Q4 2023 Li-Cycle Holdings Corp Earnings Call

Participants

Nahla Azmy; Head, Investor Relations; Li-Cycle Holdings Corp

Ajay Kochhar; President, Chief Executive Officer, Co-Founder, Director; Li-Cycle Holdings Corp

Tim Johnston; Executive Chairman of the Board, Co-Founder; Li-Cycle Holdings Corp

Debbie Simpson; Chief Financial Officer; Li-Cycle Holdings Corp

Brian Dobson; Analyts; Chardan Capital Markets

Matthew O’Keefe; Analyts; Cantor Fitzgerald

Presentation

Operator

Good day. My name is Todd, and I will be your conference operator. At this time, I would like to welcome everyone to the Fourth Quarter and Full Year 2023 lifecycle Holdings earnings call and webcast. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer session. good day. Thank you. I will now turn the call over to Nahla Azmy, Head of Investor Relations. Please go ahead.

Nahla Azmy

Thank you. Good morning, and thank you, everyone, for joining us for Lifecycle business update and review of financial results ended December 31st, 2023. We will start today with formal remarks Symantec culture, Co-Founder, President and Chief Executive Officer, Tim Johnston, Co-Founder and Executive Chair, and Debbie Simpson, Chief Financial Officer. We will then follow with a Q&A session ahead of this call, life-cycle issued a press release and a presentation which can be found on the Investor Relations section of our website at investors dot nytco.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 assumptions are incorrect, including that because of factors discussed in today's press release during this conference call and in our past reports and filings with the US Securities and Exchange Commission and the Ontario Securities Commission in Canada.
These documents can be found on our website at investors dot nytco.com and 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 by these forward-looking statements should not be relied upon as representing lifecycle assessments as of any date subsequent to the date of this call without I'm pleased to turn the call to action.

Ajay Kochhar

Thank you,Nahla, and good morning, everyone. On our last call held in mid-November, we committed to providing an update on our progress since pausing construction and initiating a strategic review of the go-forward strategy for our Rochester hub. Today, we're pleased to share the meaningful steps taken towards achieving the key objectives from this review and also to discuss our 2023 financial and operating results.
Starting on Slide 3, on the left side are the key objectives we discussed on our last earnings call. On the right side, I will review the highlights and key actions we've taken to help achieve. I'll provide more on these later in the presentation.
First, regarding financing, the special committee of the Board of Directors conducted a robust process to review and evaluate potential financial and other strategic alternatives available to the company, including to increase our liquidity after careful review and assessment of the alternatives identified through this process and consistent with the recommendation of the special committee management and the Board were pleased to expand the fund lifecycles, existing long-term partnership with Glencore to increase the strategic investment in lifecycle, I said a $5 million.
Second, with respect to the DOE loan process, simultaneous with our comprehensive review we've been actively engaged with the DOE Loan Programs Office regarding the conditional commitment for a loan of up to $375 million.
Third, regarding liquidity, we implemented a cash preservation plan to reduce non-core spend to slow cash outflows. While we evaluate financing options to support our ongoing operations and a restart of construction at the Rochester health project, finally on the Rochester hub. As part of our comprehensive review, we've been conducting an internal technical and economic review to assess a possible change in the project development strategy. The review confirmed the technical viability of the process to produce lithium carbonate and mixed hydroxide persisted for MHP.
Turning to Slide 4 for an overview of our partnership. Glencore is now nearly two years of collaboration with an alignment of strategic vision, technical expertise in asset networks in 2020 to Glencore invested $200 million in lifecycle through an unsecured convertible note and designated us as their preferred partner.
We formed a global strategic collaboration that aims to create an integrated platform to supply our global customer base with both primary and recycled critical battery materials specifically, we previously entered into long-term intake and offtake commercial agreements, which enable us to jointly develop FEED opportunities for our spokes, secure offtake for the and byproducts produced at our spokes and hubs and obtain a supply of key regional folks for our future.
How Turning to slide 5, for details on Glencore's additional investment for $75 million in a senior secured convertible note. This investment, which enhances lifecycle liquidity, represents an interim step in our funding strategies for our future plans. These notes will have a five year maturity to March 2029 and will have an initial conversion price of $0.53 per lifecycle common share.
Cash interest payments will be based on the secured overnight financing rate or silver plus 5% per year. And payment in kind or pick interest payments will be based on silver plus 6% per year. In addition, lifecycle in Glencore have agreed to amend the terms of the existing Glencore convertible unsecured note, which was issued to Glencore in 2022 and currently has an aggregate principal amount outstanding of approximately $225 million,
Which includes the tech institute charges, the two tranches would have among other changes, extended maturities and a recent conversion price to the lower of an amount based on the 30-day view off of the 25% premium and 995 per share in each case, based on the earlier of certain trigger events for Tranche one, the modification date would be the earlier of one month after the effectiveness initial funding of a project of financing for the Rochester hub and December 31st, 2024,
And for tranche two the modification date would be earlier of the first commercial production from the Rochester hub. Construction costs exceeding the construction budget set forth in the project, both answering and June first, 2026. As discussed earlier, we believe this additional financing with Glencore demonstrates continued support of life cycle business model.
I'll now turn it over to Tim to cover a review of the portfolio and operations.

Tim Johnston

Thank you, Ajay. Turning to Slide 6 to discuss our black mass production strategy. In 2023, we've produced 6,825 tonnes of black mass more than 1.5 times the level achieved in 2022. This exceeded the top end of our revised guidance of 5.5 to 6,500 tons. As noted on prior calls, in the near to term, our black mass production will be tied to the availability of feedstock in local markets and the key strategic customers in close proximity to our Spark operations. Longer term, we will strategically time production in line with the internal demand for black mass.
Turning to Slide 7 for the highlights of our Spark operations covering battery materials, sourcing processing as well as biomass production. First, regarding the composition of source battery materials, as seen on the top left in terms of form factor the predominant lithium-ion battery intake material continued to be manufacturing scrap, followed by EV battery packs on the right side for our intake of various battery chemistry types. The largest bucket in 2023 remained NMC.
However, it is worth noting that we are in a position to serve the adoption of changing battery chemistries, including LFP, which has been gaining prominence in the industry, particularly in Europe. With respect to our Spark operations for processing battery materials and our black mass production. In the fourth quarter, we exceeded 80% availability at our operating US. spikes, including the processing of EV battery packs at our Generation three sites in the fourth quarter of the total battery materials process at our US. Generation three spokes, approximately 45% was EV battery packs.
These EV battery packs can weigh upwards of GBP 1,000 and can be processed using our Generation three spokes advanced technology to process full EV battery packs with little to no disassembly and without the need to discharge.
Turning to Slide 8 for an overview of life cycles, commercial agreements, we have the capability to process all parts of lithium-ion batteries, independent of FormFactor and chemistry. This capability, combined with the operational capacity in both North America and Europe, has enabled us to build out a diversified global customer base.
As shown on the left of the slide, our customer base spans the entire battery supply chain, including being a preferred recycling partner with leading global battery EV and energy storage OEMs on the right side of the slide, we maintain a mix of short and long-term intake and offtake commercial arrangements.
At the Spark level, we entered into battery material intake contracts which range from spot multi-year to Evergreen durations, complemented by offtake arrangements for the black mass produced at our sports at the future hub level, we have offtake arrangements for our and by-products with taxes and Glencore briefly regarding pricing, it is important to note that our contracts are predominantly indexed to underlying market prices for metals.
Turning to slide 9 for the status of our network portfolio. We have slowed operations at our sports network, including pausing operations at the Ontario start slowing operations at the New York, Arizona and Alabama starts on an ongoing basis and are currently reviewing further pauses or slowdowns. The timing of the France, Norway and Germany one two are currently all under review.
We are prioritizing Generation three spokes and aligning with EV and battery OEM customers as they continue to ramp capacity in North America and Europe. We have paused construction on the Rochester hub, which we will discuss in more detail later in the presentation, we've also paused the development of the port investment hub while undergoing further review with Glencore on this project.
Turning to Slide 10 for a brief overview of our sport technology. As a reminder, last cycle developed a patented process for processing all forms of lithium ion batteries, regardless of chemistry form factor or state of charge. This environmentally friendly process does not rely on any thermal treatment produces no wastewater, and it's highly scalable for the growing EV battery market.
Turning to slide 11, we show the status of the Rochester Hub project at the pause in October 2023. Through to December 31st, 2023, we incurred total costs of approximately $567 million on the project comprised of a total cash spend of $452 million and costs incurred, but not yet paid off approximately $115 million.
Turning to slide 12, for a discussion on our analysis of a change in the project development strategy for the Rochester Hub project. The review is focused on the construction, commissioning and operation of the hub with the intent of producing lithium carbonate and MHP. Notably, both MHP and sulfates approach, maintain the production of battery-grade lithium carbonate with the MHP. Approach as depicted by the green arrows, black mass is processed to produce MHP, a combination of nickel, cobalt and manganese metals. MHP. can be sold to a refiner ahead of being supplied to the battery precursor industry with the sulfates approach, as depicted by the gray arrows, black mass will be converted directly into nickel and cobalt sulfate ahead of being supplied to the battery precursor industry.
We have no current plans that include the production of nickel sulfide and cobalt sulfate. However, the areas dedicated to the production of nickel sulphate and cobalt sulfate are being left intact under the MHP. scope to allow for the potential construction completion and integration in the future. We are conducting an internal technical and economic review of the Rochester Hub project, which resulted in an estimated cost to complete of approximately $500 million, including costs incurred, but not yet paid off approximately $115 million as of December 31st, 2023, taking into account total cash spend of approximately $452 million as of December 31st, 2023.
We expect the revised estimated project cost of the Rochester Hub project to be approximately $960 million for the MHP. scope. We know this estimate is subject to a number of assumptions and is likely to change as we continue to complete our comprehensive review work, including reengaging and rebidding construction subcontracts, the increase in estimated project costs as compared to the prior range of approximately $850 million to approximately $1 billion.
That included the expected production of nickel sulphate and cobalt sulfate from November 2023 is primarily due to further refinement of the methodology used to estimate the project costs based on the MHP. scope. Importantly, our internal technical review confirmed the technical viability of the MXP process.
In addition to the cost to complete, we will incur costs during the construction pause between October 23, 2023 to the project restart date which we expect to fund with current cash and required additional interim funding. We will also incur other costs such as working capital, commissioning ramp-up costs and financing costs, which will be included in the full funding solution. As we've indicated, we will require significant additional funding before restarting the construction of the Rochester Hub project.
I'll turn this over to Debbie to provide a review of the financials.

Debbie Simpson

Thank you, Ken. Turning to Slide 13 for a review of our 2023 financial results. Before covering the details, I would like to note that our 2023 financials reflect calendar year reporting as well as the transition to US GAAP from IFRS reporting. As you will see, US GAAP is a functional income statement presentation to manage the separation of our expenses between cost of goods sold and SG&A, a change from the line item detail in nature based approach with IFRS.
Moving now to a discussion of the actual results for 2023 versus 2022, starting with sales, black mass, which were 4,324 tons, a 3% increase versus the 4,192 tons sold in 2022. Product sales and recycling services revenues before noncash fair value pricing adjustments increased to $23.6 million, a 34% increase compared to $17.6 million in 2022. The increase was largely driven by a higher value product sales mix coupled with higher recycling services, revenue from new service contracts and partially offset by reduced market prices for cobalt and nickel.
Total revenue was $18.3 million compared to $16.5 million in the prior year, reflecting an unfavorable noncash fair value pricing adjustment of $5.3 million versus $1.1 million in 2022 related to the lower market prices for cobalt and nickel.
Moving to cost of sales, which was $81.8 million versus $65.2 million in 2022 variable and fixed costs related to plasma and shredded metal products sold in P. were $29.1 million compared to $23.2 million in 2022. This reflects increase in raw material acquisition costs and other production costs. Fixed and other costs for the spoke network not capitalized to inventory and expensed in the period was $34.9 million compared to $16.9 million in 2022.
The increase was primarily due to higher store costs, including personnel costs, leases and depreciation from the existing and new spoke asset in Germany. In addition, cost of sales increased fixed and other costs related to production assets in development, $7.4 million related to our Chester hub compared to $2.6 million in 2022 and $10.4 million related to spot networking developments compared to [$12.5 million] in 2022.
SG&A expenses were $93.4 million versus $81.3 million in 2020, primarily driven by higher personnel costs before implementing the workforce reduction in November 2023. We note that prior to construction pause at the Rochester have retired operations personnel in anticipation of the hub commissioning. We also increased headcount to support expanding Spok network capital projects and corporate requirements, further increasing our cost of sales and SG&A.
Research and development costs were $5.7 million versus $2.7 million in 2022 and were primarily related to the personnel costs and professional fees incurred for the initial R&D, the ports that we have. Other income was $24.7 million, a decrease of $27.2 million compared to the prior year, which was primarily related to a decrease in fair value gains on our convertible debt. Adjusted EBITDA loss was $166.4 million compared to a loss of $118.5 million in 2020. This was largely driven by higher cost of sales and increased SG&A related to the growth and expansion of the business.
Turning to slide 14 for a discussion on the actions taken on cash preservation plan at the beginning of November, we implemented a cash preservation fund, which has helped to reduce cash outflows. While we explore strategic alternatives and financing options to increase liquidity, we are diligently working to manage our cash to support our liquidity needs.
First, on the spoken have counsel spends because construction at the Rochester hub. While we are completing a review of the go forward plan for the project curtailed production to focus on key customers and product development. As we spoke capacity backing on improving working capital, we've been actively engaged with contractors and suppliers in Rochester have project to negotiate extended payment plans as well as extending other payment cycles and implementing other similar measures. Additionally, to the extent possible, we've been pulling forward payment terms for black box sales.
Third, on rationalizing our cost structure, we will continue to further rightsize initially for organization, further reduce costs and spoke operations and make additional cuts to non-core SG&A costs as of December 31st, 2023 and March 16th, 2024 lifecycle had cash and cash equivalents on hand of approximately $71 million and $35 million, respectively, excluding restricted cash of approximately $10 million and expected gross proceeds from Glencore financing of $75 million, which is expected to close on or around March 25, 2024. Coupled with the expected gross proceeds from the Gulf Coast financing, we estimate pro forma cash to be approximately $110 million. We expect that the results from the cash preservation plan will deliver lower cash outflows in order to maintain current operations until we are able to obtain more substantial financing.
I will now turn back to Ajay, very turn to Slide 15.

Ajay Kochhar

Thank you, Debbie. We continue to see favorable secular industry demand trends in North America Europe. The chart on the left illustrates the rising adoption of electric vehicles for sales, posting record growth adoption at an approximate 45% kegger from 2019 through 2023 based on third-party sources. Notably, these third-party industry sources are projecting that EV sales will build on this strong base growth, posting a 25% kegger through the end of the decade.
As you know, the rate these growth dynamics support the robust demand for an expanding market for recycling of all forms of lift by matters near to mid-term. The increase in recycling materials is largely be driven by manufacturing scrap from giga factory growth supplemented by end-of-life battery feedstock towards the end of the decade. It is projected by 2030. Demand for selecting materials will increase by up to six times from 2023 levels.
Turning to slide 16, concluding on Michael's go-forward strategy. First, regarding the financing strategy, we are excited to work with Glencore to close the interim financing and additionally, we continue to work closely with the DOE on progressing the conditional commitment for a loan of up to $375 million.
Second, with respect to spoken home network. We are evaluating our spoke production to drive down costs and focusing production to our Gen three spokes to support key customers. And finally, we remain focused on completing our analysis of our go forward approach for the Rochester.
Before we turn to Q&A, we I want to take a moment and express our gratitude to multiple supporters during this significant transition first, we're immensely proud of the lifecycle team for their continued commitment, hard work and dedication. Second, we're very appreciative of our customers, suppliers, the DOE. and our financial advisors for their continued support and collaboration as part of our go-forward business plans for the Rochester hub Of special note, we're excited and appreciate Glencore support and continued collaboration. Operator, we're now ready for question at this time when the floor is now open for questions.

Question and Answer Session

Operator

(Operator Instructions)
Brian Dobson from Chardan Capital Markets

Brian Dobson

You can't Thanks very much for taking my question this morning. So as you think about your ongoing conversations with VOY. how does the nature of those conversations changed? And could you put the facility into a strategic review? And would you consider the awarding of those funds as necessary or to continue construction in that arm with that project?

Ajay Kochhar

Brian, it's under your. Yes. Thanks for the question. So, starting with our engagement with the do we since the pause or just as I said there is kind of the for the call, and we're very thankful, I think, to do it for continue to actively engage with us and be very supportive.
And that hasn't changed to be frank the last couple of months. So there's interim financing imminently closing. We're looking forward to continuing to progress there towards close to the degree. That's number one. And number two, the way to think about our go-forward funding, it's really in two parts. Number one is around it's interim funding, the cash on hand.
And then we have the cash preservation plan to extend our runway as long as possible. And then there's really the need of the project. And today, we gave you a bit of an updated view of our latest estimates of where that is, and there's more work to do on that, including with the relevant subcontractors to refine that estimate on that at all in all is going to require full funding solution and project financing loan AKDOE.
Is obviously a key part of that, but depending on where those numbers come out and what the full funding need is we'll be looking to get together a full funding solution and we use those words. That's what it means to do is part of that. But it needs to be informed also by where we ultimately land up in terms of the more refined aspects.

Brian Dobson

Okay. Thanks for that color on as you're contemplating resuming coverage and you had mentioned rebating aspects of the project. Have you been in I guess you can maintain relationships with your former contractors? And then would you need to change contractors in order to perceive a forwarder or do you think defense relationships could be resumed not in the immediate future?

Tim Johnston

Yes, that's right.That's given for the deck Hebron, unless we're talking to. And so it is similar to what Roger was saying at the end, we've had immense support from the contracting community, particularly the contractors within the Rochester region. I think everyone is aligned and has a desire to see this project through to completion. Our focus from a forward perspective is really how do we best contract the projects for the remaining scope of work that needs to be done. We're also into the right strategy. That's part of the work that we're going through at the moment. And we're working with that local contracts and communities to work that out and that will be something we'll be able to provide more updates on Brian as we get closer to up to a potential restart.

Brian Dobson

Yes, excellent. And as you look at your portfolio of assets you're contemplating, call it demand in the United States and Europe and which areas are most appealing to you over the next two to three years?

Ajay Kochhar

Yes, because it's other income? Yes. Look, I mean, I think we've seen those markets grow, frankly, in a similar way from a amount of material available for recycling. Obviously, we're very present in both North America and Europe, a part it's a we wanted to give a little bit more color on our customer base. You saw those quoted figures of OEMs and battery makers flows customer span both North America and Europe. And so I'd say in short, Brent today, it's pretty neck and neck in terms of growth in each market has its own features and in terms of the regulatory landscape, incentives, policy, et cetera. So yes, it's as a summary, as I said, there's it's equal from our perspective.

Brian Dobson

Okay. And then just one final super quick one given concerns about wastewater at the Rochester facility that was brought to completion and went into went into operation.

Tim Johnston

Yes, Brian, so I can answer that. So let me sort of break that up into two parts. Two very clear. The project that's currently under care and maintenance has never had any re-agent. So materials introduced into it. So it's purely a construction site at this point in time.
So just from a status perspective today from a go forward perspective, one of the key aspects of the design of the Rochester facility is what we call a zero liquid discharge system. And so essentially where traditional facilities would be discharging industrial wastewater, we've invested in technology and capital to be able to effectively reclaim that water and avoid the need for a for an industrial wastewater discharge.It's part of our growth. It's also grown as a company as we look across our sites.

Brian Dobson

Excellent. Thank you. Very much.

Tim Johnston

Thank you. Appreciate the questions.

Operator

(Operator Instructions)
Matthew O’Keefe from Cantor Fitzgerald

Matthew O’Keefe

Yes. Thanks, Andrea, and thanks for taking my call. Just two questions here. One, with the scope change of making MHP. and which is the playing out going forward here, does that change your permitting status at all? Do you need to get amendments to your permits? Are there any changes there?

Ajay Kochhar

We should be thinking about

Tim Johnston

Good morning, Matt, etcetera, and also enable us to do more in that. And so the short answer to that is no major changing changes required from an environmental permitting perspective, it's still the same materials are at a smaller operating footprint. So it will be within our existing permanent framework. And the only considerations is what we would call normal construction style permits and maintenance and modifications to those as well.
One or two of the areas are a little bit physically different, but that's the only difference there, but

Matthew O’Keefe

Okay, so that will impact your proposal, your revised timeline, not contract.

Tim Johnston

And then just on the time line,

Matthew O’Keefe

I know it is still a lot of moving parts here and, you know, it's going to take some time. But with the Glencore convert, you fire something good amount of time. I don't know whether it's maybe a year to 18 months of runway and you can correct me if you can give me more color on that. But 3M, once you do get sort of a financing solution in place, roughly how well, how long would it take to complete the facility construction and then sort of I'll get into your ramp.

Ajay Kochhar

Yeah, Good questions, Matt. And it obviously things a lot of folks want on understand. I think at this stage, what we're doing is we're right in the midst of these just to the internal technical review, looking at the technical economic viability, which was good, no positive and now, I think the key thing that we need to get done in the coming periods is really this subcontractor fitting. So, before we come out and start talking about timeline, and where there's going to be we have a view, but and that industry is formed by the professional to do the work. And that's the key. Next thing that we're going to be looking to define something post that. And at the right time, we'll look to give some color. But where we stand today, we're still silver given.

Matthew O’Keefe

It's helpful. Thank you. That's it for me.

Ajay Kochhar

Thanks, Matt.

Operator

(Operator Instructions)
It appears there are no further questions in the queue at this time. I will turn the call back and Ajay. for his closing comment.

Ajay Kochhar

Thanks very much. And again, appreciate everybody's time and attention to right towards the end of the call and the support from our various stakeholders this period. And we look forward to updating everybody as we progress. Thank you.

Operator

This does conclude today's call and webcast. You may disconnect your line at this time and have a wonderful day, and all of them is fair. And so we'll settle all those one of the more formal part of the burning of assets and all of them will go into Phase two. And we'll never know that we have a panel may no longer are we know on a mobile phone will come our book of business, both our mobile phone and mobile phone.