energy materials, which is shown on page four of our presentation. On the top left, you can see that Q2 23 revenues increased 30% versus Q2 22 to $208 million. This increase was driven mainly by increased sales volumes and increased prices of lithium concentrate. Q2 23 EBITDA increased to $96 million, from $58 million in the second quarter of 22, due to higher revenue and profitability in our lithium business, offset by lower profitability in our vanadium business, which was due to lower volumes as a result of a defective fan at our Zanzibar facility that Eric will discuss further in his remarks. Our mine in Brazil produced a total of 29,000 dry metric tons of lithium concentrate in Q2 23. The sales volume is well in excess of our average quarterly sales of 22,000 tons and was due to shipping schedule variances, which will negatively impact the third quarter. The average realized sales price was $3,633 per ton, CIF China, for Q2-23, while the average cost per ton, again, CIF China, was $547 per ton. This cost per ton is higher than the first quarter of 23 due to lower volumes and pricing in tantalum concentrate. As discussed previously, lower tantalum revenue reduces the cost offset in calculating our net cost of spodumene production. And finally, the quarterly capex shown on the bottom left of $23 million mainly reflects our investment into a battery-grade lithium hydroxide plant in Bitterfeld, Germany, as well as the expansion of our spodumene capacity in Brazil. Turning now to page five of our presentation, which shows critical minerals. AMG critical minerals revenue for the quarter decreased 45% to $57 million compared to Q2-22 due to lower volumes across the segment, largely driven by the silicon metal plant operating one furnace during the quarter. Q2-23 EBITDA decreased 83% compared to Q2-22 to $1.5 million, largely due to lower volumes across all three businesses. The lower volumes in antimony and graphite were caused by a slowdown in their end-use markets, primarily the housing, industrial, and automotive markets. In terms of silicon, we currently plan to continue running one furnace in order to satisfy outstanding customer contracts. Moving on to AMG Critical Materials Technologies on page six. Starting on the top left, you can see that Q2 23 revenue increased by $13 million, or 8%, versus Q2 22. This improvement was driven by higher revenues in our engineering unit, as well as higher sales volumes of titanium alloys and chrome metal, partially offset by lower chrome metal pricing. EBTA was $10 million during the quarter, compared to $14 million in Q2 22. The decrease was primarily due to lower chrome prices in the second quarter of 23, partially offset by higher profitability in our engineering and titanium businesses. As Dr. Schimmelbusch mentioned, we had very strong order intake in Q2, with AMG Engineering signing $167 million in new orders during Q2 23, representing a 2.48 times book-to-bill ratio. Turning now to page 7 of the presentation on the top left, you can see that AMG's Q2 23 SG&A expenses were $49 million versus $37 million in Q2 22. The increase was attributable to higher personnel costs driven by increased hiring in our lithium, engineering, and leva businesses. It was also driven by a one-time pension expense of $6.7 million through the restructuring of executive employee benefit plans. AMG's net finance cost in Q223 was $7 million compared to $12 million in Q222. This variance was mainly driven by higher interest income earned as well as foreign exchange losses in the prior period. In today's rising rate environment, AMG continues to benefit from its low cost, fixed rate debt facilities and has an average interest rate charge across its two main debt instruments of 5%. AMG recorded an income tax expense of $27 million in the second quarter of 23 compared to $23 million in the same period of 22. This variance was mainly driven by higher profitability in AMG lithium at its Brazil operation, offset by U.S. tax expense and movements in the Brazilian RAI. The effects of the Brazilian RAI caused a $2 million tax benefit in the second quarter of 23 compared to a $4 million tax expense in the same period in 22. Fluctuations in the Brazilian RAI exchange rate impact the valuation of the company's net deferred tax positions related to our operations in Brazil. AMG paid taxes of $35 million in the second quarter of 23 compared to tax payments of $9 million in the second quarter of 22. The higher cash taxes in the current quarter were a result of tax payments tracking consistent upward trend in Brazil's results. Turning to page 8 of the presentation, you can see on the top left that cash from operating activities was $60 million in Q2 23 compared to $40 million in the same period in 22. AMG's annualized return on capital employed for the first six months of 23 was 35.7% compared to 25.5% achieved in the same period in 22. AMG ended the quarter with $280 million of net debt with the decrease versus year-end 22 due to higher cash balances from our strong operating cash flow. As of June 30, 2023, the company had $391 million in unrestricted cash and cash equivalents and total liquidity of $586 million. That concludes my remarks.

Eric? Thank you, Jackson. In addition to safety, our operating priorities are to maximize cash flow, increase operating efficiencies, manage price risk, and deliver our strategic projects on time and on budget. AMG Panadium's second quarter performance was negatively impacted by the failure of two defective bank house fans in our same store facility. The root cause has been identified as a supplier design flaw. The fans have been re-engineered or replaced. Spare fan rovers and motors have been purchased and are on site or en route, and operations restarted without interruption. AMG has commenced an arbitration claim seeking compensatory damages including costs incurred and lost profits for these defective fans. As Heinz mentioned, both Cambridge and Zanesville are now operating at full capacity and targeting to operate at full capacity for the second half of 2023. Additionally, the Zanesville mail shop has shown significant productivity improvement over the past number of weeks, much of it due to increasing operator experience. It's also worth noting that AMG Comedian has successfully extended its sourcing of stem cabers outside of North America. This is in many ways a product of our excellent relationship with Shell Catalyst of Technologies and the SARBV joint venture. As previously communicated, the lithium concentrate expansion project in Brazil is planning a temporary shutdown in the third quarter to integrate and complete our expansion from 90,000 tons to 130,000 tons of spot. This will result in reduced in the third quarter. We believe net of co-priced credits. We are at or near the bottom of the global lithium concentrate cost curve. And it's worth restating that 100% of our tantalum concentrate production is sold at market prices under the terms of our joint venture with JX Econ Mining and Metals. AMG Lithium's battery-free hydroxide refinery in Germany is under construction and commissioning the first 20,000-ton module will start in the fourth quarter. In January of 2023, we announced approval for a vanadium electrolyte plant expansion at AMG Lithium in Nuremberg, Germany. The target capacity is 6,000 cubic meters of vanadium electrolyte per annum. produced from secondary feedstocks. Construction is started and commissioning and production are expected to start at the end of the fourth quarter. Angie Silicon operated one of four furnaces throughout the second quarter and will operate one furnace for the remainder of 2023. We will continue to review the operational parameters of the Silicon business on account. In terms of our critical materials technology segment, AMG Engineering had exceptional intake in the second quarter, resulting in a book-to-bill of 2.4 rates on suspension. We had an order back off of $337 billion as of January 3rd. We're also seeing similar improvement in the end markets of our aerospace-related critical materials, specifically titanium, aluminized, vanadium aluminum, and chrome metal. We continue to focus on safety, operational improvement, risk management, and success in delivering our strategic projects on time and on budgets. Our goal-providing objective in all of our businesses is to be the low-cost, high-quality, and most environmentally responsible producer. But now I'd like to pass the floor to Dr. Samuel Bush and his Chief Executive Officer.

Thank you, Eric. Given the government economic uncertainties and the slowdown in China, current spot prices across AMG's critical materials portfolio are significantly below the prices we expected when we announced the initial guidance for 23 in November 22. The price of lithium carbonate in November 22, the date of our $400 million EBITDA guidance, or exceeding $400 million EBITDA, has now almost halved. And our other relevant portfolio prices are down in an average of more than 25%. Therefore, we have changed our full EBITDA guidance for 2023 from, quote, exceeding $400 million in EBITDA to, quote, a range between $350 and $380 million in EBITDA. And EBITDA in this range Any EBITDA in this range represents the highest EBITDA in the history of AMG. As previously disclosed, third quarter profitability will be negatively impacted by lower volumes associated with the Spodumin expansion project. Volumes will recover in the fourth quarter as the project begins to ramp up. Regarding our long-term guidance, we are extremely pleased with the advancement of our strategic projects. We are moving forward with our lithium concentrate expansion in Brazil. We have signed a mandate letter to fund the chemical upgrader in Brazil, as mentioned, and our lithium hydroxide refinery in Bitterfeld is under construction with commissioning for the first 20,000 ton module expected in the fourth quarter of 23. The transformational projects in Lesium, our newly complete ferrovenadium spent catalyst recycling facility in Ohio, and the continued ramp-up of AMG's critical materials technology segment will drive increased volumes across the clean energy materials segment and confirm our confidence in our long-term guidance. Our long-term guidance therefore remains unchanged has an EBITDA level of $650 million or more in five years or less. Operator, we would now like to open the line for questions.

Thank you. At this time, if you would like to ask a question, please press the star 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question. And we'll take our first question from the line of Martin Dendriver with ABN Aero.

Yes, good morning, gentlemen. I have three questions, please. With regards to your revised guidance, can you share with us what you've baked into that as assumptions for contributions, roughly, obviously, for Cambridge 2 and the scaling up of sp1 and sp1 plus so in other words should we assume 50 of cambridge 2 in q3 and 100 in q4 and with regards to the scaling up of sp1 and sp1 plus should we assume full production in q4 which is roughly 32 and a half thousand metric tons or should it be less assuming you know maybe perhaps the scaling up is taking a little bit more time that's question one and i'll do them one by one please

We want to remind you that the process by which... It is a group of scenarios that therefore leads to a range. And there are various... assumptions discussed and run through models, and then a process leads to a decision-making about the range, but it's more or less a given process. And therefore, it is very difficult to comment on the various assumptions running in the various scenarios behind those. But essentially, you are on the right track with that question.

Okay, so it's better to assume scaling up of Cambridge 2 towards normal EBITDA contribution in the second half and a gradual scaling up after completion of SP1 plus during Q3 and into Q4. That would be the right way to think about it.

I would repeat, you are on the right track. but I'm not commenting on one particular scenario now.

Thank you very much. Second question.

And we'll take our next question from the line of Stein Demeester with ING. Please go ahead.

Yes, good morning. I think I must answer some questions, but I will go now with three questions from ING. My first question is on vanadium. Eric had a bit of a bad line, so apologies if this has already been answered in his message. But if you deduct lithium abadah from the clean energy materials abadah, you see a sharp decline from Q2 versus Q1. I think non-lithium abadah of about 7 million in Q2 versus 14 million in Q1. So what drives this low result is I'm assuming Zanesville didn't have a meaningful contribution in Q1 either, and prices of vanadium were relatively stable quarter over quarter. So, yeah, what is this? Is this extra cost tied to the issues you had in Zanesville, or are there some other elements that you can flag?

No, Steen, you've got it. It's mainly the defective fan. So it's a loss of volume plus incremental costs.

Okay, understood. Then the second question is on the ramp-up schedule of SP1+. Can you be a bit more specific on maybe what kind of weeks of downtime we could see in Q3? Because I'm assuming you would ship something at least. So, yeah, any sort of message you can give here on kind of volumes we should pencil in in the second half and in Q3 versus Q4.

You will appreciate that the changeover from one flowsheet, which is a 90,000 ton flowsheet, to another flowsheet, which is a 130,000 ton flowsheet, while minimizing the shutdown of the change implied by the changeover, is an extremely challenging environment. It is very well planned and will be executed. But there is, of course, certain uncertainties associated with that, which makes us very hesitant to comment on the details here. The surf water will be therefore reduced as our And that will be compensated in our assumptions of work and compensated in the fourth quarter. If respectfully I might remark, the details of the borderline between the third quarter and the fourth quarter in this changeover process is meaningless as regard to value. When you consider the entrance height of the year, it is very difficult to answer the borderline here to describe the borderline also regarding shipments and the changeover implications.

Okay, understood. My final question then. It's on the timing of the guidelines. I'm basically puzzled why you waited until Q2 as Chinese lithium prices have already recovered since end of April. So I would say the uncertainty on prices was higher at Q1 than it currently is at Q2. So I'm a bit puzzled here in your thinking and, yeah, on why you didn't sort of caution at Q1 and waited until now when things have already cleared up.

Yeah, you'll hear from me, from my eagerness to answer that we don't wait with changing of guidances. we have a continuous process of monitoring the assumptions of our guidance. And I don't know how many days ago, but there was accumulation of news as regard to lithium price forecasts, et cetera, in China and quantities involved, which led us to review our guidance and which then, through the process which I've mentioned earlier, less to this range, which is a little bit lower than the previous guidance. So my main point is we didn't wait. Of course, in this continuous process of revisions of guidances, the four quarters stand out because we, of course, know that there will be a public event and therefore the intensity of scrutinizing the assumptions of such guidances is increasing prior to the quarter. So my comments here to your statement is mainly on your quote, waiting.

We don't wait. Okay. Maybe if you allow me one follow-up. What explains difference in volumes of tantalum versus lithium per quarter, as I'm assuming since you have these off-takes?

As regard to quantities, please, as a chief executive and as a shareholder, I take comfort of the fact that 100% of the quantities produced by the clean energy materials sector are sold under long-term contracts. 100% are sold under long-term contracts. Therefore, whether you have a shipment in the boundary of one quarter to the other, or months, it's completely meaningless. It's very rare to analyze a company where 100% of the sales, the quantities behind the sales, secured by lockdown context.

I understand that, but I'm simply asking why tantalum volumes and lithium volumes don't track comparatively since they are co-produced.

That's due to shipments. So the tantalum shipments make their way from Brazil to Germany. The lithium shipments make their way from Brazil to China. In both cases, we recognize the revenue when they land and our ability to control when they land and how many shipments go per quarter is difficult. So that's, it's not, it's constant production, but what we're reporting is sales, right? Okay, understood. Thanks.

And we'll take a follow-up question from the line of Martin Dendriver with ABN Aero. Please go ahead.

Yes, thank you, operator. One question left. Thanks, Dane. On the FID of the Brazil conversion plans, I didn't quite catch what Eric said. Is the plan still to have that plant fully completed, constructed at the end of 2025 and commercially in operation in 2026? And is the capex still estimated to be $250 million? Thank you.

No. We are expecting a final investment decision of the carbonate plant. I think that's what you're talking about later this year. And that is estimated to be below 300 million, a total investment, more or less fully financed by the special financing structure, which I have commented on. And so for us to talk about the startup when the investment decision is being expected to be later this year is a little premature.

I understand that. However, is the construction time unchanged then? Would that be roughly two years? Yes. Thank you very much, gentlemen.

Once again, if you would like to ask a question, please press the star 1 on your touchtone phone. And we'll take our next question from the line of Richard Hatch with Berenberg. Please go ahead.

Thanks. Yeah, morning. Thank you very much for the call. Just a couple of questions. The first question is just on your long-term EBITDA guidance of over $650 million. Can you just... clarify whether that assumes an increase in lithium prices or lithium prices staying stable or a decrease. Can you just give us some color? How much of that 650 is based on price? Present prices. Say again?

Present prices.

What? Reference prices.

Okay. No significant increase in prices. Present Present, P-R-E-S, present prices.

Okay, but consensus assumes that prices materially reduce over the next three to five years. Does that, or do you hold the price flat?

I don't know on which consensus you're talking about. We assume present prices.

Okay, so no adjustment in prices, just hold them flat. Okay, right, thank you. And then just on your costs on the clean energy material side of $547 a ton, can you just help me out a little bit just in terms of how to think about that? How much of the tantalum byproduct credit do you get against that? So what was the cost if I strip out the tantalum?

We don't disclose that. We'd just rather talk about, I mean, we'd like, what we're trying to do is we're trying to enable you to compare our delivered cost to China versus some of our competitors in Australia, which it compares extremely well. The Tantalum co-product credit is a little higher than our competitors, but it's not significantly higher. So I think that the net number is a good number for comparison purposes.

Yeah, it's the only issue is, you know, if I look at Q1, the Q1 number was $338 a ton, I think, if my model's correct. So, you know, $338 to $547 is a bit of a hike, right? So, you know, and if we're trying to model the business accurately, then, you know, any kind of... steer on how much of a credit that is would be helpful.

Well, we'd rather guide you to $500 a ton, which we've been pretty consistent on average over the year.

Okay. All right. Thank you. One component in this calculation of yours is, of course, that in the past the tantalum portion was sold under annual contracts, and it's now long-term secured.

Okay. Thank you. And then, sorry, forgive me if I've missed this. Just on the volume impact in the third quarter, or as you tie in the increase in the lithium capacity, are you able to give us any kind of steer on how much that's going to be impacted, please?

No, not really, because it depends upon the startup timing. It's pretty easy to see that we were, you know, 6,500 tons roughly above normal run rate sales in Q2. And then we have the startup. So being able to say, as Dr. Schoenbusch said before, splitting Q3 versus Q4 with a plant startup and the shipping schedule is quite hard.

Okay. How do you ever plan as to how long your ramp's going to take or how long the plant's down for or anything like that?

We already discussed that. You know, it's going to take a while to ramp. It will be shut for a certain amount of time. But those details, you know, we don't think are really necessary for modeling. We're more focused on delivering 130,000 tons in 2024. Okay, thanks very much for your time.

Cheers. Yeah, appreciate it.

And we have a follow-up question from the line of Stein Demeester with ING. Please go ahead.

Yes, thanks, thanks. Follow-up on engineering order book, which screens quite positively, I would say. Can you sort of comment on when you expect this to materialize in what time frame and how perhaps 24 hours sort of profitability should look like, because there's some pent-up demand from the aerospace, which could bode well for that business.

But the aerospace demand is very strong, as stated. And the order intake is dominated by contracts which are having an execution time around one year. So that's ranging from less than one year to more than one year. The average is one year or a little longer. So that might be for your model and input. The visibility of our 24 earnings is, of course, very high in that engineering. And we believe that all the intake will continue to rise.

Okay. That's helpful. Thank you.

And it appears that we have no further questions at this time. I'll now turn the program back over to Ms. Fisher for any additional or closing remarks.

Thank you, everyone. This concludes our second quarter earnings call.

Thank you. This concludes today's call. Thank you for your participation, and you may now disconnect.